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, visit our website at www.reacpa.com/podcast, and sign up for updates.
The 2021 busy season just got busier for tax professionals. Working through the results of the recent election, new tax provisions resulting from an ongoing pandemic, and more, business owners will have to be prepared to look at things a little differently in the year ahead. Today, Chris Axene, the principal on Rae's federal tax team is going to explain what accountants and tax pros are working through today, what businesses can expect going forward, and how to plan for these changes. Welcome to unsuitable, Chris.
Christopher Axene:
Hey, Doug. How's it going?
Doug:
Good. Good to have you back, as always.
Christopher:
Yep, thanks for having me here.
Doug:
Yeah, you're catching up to Joe, I think, is the most frequent guest here. You're going to win the Alec Baldwin award, as he does for SNL and, I think, for the most number of times hosting or guesting.
Christopher:
Fantastic. I assume there's a suitable prize for that?
Doug:
Yes, yes.
Christopher:
… with an unsuitable prize?
Doug:
A round of golf and a glass of bourbon with said host here, so that's your prize.
Christopher:
Cheers. Looking forward to that.
Doug:
Yes, me too. Enough of this. But speaking of enough of something, gosh, it seems like from a tax perspective, the thing that we have to get used to right now is change, right? Be flexible, and no matter what it is today, it's going to change tomorrow. Is that the theme we're under at this point?
Christopher:
Yeah, absolutely. Well, and quite frankly, this is, I think, my 26th year of practice, and my memory might be a little fuzzy, but it feels like, maybe, the first 10 years of the change didn't quite happen as frequently, and then the last 16, that's what you expect. The fact that something might stay the same for more than 18 months is just unheard of, so you just understand what the rules are for this filing season are likely going to be different a year from now.
Doug:
It's crazy. Obviously, I'm no tax expert. I know enough to be dangerous, basically, is when I need to come and find you and get the real expert involved. But it just seems like to that point, we've got so many more provisions that change abruptly, or sunset, or all these different things that are written in. The tax code is being used more and more, I guess, for policy, it seems to me than it ever has been. Is that your thought as well?
Christopher:
It is, and particularly, when you have a more liberal, progressive government that feels that that's the answer to how we solve issues that we have in our society, then they're going to use the leavers that they have access to accomplish that. And the reality is, is how we raise revenue is via taxes, first and foremost, and so the code is then used to incentivize the areas where they want to do that, and penalize the other areas where they need to raise the money to pay for what they want the government to provide.
Doug:
Yeah. It's always a balance and never one that satisfies everybody, that's for sure.
Christopher:
That's right.
Doug:
Well, what about coming into the 2021 tax season here? When this airs, we'll be in March, obviously in the thick of it, so what should we know coming into this tax season?
Christopher:
Well, so 2020, COVID, lots of legislation passed, temporary provisions through the tax code and outside of the tax code to help the citizens out, and so there's, obviously, the big thing are the stimulus payments, so to speak, or the economic rebates, the various things that they've been called. And there been a couple of rounds of those that have gone out and there was a process to try to get the money in the hands of the people as quickly as possible. Of course, when you're talking about the scale of that rollout, it doesn't happen on the flip of a coin very efficiently, and so lots of people got some money, but they may not have gotten, ultimately, as much as they will when they file their 2020 tax returns as individuals.
And that's where, ultimately, this will all shake out is the various payment amounts will be treated as an item on your 2020 return, and then you subtract out what you've already received. And if you, for whatever reason, didn't get as much as you were entitled to, then it will be refundable credit when you file your tax return. In some cases, you could have received more than you were entitled to. Hopefully, that's a rare instance, but the guidance is if you fall into that bucket, then you don't have to give it back. You got a freebie from the rest of us.
Doug:
Yeah. And of course the PPP for our business owners, I mean, I think everybody was all over that, and that will not be treated as taxable income. There is, obviously, some consternation about that for a while, but they did finally change that in the CAA, so you've got a big windfall there, and then all the various things with employee retention credits and all these different business provisions as well. Any other major updates that are, at least, more semi-permanent to tax provisions that we saw that will have an impact for '21?
Christopher:
Yeah. So certainly, the CAA did some extensions of things that are perennially on an extensive list for tax benefits, credits, et cetera. A couple of the big ones, Congress had been playing with the deduction for medical expenses, which is claimed as an itemized deduction. And they had raised the floor on how much you can deduct or set another way as the first dollar that you can deduct, the floor above that amount where you get a deduction, had gone out for a couple of years and then had it retroactively or temporarily been reduced back to what it used to be, which is 7.5% of your AGI, which is a number from the front part of the first page of your tax return.
So if your AGI was $100,000, and for a while, they were supposed to go to 10%, so you'd have a $10,000, basically, the first $10,000 in medical expenses wouldn't be deductible, and then anything over that would be. They've had temporarily brought that back down to 7.5%, and then with the CAA passed here at the end of 2020, they permanently extended that back to 7.5%. So that's good, particularly those that, here in 2020 and going forward, that are at risk for health issues because of COVID and other underlying conditions that they're going to be spending money on healthcare for us. So that was good.
What else is out there? Some of the tax credits for businesses, the Work Opportunity Tax Credit is a big one that, because of the cost, it's hard for them to make it permanent, and unfortunately, they didn't make it permanent this time, but they did kick the can down the road a couple more years than the, typically, one to two-year patches we've had in the past. And so now, it's good through the end of 2025, and so that lines up with some of the bulk of the tax reform changes that happened in 2017 because those are set to expire effectively at the end of 2025 as well.
Doug:
Yeah, so most of those provisions from that Tax Cuts and Jobs Act, a lot of them, as you said, sunset in 2025. It's hard to think about that far ahead, but yet here we are in 2021, right? And where do we think, maybe, the Biden plan will fall, or this administration, what they may try to address? We've heard some lofty goals, obviously, through campaign time and all that. I don't necessarily buy-in that all those are even achievable or certainly desired by any means. But where do we think, realistically, some of this stuff may fall, and how might that impact some of those provisions as we get closer to that date?
Christopher:
Yeah. So just to, maybe, step back a little bit, the tax reform act that was passed at the end of '17 was one of those, hopefully, once-in-a-career type of things in terms of the scope and breadth of the various code provisions that were impacted, both on the individual side and on the corporate side. The corporate provisions, at that point in time, were permanent, while, as you said, the individuals were not permanent and are set to expire at the end of 2025. Tax law is only as good as the next Congress that changes it, and so that's where we are. And what I found in the course of the time that I've been practicing as a CPA is all the old tricks that go out of fashion because the tax law changes, ultimately, seem like they come back around.
Doug:
It's like fashion, right?
Christopher:
You got to wait five or 10 years, and then go in your drawer and pull it back out to say, "Oh, this is what we did when the tax law used to be this." And, case in point, the Biden administration, they have some goals and things that they want to incentivize and to help the middle class, and I think I agree it will remain to be seen, just simply because of the tenuous control they have on the Senate. It's basically a one-vote margin as to what they can ultimately pass. But on the individual side, basically, President Biden wants to go back to a lot of the tax law that existed when he was vice president under President Obama. So we'd have a top tax rate of 39.6% on the individual side. There would be a limit on itemized deductions for higher-income individuals. And right now, he has that defined as anybody that makes $400,000 and above.
And then on the corporate side, you have, of course, the tax reform act. We had a flat rate of 21%, which was nice, that he has proposed that he would like to increase that to 28%, and then adjust some other things in terms of deductions that would effectively increase corporate tax rate beyond 28%. And then the big piece of it as well on the stateside is ratcheting way back the lifetime exemption amount for our states, that's currently 11.5, 11.6 million dollars right now. That's scheduled to sunset at the end of 2025, but he pulled it back to, more or less, what it was under his administration as vice president, where it was $3.5 million and a 45% tax rate. And then the nuance, the new thing here is he's proposing to eliminate the step-up in basis for inherited property.
And so that remains to be seen what will happen but to tie it back to the tax planning that we did when the state exemption was a million dollars or three million dollars, and A-B trusts and SALTs, and all those things went out of... We didn't need them anymore when the exemption was 11.5. That's probably all coming back.
And so the question that, in conversations with clients, is in planning, "Well, how can you plan in this kind of environment when there is so much uncertainty?" And, "If and when Congress passes something under Biden's plan, is it going to be prospective or retroactive? And the answer to that is, "Who knows?" The tax reform act that happened in 2017 was prospective, so it was first effective 01/01/18. I suspect if you were still dealing with COVID, and people are hurting and unemployed, and so I suspect that to do something retroactively. I would hope that there would be members of Congress that wouldn't go for that. If they get on board with implementing changes, that they'd make it effective 01/01/22.
Doug:
I tend to think you're right. I think there's a couple of reasons for that. Moderation, obviously, said that the slim margins in Congress, so you've got to appeal, to some degree, to those middle-of-the-road congressmen and women on both sides of the aisle to get that support through the middle. And then, as you said, that there's still portions of the economy which are suffering mightily, and that's the concern that I have is we see, if anything, this greater bifurcation here between the haves and the have-nots who have recovered, doing well, who's not, and I'm not sure the tax policy is the best place to try and to fix all of those things.
Christopher:
Right.
Doug:
It is interesting. And then you get in the weeds, and you see some of this stuff like, well, they're talking about eliminating the 1031 exchange. I have a lot of commercial real estate-type clients, and obviously, they're concerned about that. It would wreak havoc on their industry. I just can't imagine we'd see really, really wholesale changes like that. Can you?
Christopher:
Well, in the end, it probably comes down to the lobbyists, and real estate has a good lobby, historically. You mentioned 1031. That's something that's generally perceived, rightly or wrongly, to benefit the well-to-do, who can invest in those kinds of properties, and so I guess we'll see.
One of the other interesting thing that is in Biden's proposal which could have an impact, and maybe in a similar way, is the whole retirement savings and how it currently functions on a pre-tax basis for a 401(k)-type plan that the higher tax bracket you're in, the more you get a benefit out of the pre-tax contributions to your retirement plan because it's not taxed today, it's taxed down the road when you pull it out. And what they want to do with that is get rid of the pre-tax methodology, and instead, give you a credit on your tax return for retirement contributions that you make. And that credit would be, basically... The detail's still coming out, but I guess, worst case, it would be a flat percent that would apply to everybody, regardless of what your income level was. And so to level the playing field on who's going to be the benefit of that.
Doug:
Yeah, that would, of course, throw all of the retirement plans and all of that into the muck as well. We've seen, certainly, Roth-type of... That's been more prolific in recent years and many more companies have a provision to allow that after-tax contribution and all of that. So, gosh, I'd hate to be on the benefits planning side in dealing with that.
Christopher:
Right.
Doug:
Sorry for our folks, Paul, and the rest of the team, oh gosh. What about from an individual note? I've seen a lot of this fraud stuff already. We're early on in tax season. What are you noticing there? Is that due to all this COVID and the extra benefits and things that are being thrown out there? What's going on?
Christopher:
Yeah, so a lot of what we're seeing at the state level is unemployment compensation fraud. And this seems to be prevalent, regardless of what state you're in, but certainly, here in Ohio, the Ohio Department of Jobs and Family Services is aware that they've mailed 1099s to people for benefits that they never applied for and didn't get. Somebody else got it, apparently. And so the IRS is in the loop on this, and there's been some guidance that has been issued out there, and so we've got thought leadership on this topic. And so if you're somebody listening to the podcast, and you've received a 1099 Form from the Ohio Department of Jobs and Family Services for 2020, and you didn't get any unemployment benefits from them, you're impacted, and so you need to take some action, and we've got some guidance on how you can go about doing that because the IRS will expect you to pick that up in your tax return unless those 1099 are rescinded.
Doug:
Scary stuff, with all the cybercrime out there, and right on somewhere, and all of that.
Christopher:
You can't let your guard down for a minute. And we see it within our own firm in terms of the emails you get, and particularly this time of the year, where we're expecting people to send us stuff, and the natural inclination is to click that attachment because you think it's some kind of source document you've been waiting on, and it could be something worse.
Doug:
Yeah. It's not, that's for sure. So speaking of bad stuff, we're into, obviously, getting into the throws of deadlines and all that, and you got any good horror stories for us, or recommendations, if you don't want to go to the dark side, recommendations as we get into the meat of the season here?
Christopher:
Well, it's just another year of the Accountants' Full Employment Act. The changes that are out there and the guidance across the broad spectrum are the things that you've talked about, touched on PPP and retention credits, and changes to forms. Be patient with us as your CPA. We need to get it right. We want to get it right, but in order to do that, it's probably going to take longer, perhaps, than it has in the past. The good news is that we didn't need an extension of the busy season. Nobody wants that. But I guess the bad news is we're halfway through it, and 04/15 is around the corner, and there's still much to be done.
As a couple of thoughts that maybe tax and maybe not necessarily tax-related, but just so listeners may be aware, in case they didn't see it. There was some leeway passed, as a part of that CAA, with regard to flex spending accounts, both the medical and the dependent care, because as you may know, they are "Use it or lose it." So you've made pre-tax contributions through your employer over the course of a year. So you've built up a savings account that you can then use, in the case of the medical, on qualifying medical expenditures. And if you don't use it within a certain period of time, then you lose the use of that money. And while you didn't pay tax on it, you also don't have it. And it came out of your salary, so definitely, you don't want to lose it.
And with everything with COVID and being shut down, and maybe not being able to see your doctor or have procedures done, the powers that became out with the ability for the employers, if they amend their plans because this is a qualified plan, that will allow the extension, if you will, of that "Use it or lose it," for 2020 and by the end of 2021, and then as you're saving in 2021 into 2022. So you've got time to spend that money, which is a good thing.
Doug:
The key is to communicate with us, keep us in the loop. I mean, you and I both know the biggest problems we tend to run into are folks that... it's more the fire-aim-ready kind of, "Hey, I did this. How can we mitigate, or how do we plan?" We already affected the transaction, right?
Christopher:
Yeah. And there are clients that we tend to only see or talk to one time a year, and this is probably one of those years of, as much as the onus, it should be on us to reach out as we're delivering the 2020 returns. So we're delivering last year's results, and now, "Hey, let's have a conversation about what's going to happen here in 2021 with you personally. What do you think you've got going on? Fill me in so that I can help you think through that, and keep that in mind, too, as we go through the rest of the year if something happens in terms of tax legislation." So that when I sit in here a year from now, "Well, I did this and now I'm done. Now, I'm just learning about it." It's hard to do anything then.
Doug:
Yeah, absolutely. And you and I are both involved in a number of M&A transactions with clients. That seems to be just as prevalent as ever, too. So again, make sure you're getting us involved on the front end with that stuff.
Christopher:
Yeah, I've not seen any real let-up in M&A, so...
Doug:
Yeah, good sign. Well, thanks as always, Chris. Appreciate your wisdom and-
Christopher:
A pleasure to join you again, yep.
Doug:
We'll look forward to the round of golf and the bourbon.
Christopher:
Looks like a plan.
Doug:
Hopefully soon.
Christopher:
Yep.
Doug:
Well, thank you. And if you want more business tips and insight, or 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'm Doug Houser. Join us next week for another unsuitable interview with an industry professional.
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