Experts Say Planning, Flexibility Are Keys to Successful Tax Season

Businessman using magnifying glass to examine invoice with stacked coins arranged in increasing order
Jeffrey McMichael

The thing Jeffrey McMichael likes best about being a tax advisor is the fact it changes all the time.

As federal and state officials navigated potential changes to tax law as 2021 wound down, McMichael, a tax attorney who is senior manager in the Detroit office of Cohen & Company, an Ohio-based accounting and consulting firm, must have been in his element.

As the U.S. House and Senate bartered back and forth on President Biden’s Build Back Better Plan, those potential changes in tax laws loomed larger. While that made tax season a bit more difficult, it was a challenge McMichael was certainly willing to accept.

According to McMichael, the original Build Back Better Plan — it has since been scuttled and is awaiting possible action to pass its pieces individually — included “a lot of tax provisions” that dealt with surcharges for people making more than $400,000 a year and some talk about easing the burden on pass-through entities such as S-Corporations and limited liability corporations (LLC).

In late December, for instance, Michigan Gov. Gretchen Whitmer signed a bill into law that establishes the availability for flow-through entities to pay and deduct Michigan income taxes at the entity level.

The law signed by Whitmer on Dec. 20 — PA 135 of 2021 — amends the state Income Tax Act to create a flow-through entity tax in Michigan. According to information released by the state, the flow-through entity tax allows certain flow-through entities to elect to file a return and pay tax on income in Michigan and allows members or owners of that entity to claim a refundable tax credit equal to the tax previously paid.

Ursula Scroggs, managing director at Troy, Mich.-based DKSS CPAs + Advisors, believes the new law will ease the tax burden on the owners of “S” Corporations, partnerships and others. She just wishes Whitmer had signed it sooner.

“Signing it as late as she did didn’t give us (tax preparers) much time to advise our clients,” Scroggs said. “It’s a great advantage and cash-basis taxpayers who couldn’t take advantage (in 2021) can certainly see the tax relief in the future.”

For 2021, the state’s announcement read, while the initial election into the flow-through entity tax and any payment required are due on certain dates in 2022, many flow-through entities may have wished to make an election or payment on or before Dec 31. However, the website to do so wasn’t available until Dec. 29.

“That didn’t leave companies who wished to do so much time,” Scroggs said.

In an article posted to the firm’s website, Southfield, Mich-based Plante Moran, one of the country’s largest audit, accounting, tax, consulting, investment banking and wealth management firms, pointed out the optional flow-through entity tax “acts as a workaround” to the state’s SALT cap, which was introduced in the Tax Cuts and Jobs Act of 2017 to limit the amount of state and local taxes allowed as a federal itemized deduction to $10,000.

Michigan now joins many states that have enacted similar measures to counteract the SALT cap, Plante Moran pointed out.

Politicians debated Build Back Better all year, without bringing it to a resolution. Did all the political wrangling make it tougher to advise clients?

“Completely,” said McMichael, who has been at Cohen & Company the last five years. “Our main job … I want to know on April 15 what their tax liability is. The hard-est thing we were dealing with is the high potential for something to happen. The … legislation that (was being) put out therechanged dramatically on a daily basis or a weekly basis.”

And the politicians likely aren’t done with the wrangling. With midterms coming up, McMichael said, “this could all change again.”

“We’re at a point now where every two years the tax code changes, outside of a pandemic, which we’ve been dealing with the last two years, where the provisions are all adjusting as they go,” McMichael said. “It’s kind of a weird year. Usually you’re trying to accelerate deductions as much as possible, push income out and that might not be the best way to go this year.”

The at-least-temporary demise of Build Back Better, according to McMichael, meant the tax landscape wasn’t going to change all that much — “There’s not a tremendous amount of change into (2022),” he said —with much of the focus going on potential changes to capital gains taxes and a tax increase on people making more than $400,000 a year that could have an effect.

“It (would affect) a large number of people,” said McMichael, who got his JD from University of Detroit-Mercy and bachelor’s degrees in finance and economics from Wayne State University. “It’s obviously not the majority of the population but it is a large number of people.”

With midterm elections on the horizon and the Democrats expected to have a hard time retaining control of Congress, more changes could be coming. Don Madhavan, managing partner and tax attorney with Schlaupitz Madhavan, P.C., talked about the conversations that have surrounded capital gains rates.

If that happens, Madhavan said, companies should be ready to deal with it.

“There was a lot of discussion in the Build Back Better, and even before that, about increasing capital gains rates,” Madhavan said. “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.”

McMichael said any changes that are coming are “moreso on the business side” of the tax equation.

A couple of years ago, he said, “some rules” existed around trying to limit net operating losses and how much losses individuals could take and benefit from. But one positive that came out of the pandemic, he explained, was the passage of the CARES Act, which he pointed out suspended those limitations.

However, those changes reverted back Jan. 1, meaning some limitations are “creeping up there” that people “need to be aware of” because they hadn’t had to think of them the last two years.

McMichael said actual and potential changes to the tax rules makes one trait necessary: flexibility.

“You really do (need to be more flexible),” he said. “We talked to our clients on an every-couple-day basis to see where they’re at, to see what their plan is and to stay flexible.”

McMichael said the situation reminded him of the early days of the pandemic, when Congress passed the Payroll Protection Plan. It initially came out with a short list of instructions, and was followed by more and more rules.

“It came out and three days later banks were administering the funds, and we were dealing with a one-page document with rules on it,” McMichael recalled. “Then six days later 30 pages come out and then six months later 500 pages come out. It taught us really well to stay flexible as much as possible.”

One credit being bandied about is the Employee Retention Credit, passed by Congress in 2020. According to McMichael, the ERC was created to reward businesses that were forced by some sort of government “stay home” order or mandate for keeping people employed.

That credit, he said, had been “modified and enhanced several times” and was to be in play all the way through Dec. 31, 2021. However, the infrastructure package Congress approved last fall included a provision that ended the ERIC as of Sept. 30.

Madhavan said his firm has been working with clients on the ERC and called it “significant.”

“We are seeing significant dollar amounts that are going to business owners, north of hundreds of thousands to millions of dollars,” Madhavan said. “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.”

Madhavan said the credit is a calculation of about 70% of the wages paid to that employee, but it’s up to $10,000.

“It is significant dollars,” he said. “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.”

It can all be confusing, but McMichael said there are any number of companies who say they can help.

“There’s been a cottage industry that popped up of people just doing ERC services,” he said. “There’s a large need for it, and in states like our state, the majority of companies were under some type of shutdown and, as long as you kept your people, you should look into it.”

McMichael has one last “best piece of advice” for taxpayers: Avoid paper. “Do whatever you can to file everything electronically,” he said. “Avoiding any paper
mailing with the IRS and other tax authorities will speed up the processing of the returns. It’s important to make sure that you have complete information about your tax situation prior to filing. This will help avoid any unnecessary correspondence in the future.”