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TAX CLIMATE CHANGE

A BIG CHALLENGE IN 2022: HOW TO HANDLE UNCERTAINTY AROUND BOTH U.S. LAW AND GLOBAL RULES FOR MULTINATIONAL BUSINESSES. A major piece of legislation may be stalled on Capitol Hill, but there’s still substantial change afoot this year when it comes to tax rules. To understand what’s at stake and how individuals and businesses should respond, Crain’s Content Studio brought three tax experts together to offer their takes on today’s hot topics—everything from inflation to the OECD’s global tax initiative, from the consequences of a virtual workforce to the fate of the Build Back Better Act. One point of consensus was clear: It pays to plan carefully.

Which potential tax changes in 2022 are of most interest to your clients?

Robert A. Clary: Our corporate clients continue to focus on the possibility of higher U.S. corporate taxes, including higher taxes on income earned through non-U.S. operations. Our multinational clients are considering potential U.S. changes alongside changes occurring globally as a result of tax initiatives spearheaded by the OECD. Given the potentially substantial impact of these rules and their complexity, our clients are spending significant time understanding the latest thinking from governments in the U.S. and around the world.

Jeremy J. Bivens: Some changes to the Tax Cuts and Jobs Act, in conjunction with the expiration of taxpayer-favorable provisions within the CARES Act, have led to a lot of questions. The focus has been on the impact to organizations’ cash flows. For example, research and experimentation tax deductions are scheduled to change with no subsequent changes in existing legislation. We’ve also seen considerable interest in passthrough entity state income taxes; the rules require significant planning in order to maximize state tax deductions.

There is continued uncertainty around the fate of Build Back Better. Are there any components of that bill you expect to be incorporated into future 2022 legislation? How are you advising clients with respect to uncertainty?

Clary: Given the current political climate in Washington, it is very hard to predict whether BBBA and its associated tax provisions will be enacted—or whether any meaningful tax law changes will occur in the U.S. this year. While great uncertainty exists, KPMG is advising our clients to undertake detailed modeling of several scenarios to understand the potential tax ramifications of possible U.S. and global tax changes and to develop short- and long-term plans to account for a series of possibilities.

ROBERT A. CLARY

Partner Baker Tilly jeremy.bivens@bakertilly.com 312-729-8091

Principal KPMG rclary@kpmg.com 312-665-2342

Bivens: It’s a particularly challenging environment to ascertain what exactly might make its way through a divided

Congress. Certainly, areas such as the 163(j) interest expense limitations, the SALT deduction cap and net investment income tax expansion

JASON M. KATZ

Wealth Advisor, Principal Bartlett Wealth Management jkatz@bartlett1898.com 513-345-6218

are well-documented hot topics, but we just don’t know if we’ll see some of the changes proposed in BBBA. Ultimately, my advice to clients, given

Katz: To me, the Build Back Better Bill is a watered-down version of some of the proposals we saw early in 2021, which got a lot of people thinking about major moves with long-term effects. Provisions in the current version of the bill include a new 5% surtax on income above $10 million and an additional 3% surtax on income above $25 million (with much lower limits on trust income). It would also increase the state and local tax (SALT) deduction cap to $80,000,

“REGARDLESS OF THE SIZE OF AN ORGANIZATION’S INTERNATIONAL FOOTPRINT, WE RECOMMEND CLIENTS CLOSELY FOLLOW THE EVOLUTION OF GLOBAL TAX INITIATIVES.” — JEREMY BIVENS, BAKER TILLY

Jason M. Katz: For our higherincome clients who are still saving aggressively for retirement, the possible elimination of the back door Roth IRA strategy is of interest. The Build Back Better Act (BBBA) proposed eliminating this strategy, which involves converting a Traditional IRA into a Roth. It has allowed clients who otherwise could not save in a Roth due to their high income to do so.

JEREMY J. BIVENS

from $10,000. It’s my view that the SALT cap provision is the most widely applicable and would reduce a lot of taxpayers’ tax bills if passed. But the largest impact of this legislation is on extremely wealthy individuals, some business owners and taxpayers with large income years. All that said, tax legislation should rarely drive planning decisions. Patience and thoughtfulness are key to investing and planning.

Business can’t stand still.

Let’s get moving. At Baker Tilly, we develop a deep understanding of your business to give you a distinct advantage in the marketplace. And while we couldn’t possibly cover the details of everything here, we would love to get to know you and demonstrate how the work we put in today equates to the success you’ll enjoy in the future. It’s called now, for tomorrow. At Baker Tilly, it’s simply how we do business.

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Baker Tilly US, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. © 2022 Baker Tilly US, LLP.

TAX CLIMATE CHANGE

A BIG CHALLENGE IN 2022: HOW TO HANDLE UNCERTAINTY AROUND BOTH U.S. LAW AND GLOBAL RULES FOR MULTINATIONAL BUSINESSES. changes that might or might not come, is to maintain flexibility within your tax planning strategy. Given the uncertainty relative to what any upcoming tax legislation may look like, now is likely not the moment to make significant decisions. Waiting until further guidance becomes available allows organizations to make more informed evaluations of the applicable rules in play.

How do you see business clients dealing with the significant increase in tax compliance and reporting?

Katz: If there is one thing business owners are good at, it is adapting to change and finding a solution.

Each business will have to decide how to handle the increased compliance and reporting in terms of performing the tasks in house or outsourcing to a CPA partner. This will give rise to additional costs, which will need to be budgeted for in 2022 and beyond.

Clary: To refer to the increase in tax compliance and reporting as “significant” is an understatement.

Our multinational clients in particular are being burdened with new,

complex tax reporting from almost every country around the globe year over year. In order to fully comply with these new obligations, our clients are increasingly utilizing advanced technology to ensure required data can be obtained efficiently within their organization and reported in a timely manner to various taxing authorities. Our clients look to KPMG to provide these technology solutions, along with global tax expertise, to adapt to an environment of increased complexity.

Bivens: The increased emphasis around tax compliance is meaningful to many of Baker Tilly’s clients. In particular, the additional information reporting imposed by the new Schedules K-2 and K-3 require us to ask our clients for considerably more information in the early stages of the tax compliance process.

While taxpayer-favorable provisions provide penalty relief for 2021 reporting, if a good faith effort is exercised to gather the required information, such provisions are not guaranteed for 2022 or beyond.

So, identifying this important information sooner rather than later is paramount.

How are your clients addressing new rules in place for small businesses required to comply with accounting method requirements established through the Tax Cuts and Jobs Act (TCJA) of 2017?

Bivens: With the IRS releasing formal guidance in December, Baker Tilly’s clients are now able to further understand how to comply with some of the final issued regulations pertaining to small business taxpayer-simplified methods of accounting. One area that is particularly helpful to some clients is the expansion of certain automatic

methods of accounting changes required participation in the more involved and costly nonautomatic procedures.

current IRS Section 7520 rate, which can be affected by the rate of inflation.

The higher the rate, the less attractive a GRAT strategy is.

Some TCJA components are expiring. Which areas are expected to significantly impact organizations in 2022?

But there are many other examples of how your financial advisor should factor inflation into your overall tax (and financial) strategy.

Clary: One of the tax benefits temporarily preserved by the TCJA was the expensing of certain research and experimentation (“R&E”) expenses. That benefit expired for tax years beginning after December 31, 2021. Therefore, beginning in 2022 or later, these

Bivens: Rising inflation affects our clients in a variety of ways. As inflation continues to impact the market, the IRS has announced increases to standard deductions, 401(k) contributions and some other smaller items. However, other areas impacting taxpayers have not been adjusted for inflation over the

“GIVEN THE CURRENT POLITICAL CLIMATE IN WASHINGTON, IT IS VERY HARD TO PREDICT…WHETHER ANY MEANINGFUL TAX LAW CHANGES WILL OCCUR IN THE U.S. THIS YEAR.” —ROBERT A. CLARY, KPMG method changes to cash or accrual basis taxpayers; the automatic method change is now available to taxpayers that use hybrid methods of accounting. Previously, hybrid

R&E expenses, including software development costs, will have to be capitalized and amortized over five years for research conducted in the U.S. and over 15 years for research conducted outside the U.S. While proposals have been put forward to delay the expiration date of the expensing provision, given the uncertainty of U.S. tax legislation, KPMG is assisting our clients with determining the impact of capitalization for tax compliance and financial reporting purposes.

Bivens: Favorable CARES Act provisions lessened the impact of some of the TCJA rules. But many clients are now preparing for the phase out of these favorable rules in 2022. As such, increased tax estimates and ultimately, tax liabilities for 2022 and beyond can be reasonably anticipated in many cases. Forecasting the impact of these rule changes with clients is key. Any increase in estimated tax liabilities needs to be properly considered for cash-flow budgets and planning.

Inflation is rearing its ugly head. How do you think rising costs might impact tax planning in 2022?

Katz: Inflation affects tax planning in a few ways. It can affect interest rates, which changes some of the planning ideas we execute on behalf of clients.

One example is the Grantor Retained Annuity Trust (GRAT), an estate freezing technique that allows one to pass the appreciation of an underlying investment to an heir without using up an estate exemption. The funding of this vehicle must consider the

years. For example, couples selling a primary home may exclude up to $500,000 of income from their capital gains taxes ($250,000 for individual filers) in 2022, provided ownership and use tests are met.

This amount has remained stagnant since 1997 despite median home values more than doubling during that time.

When it comes to individual clients wanting to reduce their 2022 tax bills, what credits or incentives are your clients prioritizing?

Bivens: Tax credits that can both reduce taxes and advance personal goals continue to remain a priority for Baker Tilly’s clients. College savings contributions are popular methods for clients with children or grandchildren not yet in college. Many states have programs that can either create direct tax credits for contributions or subtractions to state taxable income.

Another particularly popular strategy for minimizing individual income taxes is focused on the timing of charitable donations.

We also continue to see strategies around opportunity zone investments, health savings account funding, and IRA contributions or conversions. For some business owners, a focus around portfolio company R&E credits, as well as state tax deduction planning through pass-through entity taxes, has caused individuals to review broader indirect activities and ensure tax minimization activities are being conducted wherever possible.

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Are you anticipating that the estate and gift tax will remain the same in 2022? And do you recommend charitable giving as a tax deduction strategy? What strategies do you suggest for clients looking to preserve more of their wealth for their family or charitable giving?

Katz: The only changes we have seen related to the estate and gift tax are the inflation adjustments to the annual exclusion gift ($16,000 now vs. $15,000) and the overall estate exemption ($12,060,000 now vs. $11,700.000). Current tax proposals do not decrease the estate exemption.

Effective estate and charitable planning start with conversations with clients about the purpose of their wealth and their overall goals.

Once we understand their vision, in terms of legacy and charity, we can put pencil to paper and start to model different strategies to optimize the financial plan. In terms of charitable giving, there are many strategies that all depend on an individual’s circumstances and goals. Giving appreciated stock or making qualified charitable donations from an IRA tend to be the most popular options.

For our ultra-high net worth clients, we have been executing large gifting strategies using IDGTs [Intentionally Defective Grantor Trust] and SLATs [Spousal Lifetime Active Trusts].

Bivens: We continue to see planning focused on using the increased estate and gift tax exemption before the scheduled sunset in 2025. Continual utilization of the annual $16,000 gift tax exclusion also remains a very important strategy in reducing client estates. Charitable giving can be an effective tax reduction strategy. Donations can range from cash and securities given to public charities, up and through private foundations, depending upon the

of these rules in various countries.

Further, our clients have analyzed the impact of potential U.S. tax legislation alongside these global changes.

Specifically, due to the complexity of these organizations and their businesses, KPMG is assisting our clients with modeling the potential impact of OECD proposals over the short- and long-term and planning for various scenarios. This process allows a company’s tax department to more clearly communicate to leadership the potential impact of proposals, even in an environment of continued uncertainty.

Bivens: With the most recent OECD release of the Global Anti-Base Erosion Model Rules, our clients recognize that the complexity of the global tax rules will increase. Regardless of the size of an organization’s international footprint, we recommend clients closely follow the evolution of global tax initiatives. Certain Baker Tilly clients have enhanced their global tax structures and transfer pricing models in anticipation of the new global standards. As a best practice, we recommend that multinational enterprises perform initial risk assessments of their global tax structures. Most importantly, they should understand where opportunities may be to drive global tax efficiencies, while still complying with the new and evolving global tax standards.

What are some of the key tax issues created by a more virtual workforce?

Katz: The key issue that comes to mind is state and local withholding requirements for employers and their employees. Many businesses will go from withholding in a small number of cities and states to trying to figure out if they need to withhold for all the cities and states where their

“IF THERE IS ONE THING BUSINESS OWNERS ARE GOOD AT, IT IS ADAPTING TO CHANGE AND FINDING A SOLUTION.” —JASON KATZ, BARTLETT WEALTH MANAGEMENT

ABOUT THE PANELISTS JEREMY J. BIVENS (CPA, MST), is a partner at Baker Tilly and the firm’s Chicago office tax leader. He has more than 20 years of experience providing tax and business advisory services to middlemarket, large and private equity-owned portfolio companies. A licensed Certified Public Accountant, Bivens has extensive business advisory experience in areas including manufacturing and distribution, food and beverage, professional services companies, software and technology, mergers and acquisitions and overall business development assistance. He earned a master of science in taxation at DePaul University.

ROBERT A. CLARY is a principal in KPMG’s Chicago International Tax practice and co-leader of markets for KPMG’s International Tax practice in the U.S. He has more than 16 years of experience in providing various tax consulting services, including cross-border tax planning, M&A planning and transfer pricing disputes. Clary has been a frequent speaker at professional organizations including BNA-Bloomberg, Chicago Tax Club and the Practicing Law Institute. He holds a law degree from the University of Miami and a master of laws in taxation degree from New York University.

JASON M. KATZ, CFP®, CPA, CEPA, is a wealth advisor and principal at Bartlett Wealth Management, providing strategic income tax planning, estate planning and other wealth planning services to individuals and families. He is a Certified Financial Planner and licensed Certified Public Accountant with more than 17 years of experience in providing comprehensive financial and tax planning services. Katz is passionate about solving complex financial planning issues with optimal solutions and staying on the cutting edge of tax legislation.

That could give the jurisdiction the right to tax profits and require significant tax reporting. Penalties can be imposed for noncompliance.

To mitigate and/or manage this

risk, KPMG assists clients with developing proper controls, including the use of technology, to understand where employees are located and the tax consequences.

In the coming years, more and more employees will want to work from different locations. We suggest establishing a robust approval process to handle such requests.

Taxes change.

Your goals shouldn’t.

Tax planning should be part of your overall financial strategy, not an afterthought.

At Bartlett, we dig deep to get to know you so that your goals are what drive your decisions. Let us remove the guesswork

level of contributions and family commitments clients may want.

In addition, we continue to work with our clients to enact broader strategic plans focused toward wealth preservation strategies, including the implementation of revocable trusts, deliberate planning in order to remove particular assets from our clients’ estates early, as well as insurance planning.

How have your multinational clients approached the global tax initiatives set forth by the OECD? Clary: Our clients have closely monitored the proposals made by the OECD regarding international taxation and the implementation

workers are located. Tracking days worked in each location is a huge burden that can be expensive.

Clary: Even before the pandemic, tax laws in the U.S. and around the world had not fully evolved to account for an increasingly “remote” workforce. Many tax consequences for businesses and individuals turn on where an employee is physically located and carrying on his or her business activity. Coming out of the pandemic, one key issue that companies are grappling with is the possibility of unknowingly creating a tax nexus with a jurisdiction—a state or foreign country—based on the location of their remote employees.

from your tax preparations so you can focus on what matters most.

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