Crain's Content Studio

SPONSORED CONTENT

TAX STRATEGIES Q1 2021 AND BEYOND TACTICS FOR BUSINESSES AND INDIVIDUALS

While 2020 was a difficult year for many, tax filing in 2021 may hold opportunities for organizations and individuals that plan accordingly. As the new year began, three Chicago-area tax professionals shared their latest insights and advice with Crain’s Content Studio.

What types of tax services does your organization provide?

Barbara Webb: MGO provides specialty tax services, including R&D credits, transaction tax impact modeling, M&A document review, equity compensation review, transfer pricing, international tax and tax due diligence. Of course, we also offer tax compliance for all entity and return types. Our clients range from emerging to publicly-traded companies and portfolio investment vehicles in industries such as life sciences and tech to the rapidly growing cannabis industry.

Nicole M. Szczepanek: Baker Tilly pairs the technical expertise and global resources of a large advisory CPA firm with the responsive service and competitive pricing of a small firm. Our tax professionals deliver forward-thinking services that help clients manage emerging risks and opportunities. We provide a robust suite of tax planning and compliance solutions, including federal tax, state and local tax, tax advocacy and controversy services, credits and incentives, M&A, international tax, transfer pricing and tax accounting.

Edward J. Hannon: Polsinelli’s tax attorneys provide creative solutions and legal guidance on international, federal, state and local tax laws to entities in all major industries and tax status classifications. Our attorneys partner with clients to deliver solutions regarding business transactions, tax controversy and litigation, entity formation, tax practice financial services and international tax.

What impact will the recent elections likely have on taxes or tax reform?

Szczepanek: Expectations are that our new administration will increase corporate and individual tax rates and inflict further international tax reform. President Biden’s proposed tax legislation does not mention possible changes to either Paycheck Protection Program (PPP) loans or Employee Retention Credits (ERC), both of which have provided significant

cash assistance to private companies suffering from the pandemic.

Webb: Business owners considering an exit and sellers in stalled or pending M&A transactions have a significantly higher degree of tax certainty regarding a transaction that closes in 2021 versus 2022. The elimination of like-kind exchanges is also possibly in the cards for tax reform, so real estate investors and manufacturers planning to defer gain though such an exchange may want to step up the search for that suitable replacement property to finalize the swap in 2021.

Hannon: Many clients are concerned about completing transactions prior to year-end to avoid any potential increase in capital gain rates. Corporate clients with non-U.S. subsidiaries are focused on how the increase in U.S. corporate rates would affect tax costs under the Global Intangible Low Tax Income category, created under the Tax Cuts and Jobs Act of 2017.

Other than the impact of the recent election, what’s the number one tax question or concern you’re hearing from clients?

EDWARD J. HANNON

Shareholder Polsinelli ehannon@polsinelli.com 312-463-6244 Similarly, many private companies are focused on state and local tax issues that must be addressed in relocating businesses out of high-tax states.

Szczepanek: Clients are wondering when they’ll get their refund from the IRS. While it’s a typical question from any client, the pandemic has placed many companies in a position where there’s a need for cash now. Since the

NICOLE M. SZCZEPANEK

Tax Partner Baker Tilly

nicole.szczepanek@bakertilly.com

312-729 8163

majority of my clients are private-equity owned businesses, they’ve not been able to take advantage of the PPP. In turn, the receipt of refunds tied to prior year returns or recent carryback claims takes on a larger focus. The CARES Act created the ability to carryback net operating losses five years through the 2020 tax year. Historically, the receipt of a refund tied to a carryback claim through the quick refund or amended

BARBARA WEBB

Tax Director MGO LLP bwebb@mgocpa.com 312-488-8293 return process takes approximately 90 days or four to five months, respectively.

Due to the pandemic, the IRS is significantly backlogged in processing refunds, creating an additional stress for many businesses.

What steps can businesses take now to plan for possible tax reform under the new administration?

Webb: Clients are asking about taxefficient business structures and exit plans. They all want to know if they’ve missed something, or if there’s a better way to operate from a tax perspective.

These questions often lead to discussions of tax filing groups, entity choice, related company transactions and transfer pricing. When planning an exit from a business, clients of course want to model out the different options and verify that the tax result is something both buyer and seller can live with.

Hannon: Our small- and mediumsized business clients are focused on how to utilize the tax savings opportunities created by the CARES Act. Meanwhile, our private equity and strategic buyers involved in M&A activities are focused on how changes in the Tax Cuts and Jobs Act impact how transactions are structured, and the pressures created by the accelerated depreciation rules.

“DUE TO THE PANDEMIC, THE IRS IS SIGNIFICANTLY BACKLOGGED IN PROCESSING REFUNDS, CREATING AN ADDITIONAL STRESS FOR MANY BUSINESSES.” — NICOLE M. SZCZEPANEK, BAKER TILLY

We focus on the numbers behind the numbers behind the numbers.

But only after we focus on building relationships. At Baker Tilly, it’s our dedication to people over spreadsheets that allows us to understand your business and build value where others can’t. It’s a way of thinking we call now, for tomorrow. So let’s get to know one another; and let’s get to work.

bakertilly.com

©2021 Baker Tilly US, LLP

TAX STRATEGIES Q1 2021 AND BEYOND TACTICS FOR BUSINESSES AND INDIVIDUALS Hannon: Businesses should assume that tax rates will increase at some point in the future. For example, future tax costs that would potentially apply to earnouts and payments of deferred purchase price in the sale of a business has become top of mind for clients contemplating M&A transactions in 2021. Similarly, for businesses facing financial distress because of the pandemic, a thorough examination of how the various tax-oriented debt modification/ cancellation rules will affect current and future tax liability should be at the top of their to-do lists.

Szczepanek: There are so many unknowns that can impact future tax reform, from economic conditions to the state of pandemic-related stimulus.

With that being said, businesses should focus on maximizing how they can benefit from current tax legislation.

Working with their tax service provider will allow them to quickly identify what opportunities they qualify for and take action before the known opportunities expire.

Webb: Businesses should identify all anticipated decisions and transactions that could have a significant tax impact, then work with an advisor to analyze which are best to accelerate or delay and which are subject to too much uncertainty to judge right now. In general, all the calculations and tax modeling undertaken in response to the Tax Cuts and Jobs Act will have to be revised to consider whether what appeared to be tax-efficient strategies in 2018 will still hold true in 2022 or 2023.

What accounting method changes are your clients most benefitting from?

Szczepanek: With the passage of the CARES Act, corporations can now carry back tax losses for five years through 2020, incentivizing clients to leverage accounting methods to not only maximize tax deductions, but generate tax losses eligible for carry back. Typical accounting methods that drive deductions are prepaids, bonus depreciation on qualified improvement property (QIP) and

“THE TAX BENEFITS FOR OPPORTUNITY ZONE DEVELOPMENT HAS BEEN A SIGNIFICANT DRIVER FOR SOME OF OUR CLIENTS.” — EDWARD J. HANNON, POLSINELLI

bonus depreciation. The CARES Act corrected an error in the Tax Cuts and Jobs Act, which had made QIP ineligible for bonus depreciation.

For many corporations, bonus depreciation on QIP can generate a substantial deduction. Significant refund opportunities can be gained through the use of accounting methods to drive tax losses.

Webb: Many clients are jumping on the expanded availability of the cash method of accounting for tax purposes instituted as part of the Tax Cuts and Jobs Act, which the IRS has further extended in recently issued regulations.

Under the Act, businesses with gross receipts averaging $26 million or less could change to the cash method, except in the case of a partnership with a significant number of limited partners in loss years. The new regulations allow a partnership with an occasional loss year to elect to use the prior year’s positive income to meet the test for the current year. As a result, eligible businesses that were putting off electing the cash method due to the potential back and forth may now face less tax uncertainty and feel freer to make the move and benefit from income deferral.

What tax-related challenges or opportunities has the coronavirus economy created?

getting beyond big challenges As strategic partners who understand the complexities of international, federal, state and local tax laws, Polsinelli Tax attorneys offer legal guidance to help you make informed business decisions.

Ranked No. 30 for “Client Service Excellence” among 650 U.S. Firms 2020 BTI Client Service A-Team, Dec 2019 Ranked No. 10 for Strongest Client Relationships 2017 BTI Industry Power Rankings, Aug 2017

real challenges. real answers.SM Am Law 100 firm with 900+ attorneys nationwide 21 offices from LA to NY 170+ services/industries polsinelli.com

The choice of a lawyer is an important decision and should not be based solely upon advertisements.

Polsinelli PC. Polsinelli LLP in California.

Szczepanek: A tremendous amount of legislation has been passed in the past several months focused on assisting businesses, including deferred payroll taxes, tax-free loans, enhanced interest expense deduction limitations and carryback claims.

The pandemic has also accelerated companies’ assessment of growth strategies, restructuring and process efficiencies, with tax implications and tax strategy taking center stage.

Proactive tax planning can position companies to efficiently repatriate earnings, lower state income taxes, lower effective tax rate and minimize cash taxes. While the pandemic has created many obstacles, tax planning can create additional benefits.

Webb: The new prevalence of remote working arrangements has the potential to exponentially increase the complexity of a company’s payroll, income and sales tax reporting requirements. Employers may find themselves with reporting responsibilities in states where they’re completely unfamiliar with the rules and procedures. Some states—but not all—are expanding grace periods and loosening reporting requirements to accommodate employment situations created by COVID-19. Since many new working arrangements may be permanent, companies will eventually have to understand how to comply in states where they now have a physical presence.

Hannon: Many of our clients in the financial services and real estate industries have been focused on potential tax issues that must be addressed in loan workouts, foreclosures and loan and lease modifications. Clients have also approached us looking for advice on whether to seek a PPP loan and how to avail themselves of the other tax relief provisions of the CARES Act. On a positive note, we’ve helped several clients form funds to purchase troubled loans and distressed properties.

What should businesses understand about the tax provisions included in the most recent coronavirus relief bill?

Webb: The Consolidated Appropriations Act of 2021 (CAA), passed on Dec. 27, clarified that business expenses paid with PPP loan proceeds are, in fact, tax-deductible even if the loan was forgiven.

Furthermore, such deductions may also count toward any related tax credits, such as the R&D credit and the Work Opportunity Credit, a federal tax credit available to employers for hiring individuals from certain groups who’ve consistently faced significant barriers to employment. The IRS had already issued guidance on both counts to the contrary that’s now been rescinded.

Given the significant amount of

confusion that’s surrounded tax issues related to PPP funds from the very beginning, businesses should work with their tax advisors to verify that all eligible expenses are being deducted for tax purposes and that forgiven PPP debt is not being included in income. The bill also extends many types of credits and incentives, so I would recommend reviewing that list in case an applicable credit that was assumed to have been phased out is actually still available.

Hannon: The CAA also included a second round of PPP loans.

Additional guidance has been issued on what’s being called PPP2, including eligibility rules that are somewhat different that those set forth in the CARES Act. Many of our clients that took out loans under PPP1 have contacted us seeking guidance on the various issues they may create if they also seek to obtain a PPP2 loan.

Szczepanek: The amount of legislation passed over the past year can be overwhelming for many businesses to digest and understand.

I encourage businesses to work handin-hand with their internal tax team or tax service provider to identify which legislative changes they can benefit from and begin taking action.

Has the pandemic impacted how your teams serve clients?

Hannon: Because our firm’s tax practice includes attorneys spread across several offices, when the pandemic caused us to work from home, we already had the technology in place to communicate internally and with clients.

Szczepanek: While my teams and I have worked remotely since midMarch, the level of service, quality of work product and communication with our clients has not suffered.

With the majority of my client base spread across the country, my teams have essentially been supporting our clients remotely since day one of our relationship. While I do miss being able to hop on a plane to visit a client, we have continued to “see” our clients through the use of Zoom and Microsoft Teams. I am proud of how my teams and clients who have juggled unique demands and supported each other throughout the pandemic.

Webb: In a way, the pandemic situation validated our national tax practice service model that matches clients to professionals from around the country who are most suited to their needs. Pre-COVID, our service teams already transcended geographical location—my own engagements included professionals from our Chicago, Florida, New York and California offices. Now many months into this pandemic, clients view a remote service arrangement as viable and normal. Some potential

SPONSORED CONTENT clients have told us that pre-pandemic they would not have been so open to engaging an advisor based in a different city, but now they see it doesn’t really matter. We could not have predicted how the world of work would change so rapidly, but fortunately we were already set up to meet the challenge.

certain gains in excess of the rolledover gain. These tax benefits provide real estate developers with a new, more flexible source of capital.

What federal and state tax credits and incentives are your clients pursuing?

Hannon: For small businesses facing pandemic-related financial distress, the various tax relief measures included in the CARES Act and CAA should be top of mind.

In addition to PPP1 and PPP2, the ERC and other tax credits should be examined to confirm eligibility and to identify any collateral tax issues that may arise from claiming these credits.

Szczepanek: A number of our clients are looking to expand their physical presence or employment base within the United States. They’re collaborating with our negotiated incentives team to identify where they can achieve their growth goal and also lock in beneficial property tax incentives and jobs credits. It is an exciting time in this space as the pandemic has also driven movement to consolidate operations.

Meanwhile, clients that invest heavily in technology/process improvements are benefitting from federal and state R&D tax credits. Our R&D team is helping clients not only identify and maximize eligible costs, but develop streamlined processes to capture and document eligible costs to capitalize on future credit opportunities.

Webb: Businesses in many industries—from tech to health care to construction and even food and beverage—are potentially eligible for federal and state R&D credits.

We’ve had many new clients who assumed they weren’t eligible for the R&D credit because their field was not obviously technical. If a business is engaged in experimenting and taking on risk, the R&D credit is definitely worth exploring with a tax advisor. We encourage even tech and life science startups with tax losses to pursue the credit since they may be eligible to apply it against their payroll taxes. The R&D credits can also become extremely valuable in a future transaction. So, it’s best to identify and document the supporting information while it’s available and fresh in everyone’s minds. Four new Illinois construction-related credits created under 2019’s Blue Collar Jobs Act are also generating a great deal of interest. These credits are worth 50 to 75 percent of Illinois tax assessed on construction project income and are based on wage withholding and project location. Each of the four credits has very specific requirements, so eligibility and compliance must be carefully evaluated and tracked.

Hannon: The tax benefits for opportunity zone development has been a significant driver for some of our clients. Under opportunity zone rules, investors in a qualified fund can obtain not only tax deferral on rollover gain, but, if certain conditions are met, exclusion from income tax on

For owners of small businesses, what tax provisions should they be aware of?

Szczepanek: With many small businesses focused on taking advantage of the PPP, the ERC, a refundable tax credit, may have gone unnoticed. Significant extensions and enhancements were made to the ERC with the passage of the CAA, including the ability to potentially benefit from both the PPP and ERC. The CAA expanded the applicability of the credit to qualifying wages incurred from Jan. 1, 2021 to June 30, 2021. This included beneficial changes to the definition of a “large” company, reduction of the gross receipts test to 20 percent, and an increase in the maximum credit to $14,000— previously $5,000—per full-time employee.

Webb: The list of changes is long, but significantly includes an increase in the value of the ERC from 50 to 70 percent of qualified wages. The details may require some effort to understand and evaluate but will certainly be worth it for many smaller employers.

What’s the most important tax issue that high-networth individuals should be looking at in 2021?

Webb: High-net-worth individuals should step back and take a comprehensive look at their tax planning assumptions in 2021, as several could no longer hold true within a year or two. Minimizing the current year tax liability may no longer be the best strategy if capital gains and ordinary income rates are predicted to rise. Now is the time to revisit estate planning strategies, as the current lifetime estate tax exclusion may shrink much earlier than anticipated. Spousal lifetime asset trusts and 678 trusts are two options worth exploring for moving wealth out of an estate while maintaining some degree of control over the assets.

Hannon: Two issues we’re helping clients with include maximizing long-term capital gain treatment

“NOW IS THE TIME TO REVISIT ESTATE PLANNING STRATEGIES, AS THE CURRENT LIFETIME ESTATE TAX EXCLUSION MAY SHRINK MUCH EARLIER THAN ANTICIPATED.” - BARBARA WEBB, MGO LLP

ABOUT THE PANELISTS EDWARD J. HANNON is an attorney and certified public accountant at the Chicago office of Polsinelli, an AmLaw 100 firm with 900 attorneys in 21 offices nationwide. He advises clients on tax-savings structures for real estate matters, including joint ventures for development projects and tax-advantaged structures for the investment in U.S. real estate by foreign investors and tax-exempt entities. He is a former chair of the Illinois CPA Society and teaches in the Masters in Real Estate Program at DePaul University Chicago.

NICOLE M. SZCZEPANEK is a certified public accountant and tax partner at the Chicago headquarters of Baker Tilly, one of the largest and fastest-growing advisory CPA firms. She has more than 18 years of experience delivering professional tax services, focusing on tax accounting, acquisition implementation and exit readiness for private companies in the private equity, manufacturing, technology and pharma/ life sciences industries. She is a member of the Ravinia Associates Board and is a two-time Boston Marathon finisher.

BARBARA WEBB is a certified public accountant and tax director at MGO LLP, one of the fastest-growing CPA and advisory services firms in the United States. Based at the Chicago office, which she co-founded in 2020, she guides a national client base through all phases of the enterprise life cycle, from startup to an M&A or go-public transaction. She delivers tax solutions to a variety of industries including technology, life sciences, private equity, construction, marketing and branding, consumer lending and cannabis.

when selling a business or property, and minimizing tax exposure in hightax states. By focusing on purchase price allocation provisions and tax sharing arrangements we’ve been able to address both of these issues on behalf of our clients.

Szczepanek: High-net-worth individuals should consider making taxable gifts to utilize the $11.7 million lifetime exemption that’s currently available, to the extent they are comfortable giving away the assets. As with any financial or tax

decision, it’s important to consult your professional advisors to understand how your personal situation may be impacted and the best planning for your fact pattern.

Accelerate income?

Reorganize?

Sell or dispose?

Prepare for

TAX REFORM

with atypical solutions from MGO ASSURANCE | TAX | ADVISORY www.mgocpa.com