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2022 Year-end tax planning strategies: What firms need to know

Helping clients mitigate their business and individual tax liabilities has historically been at the heart of tax planning — and understandably so. However, given today's complex environment and shifts in client expectations, effective tax planning reaches well beyond pulling the traditional levers.

Today, clients want more. They expect more. This comes as the regulatory landscape continues to evolve and many firms continue to navigate the challenges of staffing shortages and strained bandwidth.

Therefore, firms must approach tax planning from not only a client perspective but also the firm's perspective. What might firms need to do for themselves to remain competitive and drive greater success for the practice and their clients?

To discuss year-end tax planning and address many of the top-of-mind issues impacting the profession, Paul Miller, owner and founder of Business by Design; and Shaun Hunley, tax consultant, tax and accounting professional services at Thomson Reuters; hosted the 2022 Year-End Tax Strategy Webcast.

Year-end planning: The firm's perspective

Helping clients identify and navigate requirements and opportunities to mitigate their tax liabilities remains critical. But, as firms approach year-end planning, it is also important to reflect inward and consider whether it might be time to make some changes. This involves reevaluating client relationships, staffing, pricing, and scope considerations, as well as improving efficiencies and firm bandwidth. Let's take a closer look.

Client pacing

Clients have grown accustomed to the speed and conveniences of today's tech-driven environment. Thanks to the Internet and mobile applications, information and services can be had with the touch of a button. Those expectations have extended their search for answers and information about today's challenging regulatory environment and the revolving door of tax law changes. For many firms, all of these factors have helped fuel a shift in the dynamics of the client relationship. Clients today want more strategic advice; they demand more.

“We're probably in this period of time where I find that a lot of firms have the clients running the firm's relationships. We talk about this now as client pacing. I want to make sure that my clients are not running the relationship and I'm in control of the relationship," said Miller, whose Edina, Minnesota-based firm specializes in business planning strategies to help business clients with tax efficiency, business transitions, and equity building strategies.

To help ensure firms stay in front of the client relationship, it is important to set expectations. This involves clearly defining the scope of services.

“A lot of firms have been telling me about the importance of their engagement letter, specifying exactly what they're going to do. And if the client brings up something that's in addition to that scope, then they can add a little bit on. And that gives them some creativity, I think, with their fee structures and how much they're going to ultimately charge the client," said Hunley, who, prior to joining Thomson Reuters, spent more than 10 years with national accounting firms.

Setting the pace of client relationships is especially important when you consider how the role of the accountant is changing. A growing number of firms are moving away from a compliance-based business model to provide more consulting and advisory services. That's not to say that compliance is no longer important, but it's more of a blending of the two functions — tax and consulting/advisory.

“We're seeing consultants using the tax returns to actually provide consulting and advisory services. What happened over the COVID-era is we saw things like Paycheck Protection Program (PPP). We saw the employee retention credit. We saw things that perhaps accountants didn't traditionally deal with a few years ago. They stuck toward tax, that's all they wanted to do, but the clients maybe pushed them a little bit more out of their comfort zone into non-tax areas," said Hunley. “For example, 'How do I get a loan? What are some cash flow issues that I can solve or what are some solutions?' Now what I'm seeing with accounting firms is they are slowly, and perhaps more quickly now, moving into more of a total package approach. They're not just tax advisors, per se. They are an advisor in many different aspects of a client's life."

Being able to proactively advise clients does, however, require having the right client data at hand, which can be a frustration for many firms. When clients are the gatekeepers to vital information — especially data that can be retrieved electronically with the right tools in place — it creates bottlenecks within the firm. Constantly chasing client data is a drain on staff and further strains a firm's bandwidth.

“How silly is it in today's day and age that we are waiting on a client to get us information, some electronic piece of information that's somewhere? Really, I feel like in a lot of ways our clients still are the gatekeepers to a lot of data and information. And our mission here this year, as we head into next year, has been to try to say, ‘How do we eliminate that?’” Miller said.

Hunley agrees and said, “If you can make that flow of data more manageable, you'll have more time to serve your client in a better way. And also clarify some things that are happening with new laws and new situations. You'll have more time to devote toward that than chasing the data, which is great."

Firms that find themselves constantly chasing client data should consider taking a closer look at greater automation and integration capabilities to better manage the inflow of client data. This not only enables firms to better service clients, but it also eases the stress on staff and provides them more time to focus on higher-value tasks.

Attracting and retaining talent

Anyone who has been in the accounting industry for some time knows that attracting and retaining top talent is not a new concern for the profession. The pandemic, however, further fueled the issue and changed the way employees can — and want to — work. To remain competitive, firms must be open to rethinking how they operate as part of their broader talent strategies.

“The Great Resignation. There are a lot of people talking about it, some people saying it's not real. But I think it is a real thing right now, especially concerning accounting firms. And we need to figure out different ways to give all the professionals what they need to be successful now, especially since accounting firms are evolving," Hunley said.

Consider this: a survey of finance and accounting professionals conducted by human-resource consulting firm Robert Half found that 87% said it's challenging to find skilled professionals. Furthermore, 43% of finance and accounting employees said they are actively searching for a new role, or plan to by the end of 2022.

Why are professionals in this sector planning to look for a new job? The top-cited reasons, according to the Robert Half data, are remote work flexibility, more opportunities for advancement, and higher salaries.

There's no doubt that one of the most talked about staffing-related shifts sweeping the industry is the greater acceptance of remote or hybrid work environments, which was, of course, fueled by the onset of the COVID-19 pandemic.

Underscoring this point, Thomson Reuters Institute research found that 89% of tax professionals said they could identify lasting positive impacts as a result of the pandemic, and, of those, 26% cited remote work now being an accepted practice.

Remote work flexibility provides staff with the greater work-life balance they desire, which can help firms better attract talent. On the flip side, tearing down geographic borders and hiring talent to work remotely, regardless of their geographic location, enables firms to significantly broaden their pool of applicants.

To that point, Miller noted that his firm is benefiting from hiring remotely.

“We have some staff now who are permanently remote. Really, up until the fourth quarter of 2021, we had not had that really. So, I've started to recruit and look for very qualified people, good people. There are people out there now that are looking just for that remote job. And I think the opportunity expands itself because if I just had to look in my geographical region, I wouldn't have the resources I need," Miller told attendees.

Some firms may also want to consider hiring non-accounting professionals — people who would be a great fit for the firm and could be trained on certain accounting-related functions without the need for formal accounting education.

“Do we have to change our perspective a little bit and almost find someone that is great at working with people? They know certain things, they're very detailed. Can we teach them certain technical things?" Miller said. “Do we need to bring other people into our industry?"

Also highlighted in the Robert Half research was employees' desire for more advancement opportunities. Does your firm provide the training and professional growth opportunities that today's young professionals want?

Providing staff with the tools and resources they need to forge stronger client connections and deliver more fulfilling services, like advisory, improves employee engagement and staff retention. For instance, firms that implement robust automation capabilities can help minimize mundane manual tasks like data entry. This provides staff more time to grow their skill sets and focus on higher-value, higher-margin services.

“Another thing that staff are really interested in is, are they being developed enough? Are they receiving the training and the experience that they want? If they are merely just preparing little sections of a tax return all the time, and that's all they do, they're probably not going to stay at your firm," said Hunley. “Finding the talent is always very difficult. But retaining them is even more difficult because they do have different priorities, perhaps, than the owners do at the time."

Then there's salary. The aforementioned Robert Half research found that a desire for a higher salary is one of the most frequently cited reasons why finance and accounting employees are planning to look for a new job. Various economic factors, such as rising costs and inflation, have the potential to further fuel people's desire for more money.

The reality is that some firms may need to rethink salaries, retention bonuses, signing bonuses, and other compensation to remain competitive in the battle for talent. This is especially true considering the cost associated with losing staff and having to hire replacements — potentially three to four times the position's salary, according to an article by the Society for Human Resource Management (SHRM).

Said Miller, “We've done more things with retention bonuses, signing bonuses. These words were never used five years ago, really. But now more becomes more mainstay because, most importantly, is retaining the talent you have."

Price/scope considerations

With an increasingly complex legislative and regulatory environment, clients are placing a higher premium on strategic advice. However, as firms look to better serve clients, it is essential to manage client expectations and mitigate scope creep. The key is setting proper expectations up front.

As the expert, you already know in your mind what's included in each service and what it's worth. You just need to document it and inform the client about exactly what's included to better manage expectations. It is also imperative to communicate the value that you're delivering. Clients are more willing to pay a higher premium if they have a clear understanding of the value being provided.

In addition, more firms are re-examining their pricing models and doing away with hourly billing to help ensure they are properly compensated for the added value they are providing clients.

“I've seen some people go to different types of billing rather than time and materials. Maybe they're going to a fixed fee, maybe they're going to a subscription model, which I find very interesting," said Hunley. “I think there are ways that you can increase the scope by not really getting too caught up in, 'Oh, I'm going to lose a bunch of money.' I can actually adapt to this and, at the end of the day, earn a little more money."

Added Miller, “We use the term predictive billing. You're going to get a contract, it's going to talk about the scope that we're going to provide and what we're going to do, what your obligations are, and then how we're going to predicatively bill that. That, to me, makes so much more sense because if you've got an issue with something or something changes, I want to know in advance, and I think too often billing questions happen in arrears for clients."

Clearly defining the scope and turning to a fixed fee or subscription-based pricing model removes any surprise element from client billing. The clients know what services they will receive and how much they will be charged, so they can plan accordingly.

It should be noted that freeing staff of tracking time — and the stress associated with it — enables them to work more constructively and focus on delivering higher-value work. That's an attractive recruitment and retention tool in a competitive job market.

Finding bandwidth

Are you wondering how your firm can expand its bandwidth? If so, you're not alone.

“I think that's the question that most firms are asking right now. Offering more value-added services sounds wonderful but how do you do it from a practical standpoint when you have so much going on, and especially in the past few years with so much change in the law and regulations? How do you keep up with everything but also find additional bandwidth for maybe some of that value-added work as well?" Hunley said.

For many firms, the answer may lie in reimagining what's possible and getting more creative — and, of course, further leveraging technology. The end of the year may be a good time to explore your options and take action.

Take, for example, one time-saving move that Miller implemented in his firm. Rather than spending the time and resources to call or schedule appointments with handfuls of clients impacted by the same issue, the firm recorded an explanatory video to send to multiple clients.

Firms must also invest in their tech stack and leverage time-saving technologies, like data sharing, scanning, and third-party integrations, to further expand bandwidth.

“We have to be more creative on how we're using our own existing bandwidth. First of all, what bandwidth do we have? What can be reallocated? And possibly that has some involvement with technology," Miller told attendees.

Year-end planning: The client's perspective

Coming out of the pandemic and the plethora of COVID-related legislation, it may feel as though there's a bit of a lull. There are, however, some new legislative and regulatory moves that are important to highlight, as well as inflation pricing and the other economic factors impacting many clients. So, what tax planning moves should your clients consider?

Inflation Reduction Act

Among the newest developments is the Inflation Reduction Act of 2022, which was signed into law by President Joe Biden in August 2022.

The act contains various opportunities with updated incentives, including an increased ability to leverage the research and development (R&D) credit to offset payroll taxes for eligible businesses, as well as several new and expanded clean energy credits and incentives.

“You may have some small businesses out there who generate losses so they're not really taking advantage of the income tax credit for R&D, but they can apply this R&D credit to their payroll tax. Before the Inflation Reduction Act, you could take up to $250,000 against your social security tax, so your portion of the social security tax. What the Inflation Reduction Act did was actually double that to $500,000. So now, you can take it against your Medicare portion of the tax, which is really wonderful for your smaller businesses, your start-up companies. Maybe you have some tech startup companies in the pipeline," said Hunley.

“This is something that your clients will want to know about. So even though it doesn't really start until next year, this is where you want to tell them about it, so you can measure what their R&D activities are going to be. Perhaps they want to delay a little bit of their R&D until 2023 so they can take advantage of this higher credit. That's one thing I've got out in front of people," he concluded.

The R&D tax credit tends to be underutilized and, given this change, it may be an ideal time to create a simple video message for clients that addresses the high points. This can be an easy, cost-effective way to communicate with clients and demonstrate that your firm is aware of and on top of this change.

Energy-related incentives

There are also several energy-related incentives for businesses and individuals included in the Inflation Reduction Act. Some are expansions and modifications of existing incentives, while others are new.

For example, individuals may receive tax incentives for making energy-efficiency improvements in their homes. There's also a new energy-efficient home credit for businesses that manufacture or construct energy-efficient homes, to name a few.

Among Hunley's most notable incentives is the Clean Vehicle Credit. “There are some changes that went into effect immediately this year, and then there's going to be some changes next year. I think the best thing that happened was there used to be a limit on how many vehicles a manufacturer could make and then, once the manufacturer hit that limit, the credit went away eventually. That's been done away with in 2023," said Hunley. “This might be something, not only for your business clients, but your individual clients as well. Something they want to look into and plan to take advantage of those credits. That's another thing I think should be on your radar as we head into next year."

Increased IRS funding

The Inflation Reduction Act also provides the IRS with nearly $80 billion in additional funding over 10 years. While this isn't necessarily a tax-planning opportunity, it is news that's worth communicating to clients.

As noted by the Tax Foundation, that money is broken into four main categories — enforcement, operations support, business system modernization, and taxpayer services — as well as a few other small items such as an exploratory study on the potential of a free-file system.

While some of that money will go toward ramping up enforcement, the IRS maintains that it is not about increasing audit activity.

“These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans…Enhanced IT systems and taxpayer service will actually mean that honest taxpayers will be better able to comply with the tax laws, resulting in a lower likelihood of being audited and a reduced burden on them," wrote IRS Commissioner Charles Rettig in a letter to all Members of the Senate.

Regardless, it may be a good time to ensure clients are being more accountable and maintaining good records.

Said Hunley, “The IRS is going to get some more money. They're going to apparently hire new people for enforcement activities. Now, this is not necessarily a planning opportunity, per se, but it is something I want you to talk to your clients about because they've probably heard about it in the news. They want to know more. And the whole point there is: let's work as hard as we can to make sure we're taking proper tax return positions so, if there is some sort of audit later, we've got you covered."

Cash-flow pressures

Accounting firms are not alone in their struggles to expand bandwidth and hire top talent. Many business clients are facing the same challenges. While trying to address these challenges, however, one of the most fundamental aspects of your client's business must remain top of mind. If you haven't done so already, it may be a good time to address cash-flow pressures.

“Our clients are dealing with the same things we are: 'Where do I find people?' 'Prices of everything are going up.' 'Everybody wants more money.' 'How's this all going to work?' We're not alone when it comes to that, and I think you really want to start a conversation with your clients to talk about things that are balance sheet related — inflation, cash flow pressures, etc.," Miller said. “We do things often to talk about what we can do to manage the P&L, what do we need to mitigate tax, etc. But we do need to give equal attention to what's happening for maybe the capitalization of a business, maybe what's happening with the cash reserve that they have, or decisions they might need to make on debt or lines of credit. These are going to be things we need to start bringing up to our clients."

Added Miller: “What is the plan? What are they trying to do? Where are they going? And do you, as a firm, as a knowledge holder, do you have information you can provide to them to give them perspective? I think that we're so used to feeling like we have to give the client the exact answer, and I think it's really more about that perspective. We just have to give them a different perspective or a perspective on something they might be considering."

Potential changes to traditional levers

When approaching year-end tax planning, there are also several traditional levers you might pull when talking with clients. Consider, for instance, the following:

Bonus depreciation. Starting in 2023, bonus depreciation will begin to phase out. It will drop 20% each year for four years until it expires at the end of 2026. If clients are looking for assets, is it best to buy them sooner rather than later to get the greatest deduction?

Qualified business income (QBI) deduction. Many clients are likely taking this deduction, which is set to expire at the end of 2025 but could be extended. Some clients may have very sizable QBI deductions, so firms may want to talk with clients and address what those artificially depressed taxes might look like once QBI expires.

Cryptocurrency (crypto). If you have a client that holds crypto, think about the timing. For instance, it might be a good strategy to offload the crypto to take a capital loss that could help offset their capital gains.

Next steps

You might be asking, “Now what?" What are some next steps that firms may want to consider when approaching year-end planning? Below are some actionable steps your firm can set in motion today.

Evaluate what firm resources are available. What resources do you need within the firm? Do you need more bandwidth?

Where are you heading? Start thinking about what direction you want your firm to take in 2023, 2024, or even 2025. Do you want to branch out into more advisory services? Do you want to expand beyond compliance?

Provide knowledge to staff about client issues. Share stories and examples. Also, think about questions like:

  •  What do you do well as a firm?
  • What needs improvement?
  • How do you learn from those things?

Prioritize best practices for client planning. Consider creating a priority list of the top five or six items you want to discuss with clients. Also, think of ways to deliver those messages in a one-to-many fashion, such as a video or webinar that can reach multiple clients at once.

Conclusion

In today's environment, effective tax planning is not only about helping clients plan and navigate the complexities. It is also about reflecting inward to ensure the firm is ideally positioned for success. Consider these questions to gauge your readiness:

  •  Is your firm in front of client relationships?
  • Are you a talent magnet?
  • Are you mitigating scope creep and getting properly paid for the value add being provided?
  • Are there steps you can take to expand bandwidth?

These are some of the key items that firms should look at as they approach tax planning.

To help ensure your firm has the right tools and resources in place, consider turning to a solutions provider like Thomson Reuters. Thomson Reuters can provide the methodology, guidance, and content solutions firms need to succeed.


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