Cindy:
When you're doing business tax planning you have to involve your individual tax planning. You can't just see one without the other. So, that's where professionals come into play and they look at the total picture and they just don't look at business tax planning outside of the individual tax planning.
Doug:
From Rea and Associate's remote studio this is Unsuitable a management and financial services podcast for entrepreneurs, tenured business leaders, and others who are ready to look beyond the suit and tie culture for meaningful measurable results. I'm Doug Houser. On this weekly podcast thought leaders and business professionals break down complicated and mundane topics and give you the tips and insight you actually need to grow as a leader and help your organization thrive.
If you haven't already hit the subscribe button so you don't miss future episodes. And if you want access to even more information, show notes and exclusive content visit our website at www.reacpa.com/podcast, and sign up for updates. I firmly believe that there is an opportunity in every challenge. These days of course there are challenges at every turn so that means that opportunities should be everywhere too.
Today's guest is here to talk to us about turning lemons into lemonade at least from a tax planning perspective. It's no longer business as usual, things are constantly changing, especially the Cares Act and other legislation related to the Coronavirus. And businesses are strapped for cash but none of these challenges should get in the way of tax planning for your business. In fact, tax planning is now more important than ever.
Cindy's here today to talk about how COVID-19 may impact your tax liability and she's also going to break down some of the new legislation to come out of this situation and how the proper tax planning can help minimize your tax liability. So welcome to Unsuitable Cindy again. I love to have you on as always.
Cindy:
Thanks, Doug. It's been an interesting economic reality so...
Doug:
No kidding and we seem to get changes every day. I know I've been myself immersed in all the various loan programs that are available to help businesses and individuals out there and we continue to see new IRS rulings it seems like all the time just related to that. So, I can't even imagine what you're seeing right now as a tax expert with regard to the Cares Act and some of the changes there. And talk to us a little bit about some of the biggest items within the Cares Act from a tax perspective.
Cindy:
Now, one thing I do realize is that like the government business owners have to be reactionary and do it quickly. And I think the Rea Associates that we have in our team have done a great job keeping up with this and not one person can do it and I think that that's key to remember. So we have PPP loans, we have a lot of things out there that are pretty much specific and the knowledge is specific and I think that it's important to reach out to each respective member. So, business survival is going to be key and I think monitor cash flow is also key.
And I think that when it comes to cash flow I think that even with the PPP loans small businesses were required to give information they don't normally prepare. So, they were given the opportunity to, or the challenge whatever you want to call it, to provide this information to SBA, to the banks or whatever. And so, now they at least have some framework to move forward. And just because it's business as usual when people review their business plans it's really not something that... Some of them might realize that they can't survive. Okay. And so then they have to do another turn, they have to revamp their business plan and go forward.
And the other thing that's out there too is the 2020 presidential election. And usually, in an election year tax public policy gears towards taxes and right now, I don't know what election is going to prove. They're paying attention to the 2020 campaign and they're wondering, they like the 2017 tax law, small businesses. So, they're wondering where this is all going to end up.
So once again, COVID-19 had several legislation and regulatory tax measures that were undertaken. When you guys first invited me I had the Secure Act out there and that was. It was interesting, it was pretty subtle and it was something to look at. But now with COVID-19 several acts and regulations came in very quickly. One of the probable benefits for both the tax preparer and the small businesses is the delay in the filing of tax returns. I think that giving extensions until July 15 for the individual owners has really made it a little bit easier to handle while dealing with all the other things that have been requested.
So under the, if we go back to the Secure Act they were trying to be a revenue generator for the government. They did a lot of things that at the individual level were going to increase taxes but they were also making it easier for retirement plans, setups. They were getting more credits for retirement plans because they were encouraging savings. So, some of the Secure Act applications are not really going to be relevant right now because people are taking out of the retirement plans to fund their businesses.
So, when I go through the Secure Act I'm thinking, "Now, this is going to be put on the wayside." Will they rethink RMDs and will they rethink the stretch IRA provisions? Right now, there's so much out there and we have to realize that anything that affects small businesses is also impacted by the individual provisions because most small businesses are pass-through entities and we want to try to minimize the taxes at both levels, individual and the small business.
Doug:
Yeah. It seems if I hear that, if I'm a business owner, it's just my gosh this seems overly complex. I'm in crisis mode right now I'm not thinking beyond the next month or two months or maybe three months. So, I think that the thing we try to do is to counsel clients to think not only short term but let's think about the longer-term, let's think about next year or the year after as well. Is that fair to say?
Cindy:
It is fair to say it. I think that we have to get them just like when I'm looking at my portfolio I don't want to look at it at what it is today. I was in there for the long-term so I'm going to look at it and probably not look at it given the situation. But once again, businesses have to do that too. But I think that if a business realizes that they can't survive whether it's the product they're selling or the service they're providing that they should rethink a business plan. And it may be a good time to just look through and get some of the key leaders in the company to say, "What can we do differently? Can we survive this?"
And I think COVID-19 actually is giving us that opportunity to be survivors and I think that the government is helping along the way. But once again, everything was reactionary. It wasn't thought out process it was everybody had to react and get that money back into the economy. So I think overall whether we have the PPP loans or we have employment credits or deferrals of employment taxes those are all things that they should be looking at to take advantage of it.
Doug:
Right. Yeah. And I think from a business perspective as you said there are so many opportunities out there for them to evaluate these different things and they're not necessarily all mutually exclusive. Some of them are, in other words, if you have taken a PPP loan for example then employee retention tax credits are not allowable. But there certainly are things that aren't mutually exclusive that you should think about in terms of planning.
Cindy:
Right. And I know that the Secure Act provided a larger credit for new employment plans or retirement plans only because I think they wanted people to start saving. But are people really going to be doing that? Given the economic situation are they really going to be able to do that? Are the employment credits or the retirement small business credit going to be as valuable as they thought it was under the Secure Act? I think saving for the future, saving for retirement is important for individuals but the businesses also have to realize that is that going to be a priority for them?
Doug:
Yeah. Absolutely.
Cindy:
So, there's a lot of things out there. But once again, what happened with the COVID acts whether it was the Cares Act or the Family Act that they did or the additional regulations that they put into place they have to realize that it did a lot of things that helped us. It provided technical corrections for something that happened back at the end of '17. So I think that overall they realized that things needed to get done and businesses can now go back and look at, "And how did I depreciate property that I can now depreciate in a different manner to get a bigger deduction and is it worth that savings?" So I think that a lot of things that happened under the Cares Act actually was able to clarify, once again it might've been reactionary but it got a lot of things out there that were questionable.
Doug:
One of the big things I know I've heard and we've dealt with clients on this already are the NOL carryback rules and there are some significant benefits to potentially be had there. Can you give us an overview?
Cindy:
Yeah under the tax cuts of the Jobs Act they wanted once again as a revenue generator so they were trying to change things like NOILs and business losses. So they put limitations on those and they actually said, "From now on going forward your NOILs are only carried forward not carried back." So once again they said, "Okay, well can we generate more cash flow for small businesses if we change that?" And they did they said, "Now we can go back five years for losses that are generated." And once again, this is going back and as a preparer, we're searching our databases for eligible clients. And once again, past remedies not only are you amending the business returns you're also amending the individual returns so now you have more of an opportunity there.
Doug:
Yeah and in some cases obviously that can be significant and at least you're taking advantage of the situation now where cash flow and liquidity are of the utmost importance. So, you can capture, recapture some of that it's well worthwhile.
Cindy:
And that's what the Cares Act really did is can we capture some cash flow? What can we do to help small businesses do that in addition to the PPP loans? Can we... And it's not that that is a very difficult thing to do but we can reevaluate what was done for '17 and '18 and see if we can actually make it better for the clients and increase their cash flow.
They also looked at limitations on business interest. And so, they imposed a lot of limitations on the business owners. And once again, that is something that we are looking through, more business interest is deductible. They raised the limit from 30 to 50%. So once again, we have to look at that and take advantage of those kinds of situations.
Doug:
Yeah. Now let's talk a little bit specifically related to the Cares Act there's been a lot of discussion around the PPP loans and all that again which I've been heavily immersed in the Cares Act allows for that forgiven loan amount to not be included as taxable income which was nice and very different obviously from any normal loan that's forgiven. However, the IRS has also clarified recently that those related expenses are not deductible for tax purposes which makes this a tax neutral thing. It's like, "Well, what was the point of that?" So, what are your thoughts there? Will we see hopefully some guidance or change around that? What do you think?
Cindy:
I think we will. I think we have enough trade organizations like the AI CPA, the [inaudible 00:13:11] of CPAs and the professionals saying, "Hey, is this really supposed to be tax neutral or is it supposed to be forgiveness?" And I think that when it originally came out I was in a few webinars where people like lawyers were saying, "It will be allowed as a carryback which is going to help your cash flow." Even though it's supposed to for small businesses it does increase your basis they're saying even though it's forgiven. But once again, I think that we're going to see enough professional push to eventually make it available as a deduction also, the expenses paid using the forgivable loan. But that's just a personal opinion, I can't say for sure because right now it's not. And I agree with you, you're making it tax neutral so it's really not forgivable. So, it just didn't make sense to me.
Doug:
It's nice to get certainly the cash in hand but you've essentially reduced the value of that by upwards of perhaps 34%, right?
Cindy:
Correct.
Doug:
If you do that so it's like, "Well, wait a minute." Again, but that's what happens when you're trying to get the funds out there in the hands of people and write the rules after the fact. So, obviously none of us are political pundits and we don't want to get into necessarily the politics but again I like to not only think short term but long term. So, no matter who's in charge or what's going on I starts to think long-term, "Well, it's great. We've got to get this money in the hands of small businesses and individuals out there to get the economy or it needs to be." But in the long run, how do you pay for all these things? Where are we going with that? Any thoughts there Cindy as to...
Cindy:
Yeah and I think that's where the presidential election campaign is going to have to start addressing those issues. Because we have really, really good tax rates right now. I can definitely say that I've been practicing for 45 years and I've seen the 70% rate, I've seen the 50% rate and I haven't seen these low rates. I mean, we are blessed, and taking advantage of these low rates is good but how long can it last? I don't know. Because we want to make sure that we can, the government's not going into bankruptcy or default on a lot of things. So, I think the campaign will probably address some of these issues or I just hope they're not neutral on them where they're trying to avoid the issue.
I'm not even so sure the government knows the overall impact of what has happened under the Cares Act and the PPP loans. I think that everything was so reactionary that they didn't have time to think about it. So I think that I foresee rates going up but that doesn't mean it'll happen because not only federal rates, I mean I think states and local governments are also feeling the impact of what's been going on. So, how else do you get to pay for all the things that they're doing without raising taxes?
Doug:
Yeah and that's a great point you make about state and local as well. For example, obviously, in Ohio we have a balanced budget amendment as the budget has to be balanced, they cannot operate in a deficit. And today I thought I saw that they updated the deficit projection at well north of $800 billion, $800 million I'm sorry I don't want to misstate that. But still, it's quite significant and in some fashion or another, the state government has to find revenues to balance that budget or cut expenses or some balance thereof. So, I think it's of utmost importance that we all think about those things too. And to some degree, it's beyond the scope of this conversation certainly to figure it out but we want folks to be aware because what happens related to that we've always been in this mode of we'll defer taxes, defer taxes, defer taxes. Well, Cindy, that may not be the right answer now because rates might be as good as they're ever going to be correct?
Cindy:
Yeah and that's where when you do even individual tax planning Doug you're thinking, "Wait a minute, should I not maybe take, do some Roth conversions now while the rates are low?" And with people inheriting IRAs, they eliminated the stretch IRA provisions at the individual level. So a business owner whose parents is leaving only the IRA is a legacy some of those retirement plans are fairly large. And giving a business owner who is doing very well an inherited IRA they have to take out over 10 years by increasing their income by $100,000 will reduce the 199A deduction and perhaps put them in a position where they can't do a lot of things for their own planning.
So I think overall, we do have to look at taking advantage of the current rates situation. And I have to honestly push the idea that when you're doing business tax planning you have to involve your individual tax planning. You can't just see one without the other. So, that's where professionals come into play and they look at the total picture and they just don't look at business tax planning outside of the individual tax planning because our individual, our business owners, our small business owners that pass through that their individual return.
Doug:
Yeah. That's absolutely great insight and I think the key there has that holistic view not only from your business perspective but the personal perspective. Get your advisors together, get those folks that have a stake in your financial future together. And that's what we're here for is to have those conversations.
Cindy:
And to look past the present day. What can you inherit? What will you inherit? This is something that will impact and that's why multiple year planning is more important right now than just looking at the present moment.
Doug:
Yeah, absolutely. I wholeheartedly agree. Well, thank you, Cindy. This has been wonderful as always and I enjoyed the conversation and look forward to having you on again. And in the meantime, if you want more business tips and insight or to hear previous episodes of Unsuitable visit our podcast page at www.reacpa.com/podcast. And while you're there sign up for exclusive content and show notes. Thanks for listening to this week's show. Be sure to subscribe to Unsuitable on Apple podcasts, Google podcasts, or wherever you're listening to us right now including YouTube. I am Doug Houser. Join us next week for another Unsuitable interview from an industry professional.
Disclaimer:
The views expressed on Unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea & Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.
