Doug Houser:
From Rea & Associates 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 while helping your organization grow and 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.
No time to sit back and relax because decisions on tax planning are still in play. With the 2020 elections approaching and the uncertainty of COVID-19 continuing for who knows how long, we can expect to see new legislation and tax-related provisions in the works. Today, Chris Axene, principal at Rea & Associates, is going to share some of the decisions we can expect to see from the Supreme Court as well as some questions you should consider asking your CPA during an election year. Welcome back to unsuitable, Chris.
Chris Axene:
Thanks, Doug. Glad to be here.
Doug:
Glad to have you on as always. I think you might be approaching the record for most guest appearances on unsuitable.
Chris:
Really?
Doug:
Yeah.
Chris:
Do I get a prize for that?
Doug:
Well, maybe a drink from the host. How about that?
Chris:
Perfect. I'll take that.
Doug:
Yes. We'll have to do that. Hopefully, we can do this again in person here sometime soon.
Chris:
I agree. I miss the in-person podcast experience.
Doug:
Yes, absolutely. But yeah, so let's start with the Affordable Care Act. Obviously, that's been challenged through the court systems, currently awaiting a decision from the Supreme Court. Correct on that?
Chris:
Yeah. So a bit of breaking news, I suppose, related to prior years that I wanted to bring up to our listeners here. So the Supreme Court has agreed to hear a lower court case challenging the constitutionality of the Affordable Care Act and everything that goes with it. They announced that a month or so ago, and they'll be hearing that case then their October term, so starting in October. The outcome of that will be some time after that in terms of an up or down on whether the Affordable Care Act will stand that as enacted or be struck down.
So what that does there's potentially an opportunity for many of our clients and listeners here on the podcast because as you may know, the Affordable Care Act was passed for basically universal-type healthcare and the pay for to cover that was the enactment of a couple of surtaxes. One on so-called net investment income, a 3.8% surtax. So that's on interest, dividends, cap gain for certain taxpayers that are over the threshold in terms of when it applies. Then, the second piece was the Medicare surtax, 0.9% on wage, and self-employment income that's above the threshold. So the Affordable Care Act was what? First enacted, I think, in 2010 and then fully phased in maybe '13, '14 timeframe. Clients and taxpayers, in general, that have paid the surtaxes in the past may be eligible for a refund opportunity if the Supreme Court rules that the Affordable Care Act is unconstitutional.
Doug:
Interesting.
Chris:
So what happens is, of course, tax returns have a three-year statute of limitations in terms of years that are open. Right now, there certainly is a segment of taxpayers that extended their 2016 returns, and they may have filed them in let's say September or October of 2017. So that three-year statute is coming up and will expire, and so the opportunity here in the short run, next 60 days, let's say, is to file protective refund claims if you've paid a significant amount of either of those two surtaxes for that 2016 year to maintain your rights to a refund if the Affordable Care Act is struck down.
Doug:
Wow. Yeah. Obviously, that would be quite messy going back that far, certainly.
Chris:
Yep.
Doug:
Can you speak, Chris, in general terms about the threshold for taxpayers that paid each of those surtaxes, the 3.8% on that investment income, roughly where was the threshold on that?
Chris:
Yep. Yep. The line in the sand, so to speak, would be for married filing joint that had their adjusted gross income was over 250,000. For single taxpayers, it was $200,000. Above that, then you can start to pay either of those two surtaxes and it's the same threshold.
Doug:
Yeah. Yeah. That's certainly interesting. Of course, there are many other things that go along with that, the preexisting condition protections and things like that, which would go away. So certainly more to come on that. But you said there are no decisions certainly expected prior to the election, is that correct?
Chris:
If I were a betting man, I would bet that we would not get anything prior to November 3rd. Quite frankly, it may come out after the end of this year, maybe early January timeframe.
Doug:
Yeah. Of course, the legislative environment could change entirely in that timeframe, right?
Chris:
That's correct. Yep. Yep.
Doug:
So, who knows? But yeah, that's a great, obviously, planning advice for folks. So the message there is get with your tax professional here soon to protect that 2017 tax year, correct?
Chris:
2016, yeah.
Doug:
- That might've been filed.
Chris:
That would've been filed in 2017. Yep. And then we've got a little more time for 2017 and, of course, 2018. That three years is a couple... What I would expect there is maybe 2017 for those that would've timely filed, that would have been by April 15th, 2018. So if we get a decision there in January, February, then '17, we'll know what our options are at that point.
Doug:
Yeah. Now, what about some of the other CARES Act, COVID-related stuff that we've seen this year? Can you talk a little bit about the impact there and what folks should be thinking about at this point in time?
Chris:
I wanted to remind our listeners about some opportunities that Congress passed already with the CARES Act that are applicable to 2018 returns, 2019 returns, and potentially 2020 returns. The biggest of which really is in two areas, but it gets all to the net operating loss deductions. So I guess the first thing to bring up is our listeners may have been aware that when the so-called Tax Reform Act was passed and effective for 2018, there was a glitch. They called it a so-called retail glitch with leasehold improvements to real property and the ability to take bonus depreciation at 100% in the year of purchase.
That finally got fixed with the CARES Act retroactive to 2018. That makes a big difference because, in the absence of fixing that, we had to depreciate those improvements straight line over 39 years, which is a significant difference in terms of a deduction. So that got fixed. So if we had, and we did have clients that we took the position at the time, particularly with regard to 2018 returns, was it hasn't been fixed and this is what the statute says and so we have to go with 39 years straight line. Now, we can fix that. Clients have a variety of options to fixing it, whether they want to actually amend the 2018 return or if they can fix it on their 2019 business returns or individual returns if they haven't been filed yet.
What that can do in and of itself is I can create a net operating loss. So that's really one of the other big things with on the tax side of the CARES Act was the ability to, for tax years, '18, '19, and '20, if the business generated a loss, you could carry that loss back up to five years. Under tax reform, the Congress had eliminated that carryback. Used to be two, they got rid of it, and there were some significant limitations on the use of that going forward. Then, the CARES Act came in and fix that.
So there's an opportunity, right now, let's stick with individual taxpayers. The top individual tax rate is 37%. If you have a business loss that you can carry it back to five years, you'd be going pre-tax law change when the maximum tax rate was 39.6%. So there definitely is an opportunity there to get some higher dollars back if you find yourself in an NOL situation.
Doug:
So it's nice to try to take advantage of those while you can, certainly, because those winds may blow the other direction before too long. Right?
Chris:
That’s right. On the corporate side, I think the difference is even bigger. Corporate tax rates right now are 21%, starting in 2018. Prior to that, most C-Corps paid a 34% tax rate, but the really big ones could be at 35. So again, some significant dollars. When we're still feeling the impact of COVID on the economy and business owners, cash flow is important, and this is a way to reclaim tax dollars that you paid in the prior year.
Doug:
Yeah, absolutely. I think of it another way too. I've gotten this question, had this discussion a lot with a fair amount of construction clients who've continued to perform well during this timeframe. So there used to always be this consistent thought, "Well, I want to try to defer my tax burden as much as I can." That type of thing. But, given where rates are now, as you said, so low on the corporate side and with all kinds of government entities, be it federal, state, local now seeing these massive revenue shortfalls that they're going to have to try to recover in some way, the likelihood of future tax rates being better than they are today is probably pretty low. Would you concur?
Chris:
At the rate, we're printing money, that the outlook is not good for low rates.
Doug:
So given that, if we expect perhaps future rates, whether they're capital gains, ordinary income, whatever that more likely than not may be higher, what does that do from a tax-planning perspective? Does that change thinking right now? What do you advise at This point?
Chris:
Sure. Yeah. The so tax planning in an election year is always a shot in the dark in many respects, particularly when we're sitting here in August and we're still waiting to have our election on November 3rd. Typically, you don't get changes to the tax law prior to November 3rd because the incumbent generally isn't going to try to enact anything. They're going with what got them here, so to speak. The other side may or may not want to go out on a limb to create something that can be held against them in advertising by their opponents. It's rare to see any meaningful tax legislation prior to November 3rd in an election year.
This year, because of COVID and really from my perspective, entirely because of COVID, I guess I wouldn't be surprised if we got something just because the different areas of the country continuing to be impacted differently by the pandemic. You've got, particularly in the retail or restaurant sector that, again, is being impacted because of early closings and their inability to get large groups to buy from them. You could see something happen, and they would have to happen in September or October to try to pass something tax-related that is also COVID-related. An absence that, what I counsel to my clients and for the good of our listeners is tax planning in an election year is be flexible, maintain the flexibility as much as you can so that after November 3rd when now we kind of have an idea or we will have an idea of what Congress looks like, and what the White House looks like, and what impact that may have on taxes going forward.
At this point, since we know President Trump is running against Joe Biden, if Biden wins and if the Senate changes hands and let's say the liberals control both parties in Congress and the White House, I think you alluded to earlier, taxes are going up. When taxes go up and we know that that's what we have in our future, then we try to do things to push off deductions and accelerate income to the extent that we can into, probably at that point, a month and a half in 2020.
Doug:
Yeah. It'll be a crazy time. I mean, I even think of, in my world, related to construction. I was on a conference call a short while back with Jack Marchbanks, who's the director of ODOT. Of course, all of the road projects in Ohio are separate from the general fund. They're entirely funded by the diesel tax, the gas tax, as well as contributions from the federal government. But the question came up, "Well, how are we doing on diesel tax collections? What does that mean for future road projects, all that?
Now, they were flat at that point. This was maybe 45 days ago. Year over year, they were flat. But the only reason they were flat was that we had a significant increase in that tax that was finally passed the first time in 20 some years, last year. Absent that, that would've been down significantly. Of course, they're very well below projections, and then that impacts the ability to fund those infrastructure projects. So the question then becomes, "Well, if we're still in this crisis, things like that, habits don't change immediately. How do we alter the different taxes that we have based on the current environment and usage that we see?" So I think there's a lot of those kinds of discussions, a lot more going into it at all levels because behaviors have changed. Right? And how does that impact the tax code going forward?
Chris:
Absolutely. I was reading something over the weekend about the bed tax, the occupancy taxes, and hotels here in Columbus. My numbers, take them with a grain of salt, but the context of the article as I recall it was in general, year-to-date that there might've been something like 30 million of taxes collected in an occupancy-related bed tax and hotels. Year-to-date, it was like two.
Doug:
Wow.
Chris:
Yeah.
Doug:
Some States, right, don't have an income tax? They rely more on higher sales taxes due to tourism and things?
Chris:
Right. Taxes, yep, et cetera. Yeah.
Doug:
So States like Florida could be impacted completely differently, right?
Chris:
Absolutely. The conundrum in tax law... So we have a progressive tax system and we want to tax those that make more. When you have times like these though, and some industries, an income tax when you don't have income, doesn't raise any revenue. Then, you get into the kind of the quicksand of well, state and local governments need revenue and do we raise sales tax on things? That disproportionately may impact a group of people that isn't where you want because it's a transaction-type tax. It certainly is not easy.
Doug:
That's the difficulty at the state local level too because most of them have balanced budget requirements, so they're forced to deal with that in some fashion. Whereas, the federal government can sort of punt it a little bit.
Chris:
Unfortunately, that's true. Yep.
Doug:
Yeah. Various industries, obviously, impacted very differently too. I mean, think of oil and gas and what's happened there and how that trickles through those economies, where that's a focus.
Chris:
Right. Yeah.
Doug:
Where do we go? A lot of questions. If you're the typical owner-managed business and your businesses is doing okay, you've had, obviously, just all the unknowns we face this year and going forward, what are some questions they should be thinking about and asking as we get into tax planning season here in the fall?
Chris:
Well, so what I would suggest is make a date with your CPA if you haven't. Some clients, they dread interacting with their CPA. They liken it maybe going to the dentist. From the other side of the table is we can only be as effective as a planner as the business owner's willing to share where they are in their business, and what's going on, and what's impacting them. If there isn't that good two-way dialogue, then we're not going to be very effective to help them out. So make a date with your CPA either over Zoom, or socially distant, or whatever, and have those conversations about, "Okay, what's 2020 look like? Let's assume that in 2019 we filed, it's in the books. We're at 2020. Okay, this is the year the COVID has hit. We likely have an impact on our business. What are the options that are out there based on what the business owner is seeing and the prospects for the rest of their year?"
Then, hopefully, your CPA is talking about, again, some of the things we've covered at a really high level in terms of cash flow items. Because ultimately, the business owner, they need cash. Many things in the tax code are in order to get a benefit, you've got to expend money. When you get an opportunity like net operating losses and the ability to carry those back for five years, where that didn't exist previously, that an opportunity that you want to make sure you take advantage of.
Doug:
Yeah. And as you say, cash is always king. That's imperative. That's sage advice. Get in front of your CPA. Have those conversations so we can be as informed as possible and help you make some of those decisions and like you said, keep that flexibility, sort of hedge maybe a little bit because we don't know so many things.
Chris:
Right. Yeah. Yeah.
Doug:
Well, Chris, I got to say too, I love the treetop shirt today. Very well done. We got to get back out on the golf course since last time we played, I think you took four bucks off of me. I want that back.
Chris:
I need to give you an opportunity to win it back. I played on Tuesday, and you would've won your money back if you'd been playing.
Doug:
Well, you never know. Hopefully, let's try to do that soon. That would be fun. Before we get to get into the fall too far. Well, thanks again, Chris, really appreciate you being on. Certainly, if you want more business tips and insight or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast. 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'm Doug Houser. Join us next week for another unsuitable interview from an industry professional.
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