Tax Services: 2021 Highlights & 2022 Trends and Expectations

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters.

BROOKS NELSON: Welcome to this edition of the Cherry Bekaert Tax Beat podcast. It's the start of a new year and the start of the spring tax filing season. The Build Back Better bill is still under consideration in Congress, but even without a new major tax law, there are challenges for taxpayers and tax professionals.

BROOKS NELSON: Today's podcast will focus on several of these challenges and opportunities. First, let me introduce my colleagues joining this podcast today. First of all, Christy.

CHRISTY PIERCE: Hi. I'm Christy Pierce. I am the managing tax partner for the tax service line at Cherry Bekaert, and I am joining you from Atlanta, Georgia today.

SARAH MCGREGOR: Hi. This is Sarah McGregor calling in from Greenville.

BROOKS NELSON: I'm Brooks Nelson, partner out of Richmond, Virginia, and I've been waiting to make this call for about a month now. I'm sitting here on the slopes of Snowmass, Colorado, as I record this podcast. Sarah McGregor, how's life treating you?

SARAH MCGREGOR: Life is good. As you mentioned, it is the start of a new year, 2022, and we're getting ready to start our next round of tax filing for 2021. I'm a little relieved that we didn't get a new tax law at the end of 2021.

BROOKS NELSON: All right. Let's jump right into it. Christy, from your perspective as the managing partner of tax services, what are some of the highlights from 2021?

CHRISTY PIERCE: When I think about 2021 and highlights around tax, I focus first on business activities we saw in the business environment. 2021 was our second year living with COVID, and things changed a lot. For many, business got better, but for others it remained very difficult.

CHRISTY PIERCE: It continues to be a world of haves and have-nots in terms of success in 2021. This global pandemic put some businesses in dire straits through no fault of their own, so we continued to see stresses in many industries such as hospitality, travel, and real estate. Other businesses had stellar years, some experiencing best years ever.

CHRISTY PIERCE: Some successes were a result of changes from COVID and new opportunities, including moving goods and strong investment returns. 2021 also saw an unusual amount of sales and transactions. Increased earnings and favorable market conditions made it a good time to sell or invest in businesses. The pending tax legislation also drove some of that activity as the prospect of potentially higher rates pushed transactions to close in 2021.

SARAH MCGREGOR: Brooks, you're now working with our advisory tax services specialists. What were some of the highlights or things you saw last year?

BROOKS NELSON: I echo everything Christy said. With unique business challenges came opportunities for advisory tax services. Congress used tax incentives to help address pandemic-related issues. In advisory tax services, the Employee Retention Credit jumped to the top of the list. It was intended to help employers keep employees on payroll and, from our firm's perspective, it has been very effective.

BROOKS NELSON: The ERC showed us how virtual teams and technology can deliver solutions for clients. As businesses shifted locations and added virtual operations, sales and use tax issues increased. Since the landmark Supreme Court decision, state activity around sales and use tax has been significant, driven further by business changes this past year. We've seen a tremendous increase in consulting and outsourcing services in that space.

BROOKS NELSON: Other areas that continued to matter include the R&D credit. We need to be a leading technology country to maintain economic independence, and the pandemic highlighted supply chain weaknesses. R&D credits, on-shoring opportunities, energy studies, cost segregation studies, and state incentives have all been important.

SARAH MCGREGOR: I think when economists look back in five to eight years, they'll see significant shifts in how we conduct business. The long-held practice of just-in-time inventory has impacted companies' ability to deliver. The shift to virtual work and increased connectivity will have a lasting impact and was jump-started by COVID.

SARAH MCGREGOR: Christy, let's go back to some challenges, including legislative uncertainty and whether we would get a tax law. We started with the American Family Plan and the American Jobs Plan, then the Green Book, the House version, and Build Back Better. Many provisions we saw early on did not come through.

CHRISTY PIERCE: You're right, Sarah. We had a lot of activity around tax legislation in 2021, which was both fascinating and frustrating. I've practiced for a number of years and have seen many tax proposals, but this year was unusual. The proposals were enormous and highly political.

CHRISTY PIERCE: The first significant proposal came in April and raised concerns about increases in capital gains rates and tax increases for businesses and high-income individuals. The real turning point was in late August, when a wide array of proposed provisions was introduced to raise revenue to cover about $3 trillion. Those proposals included many novel and stacked provisions, some even retroactive.

CHRISTY PIERCE: That prompted Cherry Bekaert to start advising clients on potential actions because there were only a few months left in the year. In September, draft legislation appeared, and many onerous provisions from August were gone. The proposals were scaled back to around $2 to $2.1 trillion.

CHRISTY PIERCE: We then spent months in political negotiations and vote-getting, with the debt ceiling complicating matters. Everything stopped just before Christmas when Senator Manchin said he would not support the proposal at that volume. For taxpayers who completed transactions, they likely benefited from the lowest capital gains rates in the near term. For the first time in years, we went into tax season without significant new changes, but filing complexities remain.

SARAH MCGREGOR: Initially we were on our back foot, then we stepped forward, and it felt anticlimactic by the end of December. You mentioned complexity of tax reporting, which has been another big issue for us and our clients, especially state and local tax reporting, international tax reporting, and federal reporting. We're already facing new schedules K-2 and K-3, and the IRS is asking for more information even without new legislation.

CHRISTY PIERCE: With every law change and greater focus on compliance, tax reporting requirements grow. Laws are often convoluted and demand extensive disclosures, calculations, and support. We've seen this on interest limitations and the 20% business deduction for QBI under Section 199A. There have been increased reporting requirements for S corporations and partnerships.

CHRISTY PIERCE: This year adds K-2 and K-3, which significantly increase reporting for foreign and international activities. Even returns with any international activity require a high level of reporting, and practitioners are still determining how much is required for domestic activities without international involvement. The complexity in tax reporting is increasing and unlikely to decrease soon.

BROOKS NELSON: With all this increased reporting funneling to the IRS, taxpayers face challenges when the IRS does not respond promptly. Can you comment on the challenges the IRS dysfunction has brought to practice and taxpayers during the pandemic, Christy?

CHRISTY PIERCE: It has been a serious issue. In March 2020, businesses shut down and the federal government reduced on-site operations, leaving the IRS with limited capacity. Extensions and delayed deadlines caused warehouses to fill up with returns and mail, and catching up was slow through 2020 and into 2021. The April 15 deadline was moved to May 15 in 2021, and many staff were still working remotely.

CHRISTY PIERCE: The result is a large backlog. Starting 2022, articles reported a backlog of about 10 million returns and other filings, including amended returns, which are paper-filed and require hands-on reviews. Employment tax returns, notices, and approvals are also delayed. Telephone service is limited, with only a small percentage of calls answered. Overall, it's difficult and slow to get communication with the IRS.

CHRISTY PIERCE: I have empathy for the IRS staff trying to do their jobs while understaffed and dealing with a backlog, but the delays do not make clients feel better when refunds and issues take so long to resolve.

SARAH MCGREGOR: We've discussed several challenges. Brooks, I want to ask about opportunities and positive things that happened for our firm and clients, such as helping them obtain PPP loans and Employee Retention Credits.

BROOKS NELSON: Those were well-intended measures by Congress that largely achieved their goals. There will be abuses uncovered later, but overall the programs were positive for clients. Firms that invested in technical expertise and thought leadership, like Cherry Bekaert, were able to serve clients better.

BROOKS NELSON: We formed focused teams, developed digital solutions to handle high volumes, and connected what Congress was trying to do with the ability to deliver for clients. Guidance on these programs was frequent and evolving, so nimbleness and commitment were key.

SARAH MCGREGOR: Jumping into uncertainty and owning it allowed us to be responsive to clients sooner.

BROOKS NELSON: Right. All right. One more topic before final comments: people. Our organizations are people, and everyone is looking for good talent. We need diversity, inclusion, and talent to deliver services. It's been especially challenging in accounting and tax. Clients want to outsource, partners are retiring, and there's a war for talent at the associate level. Christy, what are your thoughts?

CHRISTY PIERCE: Our people are critical to serving clients. There was a time when hiring multiple candidates took weeks, but prior to COVID we already saw stresses in accounting graduates. The pandemic caused great disruption in employment, including the "great resignation," which affected workforce dynamics across industries. Employers must be nimble.

CHRISTY PIERCE: I'm proud of our team and those who joined us during the year. I appreciate those who stayed with Cherry Bekaert and those who moved on. How people want to work will continue to evolve, and employers will need to accept that employees choose whether to stay, move, or try something different.

SARAH MCGREGOR: I think of it as the great labor reset. I'm encouraged by our new tax hires who started this winter. On that note, we began with highlights of 2021. Let's finish with hopes or expectations for tax services in 2022. Brooks?

BROOKS NELSON: I'll focus on advisory services. In addition to ERC, sales and use tax, and R&D work, I expect supply chain tax optimization to be significant in 2022. That includes R&D credits, cost segregation, state tax credits and incentives, New Markets Tax Credits, and international tax planning related to moving inventory and changing distribution strategies.

BROOKS NELSON: International tax remains uncertain, and if major changes occur, global businesses may pause planning. Once there's clarity, we could see a big uptick in international tax restructuring and complex planning. Energy incentives will also continue to grow regardless of administration, as Congress uses tax law to influence policy. Opportunities will continue in energy tax credits and incentives.

CHRISTY PIERCE: In 2022 we'll have many tax returns to file, and there will be challenges. I recommend taxpayers focus on planning opportunities. Legislation may return later in the year but likely in a more moderate form than the 2021 proposals. Legislation creates the need and opportunity for planning, especially for transactions and investments.

CHRISTY PIERCE: One exciting area is the pass-through entity election at the state level. Many states allow partnerships and S corporations, commonly called pass-through entities, to pay state income taxes at the entity level. This is meaningful because the $10,000 SALT cap limits individual itemized deductions for state income tax. Entity-level payments can provide benefits for taxpayers, but analyses are complex when activities span multiple states or investors are in different states.

CHRISTY PIERCE: Estate planning is another area to watch. The August proposals focused on reducing estate and gift tax exemptions significantly, which pushed transfer tax planning. Those proposals have receded, but the large exemptions are scheduled to sunset in a few years. Clients should continue discussions because change could occur.

BROOKS NELSON: Change is coming and will continue. Thank you for listening to our discussion of opportunities and challenges for tax services. A quick disclaimer: we are not providing specific tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, for specific tax issues or to discuss information from today's podcast.

BROOKS NELSON: Check the firm's website at cbh.com for the latest guidance and materials on tax and business topics. This concludes today's podcast. Please like, share, and subscribe. Thank you, Christy. Thank you, Sarah. Thank you to our listeners for spending time with us. Let's call it a day.