Expert: Plan Early, Find Incentives as Tax Season Moves In

It wasn’t going to be this way originally for Don Madhavan.

Initially Madhavan, managing partner and tax attorney with Schlaupitz Madhavan, P.C., was going to be an engineer. He graduated from what was GMI at the time (it’s long since been renamed Kettering University) and planned on a career in engineering.

He shifted his interest toward being a patent attorney, and went off to Santa Clara University in California, which had a professor at the time known for patents. It being Silicon Valley, Madhavan thought it was a path forward for him.

He was working in a small patent boutique his first summer, and one of the partners suggested he take a tax class he called a “good, fundamental business class.”

“I took it, and the rest is history,” said Madavan, who worked at Ernst & Young before meeting Ron Schlaupitz, the founder of his current firm, in 2009. “I just sort of like the logic – or the illogic – of the tax code and the problem-solving with it, so I just kind of continued. I thought I’d be a professor, but I ended up starting to work.

“Growing up it was engineering or science, something in that area,” added Madhavan, who grew up in Bloomfield Township, Mich. “Some of my colleagues knew they wanted to be accountants from Day One, since a very young age, but with my background and kind of taking my path, it brought me into it.”

He said he and Schlaupitz talked about bringing “technical planning” to privately held businesses in Michigan.

“We joined together with our unique backgrounds and really focused on bringing great people into our firm, and it’s really grown from there,” he said.

With the arrival of tax season – most businesses have to file by March 15 – Madhavan and his colleagues have gotten busy. He took time to offer views on a variety of tax issues:

Corp! Magazine: What should business owners be looking for right now?

Don Madhavan: For 2021, there are a lot of important items business owners should be taking advantage of or looking into. For example, the employee retention credit (ERC). This credit came out as a response to the pandemic. What it allowed is for employers to receive a credit for up to $10,000 per employee. For 2021, they expanded it to up to $10K per quarter.

Our experts are working with our clients on these employee retention credits and we’re seeing significant dollar amounts that are going to business owners, north of hundreds of thousands to millions of dollars.

The 2021 ERC ended in the third quarter. You can still file by amending your payroll tax returns, but they could get $10,000 per employee quarter. It’s a calculation of about 70% of the wages paid to that employee, but it’s up to 10,000. It is significant dollars. A lot of our businesses receive much more money back on the ERC versus what they got on Payroll Protection Plan loans. If they haven’t looked at it and taken advantage of it, it would be important to do.

Corp!: Would it be surprising to learn that businesses don’t know about this?

Madhavan: We’ve talked to business owners who have not even started the process to analyze whether they qualify. You can still qualify, you can still file those amended payroll returns. It’s important for them to understand the impact on their taxes before they file the 2021 tax return. A lot of them think maybe they don’t qualify, or don’t know who the right person is to talk to. Our experts have been helping even clients that we don’t prepare their returns, helping them with this ERC.

Corp!: What changes are coming that people need to be aware of?

Madhavan: Michigan enacted a flow-through tax late in December, which is the work-around for the State and Local Income Tax (SALT) cap. Many individuals when they file their taxes their itemized deduction gets limited to the $10,000 SALT cap.

This legislation – other states have enacted very similar legislation – helps business owners of flow-through entities like S-Corps and LLCs – which most privately held business are –deduct the state of Michigan tax against their federal income for their net business income. It’s a good thing. It’s important to analyze whether or not businesses should make that election, It’s a three-year election, so it’s important to look at the nuances of that.

Corp!: Why is the flow-through option an advantage?

Madhavan: If the corporation pays the tax, the corporation is going to get a deduction of that tax against their federal income. If the corporation doesn’t pay it, the net income that flows to the owner will be higher, since they don’t have that deduction, and the business owner who pays that tax on their personal return is going to be limited in their ability to deduct that with the itemized tax deduction.

There are filing requirements, and then there’s compliance … they have to pay quarterly, there’s costs associated with doing that. They have to look at it to see if it makes sense. I think it makes sense for most business owners; it’s just a matter of at what point does it make economic sense to do it.

Corp!: Is it too late to look into the flow-through plan on the 2021 taxes?

Madhavan: To get the deduction, it is very interesting, the way the IRS has this notice suggests the payment needs to be made … you get the deduction for the year the payment is made. For 2021 the state of Michigan enacted this in late December, so we worked with clients through the holidays to try to get them filed.

Corp!: What is the tax outlook for business owners this year? Are they getting breaks? Is it going to be a tougher year?

Madhavan: The ERC can impact their taxes because you don’t get the deduction if you’re getting the credit, so your taxes may be higher, but you’re getting that money back. That’s something a lot of business owners may not have planned for, and it’s important for them to understand how that works.

Other things business owners really need to look at if they had tough years and they see that certain of their balance sheet is worthless now. They may have a lot of bad debts they need to write off. In reviewing that balance sheet, should they write it off or take that loss now?

There are certain things business owners should look at to take advantage including accelerated depreciation. If they purchased equipment should they write off all of that depreciation in this current year?

There’s a lot of things business owners should look into and see whether or not it makes sense. For example, we had a longtime business owner who became our client recently. We looked at accounting methods, should they be filing taxes on an accrual, on a cash basis, certain methods may make their business optimize for tax efficiency. We go through that strategy with the business owners to review.

Corp!: Gov. Whitmer talks about michigan being a bsuiness friendly state. Is that true from a tax standpoint? How does mihigan compare to other states?

Madhavan: Many years ago when there was the Michigan business Tax, which was a really challenging tax on business owners. The MBT went away, so now for most privately held businesses the income tax on Michigan flows through their personal return and they pay the 4.25% on that income.

I’d say it’s somewhere in the middle. There are states where they don’t tax anything to companies, but it’s not as reaching as, say, California. There are some benefits (to Michigan).

Corp!: What do people really need to know as they go to file their taxes?

Madhavan: We work with our clients to help them understand the tax compliance deadline. For instance, pass-through entities, the S-Corps, the LLCs, need to file by March 15. Business owners really should be working now; hopefully they closed their books for 2021 and really should be working with their accountant to review those numbers. After you get past the March 15, you can always extend the business tax return, you get a six-month extension.

Corporations have an April 15 deadline. So corporations, much like the individual owners, need to know how much they need to pay in before they extend the return or if they’re going to file timely on April 15.

It’s very important to review the tax return and various incentives that can be for business owners. For example, for certain new companies, maybe they have research and development expenses, but they don’t’ realize they could qualify for R&D credits or offsets of payroll taxes. It’s very important for each business owner to review what they have in their tax return with a qualified professional, and analyze what the possible incentives are and taxes they may be able to optimize.

Corp!: What is the business market like? Is there a lot of selling going on?

Madhavan: A lot of businesses are going through that transition of selling their company. Those business owners need to analyze the structure that’s the best fit to help them reduce the impact of taxes. For example, you could have an asset sale or you could have a stock sale. Some of the different ways the sale transaction can occur can really impact how much taxes the business owner is paying.

The bottom line is it’s not the sales price, it’s what they take home after they pay taxes that’s really the important number for them to plan their future after selling their company.

Corp!: There’s been discussion in financial circles about increasing capital gains rates. How has that affected things?

Madhavan: There was a lot of discussion in the Build Back Better, and even before that, about increasing capital gains rates. If a company sells, and let’s say it’s on an installment sale, so you’re selling your company but you’re getting payments over time, should that owner elect out of the installment treatment, which means they should pay all the taxes now because the capital gains rates are lower, or should they wait and see and continue to pay taxes as they receive the money. Those are important decisions to model out for a business owner going through that transition.

Corp!: Are you seeing an increase in owenrs selling their businesses, and do you think that is pademic-induced?

Madhavan: I do see an increase in selling businesses. I do see some pandemic-level surge where the thought is, ‘is my business impacted? Am I going to be able to run this business in the future? Do I want to do something else?’” But we’re also seeing business owners hold on and try to bring the value back, if they’ve had a couple of difficult years. We’re seeing both, but there is a lot of activity of transactions.

Corp!: Have the tax implications in the various covid stimulus packages made it difficult to do your job?

Madhavan: The hard part is timing. If things are made retroactively, if they’re made last-minute, it becomes hard for the business owner to plan. That’s the key. Ideally when they pass these bills, if the business owner has time to plan, they can be in a better situation for the value of their company.

Corp!: Has it been tough to keep up with it all?

Madhavan: When the pandemic came, and the PPP came out and the ERC … there are a lot of things that would come out. I understand the government is trying to have these incentives so business owners can jump quickly. You have to move at that same speed of light to understand what are the nuances, how do we qualify, how do we get the money? It’s about moving quickly through that.

The good thing is, you work with a team and experts and we work together to understand, dialogue and have that plan in place to present to the client. You have to move quickly.