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 to 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.
Having a strong foundation is required in anything you build and that is no different when you are working to create a better business. Today, Scott Betchel, principal at Rea & Associates, is here to give insight on the construction industry, what he sees in the future and how you can create a strong foundation for your business by choosing the right advisor. Welcome to unsuitable, Scott.
Scott Betchel:
Thanks, Doug.
Doug:
Great to have you on. Known each other for a number of years, but now that you're a part of Rea & Associates and certainly our tax expert on the construction side, it's great to have you on the podcast from a personal standpoint.
Scott:
Great to be on here. I'm a big fan of podcasts and have also been a, I think it's safe to say, I've been a subscriber for a few years myself on unsuitable. It's an honor to be here.
Doug:
Yeah. That's scary. That's a lot of pressure. I'm glad I didn't know. But yeah, obviously strange times as we're in this, in the midst of this COVID thing. We seem to have sort of, I won't say settled in but many ways we have. We've adapted to the construction industry. Most of our clients and prospects have, it's not going to go away soon it doesn't appear so we're in this for a while. What have you seen the clients you've worked with, what have you seen them do that's been successful over the last six months?
Scott:
Yeah, so I think as you mentioned, everyone has had to adapt and move forward with the current situation and considerations. I think early on a lot of it was the market was busy and they had jobs to manage so there were a lot of considerations from the labor standpoint of how to develop the policies and procedures to meet the guidelines. And I think from a standpoint of both out in the field, but also in the office and maybe with some remote workers and so forth. Much like any other industry had to adapt to that but then I think also with the high labor costs and so forth in construction, there were a lot of considerations around the PPP loans and getting those in place. And now there's still a lot of consideration about on the backend, on the forgiveness side, and what that all means as we're moving through that process now. But I think as mentioned with the market being so busy, there wasn't a whole lot of time to just pause. It was more like, okay, how do we adapt and keep moving forward?
Doug:
Yeah. You had to evolve quickly. While there were a few projects that got delayed, most picked up very quickly if they were stopped at all. Obviously, construction was deemed an essential activity. But you lose efficiency, with some of the PPE, all this equipment stuff and that's tough for construction companies to deal with when they turn around and go to the project owners, things like that. There's a lot more thought and planning that has to go into this. Have you seen a lot of those considerations taking place?
Scott:
Yeah, I think it's always been a, I guess previously considerations more from weather-related type thing or something like that. This was kind of just the next thing up and needed to be addressed in the most efficient way possible and move forward so that everybody could be successful and the project still continues to move forward on schedule.
Doug:
Yeah, for sure. Well, your background, obviously more on the tax side and dealing with tax issues and planning, this is a certainly a tax environment, unlike anything we've ever seen with the changes that came into the fore a couple of years ago. Obviously, we can't necessarily predict the future, but what are some of the things that construction clients should be focused on as we get towards year-end here and thinking about planning and all of that?
Scott:
I think honestly, just continuing to monitor, obviously with the upcoming election, we will be heavily focused on that and what that may mean to the legislation from a couple of years ago. And if that might mean a further extension of the current rules or reversal of some of the current rules. I think one of the things, even though the construction industry has been very busy and still profitable, one of the things I think that's important is under the CARES Act, there were some changes with the net operating loss, opportunity to carry losses back. That was something that went away with the tax legislation a couple of years ago. And honestly, when you look back to the downturn in 08 through 10, there were a lot of NOL carrybacks that provided cash to the contractors so they could continue to have some cash flow and move forward.
When times were great, that wasn't really a concern, but I think there might be some now with some challenges that there might be some losses generated. And then also with all of the accelerated depreciation that is available, there can also be losses generated through that, that would allow you to carry back to previous years and get some cash flow from them.
Doug:
Yeah. I know we've had a few clients where they've had just massive capital expenditures the last couple of years and in taking that bonus depreciation could throw them into a tax NOL. And as you said, now you can carry that back and perhaps recapture some funds that way. It's worth it to certainly sit down with an expert like yourself and take a look and try to figure out where you can take advantage. And certainly, capital gains. We can talk about all those things too. I don't think anybody thinks tax rates are going down any further anytime soon.
Scott:
Right absolutely.
Doug:
There may be a case to be made that you might want to accelerate as much income as you can to say the current period rather than deferring as we have in the past.
Scott:
Right. The reverse of what we've always advised.
Doug:
Right, yeah. But again, I think the sage advice is to try to be flexible and maintain some flexibility as you think through that. As we get back to the construction segment as a whole, you and I are involved and we continue to see some M and A activity in the industry and things like that. Can you talk about trends you've seen over the last couple of years where you see things like that headed in the future?
Scott:
Yeah, I think M and A activity, and honestly, I think a lot of that is stemming from succession planning or in some situations, lack of succession planning and companies getting to a point that the owners are looking to get out and do not have that plan. And I think we always advise to start that plan well in advance and look at the different options, whether that be a transaction with family members or current employees or even more complicated things like ESOP, some of those types of opportunities. Seeing those ahead of time. But I think just with the current environment of so many business owners nearing that retirement age and honestly, probably some of the stress that things like COVID have brought on and so forth people are, "Okay, I've had enough." And looking for what's the next step. I think that's creating opportunities for those growing companies that may be looking to acquire other activity as well.
Doug:
Yeah, we certainly continue to see it quite active. And you're right. I think about the conversations that I have. Was just talking with an excavator here this past week, he's done very well, had a great run for certainly the last 10, 15 years. And the principal involved is in his early sixties and you know what? He doesn't want to work 60 hours a week anymore. And yet he doesn't really have, family is not an option so doesn't have that kind of next level to transition to. We've started to try to help him think through those things. How do you take some risk off the table? How do you do that? To your point, you've got to start a couple of years ahead. It's not something that you execute in a couple of months to do that.
Well, Scott, talk about how you've seen particularly the tax side change and progress from a technology perspective in your career. You've been around a little bit, you've got some gray hair, no offense as do I. What have you really seen from a technology perspective? How has it impacted what you do the last say five to 10 years?
Scott:
I would say there's definitely been a shift of continuing to whether it acquires the information from our clients and other sources electronically versus getting anything in print or so forth so that the use of client portals to transfer information. Also has allowed accounting firms to work on the assurance work, the audits and reviews, and the tax team to start working on that, even at the same time, were in the past, a lot of times you would have to wait till everything was nailed down before you could really get started on the tax side. But I think there's a lot of opportunities now where on the companies we can actually get started while the assurance team is out in the field. That helps with some turnaround and efficiencies there. And honestly then helps with communication with our team of, "Hey, we noticed this." Maybe asking some of those questions right then live when they're out there versus following up later.
I think also on the tax side, especially on the individual side, there's the opportunity for using technology to scan information directly into our tax software and work more as a reviewer or advisor from the beginning versus somebody just punching in the information into the return. It's kind of been a shift with our employees as well of looking to look for opportunities and things to dive into a little deeper versus just getting the information in.
Doug:
Yeah, move beyond that compliance piece.
Scott:
Right, right. And then on the backend, using some of the technologies to get returns out the door, whether it be e-filing or e-signatures from clients and so forth. That's been a gradual change that continues to improve it. Some of the documents weren't allowed to be e-signed according to the IRS, but they've released some guidelines now, they're kind of opening that up. And honestly, I think all of this remote work is forcing people to open their eyes a little bit more to those opportunities out there to use the technology that's available.
Doug:
Yeah, for sure. It's accelerated some of these things no doubt. And you talked a little bit, there are still so many unknowns. We've got the PPP thing, which right now obviously is quote-unquote a tax neutral situation, wherefrom a federal tax standpoint, that forgiven loan amount is not taxable income. However, the related expenses are not deductible. Now that isn't what most folks expected or necessarily wanted to hear with it, but who knows if that'll change, but you've got planning issues around that. Because all of a sudden, now there's a potential tax bill there. Other things floating around out there we've heard. And I don't know, we talked about this a little bit late last week is the forgiven loan amount subject to the CAT tax in Ohio? You wouldn't think so, but who knows? It's all the governments are short of revenue. It might be a cash grab.
Scott:
Right. And I think that's one of the things that you mentioned in the construction industry and the tax considerations, state and local has always been a very big piece of that with contractors working in multiple states and then obviously in Ohio, all of the city tax considerations. That's where work together with our state and local team here to make sure those things are covered and addressed for our clients.
Doug:
Yeah, absolutely. And it brings to mind, you and I have long been involved in a number of the industry groups in central Ohio. And I know that's one thing I've always enjoyed about the construction industry is that camaraderie with all the different professionals. Talk about from your perspective, what you've learned over the years, being involved in a number of those groups, and all of that.
Scott:
I think that the thing that jumps right out is just relationships and knowing the players and building those relationships. I think from a service provider standpoint, you have to really build the relationship so that they trust you as an advisor and so forth. I think there's a lot of very loyal people in the contracting world that as we are, if they're not working with us, they don't know maybe what all is out there and they've been very loyal with the firm that they've been with for years and years. And I think that's where you just continue to stay in touch and build those relationships and help where you can. And maybe someday you work with them and other others you may never work with. But knowing the people involved, I think there's a lot of interactions between the contractors that even just knowing the players is a big deal.
And I think obviously what has jumped out to me just since joining Rea, is there a lot of people that I have known over the years that I've not necessarily worked directly with, but now those relationships and knowing them through those years, joining the team and feel like I don't have that learning curve of learning some of the companies and so forth. I think it all goes to a relationship. I think that's on the contractor side, that's important to their business with the owners that they're working with or when it's subbed working with the TCs and so forth, it's all about the relationships that they've built over the years. And it carries it out to the other areas of the industry as well.
Doug:
Yeah, there's certainly a large element of trust together because the industry is so intertwined, as you said. Subs working with GCs or other subs on same projects. You become close-knit. And I think we have over the years too, whether even competitors. I certainly have a great deal of respect for the other folks that do what we do, that pay attention to the industry, and try to do our best to make the whole ocean rise, as they say. It lifts all boats. A great, great thing to keep in mind. Well Scott, if you had one piece of advice that you see, where do you see the industry, the construction segment in 21? We've had obviously stayed on a good run here in 20. Hard to say, but what are your thoughts as we look forward to 2021?
Scott:
I think obviously keeping an eye on the election and what that may or may not do to the economy itself. But I think here in Ohio, I know specifically in central Ohio, there are a lot of very large projects that are coming down the pipe that will keep a lot of people busy in Columbus. I know some of them may be larger and be being handled by some of the large non-central Ohio contractors, but it's still providing opportunities to some of the subs and some of those. I think in looking at that, it looks pretty strong. There are some articles that I've seen recently talking about the starts are down a little bit and kind of projecting that out. And if funding goes away, if some sectors continue to be challenged with COVID and so forth. But overall, it seems to me like it's still clipping along pretty well.
I think the other interesting thing is what the impact of all of the remote working that everybody is doing will have on real estate and in turn construction. If everybody starts working from home, well, what's going to happen with all of the office buildings and office renovations and some of that type of thing. I think that's an interesting area as well, that may not be right away and may not even impact 2021, but could impact things going forward.
Doug:
Yeah. One of the things that I think that's great wisdom there. One of the things I've learned in the commercial real estate and construction space, they adapt quickly. You see certainly the segments that maybe didn't have quite as high a sentiment or outlook six months ago, certainly do now. Industrial warehouse, different things like that continue obviously to be a lot of data centers, the big $1.8 billion Wexner Healthcare facility at OSU. Different segments, as you said, farewell, but then you look at maybe hospitality and office. Renovate, update, evolve, that's the way of the world.
Well, great to have you as part of the team now, Scott, and look forward to getting out on the golf course here again, sometime soon. I think we had a draw last time we were out. Neither of us.
Scott:
Yeah, it was a grind to get it back to even on the 18th. I think it was a draw.
Doug:
Yeah. Big $4 hole on the last hole. Major dollars there. That was fun. Thanks for joining us today. And 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 listening to us right now, including YouTube. I'm 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.
