Trends Impacting Professional Services Firms

By Karen Artasanchez, CPA, MST, WilkinGuttenplan

In the aftermath of the COVID-19 pandemic, professional services firms are facing challenges well recognized by CPAs and advisors to the industry. Issues such as dealing with a remote/hybrid workforce and talent acquisition have impacted overall business management as well as the accounting and tax reporting functions. Notably, the impact extends to state and local tax filings including the pass-through entity (PTE) tax regime that many states have recently adopted. It is to be expected that the managing partners and COOs of those firms will turn to their CPAs seeking advice on how best to navigate these challenges.

Remote/Hybrid Workforce

The shift towards remote/hybrid work models has presented both opportunities and challenges for professional services firms. While the flexibility offered by these arrangements can enhance employee satisfaction and productivity, many challenges exist. One major hurdle is maintaining effective communication and collaboration. In a remote/hybrid setting, the lack of face-to-face interactions can hinder spontaneous idea exchange and impede the development of a cohesive team environment. New hires don’t have a network and may not feel comfortable asking “dumb” questions. As such, a level of creativity is needed to find acceptable ways to maintain firm culture. Additionally, ensuring data security and compliance becomes a paramount concern. Professional services firms deal with sensitive client information, and maintaining the same level of security outside traditional office boundaries requires a robust digital infrastructure and vigilant cybersecurity measures.

Another challenge facing firms with remote/hybrid work environments lies in managing performance and evaluating employee contributions to the firm. This becomes complicated in cases where there is no direct supervision. Thus, establishing transparent performance metrics and efficient monitoring mechanisms in a remote/ hybrid environment is crucial. Balancing the benefits of flexibility with the need for accountability poses a continuous challenge for professional services firms navigating the “new normal” of remote/hybrid work arrangements. It has become evident that firms must invest in technology, foster a culture of trust and adapt their management strategies to this evolving landscape to stay competitive and continue to grow.

Talent Acquisition

Talent acquisition poses a formidable challenge for professional services firms in the competitive landscape of today’s world. The demand for specialized skills often exceeds the available talent pool, making recruitment an uphill task. To counter this, many firms are turning to mergers and acquisitions (M&A) as a strategic solution. M&A enables firms to not only onboard skilled professionals, but also to acquire established client bases. This strategy has the potential to accelerate a firm’s growth trajectory by instantly augmenting the workforce and expanding services capabilities.

However, M&A in the professional services industry is not without challenges. Cultural integration, aligning disparate processes and ensuring a seamless client experience post-deal are critical hurdles. Striking the right balance between organic talent development and inorganic growth through M&A is the key for professional services firms seeking to stay ahead in the talent acquisition game.

As with any M&A transaction, determining the best structure for the deal requires some level of due diligence to identify potential tax liabilities and compliance issues, particularly in the case of a merger of two firms or the acquisition of one by another. Additionally, assessing the tax implications of existing contractual obligations and contingencies, such as potential legal liabilities or pending litigation, is essential to avoid post-transaction surprises.

State and Local Tax Issues

As firms change their business models and hire remote workers, they will find their geographic footprint expanding. Operating in multiple jurisdictions creates the potential for additional state income tax filing requirements, if nexus exists, as well as compliance with local employment laws. Further, as many professional services firms are taxed as PTEs, the benefits of the various PTE tax regimes should not be overlooked. Maximizing this deduction is dependent on accurate record-keeping practices as most states’ PTE tax calculations are based, in part, on state-sourced revenue. Firms operating in multiple jurisdictions must understand each state’s rules related to revenue sourcing (i.e., market based versus cost of performance).

CPAs are often the first ones clients call, so be sure to be prepared to help them navigate these challenges and opportunities. Sharing experiences in dealing with similar issues will add value and create stickiness to client relationships, leading to an improved client experience.

Karen Artasanchez, CPA, MST, is a shareholder at WilkinGuttenplan. She is a member of the NJCPA State Tax Task Force and Federal Taxation Interest Group. She can be reached at kartasanchez@wgcpas.com.