Doug Houser:
From Rea & Associates studio, this is unsuitable, a management 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, please visit our website at www.reacpa.com/podcast and sign up for updates. Today, two Rea principals, Greg Speece, and Melissa Dunkle, are going to talk about potential tax law changes, stimulus updates, and lingering issues from the CARES Act. Welcome to unsuitable, Greg and Melissa.
Greg Speece:
Thanks, Doug.
Melissa Dunkle:
Doug.
Doug:
Great to have you two on. As always, you're two of our best and brightest tax superstars, so appreciate you coming on to enlighten us all further about some of the changes that have gone on. I know both of you have probably done away deeper dive into the latest stimulus act than you care to. I know Greg, particularly, you've had a lot of broadcasts here recently. But, Melissa, why don't you start us off? Give us a maybe a high-level update in terms of some of what has come down the pike here recently.
Melissa:
Sure. Doug, like you've said and that we've talked about, I don't know what feels like every day. The changes are nothing short of constant. And I felt like the whole year has really been a whirlwind of okay, what new thing happened today that we all have to read about and digest and figure out how to apply. So, obviously, there's been a lot of discussions recently with PPP and ERC. And I know between you and Greg, you both like you said, have done so many webinars and podcasts and discussions of those two topics alone. You could probably fill a day's worth of recordings just on that. I think the main thing with the PPP, the good thing there, from the first round perspective, is the deductibility of expenses and that the income isn't taxable.
Melissa:
So, I think many of our clients, had a deep sigh of relief when that came around. To just think about the tax consequence of that not happening was making a lot of people a little nervous, a little uncomfortable. So, that was a big one. That was a good thing. And then, now, all of the round two funding fun that gets to start again, which we'll continue to say, "Hey, talk to Doug for those questions and infield those." But, I think, just like you, it seems like every week, if not every day, there's a new article about here's what the SBA is doing now. So, that stuff definitely keeps us on our toes to stay on top of ERC as Greg talked about yesterday. Good job, Greg, for that webinar. So, if you missed it, I think it'll be on-demand, put that little plug-in here. Plug-in here soon.
Melissa:
So, that was good in terms of clarifying some things from previous and that they really expanded it, right? The ability to now retroactively go back. If you qualify and all things considered to get some credits related to 2020 and then looking forward to 2021 if clients qualify. So, nothing short of additional work for there to be done to help determine is there extra funds out there that clients thought they weren't going to be able to get now? I think those are the two big things we've really just been talking about a lot lately.
Doug:
You bring up a great point there, Melissa. And for those that don't know, ERC is Employee Retention Credit, which was part of the stimulus that's been passed. But, Greg, that brings up a great point. You've done a deep dive into some of the ERC stuff. I've spent a lot of time with PPP. We've got other experts around the firm and in all these different topics. I couldn't imagine trying to tackle all of this alone or just with a small group. So talk about the interplay. Maybe we've had as a firm in terms of getting everybody together to try to get the right resources involved for a client.
Greg:
Yeah, absolutely. I've been thinking a lot lately about how much we've seen in this last year. And really the theme of 2020 was uncertain for me. We're sitting here at this time last year and we had no idea what was about to unfold, really. So, heading into one of the more difficult busy seasons we've had in a long time, starting with the initial passage of the CARES Act, which we were all probably a week removed from the office at that point and they passed that. So, we were literally just all trying to take a deep dive and figuring out what it means for clients. Meanwhile, it's the end of March, which is typically one of our busiest times of the year as we're gearing up for the tax deadline.
Melissa:
Don't forget to try to figure out how Zoom worked in that whole process.
Greg:
Yeah, exactly. Exactly.
Melissa:
Can you hear me? Can you see me?
Greg:
Yeah, trying to work through those technological difficulties was definitely a part of it. But, I think I was really proud of my teammates here. Doug and Paul jumping right in on the PPP stuff because we really didn't have time to wait. Clients were asking questions and you're just trying to be as fluid as possible. And when you get these massive, massive overhauls in the tax code that's written into these stimulus bills, there's a lot of unintended consequences and unanswered questions. So, the way that we divided things up, we had a team internally here of tax folks, like Melissa and I, a couple of others, that really dug into the tax provisions, the tax provisions of the CARES Act, while Paul and Doug and his team took on the PPP process and started putting our webinars out to clients.
Greg:
And we started publishing some other material and basically, the theme was just to contact your clients to have a discussion with them, try to figure out what's going on in their business.
Doug:
I think that's been the best part is just collaborating across the firm and trying to get the right expertise involved. And we certainly have shown we're not afraid of that and you've got to do it because I just couldn't imagine trying to tackle this and be an expert across. People forget these are the two largest stimulus packages in our history that have now been passed. So, there's so much involved there.
Doug:
Melissa, maybe you can talk to us a little bit about what you see as we move beyond these two stimulus packages that were passed now that we're into a new administration. Obviously very early on, too early to tell, but what are some of the things that you think will probably be addressed fairly early on, if any?
Melissa:
I think a lot of the discussion has been around, to your point, what's coming and when. And I think the when is probably, in my opinion, what we really don't know. My personal feeling, and Greg, I'm curious to see what you think, I'd be shocked if anything happened sooner rather than later just because how can we be on the men from this pandemic and you're pushing out funding and then, "Hey, we're going to increase taxes though, too." It just doesn't logically make sense. I think an increase goes without saying. I don't know how, unless something, of everything we've read, unless something changes. I don't know how an increase in taxes isn't coming down the road. And I think the interesting part will be how similar is it to what was originally kind of in Biden's plan and the proposals versus what actually gets enacted.
Melissa:
So, he pushed a lot and talked a lot about this $400,000 threshold on the individual side. That seems to kind of be the sweet spot of where some of these provisions come into play, whether that's tax bracket changes or additional tax on high-income earners, or the removal of the qualified business income deduction. All of that seems to hit around that 400,000 for individuals. And then, on the corporation side, right now, the nice benefit for C Corps is that flat 21% that, if that changes, they really haven't had that all that long, but at the most, it looks like maybe it'd go up to 28%. So, I'm curious, just like everybody else, how much of those things that were outlined are really going to be the things that change and, Greg, I don't know. FEMA, kind of what are your thoughts on all that too?
Greg:
Yeah, I completely agree. I think the incoming administration is going to have a lot on their plate right away. The first hundred days talked about another stimulus package, which I believe we might get some details on today as we're recording this. And then, also, obviously, dealing with the vaccine distribution and the pandemic. And so, from that end and also getting his cabinet in place, there's going to be a lot to do and a lot for Congress to handle to pass any major tax laws in the near future. Everything I'm reading says you're looking at probably later this spring or even in the summer before that gets addressed, at least, in its entirety. Because, as we know, for some of these stimulus bills, you might tuck in one or two little provisions here and there that do impact people. But, as far as a broader tax plan, it's probably not going to happen until later this year.
Doug:
Yeah. That's a great point. And I think, oftentimes too, and I'll date myself here a little bit. I go back a little more, a little further than either of the two of you. But, despite whatever changes may be coming, I think back to the Clinton administration, the Bush administration, the Obama administration. The economy was generally very successful through all of these administrations. That doesn't mean we don't plan and adapt and do things, but I think, sometimes, there tends to be a little more circus around, "Oh my gosh, this is the kind of the end of the world if we change a few of these provisions."
Doug:
It's more around kind of the planning and how we can continue to be successful. It doesn't necessarily mean that "Oh my gosh, all economic activity is going to come to a halt", right? But, it is surprising. You get some of the reactions that you see from certain sectors and all that. Melissa, what's one of the things that you find yourself doing when you talk to clients through this period in terms of that, trying to do projections and think ahead and kind of wrap their heads around everything that's going on? What do you try to preach to people when you're-
Melissa:
I feel like I try to do both sides. Conservatively, here's the worst-case scenario. Worst case meaning taxes are going up and here's that impact to you and then, and try to give them all the facts, so that they can make the most informed decision. The challenge that I feel like we have had for the past few years with the Tax Cut and Jobs Act that changed beginning with '18. There were so many things that changed about the tax code because of that overhaul. And it was hard to plan because it was not timely. Things weren't timely enacted. And then, you had these errors that when you were waiting for technical correction bills that never came around until the CARES Act. And so, all these things were making it a little bit more challenging to plan, but still doable for the most part.
Melissa:
And then you come into the CARES Act world in this past year and you feel like a broken record of saying, "We know this much, but we don't know this much. So, if this happens, then this might happen. So, if that's the case, then do this." You just feel like you're trying to give them all the information without really sounding like you have no answers for them because a lot of it, we're just waiting. And you can give them all the info you want, regurgitate all this stuff that comes out, but at the end of the day, if we don't have final guidance for how something works, it's hard to help them plan. And sometimes more information than less can be confusing too. So, I think back to all the PPP stuff with you guys and for the longest time, it was eight weeks and then all of a sudden, it was 24.
Melissa:
And then, you have people that applied early on and got funding. "If we knew it was going to be 24 weeks. I probably could have got more money." And then, you go through all this process and it's you can only make so many decisions with what you know today. And so, is that how you're going to run your whole business? No, you've got to find that risk. I think that risk element that you're comfortable with. I had a few discussions with clients on, "If I'm going to be in that threshold of paying capital gains at my ordinary income rates, if, when that happens, if that happens, should I sell a bunch of stuff this year?" And it's like I'm not going to tell you yes because we don't know when that's going to happen, if it's going to happen and if it happens in 2021. So, yeah. Sell all this stuff this year, because that's going to be the best answer because we don't know.
Doug:
Right. I think of two things that I think of when it comes to that. One, don't be paralyzed with your decision-making because we still have all these unknowns. And two, don't let, necessarily, that potential tax impact drive 100% of your decision-making. There are other considerations there. So, Greg.
Melissa:
Yeah. There's certainly something to be said about, if you owe tax, it's probably because you were in a position where you had a good year or a good revenue stream and that's I think certainly better than the alternative.
Doug:
Yeah. Feel good about that.
Doug:
So, Greg, what about from your perspective? What are you seeing in conversations with clients, whether it's related to M&A activity or other planning and decision-making? Has it changed the outlook much?
Greg:
Not too much. So, at the end of 2020, the big uncertainty was the PPP expenses. And now that we got some final rules on that, we can kind of move on and really drive into 2021 because most of my clients, and Doug, you and I share a lot of clients, are in industries that they have an impact from the pandemic, but it wasn't as severe as others. So, in large part, they've had decent years and really, they're looking to improve on that in 2021. So, yeah. Definitely a lot of questions around what might happen with the new administration, of tax rates going up. Is now a good time to sell? Is now a good time to buy on the M&A side?
Greg:
Some of the provisions would certainly impact that side of things. But, as you said, I was going to echo your comments here if you really don't want the tax implications to be the driver. You've got to make sure that it makes good business sense, whatever you want to do. And then, have us on-call along the way, so we can help you do it in a tax-effective manner. But, especially with those larger transactions, I've seen a lot of M&A activity over the last year. So, there's no shortage of that, but you want to make sure that, at the end of the day, you're doing it for good business reasons, solid business reasons. And then, you can kind of structure the deal around that.
Doug:
I think that's so vitally important. And, if anything, I know in the construction segment, we've seen M&A activity, in fact, increase. I don't know if that's because the segment itself has done well, so it's relatively even more attractive than it was before, or certainly banks, they still have a lot of capital and are willing to lend to the right successful businesses. So, there's a lot of positives, yet there's also a lot of negative things that have impacted certainly industries and businesses adversely. So, Melissa, how do you balance that? It's so unlike, obviously, what we've seen before. You've got folks that have continued to be very successful and others that have suffered. And how do you kind of balance that whole outlook when you're talking to clients and trying to help them plan and think ahead just with all these unknowns?
Melissa:
You really do have to sort of compartmentalizing the conversations because, as you said, some industries are doing great. And even within the industry, you may have pockets of, depending on their specialty, some are doing better than others, but then when you look just across, at least like my client base, it does vary. You have those that are in that retail space. They are struggling. They're trying to adapt and they're trying to find ways to keep customers, get new customers, be innovative, think of new ways to reach people because that foot traffic is just not there. And it's hard to say when it is going to effectively come back to normal. So those conversations are around cash flow and ways to save money and ways to save on taxes and to do things differently and not maybe splurge on some of the things they were doing in the past.
Melissa:
Whereas then you're looking at, on the flip side, clients that are doing okay and cash flow are good and their business is good and they don't see that changing in the next 12 to 24 months. So, from there, you're looking at, "Okay, I have all this extra cash. What should I do with it? Are there things I should be doing? Putting back into the business? Investing in other ways? Planning accordingly?" So, the conversations are very different and you really just have to understand each person's business probably better than you have in the past because it's not the same cycle that it has been. It's a little more unpredictable.
Doug:
Yeah. I think that's a great point. It's taking that time to do that. Greg, from your perspective, what are still some of the most pressing or unknown lingering issues out of some of this, the CARES Act and the follow-on stimulus?
Greg:
Yeah. So, we've talked about this recently in our webinars with the follow-up stimulus here that we just got. The ERC interplay with the PPP loans is one of the big things that we'll be working through with clients. A lot of that is forward-looking as we look at some of the enhancements to this credit and who is actually qualified for it and whether or not it makes sense to go after the PPP 2.0 funding. So, that's one thing that I think a lot of us are looking at right now. There are definitely other things that kind of carried over from the CARES Act. We still have a five-year NOL carryback available for 2020.
Greg:
So, as Melissa mentioned, some of our clients are struggling a little bit for cash flow and that's really all the provisions of the CARES Act and these other stimulus bills from the tax side. It's really just been centered around increasing cash flow in the way of credits, the funding through the PPP, but then also carryback claims and other things like that. So, it's almost... It is a case-by-case basis, but, at the end of the day, we have a lot of clients that are doing well that we're doing traditional type tax planning for and trying to plan for what might come down the pipe. But then, we also have clients that aren't doing as well, so we can take advantage of some of these new provisions and the CARES Act that can help them improve their cash flow and get through to the other side of this.
Doug:
Yeah. And you think through all of the kind of unintended consequences with this too. For example, with COVID, so many more people working from home or a hybrid model, we haven't seen really the fallout yet from, say, the municipal level, where taxes continue to be paid and withheld for folks based on where their "office" was. How does that all play out, unknowns like that? Have you heard anything along those lines, Melissa? I know there's probably going to be all kinds of litigation and stuff as it relates to that.
Melissa:
The last time I was talking with Joe Popp and Luke and our state and local tax group, they were following a potential case with that exact issue. Because you think about, for the longest time, businesses withhold... And we're talking about Ohio for our city purposes, they withhold where you work, where your primary place of work is. And so, for us, that's Dublin. But I live in Columbus, which has a different tax rate. So then, you think about how that affects people. And, if I'm using my home as my main office location and don't I want my withholding to reflect that and whatever else. So, I could definitely see where it becomes an issue and people argue it, one way or the other and it'll be interesting. I haven't heard anything recently if anything has changed or closer to changing, but Greg, I don't know if you have either.
Greg:
No, I haven't either. I was just going to say I think that's a tough topic for an entirely different podcast there, the state and local implications of all of this as states are struggling for funding. They're going to implement new taxes and change things around. Obviously, they don't have to follow all the federal rules that we're getting through the CARES Act and other things like that, so it just raises a whole host of other questions.
Doug:
It's just this cascading effect and you can imagine the impact to municipalities and their funding and all of those things. And, we're just really kind of the tip of the iceberg, I guess, is the point with all this. I think, even in Ohio, the BWC, the Bureau Workers' Comp, all these huge dividends, 370% dividend that they gave back in December. I was on a [inaudible 00:23:50] earlier today and I didn't realize this. Maybe, you guys, it's certainly more your era, but that dividend will now be a part of the CAT Tax for folks. So, it's like, all right, you got this nice, huge windfall, but guess what? There's going to tax on it. So, stuff like that, it's just... I can't even follow it.
Melissa:
No, and that's a good point because I know for one of my clients when I was looking at stuff and talking with the state and local team, Ohio sounds like they're following the rules of PPP and the expense deductibility, but that's not across all the states right now. I don't know if, eventually, that will be the plan, but some of the States I was looking at, had not passed anything to follow suit. So, then as we're trying to plan for fourth-quarter estimates and what-not, you have some that are proportionately higher because of that. Just to be conservative, we don't know they're going to allow the deductibility or not.
Doug:
Yeah. I guess that, for me, it's what I got to call the experts. That's why we call you guys.
Melissa:
And then, that's why we call Joe Popp.
Doug:
Right. Right. We'll get a wrap-up comment from each of you here. Greg, if you want to leave our audience with one theme for 2021, what would that be at this point?
Greg:
I would say just be patient. The rules are going to continue to unfold as we go through the busy season. Stay in contact with your advisors. We're going to closely monitor what's coming out, but it's likely to change by the day. So it's something that we're all kind of working through together at the end of the day. We'll try to do what's best for each individual situation.
Doug:
Sage advice for sure. Melissa, what about you, if you've got an overarching theme?
Melissa:
Yeah. Greg, I like yours. I like the 'be patient' one a lot because I think you're right. It's the wealth of information to come that I don't think has ended. And I've always liked the phrase of just kind of get comfortable with being uncomfortable because I think that last year and this year if nothing else, they will continue to be uncomfortable for people. And I guess it... I hope it can't get any worse.
Doug:
Don't say that, Melissa, please. Please.
Melissa:
It can only go up from here. That's my positive thinking.
Doug:
I hope so. I guess my theme is always... I like it when our clients when we get our advisors and their advisors altogether, not just us, but financing provider if they have a financial advisor, all these things. I think when we, and now in the world of Zoom and all this, it's so much easier than ever before to do that, get everybody together because we all have different perspectives, different ideas. It can help the client from all angles. So, that's the message for the day, at least from me.
Greg:
Yeah, completely agree with that.
Doug:
Melissa and Greg, it's so great to have you on as always, and really appreciate your insight and I'm sure we'll have you on again as we hopefully get more clarity as things move forward and not less.
Melissa:
More rules.
Doug:
Yeah. I guess that's not going to change, is it?
Melissa:
Nope.
Doug:
Thanks again to both of you. And if you want more business tips and insight or to hear previous episodes of unsuitable, please 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'm Doug Houser. Join us next week for another unsuitable interview with an industry professional.
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