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Tax News Now Ep. 1 - Introducing Mark Gallegos
251 Plays1 month ago
Mark Gallegos, Tax Partner at Porte Brown, kicks off this 2025 tax discussion series. He shares what he loves about the tax profession, being very human-centric and focused on helping people. Learn from his expertise on the current tax landscape and his insights surrounding 2025 as an especially critical year, where tax provisions are set to expire and a new president will impact the results of new tax bills. Acknowledging the many uncertainties that tax professionals face regarding imminent changes in regulation, he highlights this as an opportunity to grow even closer client relationships.
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Transcript
Introduction to Becker Tax Podcast
00:00:09
Speaker
Welcome to the first in a series of Becker Tax podcasts. My name is Chris Pacina and I'm a member of the Becker Tax team. I'm excited to welcome you to this monthly podcast series and and introduce you to our host for all future podcast, Mark Galagos. Welcome Mark and thanks for being here and host hosting this podcast for us.
Mark's Journey into Tax
00:00:31
Speaker
Thanks for having me, Chris.
00:00:33
Speaker
Why don't you tell us about your career journey? Sort of what led you into public accounting and what keeps you excited about it to start? Yeah, no, great question. So if I go back, when I was in high school, I, you know, I was really good in math and science and everyone's like, Hey, you should be an engineer.
00:00:50
Speaker
um But I did take some accounting classes in high school, in basic accounting, and I really enjoyed it. So in college, I and went into accounting, I ended up at the University of Kentucky, and I graduated with a degree in accounting. um And moving into public accounting, I decided I'm going to work in the tax area. And I really enjoyed the challenge of like,
00:01:12
Speaker
understanding not only all these tax rules that this massive code but how do you really unpack what's in there and along the way not only learn it but provide value and advice to people so that they can understand it in more of an English way. So that's kind of been my passion is to figure out how to take something very complicated and make it seem easy for others to understand.
00:01:34
Speaker
And with that, what I would say is along in my journey is public accounting is some an area where I enjoy working with people. I enjoy being able to listen to them, find out what but keeps them up at night. What are their pain points? What are the reasons why they do what they do? Maybe they're running a manufacturing business. Maybe they're in construction. Maybe they're they're running a great law practice.
00:01:58
Speaker
Whatever the business or the way they earn their living, for me, it's learning to navigate how to help them, advise them, and provide the right insights from the tax and accounting realm in order to give them that value that they're looking for.
Passion for Public Accounting
00:02:14
Speaker
and And when I look at things from from the tax side, what really has gotten me um really inspired in this area over the years is as I've learned more about tax law and legislation and how this impacts, it's constantly a fluid area, meaning it's always changing. And I think back and forth, the way we do things is trying to determine, hey, on a given year, there may not be a lot of tax changes But there are things that are going to change. Maybe there's new forms. Maybe there's new ways we have to look at something. Maybe there's been rulings and other um items put out throughout the year that has changed the way we're going to deal with it from a compliance aspect. And so with that being said, it's always been a challenge to figure out, hey, what's going on? What's happening in our tax landscape? And what do we need to be aware of from ourselves, but also for our clients? So I think that's kind of where I'm at, Chris, with it.
00:03:09
Speaker
Yeah, that's great. um so So you mentioned your clients. what What is your client base now and what has it been historically? Yeah, my client base um right now is I'd say middle markets, businesses, privately held businesses in the manufacturing and professional services um area distribution. um I'm a tax partner at Portie Brown.
Focus Areas in Tax
00:03:33
Speaker
we're in a chicago land area um and our clients obviously are focused in the midwest but i have clients all over the u.s including all over the globe um and so for myself working with clients ideal a lot is a tax generalist on complicated tax transactions um from the compliance level and also on the consulting level. But I also focus a lot on mergers and acquisitions. I focus on international tax and the complexities there. And then I also focus a lot on um credits and incentives and tax legislation. I really, I think understanding and following where tax laws are going or what changes are coming down the pipeline is something that excites me. And I always try to spend my time really up to speed on this as things go on.
00:04:21
Speaker
Yeah, that's great. And I think we'll wellll we talk a lot about the tax legislation coming up a little bit later in this in this podcast session, but um obviously you do a lot of public speaking, you do a lot of teaching and webinars, you do a lot for Becker, but I'm sure you also do quite a few outside of Becker. what What's your favorite part of of the teaching and the the podcasts and the webcasts and the seminars that you do?
Teaching and Sharing Knowledge
00:04:47
Speaker
Yeah, I think for me, the the greatest thrill in it is being able to take, you know, whether I'm talking to someone that's new to the industry, maybe they're a young staff, right? Or maybe they're they're seasoned and they've been doing this for 20, 30 years or plus, right? um But how do I take the knowledge that I have learned, the experiences I have learned and really be able to consult and advise in those areas. And so, you know, just like when I'm working with clients and we're doing tax planning, we're trying to figure out, Hey, your year looks like in 2024 that you've made X amount of dollars and it's a great year. And then the question the client may have is, well, how much in tax am I going to pay? Come.
00:05:27
Speaker
you know, April 15th, we'll say. And at that point in time, we're trying to plan for it and figure out, hey, here's what you're going to owe, but here's some things you could do along the way in order to mitigate some of that tax. Have we thought about, you know, is it, you know, accelerating depreciation? Is it about retirement plans? Is it about other mechanisms in place using the tax law in order to help clients, you know, mitigate taxes, but at the same time enhance their business?
00:05:54
Speaker
And so when i go out speak or i write or ice or i do a webinar or a podcast. The way i look at it is i've had an amazing experience in this field of public accounting where i just want to give back to others in a way that helps them say hey this isn't all about when you show up at a party everyone's like oh you're an accountant you're a numbers guy.
00:06:15
Speaker
Of course, we're numbers people, but there's a whole lot more to that than being someone that just does debits and credits and files a few tax returns. So, you know, I think over the years, Chris, the way I looked at it is, how do I take all these experiences and really put them into an area that, you know, I can help others see, you know, where they fit into this?
00:06:37
Speaker
you know So, for example, I may have a client that over the years has had some amazing growth and I've watched them go from a small little business until some some company that's grown to a large lots of revenue. They're on many different states. They're growing. They've got lots of employees and they're doing phenomenal. And to work with them along the way and see, you know, have that front row seat to really see them and advise them along the way, almost like I'm a tour guide, you know, k client calls you and you're like, Hey, do you know someone that can help us with our insurance needs, our legal needs, whatever our investment needs?
00:07:13
Speaker
And you're you're just basically saying, yeah, let me invite introduce you to X so and so. Or maybe it's within our own firm, you know hey, I need financials. I need areas. I need help with accounting systems, things that I don't know anything about. But there's people within my firm that can help, or maybe people in other firms that can help. and i And I just feel that at the end of the day, I'm just helping people get to the right solution. you know and And sometimes,
00:07:38
Speaker
It's all about asking those open-ended questions, finding out where their pain points are, you know what keeps them up at night, where where are they at right now with their business or with their job or with maybe it's their family life, whatever it may be, but determining how can I step in. and Sometimes it's just listening and taking notes and going, hey, I hear you, and just giving that satisfaction of knowing, hey, I'm an echoing voice for them. But sometimes it's listening and figuring out, hey, I know you mentioned that What keeps you up late at night is the fact that you've made a bunch of money this year and you're looking to find ways to save on taxes. I don't know if there's anything we can do at this point and at least give me the opportunity then to step in and go, well, here's some areas that maybe we haven't considered or you should consider. And can we do and X, Y, and Z before your end? Yeah, that sounds really like a rewarding way to approach the accounting profession and and helping people.
00:08:34
Speaker
Right.
Shark Encounter Icebreaker
00:08:35
Speaker
So but before we get into tax, like we were talking off camera before we we started this podcast, you're telling me you have this um, encounter with a shark and a shark bite story. So you want to maybe tell the listeners about that and then we can maybe dive more into actual tax discussion. e Absolutely. So, you know, one of the most things that I always say, you know, if you're at a wedding, right? A party and you're at a table with, you know, it's a table with 10 and you're, you don't know anyone there. And so I love to sometimes do icebreakers, right? You know, ask a question and let everyone answer. It's just a good way to get it to know everyone. And,
00:09:09
Speaker
good or bad, I'm not sure. I've, I've always grown up going to various parts of the country and love spending time at the beach. There's something about when you grew up in Chicago, and I live in Chicago currently, you know, the winters can be a little cold. So sometimes that looking forward to going to a beach somewhere and having some hot sun hits you just feels good and relaxing to me so over the years i've gone to the outer banks north carolina and um you know somewhere along the way i was there and i was doing some body boarding and taking in waves and i got bit by a shark
00:09:43
Speaker
And the real thing about it was that it was just a close encounter. It wasn't a massive bite where I lost any limbs, but I ended up with bite marks in my ah hand and arm and, ah you know, have to have that taken care of. But it's always an interesting thing when people say, tell me something about you that no one would know or or tell you something interesting about you. And I say, well, I was bitten by a shark.
00:10:06
Speaker
that really gets the room because usually people don't have anything of that nature. Not that I, you know, I just sit there and go, well, I'm lucky because I didn't really have like, you know, where I lost my hand or my arm in the process, but it is definitely something you typically don't hear. Yeah, that's a that's a cool story to live and tell about without having any major injuries. Absolutely. Because not everyone's so lucky, I guess.
00:10:32
Speaker
All right.
Explaining the Tax Cuts and Jobs Act
00:10:33
Speaker
so why don't we talk about ah so The Tax Cuts and Jobs Act, the TCJA, comes out in 2017. It's one of the the biggest significant overhauls of the tax system you know probably since 1986.
00:10:47
Speaker
um and ah I know there's a lot of people on who are familiar with that, but we might have a lot of listeners who are new to the tax profession. Can you maybe give a quick recap of the major changes that TCJA brought about?
00:11:01
Speaker
And you know the the effect of those on on businesses or on your clients specifically. Absolutely. So if you kind of go back a number of years, when we we were in this um tax world where the highest tax rate at at that time in 2017 was 39.6% on the graduated system. um And the in the C-Corp world, it was the highest tax rate was 35%.
00:11:30
Speaker
um There was all kinds of great tax provisions, but they were looked they wanted to make taxes more simple. There was a simplification um sell going on. And so when President Trump took office, they wanted to read overhaul the tax code. And so at the end of 2017, they signed something called the Tax Cuts and Jobs Act.
00:11:50
Speaker
referred to as TCGA, but it was a spending bill. um The bill was put together under reconciliation, and essentially it really overhauled a number of tax provisions, like you said, since 1986. Lots of things that came into play.
00:12:07
Speaker
And with that being said, it was a, you know, it was a reconciliation bill that was basically a spending bill. It had a roughly $5.5 trillion dollars in tax cuts and $4 trillion dollars in tax revenue generators and pay-fors. So, you know, it scored out at roughly around a $1.5 trillion dollar um spending hit.
00:12:28
Speaker
And with that, because of reconciliation, which we'll talk about later, there is a timeline for this. So basically, they put together these provisions, some were made permanent, some were expiring along the way. um And so some of the key highlights of it is they took that 35% graduated C-Corp rate, and they made a flat 21% C-Corp corporate tax rate.
00:12:52
Speaker
And so whether you made a dollar or you made a billion dollars or whatever the number you made, if you were taxed as a C Corp, then you played a flat 21% federal tax rate. With that came the conversation, you know, that Congress had to go through as well. Well, if you're giving corporations, you know, this flat 21%, what are we going to do for most of the businesses in this country that are taxed so as flow through entities, meaning your S Corps and your partnerships?
00:13:20
Speaker
And so ah within within the debate, they finally came up with something called Section 189 CAPA, the Qualified Business Income Deduction. QBI is another term we you refer to it as. And essentially, it was a potential 20% deduction for pass-through business entities um based on their qualified business income.
00:13:40
Speaker
And I had a lot of other caveats to it, depending on if you hit a certain threshold of income, do you still get the full 20%? Do you lose it? Does it phase out? But within it, it was a 20%. Because if you think about it, and I just look at those two provisions,
00:13:55
Speaker
you know, if i if I'm a manufacturing company and I make a million dollars and normally under the under the provisions, if I'm getting from a C Corp or I convert to be in a C Corp, I pay 21% on that, right? So I pay $210,000 on that million dollars of taxable income, hypothetically.
00:14:14
Speaker
But the downside sometimes to the C-Corp is that if I decide to take cash out of the business or take all the cash out, then I got to take it out as a taxable dividend to me, the shareholder or the shareholders. um So that's where the double tax provisions come in.
00:14:28
Speaker
where a lot of people operate LLCs, taxes, partnerships, or some form of a partnership, or definitely S-corps, where you have this pass-through entity regime where they don't pay any federal tax at the federal level, but the income passes through to the end user, whether it's the individual or a trust or another entity, and they pay tax at the federal level.
00:14:50
Speaker
And so if I'm thinking about an individual, you know same example, it makes a million dollars of taxable income. That million dollars passes through to the shareholder and they pick it up on their personal return.
00:15:02
Speaker
So, you know, one of the things they did is they lowered the highest rate um from 39.6% down to 37%. So that million dollars comes out, now it's taxed at 37%. But again, such a, you know, how do we help these flow through our business entities get to a a good balance considering Secorps give you a flat 21%.
00:15:23
Speaker
So they created the qualified business income deduction, the QBI, and essentially they gave you a potential 20% deduction. So in that case, you get a million dollars instead of paying tax on the million, essentially you could get a potential $200,000 deduction and pay tax on $800,000. So what that did is it effectively brought your um tax rate from 37% on that million dollars down to 29.6%.
00:15:50
Speaker
um So, again, I know what you're saying there. It doesn't take a math genius right to go, hey, 29.6% sounds great. However, it's still greater than the the corporate tax rate of 21%. And I get that. But one of the beauties of the flow through entity is you avoid the double taxation. So, in years where you have substantial income, if you want to take cash out You can take it out and not have that double tax impact. And I think that was one of the good things that was created from this along with other things that came out of TCGA where bonus depreciation, they made a hundred percent. So, Hey, if you have qualified, um, personal tangible property, 20 years or less, it'd be certain definitions. You can, you could get originally up to a hundred percent bonus depreciation, meaning I go out and buy a machine. I get right a hundred percent of it off in year one.
00:16:39
Speaker
And that's a great thing. Now, there are some caveats to that, considering state tax law also doesn't always follow federal. But if we're just focusing on the Fed, it was a great provision. They enhanced Section 179 depreciation. They created all kinds of other provisions in there that really benefited people.
00:16:57
Speaker
But along the way, they had a number of other pay-fors in there, things that could generate revenue over the years. So one of them was that, hey, over this time period, this 10-year bill, there would be not 100% bonus depreciation. So we started to see bonus start to drop down. So it dropped down by 20%, not dropped down to 80. And this year, we're at 60%. And it's supposed to continue to go down until we're at zero.
00:17:23
Speaker
With that being said, they also put in provisions under interest limitation provisions, 163J. They also put in provisions that kicked in a few years ago regarding capitalization of your R and&E 174 costs, things that counter to people by surprise, but at the end of the day, were put in so they can balance this bill along the way. So a lot of things.
Impact of TCJA on Tax System
00:17:47
Speaker
Other things that were created from this bill were an increase in estate tax, the lifetime exemption, um which created all kinds of great tax planning for a estate. And it's still a great thing to do. International tax reform, they created a number of provisions that said, hey, we're going to, the way we treat this is going to be different.
00:18:06
Speaker
And I always give the example from that perspective is, you know, a lot of businesses had offshore companies. I set up a company in another country and essentially, how do I pay tax on that? Well, in the past you would hit you be earning money in another company. You may pay tax to that foreign country, but you would never pay tax in the US on that income unless you repatriated that income back to the US.
00:18:29
Speaker
Well, and with the Tax Cuts and Jobs Act, they created a number of things. One, they created something called the ah transition tax, where they had to calculate at the end of 2017, essentially your liquidity and your, look at your gross foreign EMP on a particular controlled foreign corporation and pay a tax. And now it was less than the dividend tax. It was some sort of blended rate, but the reality was a lot of businesses had to go through that.
00:18:55
Speaker
Then beyond that, they created the guilty tax. They created a number of other things that helped reform how international companies would work. So um all of this changed the dynamic of the tax landscape more than we've ever seen before. And with that being said, we've created all these provisions and some of them have been in place this entire time. Like I said before, some of them had been phasing out. Some of them have been changing.
00:19:21
Speaker
Um, but with all that being said, we've seen, you know, when you create tax law, sometimes it works really well. And sometimes you don't. One of the things that was part of it. And I, and I i think you'd agree with is the salt cap, the state and local tax cap meeting. Hey, if I'm itemizing deductions on my personal tax return and you know I get to deduct my state local taxes and my real estate taxes. You used to be able to be able to deduct all of them. Well, now you can only deduct up to $10,000. So this is what the salt cap was called. And and what what this did is it kind of simplified a lot of filing for many Americans, meaning they didn't have to now go ahead and utilize Schedule A. So they would just get the standard deduction, which also doubled in size.
00:20:06
Speaker
and you know, made their return maybe a little bit more simplistic. Although I will always say anytime anyone talks about simplicity in taxes, it's kind of an oxymoron because it's never really simple, right? But the salt cap created, um, you know, planning that had to be on, you know, Hey, my client that normally had $20,000 in state local taxes is only now able to deduct 10. So they lost 10,000. They didn't get to carry it forward. They just lose it all together on a given year.
00:20:36
Speaker
So where this came into play is it created all kinds of other ah potential benefits that were made because of TCGA. One of them at the state and local tax level was the pass-through entity tax, PTET. And this was certain states created a workaround to the salt cap. And the workaround essentially said, hey, Chris, if you own a Escorp, we'll save.
00:21:01
Speaker
And we'll use my example. we get You made a million dollars in taxable income and you're in Illinois and the the state individual tax rate is 4.95%. We'll call it 5% to round, rounding purposes. And you make a million dollars of taxable income. Remember that income flows through to your personal return and you would pay tax on it at the federal level, but at the state level in Illinois, if it was all subject to tax here, you pay about $50,000 in state income taxes.
00:21:28
Speaker
Well, remember, you only get to deduct 10,000 of them. So states created something called the pass serenity tax, where essentially that S corp could make an election um and essentially prepay their state taxes in a given year.
00:21:44
Speaker
get the federal deduction at the entity level for prepaying itself. My example, if you have a million dollars of income, I prepaid $50,000. I got a $50,000 federal tax deduction, state income tax. So my million dollars now becomes $950,000 for federal purposes. For state, I'm still at the million because I add back the deduction.
00:22:06
Speaker
and I basically get a credit that I've prepaid my taxes. So this was a great benefit still in play. Most of the states in the union have followed along in some capacity with their own version of what this looks like. And it's created this great benefit out there.
00:22:21
Speaker
um I bring this up because I think this is also an area that could be something that we're looking at in a potential future legislation that could be modified or changed at the federal level. So we'll have to see where this heads. But again, TCGA created so many different provisions that we've all been working with. And you know when I talk to young people, a lot of them have graduated after 2018 and now are in the industry. And you know what? The only tax rules they know are the Tax Cuts and Jobs Act.
00:22:51
Speaker
So now they're going to be up against potential overhaul again, or what does that look like? And they're going to have to see what it really looks like when massive tax change happens and how we have to have um our ability to understand what this is and digest it. So a lot there. Yeah, that's that's a great comprehensive answer. ah i'll I'll give you a break for a second um because with all these moving pieces, right? Then you you try to simplify things, but you end up creating a lot more complexity. So I know at least in my prior practice before joining Becker, I dealt with a lot with the international provisions. And we saw a lot of major companies and big four firms and law firms and anyone who's dealing with these international provisions having to
00:23:41
Speaker
generate these sophisticated models because a change in one type of income, whether it be sub-hard F income or guilty income, could change everything else about your return, what kind of foreign tax credits you would get, what kind of um horn-dried and tangible income, FDII, you would have coming into the US. So all these different pieces, you'd move one lever and it affects five other things, not to mention at the same time and sort of right after TCGA was being enacted and and sort of rolling in over the years, right? You had foreign countries making a lot of changes to their tax laws around um
00:24:22
Speaker
base erosion and profit shifting, pillar two, OECD was out there trying to bring up the but tax regimes of other countries to to be a little bit more fair across the board. And we heard about minimum taxes and and so forth. But that then also figured into these different modeling exercises that all these large companies had to do. i want i'm I'm interested from your perspective, what are some of the maybe intended or unintended consequences that you saw out of provisions that you know maybe made things a little more complex and hard harder to deal with than maybe anticipated when TCJA came into into play.
Complexities of TCJA
00:25:06
Speaker
Yeah, no, it completely agree with all that, you know, some of the things that, like I said before, it was, and I remember they wanted to simplify the tax code and everybody was in board with that. And remember they even, want they proposed, Hey, we can even do you the tax return on a postcard, right? There was this sell of like, how do we simplify things for people? And I think maybe the simplification was for the average American taxpayer that, you know, works a job, gets a W two, and, uh, maybe they have,
00:25:36
Speaker
a home and they get you know a little bit of mortgage interest and they pay the real estate taxes. But how do we make their returns more simplified? And so depending on your facts and circumstances, maybe it's simplified along the way. But in general, when you look at business owners,
00:25:53
Speaker
people that are in the pass through entity regime, people that have all kinds of other things going on within their business. Maybe they're heavily involved in R and&D. Maybe they're doing sales in other countries. Maybe they're setting up operations in other countries. It created a dynamic tax landscape that now did it become more simplified, it became more complex. And so the unintended consequences of the tax bill was the fact that it created all of this, I would say, challenge for people to understand, hey, how do these provisions apply to us? And what do we need to do in order to make sure that we're in compliance?
00:26:35
Speaker
Um, and so, you know, just like anytime attacks, new a new tax provision gets proposed and let's say gets enacted into law. The reality is, you know, as a practitioner, you're trying to determine, okay, well, what does it say? How does it work?
00:26:49
Speaker
And then you start trying to really think outside the box of like all the different areas. Unfortunately, sometimes when rules come out, it's not as clear as we want it to be. So now you're waiting on some sort of guidance. Maybe it's FAQs the treasury would put out or the IRS. Maybe it's regulations from treasury. Maybe it's, uh, you know, all kinds of other ways we get guidance. And so with that being said, that takes time. And so sometimes we don't always have time. So you're trying to operate.
00:27:19
Speaker
in an ever changing fluid world of taxes but at the same time digest all this information and then say to your client hey i know you're operating a control form corporation in hong kong. But you made a lot of money over the years well guilty is now gonna be something we gotta deal with you try to explain that to someone that truly.
00:27:41
Speaker
just knows how to make money. They don't understand the tax rules. And so that became a challenge. But even, you know, stateside, just saying, hey, you know, you go out and you buy a lot of heavy machinery for your business because you manufacture all kinds of, you know, goods. And so in order to do so, how can you go out and buy more machinery at the same time, take advantage of the accelerated depreciation, whether it's bonus depreciation or 179,
00:28:09
Speaker
or some combination? And how does that impact your business? And, you know, while this comes out, a few years later, we have the the COVID pandemic. And, you know, it kind of disrupted supply chain and created all kinds of other issues, which, you know, created other tax rules and bills along the way. And All these things come into play and I think so. There's great there's great things that came out of TCGA, you know the effective tax rate coming down for businesses um at all levels, finding ways to accelerate deductions, finding ways to really you know enhance, the lower the tax ramifications, which I always say when you can mitigate taxes, you put money back into the business so they can invest in their people and technology and really growing their business.
00:28:58
Speaker
ah And the unintended consequences where it created a more complex dynamic that wasn't necessarily a permanent tax system. It was a tax system that had expiring provisions, which is what we've seen. A lot of the individual tax provisions technically are set to expire at the end of 2025.
00:29:18
Speaker
And with that is created this discussion that we've had for leading all the way up this past year up until the election and everyone asking will mark tell me what's going to happen to my taxes and again even after the election people ask me the question i mean almost every day where are taxes going to pay more money to pay less and again we we only know what we know now we can make assumptions based on Campaign promises and where people are speaking about it publicly but the reality is until we see a bill put together we start to see people vote on it we see it get enacted you truly don't know and so.
00:29:56
Speaker
the the The good and bad of this is that we have to still keep our head on a swivel, understand when we're at, and advise our clients appropriately like, hey, here's the law right now for 2024, for 2025. And we need to plan that way, but at the same time, know where things are potentially headed and how do we bring these up and model it out for people to say, hey,
00:30:21
Speaker
If things change and it looks like this, here's where your taxes may go. If they don't change, here's where they may go. If they let the whole thing sunset, here's where your taxes will go. So there's a lot of moving parts there. And I think as practitioners, we've got to keep our eye on what does this tax landscape look like and stay up to date on things.
Preparing for 2025 Tax Changes
00:30:41
Speaker
Yeah, and and talking about that, so so when TCGA came in, there were a lot of provisions that sunsetted at the end of 2025, which at that time seemed like a long way off, but now we're here in 2025.
00:30:58
Speaker
and um so what Thinking about 2025 specifically, and obviously we're we're waiting to see what comes out, as you as you mentioned, we'll talk a little more about that. but your clients now, like what should what should individuals, what should corporations, what should flow throughs be thinking about from a tax planning perspective with the idea that something may happen, but as of right now, we have these sunsetting provisions at the end of 2025.
00:31:29
Speaker
Yeah, I think at a minimum, you should be doing tax planning. You should be talking to your clients, you know, before your end and giving them the idea because these I'm sure, and I'm sure everyone listening is probably already getting these questions, right? And you've already been doing this, but my thought process is make sure they're aware that, Hey, even though.
00:31:48
Speaker
you know we now potentially well have we will have a Republican executive branch, Republican ah controlled legislative branch. That doesn't mean that just you know blanket everything gets extended and we're status quo, right? um There's a lot more to it, which we'll talk about. But with that, I think your client needs to be aware of like, hey, a lot of the provisions, the highest tax rate of 37%, the QBI, 20% deduction, the estate lifetime exclusion,
00:32:16
Speaker
There's a number of things that you know come to a solid halt at the end of 2025, unless a new bill is put in place that either extends it, um changes it, or modifies it. right and And in the meantime, we we don't have a crystal ball that says, OK, here's exactly what's going to happen. So here's what you got to do. But I think you got to at least make your clients aware that there's a lot of things happening, and you need to be aware of these changes.
00:32:44
Speaker
Now, if they want to go further, you could always model it out. Hey, here's your tax. Here's what your taxes for 2025 would look like based on a projection based on the current tax law. And here's where 2026 would look like if nothing was done in the certain provisions expired, and they would see the difference in taxes. you know And so when people say, are my taxes going up?
00:33:07
Speaker
or are they going down, you know you really can't answer that fully. You could give your opinion, but you really if they really want, you know hey, give me your ah best educated guess, you really got to work through the numbers and give them an idea of what that would look like. And I think from our perspective, helping our clients from an advisory role really understand you know, the tax landscape and where they need to be pointing, you know, it will give them the insight that one, we're there, we're supporting them, we're there with them the whole way. And then as these changes come, they know they can rely on us to really help them navigate this because, you know, there's nothing worse than changes come and it creates this ah this void where everyone's like, not sure what's happening, right? But, you know,
00:33:49
Speaker
that's why we are called the trusted advisors and you know the more we understand what's going on, our clients trust us and they rely on our opinion and our judgment that we at least can give them, hey, here's here's all the different avenues out there and here's where we think things are going, but let's just make sure we'rere we're planning accordingly and making you aware of what's happening in the changing landscape.
00:34:11
Speaker
ah so You had mentioned before reck and reconciliation, and I know in and your practice, you have some pretty good insight as to what's happening and on Capitol Hill or what may happen on Capitol Hill. I wanted to get your thoughts for the listeners on where you think legislation is going, what you see some of the challenges of passing legislation would be some of the deficit concerns because I know you have a really good perspective on this. so i think listeners would be interested in hearing that. Yeah. No, thank you.
Legislative Challenges and TCJA
00:34:45
Speaker
I think and think the most important thing is, you know one question I get every day is clients calling and saying, hey, now that Trump will be the president and we have a Republican controlled Senate and a Republican controlled House, I don't have to worry about taxes, right? We're good to go. We just keep moving on and for for the time being, right? and And I love to be able to say, yeah, absolutely. But that that would not be I would not be doing them any service by telling them that.
00:35:11
Speaker
The reality is, yes, I think a lot of things are going to continue on, but we have to still put a bill together. Because remember, the Tax Cuts and Jobs Act, a lot of the provisions expire as of December 31st, 2025. So Congress, you know the new Congress and then and the president takes their inaugurated and they come in January 20th of 2025. So they have the rest of the year to figure out, hey, what is this going to look like?
00:35:35
Speaker
now Typically under normal legislation, you know, let's just say the house, you know, speaker takes up and they create a bill and they take it to a floor vote. It would need a simple majority to pass a bill in the house. And then it would go to the Senate. And normally because of the filibuster rules, you would need 60 votes in the Senate in order to pass the legislation.
00:35:57
Speaker
Well, you're currently going to be with a Senate come January 20th of 53 Republicans versus 47 Democrats. so you So if everyone voted party line, you wouldn't have that 60 vote, right? And so in a in a in a perfect world, you'd have bipartisan support, meaning you'd have people on both sides, Republican and Democrat, working together to try to figure out, hey, let's come up with a bill that makes sense for everybody, and then we can all jump on board and at least get over that hump.
00:36:27
Speaker
But what we've seen in the past is there's another method that can be used called reconciliation. This was used for the Tax Cuts and Jobs Act back in 2017. This was used for the Inflation Reduction Act under President Biden in 2022. And so this is a this is a great thing. Some of the benefits of using reconciliation is that the House and Senate, they put together a joint budget resolution that can be approved with simple majority in each of the chambers.
00:36:55
Speaker
It provides reconciliation instructions, setting the amount of the deficit financing the basically the tax committees can use for the tax bill within a budget window. So they put together a budget. Usually it's a 10-year window. It could be less, but it's usually a 10-year window. um And then it requires only a simple majority and in the House and a simple majority in the Senate, which bypasses that filibuster rule.
00:37:19
Speaker
um And it also creates an expedited time for people to get this through. So in essence, if if you put a reconciliation bill through and everyone voted party lines, then you know essentially the Democrats wouldn't vote for it, the Republicans would, and they'd be able to pass this bill.
00:37:37
Speaker
overall. you know But there's always the limitation. There's the downside to reconciliation. And the downside is that you know this legislation, because it's a spending bill, would increase the deficit outside the budget window, which would be having some sort of um sunset provisions in there to kind of offset the long-term deficit provisions. So as we saw in TCGA, a lot of the individual provisions were set to expire when? and December 31, 2025.
00:38:08
Speaker
ah and and And all that also you know reconciliation it cannot be used to modify the social security program so that has to be left out so there's there's a number of things there um but when you're talking about reconciliation what will happen after january twentieth is.
00:38:25
Speaker
they'll have to come up with the instructions. So step one, there would be a budget resolution. So Congress, they must pass a budget resolution that includes the reconciliation instructions. And this is where the House Ways and Means and the Senate Finance Committee, and they got to work towards figuring out what these instructions look like from a reconciliation standpoint. And it specifies spending and revenue and deficit targets.
00:38:50
Speaker
Then both chambers will draft, you know, their own tax bill, um you know, in a way that is here, here's all the things we wanted in the tax bill and let's just see if we get a bill put together. And then step three is you have the bird rule compliance. And this means the bill must adhere to the bird rule, which prohibits provisions that are extraneous to the budget. So for instance,
00:39:16
Speaker
provisions that must affect federal spending or revenue, and the bill cannot increase the federal deficit beyond what? A 10-year window unless offsets are included. So you know anytime you have a bill and you have all these great tax provisions in there, when people say great tax provisions, they're usually talking about tax cuts. Well, if if you're not going to increase the federal deficit beyond a 10-year window in the instructions, you're trying to figure out how do you do that? So what are the pay-fors?
00:39:43
Speaker
we're the revenue generators in there to kind of help balance this. And then step four would be, you know, once you have the bill scatter, you're voting, you know, after the committee approval, the bill proceeds to, you know, the house, they pass it as civil majority, it goes to the Senate, they pass it as a majority, and then it would go to the president for signature.
00:40:02
Speaker
Um, so again, there's a lot there. Um, but I think this is, this is most likely we've even heard speaker Johnson from the house talk about this. We've heard the Senate, um, talk about this. So I firmly believe that this is where we're headed in the process of trying to determine, Hey, where's the tax cuts and jobs act and where are we going to go with it? So a lot there, um, that we have to consider in this process.
00:40:29
Speaker
But with that being said, you know, to extend the current provisions, remember it costs earlier as I said, $1.5 trillion, dollars um but this t to extend the current TCGA in its form, it's an estimated 4 trillion costs of extending those provisions right now because of inflationary costs and everything else, combined with about $600 billion in interest costs,
00:40:53
Speaker
raising the federal deficit. So this is a $4.6 trillion dollar hit. you know In addition, you're talking about a number of other tax proposals that have been talked about, not just extending you know the tax rate system yeah as we know it as extending QBI, extending the estate lifetime exemption, maybe adding back a number of provisions, but there's been a lot of other things that have come up that we have to be aware of. One, um you know, is bonus depreciation. Do we bring that back to 100%? Well, great. Everybody wants that. ah President Trump said in his campaign, he wants to take the 21% flat tax rate for C-corps, and he wants to reduce it to 15% for businesses with domestic operations here in the US.
00:41:42
Speaker
So again, more tax cuts create a bigger tax bill. Then we have provisions to fix, you know, maybe it's fixing 163J on the interest limitations. Maybe it's fixing the capitalization under 174 for qualified research and experimentation costs. All these things come into play. There's other provisions in the campaign regarding taxing overtime paid, taxing ah tip income, taxing social security pay, all these things create, oh, if we want to tax something, what happens then? A bigger tax bill. So our 4.6 trillion we're talking about has grown substantially. In addition, everybody wants to kind of like take off the salt cap. Remember, we talked about that, that $10,000 salt cap that was put in place. Well, if you take it off and make it unlimited for everybody, that comes at a bigger cost.
00:42:36
Speaker
So the likelihood is when they do that, the likelihood is they probably put a dial on it. you know Maybe depending on your level of income, there is a year stuck at 10,000 still, or maybe maybe it's up to 50,000 or 70,000. Whatever the number may be, there's probably going to be some provisions that almost like a dial to determine how much of that self-cap you are entitled to.
00:42:58
Speaker
But I think there's a lot of other things in there that the GOP is going to be facing, the Republicans, um to identify offsets such as spending cuts or closing tax loopholes to basically mitigate the deficit increases that we just been talking about along the way.
00:43:14
Speaker
And the downside to having a massive tax bill is Republican party, right? They run on a, we want smaller government. We want less spending. And so anytime you have a growing deficit, it can lead to higher borrow borrowing, which for the federal government. And when you have to borrow, how does the federal government borrow? Well, they issue us treasuries, they sell them, and then they got to pay interest on those treasuries.
00:43:38
Speaker
and So higher interest rates right now would increase the cost of borrowing for both the government, private sector, and you know and depending on what economist you talk to, it could potentially slow down economic growth, so yeah which you don't want. Obviously, you want to increase economic growth, you want to lower the interest rates, and we want to somehow find a way to get all these great tax provisions enacted for everyone. So all of this creates a lot of challenge ahead for the members of the men and women that are coming into Congress right now. so They really got their work cut out for them to come up with a good bill that's going to work through reconciliation, I think.
Predictions for Tax Provisions
00:44:19
Speaker
So I know you're, you can't, nobody can predict the future, but maybe just from your dealings and your gut, what, what provisions do you see? What what do you think is going to happen from a a tax bill perspective? What, what changes do you think we, uh, such a bill might include both from an individual and a corporate perspective? Just not going to hold you to it, but just sort of what's your gut at this point in time.
00:44:44
Speaker
Oh my God is the the individual provisions that we see expiring at December 31st, 2025. I think all of them will probably get, you know they'll be put into a new bill. They'll be effective January 1st of 26th. And that would include keeping the, you know, the graduated tax system right now in place where you have seven tax brackets with the highest brackets still at 37%. I see that stay in place. I still see QBI still staying in place because it really provides ah an amazing benefit for pass-through entities, um that 20% deduction. The question I know talking to people is, are we going to give more people the ability to maximize that 20%? Will we restrict who gets to use it based on some threshold of income?
00:45:27
Speaker
you know we'll have to wait and see, but the likelihood is that 20% will be also be in the lifetime exemption for estate planning. That will also stay in place is what I'm betting on. um With that being said, youre ah you you think to yourself, like all this spending and all the the large bill at hand, how do you pay for it? Where where are the pay fors? Where are the revenue generators? and As you look at it, you're thinking, okay, well, what what does Congress have for to deal with? Well,
00:45:57
Speaker
There's yeah ERC money out there. Could they shut down the yeah ERC, the employee retention credit program? Can they claw back money there for bad actors and other things of people that have taken advantage of that maybe in a bad way?
00:46:09
Speaker
So I think that's, there's some money there. There's money from the inflation reduction act that, you know, different people within the Republican party have talked about clawing back. Um, what does that look like and how much, who knows? Um, but I think there's stuff there. I think there's the ability to not make a bill that everybody gets all the provisions for a 10 year window. Just like we saw with TCGA, we'll see provisions that start to phase out over a shorter period of time.
00:46:37
Speaker
or change over a shorter period of time is pay-fors in order to fix the the deficit problem. So that's one way to pay for it. The downside from our perspective is that you know maybe like we looked at bonus depreciation before. It started at 100% and then it started go you know coming down 20% a year. So again, that's something that is on the table.
00:46:57
Speaker
Um, in addition, you could see different things out there. Like I, I say the pastor entity tax, you know, Hey, if you re if you change the salt cap. and you still allow businesses to take full advantage of the pass-through entity tax at the state level, well, maybe the the you know Congress will say, well, we're not going to allow the federal deduction on that PTET at the federal level. Or maybe we're going to create some sort of alternative minimum tax ad back where you're go to we're going to help determine whether you get the full deduction or not. So these are things that are out there and I think they can spend in order to determine where they can control the bill spending along the way. And I'm and i'm sure there's a number of other things.
00:47:38
Speaker
ah Questions I get is i you people you people have heard President Trump talk about, hey, you're going to pose tariffs up to potentially 20% and all imports into the US, hitting more tariffs on China and other countries. Well, all that can be done. If he uses the executive order to do it, like they said on the first day, you know then that's outside this reconciliation. In order for any of this budgetary constraint to come into this reconciliation bill, Congress would have to enact it along with the creation of this tax bill. So again, there's a lot of moving parts as we've said, but my prediction is we will have a lot of these provisions in there. I also you know like to believe that we're going to get a fix on 163J, a fix on the capitalization 174,
00:48:25
Speaker
But again, I'm also a realist, and I understand that all these things come at a cost. And so you know talking to people um that that are think tanks in the industry, a lot of people believe that the 174, they'll continue to keep that in place, is a pay for. Because by the time this bill would essentially take effect, we'll call it 2026,
00:48:47
Speaker
most people that initially had to capitalize and advertise those 174 costs over 60 months or we call five years, you know they're going to be able to fully amortize at that point in time. So if you are looking at a company that manufactures a product and they have consistent or you know growing R and&E costs year to year, ah by the time the bill's enacted, they're almost going to be whole when it comes to this. So the question would be, do you just shut it down altogether or do you just keep it in place is a timing difference, essentially, and you know and and it helps in the process. So again, these are all things that I'm not telling you is going to happen or not, but these are all things that are out there that I think you know it's going to be interesting to watch over the you know starting and you know after January 20th. Where's all this going? where Where's everyone you know starting to kind of jockey for position as to what they want in this bill?
00:49:41
Speaker
Um, you've heard, you know, speaker Johnson from the house perspective saying we want to fix this and get one bill out there. We've talked, heard members of the Senate already say we want to reconciliation bills. So, you know, there's many people that are on board with all of it or none of it. So we'll have to see.
00:49:58
Speaker
ah And I think, Chris, along the way, one of the things I think that's important to note is Congress, you know, remember I said the Senate is going to be controlled by the Republicans 53 seats to 47. And then, you know, in the in the House, it's a slim majority also. And we're assuming the past reconciliation, everybody votes party lines, right?
00:50:22
Speaker
It doesn't have to be that way. You could have Democrats come across the aisle and vote. um Does it seem likely? Probably not, but it can happen. But what we have seen is if you remember when President Biden took office, the first bill they really wanted it to put through and they were trying to use reconciliation was the Build Back Better bill. Remember that that huge bill, BBB? And it had lots of great tax provisions in there that were going to fix a lot of the things and extend a lot of things.
00:50:49
Speaker
But it didn't get passed because it passed the House, but when it went to the Senate, there were two senators at that time that were able to kind of shoot down the bill. One was Senator Manchin from West Virginia, Senator Sinema from Arizona. Both of them said, no, this bill, bill back better is not for us. And they said no. And that basically stopped the bill in its tracks. OK, so what do they do? They said, hey, here are the provisions we would vote for.
00:51:15
Speaker
and they created the Inflation Reduction Act at a later time, and then that got passed in 2022. So again, I'm not saying that that will be the same case here, but we can't just assume that everyone always votes party lines. There could always be some rogue people that say, hey, I want to make sure X, Y, and Z are in this bill, and if I don't get it, I may not vote for it. Right. And so there's a lot of work that has to be done behind the scenes to figure out, one, how do we how do we get the right provisions in it? Two, do we have all the support for it? and Three, how do we do this in a way that doesn't create a huge strain to the US budgetary system and create a federal deficit that's greater than it already is?
00:51:55
Speaker
Yeah, that's buts that's helpful. ah Again, um as far as timing goes, you you mentioned you think we'll see something during 2025.
Anticipating 2026 Tax Rules
00:52:06
Speaker
You think it'll be in this first half of 2025 or go right down to the wire at the end when the the provision should be sunsetting?
00:52:15
Speaker
Well, I know Speaker Johnson said he'd like in a, you know in a comment that he'd like to see a draft or a framework on his desk within the first hundred days of the new administration. So if, if the new administration takes office, January 20th, you're looking at April 30th is a potential framework if you're meeting that deadline. But again, I mean, you know, if, if we're saying we're doing one reconciliation bill by the time you get all the budget resolution and everything together, you're, you're talking, it's going to take some time.
00:52:43
Speaker
So in a perfect world, you know you you got it all put together and you're voting on it before the summer recess. But the likelihood is, you know my perspective is it's probably going to take into the fall and you know we'll we'll have a bill passed in the fall that that will take effect you know January 1st, 2026. And in a perfect world, that would work best for me because why? Because I know, hey, 2025, I know the tax rules.
00:53:09
Speaker
Then in 2026, I see where the rules are going, whether they stay the same or being modified. We can plan for that. um But we you know where when we get to the filing season, we're filing the 2025 tax returns, and we still got a year before we're going to file a 26 to have to adjust to the new stuff. So that's a perfect world. It also gives software companies and all the computer stuff a chance to get caught up on the changes. It gives Treasury and the IRS a chance to digest it, create regulations.
00:53:39
Speaker
That's perfect world is you and I know Chris nothing is perfect especially when it comes to tax and you know will there be any provisions in there that are retroactive to another date. You never know i remember when tcga was passed it was passed at the sign in the law at the end of two thousand and seventeen that would be effective january first of two thousand eighteen however there were.
00:54:01
Speaker
the 100% bonus depreciation that went retroactive to September of 2017. So, you know, anything is possible. So again, pay attention, listen, but also listen to the right people that know what's going on because I know I constantly hear all kinds of You don't have clients that call and say, my neighbor says this is the bill that's getting passed and it's already passed. And, you know, whether it is or not, you just kind of know, is this, you know, something they can rely on or, or, hey, no, here's where it's really at. You need to pay attention to these provisions. So again, it's up to everyone to kind of do their own due diligence in the process. But I suspect that we will have a bill, um, by the end of, in the fall of 2025. So.
00:54:42
Speaker
Great. I really appreciate your insights on that. So maybe maybe thinking, all right, maybe some final thoughts for our listeners for this first podcast.
Advising Amidst Tax Uncertainty
00:54:53
Speaker
Thinking, well, we have a lot of tax practitioners listening CPAs, but maybe also some ah business owners or in-house tax professionals. Maybe what what would be your advice for this year of coming up, this 2025 of what they should be doing, what they should be thinking about. Again, given all this uncertainty of will something get passed? When will it get passed? What will it include? What would be just your general advice to to to our audience?
00:55:25
Speaker
Sure. Yeah, I mean, obviously, anytime you're talking about and changes in taxes, whether, hey, we're just extending everything as is and no changes, but no matter what, uncertainty creates kind of a headache for a lot of a lot of us, right? we we We don't like to not know what's happening. We want to know, hey, tell me what the rules are and I want to be able to plan for it.
00:55:47
Speaker
And because of that, that uncertainty, you could take the half glass half empty approach where it's like, Oh, gloom and doom and negativity, how are we going to get through this? We can take the glass half full approach where I believe, Hey, yes, there's uncertainty. But as we stay on top of this, we're the ones that are the advisors. We're the ones that understand the rules, right? The ones that take tax rules that get implemented and figure out how to put them into compliance.
00:56:14
Speaker
and plan and help people plan for that. And so I think the opportunity is there to one, even get closer to your clients, get closer in a way and then find out, hey, I'm the one that's going to understand this. I'm going to help you navigate through this. We're going to help you every step along the way. And as we digest it, we're going to help you digest it and figure out from a tax perspective, where do we do we need to be navigating? Hey, maybe you've been an S corp this whole time and maybe the C corp rates dropping to 15%.
00:56:42
Speaker
Maybe we really need to look at whether we should go back to being a C corp. I'm not saying you need to, but I think there's all kinds of opportunity there. and and maybe it's I'm starting a new business. It's a tech company. Should I be a C corp to start? and Maybe 1202 qualified small business stock is something on the horizon if I sell this thing. Again, all kinds of opportunities that are out there And i'll you know it's different based on facts and circumstances for every client. But the reality is we have an amazing opportunity going forward to really take all this, get our arms around it, and really be the leaders in trying to figure out, hey, but we're just the messengers, but we're we're going to basically give you the right facts and help guide you along the way properly. Yeah, that's that's great, Mark. And and i want I really appreciate your thoughts on this.
00:57:31
Speaker
and also you hosting this podcast for us. ah where We at Becker are really excited to have you hosting this podcast. and And I wanted to maybe get from you as just our final thought before we sign off.
00:57:45
Speaker
what What's your vision and what's what's exciting you about this podcast series that you'll be doing for us on ah on a monthly basis? So listeners, you know look out for the next podcast of this coming next month. What's what's really behind this from your perspective?
00:58:03
Speaker
Yeah, I know. i'm I'm very excited about it. And I think one of the things that I think that as people, you know, one in the industry is I always want to know, Hey, you know, the technical side, dick you know, Hey, what we're talking about today, you know, tax law changes or specific areas in tax.
00:58:19
Speaker
that we need to be aware of, right? That's very important. But also, you know, bringing in different people within the industry, you know, and to to interview them and find out, hey, why are you in this industry? Where's your passion in this? Like, because somewhere along the way, someone's been in this thing 10 years, 20, 30, 40 years, where's their passion? They started off just being, you know, a tax preparer. And then they are doing basic accounting, went to tax, and now they've grown into doing consulting in some amazing area.
00:58:49
Speaker
But I want to get into understanding not only why they do it, but so we can really look into you know what we can learn from them. And I think when we draw out not only the technical side, but the human side of this industry, you really see that we have this amazing industry where we have the ability to take things that are highly complex. That's why people have to come to us.
00:59:11
Speaker
and and and boil it down to something that is a little bit more simpler and and help them navigate that. And I'm excited about that. And I think that's what we're going to draw out in this podcast is really reveal to show people the human side of this industry um at the same time, learn something along the way.
00:59:30
Speaker
Yeah, that's great, Mark. thank Thank you so much for hosting this podcast. We're really looking forward to it. And to the listeners out there, I hope you enjoyed this podcast and look forward to future podcasts with with Mark and his guests. Thanks again.