BeansTalk
BeansTalk: Where Expertise Meets Opportunity, Mauldin & Jenkins' podcast, where we are sharing and showcasing our areas of expertise through conversations with practice leaders on their knowledge and experience.
BeansTalk
Beyond the Return: How Tax Law, AI, and the IRS Are Reshaping Business Strategy
Explore how evolving tax laws, cutting-edge AI, and a modernizing IRS are transforming business strategy. "Beyond the Return" goes past compliance to uncover the tools, trends, and insights shaping the future of finance and decision-making—including the sweeping implications of The One Big Beautiful Bill Act.
About Our Guest
Brent Ullrich is a Partner with Mauldin & Jenkins, LLC, with over 15 years of experience in many areas of taxation and industries, most notably in healthcare, real estate, private equity, technology and professional services. He also serves as the Firm’s Tax Strategy and Research Leader, which offers technical guidance and identifies planning opportunities for the firm to support clients on complex issues across a range of technical tax areas.
About Our Host
Brandon Smith, CPA, is a Partner based in the Atlanta office and the Advisory Practice Leader.
Welcome to Beanstalk, M&J's podcast where we are sharing and showcasing our areas of expertise through conversations with practice leaders on their knowledge and experience. As we've discussed in previous episodes, the world of tax is complicated. We have federal tax laws, state and local tax laws, regulatory bodies like the IRS and their interpretations of those tax laws, tax returns and forms and all the instructions that come along with it. And not only is this a complicated and challenging area, but it also changes. There are changes to those laws, evolving interpretations, and that's not even to speak to the technologies driving a lot of the tax world. And so because of that, we have a national tax practice at Mauldin and Jenkins who works to stay up to date on that complicated world of tax, tax law, tax regulation, and also monitors the changes in it to help us understand those laws, navigate them, interpret them, and importantly assist our clients with strategies for them. When it comes to that national tax practice, I'm really excited to be joined by the leader of that group today, Brent Ulrich.
Speaker 02:It's good to be here.
Speaker 01:So yeah Brent thank you so much for joining us for this episode I'm really excited to dive into the complicated world of tax with you. And before we get too deep, we'll just do a favor for our listeners and kind of tell us about your experience and your role at Mauldin and Jenkins.
Speaker 02:Yeah, well, I mean, you kind of hit it on the head, right? So we've got all sorts of tax things to digest and, you know, our clients have business problems. They don't just have tax problems. So, you know, we're tasked with, hey, well, what tax implications are part of your business process? And, you know, all the partners and their clients, I mean, they can't digest all that themselves. Like no one person can go and know everything about a client's business tax issues. So, you know, our department, our office is charged with, you know, digesting that, right? And you mentioned AI and we'll get your technology and we'll get into that, right? But it really is, hey, in a landscape that's changing so frequently, how do you stay on top of the opportunities for your clients, for the pitfalls for your clients. And that's what, that's what we do. You know, we use, we're using our, you know, our firm data, our client data in-house to make sure that we understand their position, understand what opportunities are, you know, present themselves based on law changes, right? Federal, state, international, all of it.
Speaker 01:And, and I love how you put that is it's not just we're navigating tax challenges. We're navigating business challenges. The tax is just kind of the subject matter we're considering from the frame of a business challenge, a business strategy, business goals. How does tax play into that?
Speaker 02:Right, right. And then you've probably heard the phrase like, we don't want the tax tail wagging the dog, right? So it's, yeah, it's a consideration. It's usually never a reason you're doing something, but understanding a client's problem, his business problem, and weighing in on, well, we can do it this way, X, Y, or Z, just helps them kind of frame, hey, from a cash flow perspective, this may be better from an operations perspective. There are opportunities out there in the tax code that help you operate more efficiently tax-wise that just align with your business structure.
Speaker 01:So one thing I'm interested in is just, generally speaking, how to navigate changes to taxes. And because we have this recent example, I'm curious. just like a use case, a very recent use case, kind of case studies, like what did change with this most recent tech? Not too much of a deep dive or anything, just kind of the broad strokes. What were some of the things that really changed?
Speaker 02:Yeah, I mean, there were three or four really big changes, right? And, you know, the individual cuts were great and we had the tips credit and, you know, and all that. But, you know, I think the four biggest business provisions that will impact, you know, a lot of people are 100% bonus depreciation, meaning we can expense our assets, our tangible equipment. property and whatnot. So, you know, that helps people, you know, ensure their investment and their cost recovery in that investment very quickly. You know, the interest expense limitations, much more taxpayer favorable, kind of reverted back to pre '22 calculations, meaning, hey, we can just, based on the calculation, we can deduct more interest, right? Provided more, and those are permanent, right? And as well as the QBI deduction, which is the pass-through deduction for small businesses. So all three of those made permanent. And then there was 174, which was R&D expenses. We used to have to capitalize those for the past couple of years, reverted back to being able to expense them. And even for smaller businesses, actually kind of go back and expense them for prior years, right? So very taxpayer-friendly provisions in general for business, encouraging a lot of domestic investment.
Speaker 01:Well, and I can see that these would lead to a lot of opportunities. You know I always like to think in terms of not just keeping up with the compliance and doing things that should be done but seeking out how to kind of get an advantage out of a changing environment so kind of talk me through like how can we apply some of these things like you just described to actually help us from our business plans perspective
Speaker 02:Yeah well I mean all these things are cash flow you know important right if I buy an asset, I want to know what's my tax benefit of that, right? If I am investing in a five-year, three-year R&D project, well, now all of a sudden the cost recovery of that, you know, it becomes more beneficial and, you know, impacts cashflow for this year, right? I mean, now I have the certainty of these deductions. I know that I can, you know, basically reduce my taxes that I expected to pay before this bill passed. So, you know, provides a little bit more of, you know, an expected understanding of going forward environment.
Speaker 01:Can you do me a favor and just kind of help me see the environment? Like what really are we navigating here from a perspective? So like when I say tax law, what does that really mean?
Speaker 02:Well, it's a perfect opportunity right now because we're just at a point where we've passed a pretty sweeping tax legislative bill. And we kind of get in the history of that, right? I mean, it's not... we didn't usually have these sweeping changes every eight, 10 years, right? But it's really accelerated in the last, you know, 20 years or so, where you've got, you know, and we'll get into how laws are made, right? And, you know, how they're being done now. But it really is, hey, you've kind of got these windows now of, I've got maybe four or eight years of certainty under the tax law may change. If a regime change in Washington happens, then we may have a tax law change. And so just navigating those little windows has become, you just have to have more conversations with your client. Are we structured right now based on what we know now? And what are we hearing? What things are going to be on the horizon now, that may impact our assumptions right now? The now passing of the law has provided a little more certainty. We weren't sure about that certainty. There was a lot of back and forth in the House and the Senate. What things are going to be temporary? What things are going to be permanent? We got a lot of permanency out of it, which is a good thing. And so that's kind of helped us frame our conversations, right? Okay, well, now we know what these things are. Let's plan around that and hopefully not have to plan through that regime change uncertainty so much
Speaker 01:Right, because again, we're solving business problems, not just tax problems. And so we want to look ahead on plan, develop our strategies, and that can be hard to do if you think it might change in another four, eight, however many years. So kind of tell me a little more about that permanent concept. What do you mean by that?
Speaker 02:Well, you know, kind of take a step back historically, right? I mean, we didn't see very significant tax law change from, you know, 1986, which is kind of the big sweeping change, until really 2017. I mean, there were some little, you know, tax cuts here and there in 03, 2012, but 2017 was just kind of, hey, we're making changes, right? And we're doing it in a way where now we've opened the door for not bipartisan support right we can do it through a thing called budget reconciliation which is effectively hey I don't need the other side of the aisle to make sweeping changes in the tax code I mean other parts of law right but you know sweeping changes just generally I can do it through this process I can do it you know according to you know republican democrat whatever and there's generally certain windows to do it in, right? You can't make things permanent under budget reconciliation that, you know, you could make permanent under, you know, bipartisan support. So, you know, 2017, the Tax Cuts and Jobs Act was, you know, a pretty taxpayer-friendly provisions in that bill and everybody, you know, knew that those were gonna sunset, you know, in eight years. 2022 is a similar example, right? I mean, we had the Inflation Reduction Act that was on the other side of the aisle. The Democrats kind of passed that without Republican support. And now we're back over to the Republican side and we've repealed a lot of the Inflation Reduction Act. We've extended a lot of the provisions that was passed in the Tax Cuts and Jobs Act. And so the... There is some permanency that was not felt in the 2017 bill that is here now that I think everybody's excited about. You know, just, hey, we've got a little bit more certainty.
Speaker 01:Some certainty
Speaker 02:Yeah, right. You know, and so I think that's helpful for taxpayers, helpful for us, you know, helpful for clients, most importantly, right? I mean, it is just, hey, we know the plan field for the foreseeable future. Unless something crazy happens, we know what assumptions to make, right?
Speaker 01:Well, and as a business leader- kind of looking at this as an area where I just need to stay on top of it enough to make sure my business plans are good. You know, I want to make sure I'm approaching this from the perspective of just really understanding the tax environment, thinking about strategies to navigate that environment successfully. But since this did happen recently, can you just kind of tell me about some of the changes that occurred, just as like an example of when there are changes to the tax law, like the kind of things that we have to navigate? Yeah.
Speaker 02:And you can, I mean, you know, I would say the last couple of weeks of June, first week of July, were very very active, right? You could sense bits and pieces of what was going to happen. The House and the Senate were misaligned on some provisions, mostly related to timing. Do I make things temporary? Do I make things permanent? But you knew in a general sense, hey, individual tax rates were going to remain low relative to their 2017 rates. We were going to have some R&D deductions that we didn't have for the last couple of years. We're going to have some interest expense. You could pick up bits and pieces before the bill passed. Now that it's passed, we've got, you know, mostly taxpayer favorable provisions, right? I mean, I mentioned that on the individual side, you've got interest rate or tax rate cuts, you know, increases to the standard exemption. You know, you've got the TIPS credit or the TIPS deduction and the overtime deduction and the auto loan interest deduction. So, I mean, all the kind of campaign promises that were made came to fruition in some, you know, some form or fashion.
Speaker 01:And Brent, you know, when it comes the things you're describing, like those have real implications. You know, those are things that impact my business, impact my plan. So I'm kind of curious, even just kind of reliving this past year, we discussed, you know, like the campaigns and the promises and the ideas early on into, and people are actually in their seats, you know, in Congress, in the White House, continuing the conversations and going public with a little bit, and then kind of leading up to a potential passage of the bill and maybe final changes. I guess, like, when does the planning start? Like, I know now we have hindsight of what actually came to be, and you're just describing that. I'm going to circle back to a couple of those. You piqued my interest. But even before we dive in the details, when does planning start in this whole process?
Speaker 02:Yeah, it's a good question because you don't want to go too early because that's probably time wasted in terms of, hey, we're not sure on something, right? I mean, hey, this is out there. It's a possibility. There were a couple of possibilities in the House versus Senate bill that were know frankly a little scary and fortunately got dismissed right so it there is too early you know I mean but but now's the time once once you're when you're closer at passage that's when you reach out your advisor, or your advisor should be reaching out to you, like, hey, these are impactful to you, right? And so, and that's, you know, that's our job too, right? Is, hey, we know what's impactful to you. We are, you know, we are measuring that impact in, you know, on your cashflow, on your business, on your structure. And then there are a couple of other provisions that may have, may lead to those structural discussions, right?
Speaker 01:So it's paying attention to the conversation, paying attention to what's being discussed and thought about, and then just being prepared for, okay, this is the final language. This is what's in there now. We've been thinking about this stuff, and now we know it's go time. Let's act.
Speaker 02:And really, it's paying attention after, too, because since the bill's been passed, you've got little bits and pieces of, well... know you might have a senator saying i didn't know what was in the bill was let's maybe even rescind a portion of it or let's add on you know so there there are even opportunities where or not opportunities but things to monitor right of hey this this might actually help you later right they may try and push out another reconciliation bill in in a couple of months so it it's it's ongoing right it's it's it takes forever.
Speaker 01:And now that we have that, a little bit more clarity, maybe still some things to think about, keep an eye on and monitor. But just generally, now that the clarity is largely here, what are some of the best opportunities you see? You know, in terms of, I know you're talking about things like the R&D changes, you know, what that can mean. Like, what are some things just for businesses really have on mind of, and what's the timeframe? Like, is this a neat new four-year strategy, eight-year strategy, longer term strategy? And then how can we maybe start to really incorporate some of these changes into what we're doing as our enterprises.
Speaker 02:Yeah, I mean, there were four or five really big, important things that were all really pretty much made permanent, right? I mean, R&D, you mentioned the ability to deduct research and experimental deductions immediately versus having to capitalize and cost recover them over a period of time.
Speaker 01:Yeah, let's pause there for a minute because I feel like that was one that's been changing a bit. I feel like for a while we were capitalizing it and expending over time, but then there was a credit available. What has been the process for R&D and where are we now?
Speaker 02:We're at a point where we are if we're investing in domestic R&D, that we know we're getting an immediate deduction for that. Before the bill was passed, we were at a point where we couldn't get that deduction, right? We had to take that deduction over five years for domestic expenses and 15 over foreign, right? So we've created an environment where, you know, in encouraging more, obviously, domestic investment in R&D by allowing you an immediate deduction. And with that comes the R&D credit, right, in a 401 and you know they're they're brother sister they're not exactly you know maybe brother sister-in-law not exactly related and just because you have 174 expenses doesn't mean you get an R&D credit but generally you're going to find hey I've got domestic research expenses I'm going to get a deduction and also a credit to a degree depending on the nature of those expenses so it's provided a lot of certainty for domestic R&D for an R&D there's still not a lot of encouragement right to go out and do that because you don't get the immediate deduction you don't get a you know a credit for it and so it's it's just not as not as friendly not as taxpayer friendly
Speaker 01:S o some of their strats we can start to incorporate based off of the changes.
Speaker 02:Well I think one of my favorite provisions that really wasn't on anybody's radar um it has to do with it's called 1202 stock and You know, we had these conversations in 2017, I think 1202 really took off on people's radar back then, where it's this concept of I own a corporation. If I hold it for five years and I do all the right things, you know, simplifying it a little bit, but I hold a corporation that's doing the right business for five years and I sell that stock of that corporation, well, I don't have to pay tax on the gains. Right. And that's a pretty powerful provision. I mean, you don't see a lot of just gain elimination provisions in the code and the new bill actually expanded on that code section. Right. So, you know, now you don't have to hold it for five years. You can hold it for three and get a portion of the benefits right. Now your company doesn't have to be as small when you're issued that stock. And so You might see people in the 50 to 75 million dollar range relative to their value start to take advantage of this new provision. And when I said we had these conversations back in 2017, right? I mean, couple the 1202 stock with the reduced corporate rate. you've created a situation where, depending on your goals, right, you may be much more, it may be much more valuable to be structured as a corporation versus a, you know, a pass-through entity that gets the QBI deduction, which was also extended, right? But there's at least a conversation to be had, right, of, hey, what are your goals? Are you trying to exit this thing in three, five, seven years? How is... What kind of cash flow are you expecting out of this business? Are you reinvesting back into the company to build it and grow it? Well, you might not want to be a flow-through entity. You might want to be a corporation because your cost of capital is a little lower because your tax rate is lower, right? So those are the conversations we want to have with clients of, hey, this provision is powerful. You know, you may be structured right for your situation, but we just want to make sure, right? We want to make sure we're providing the best advice we can. And I think those conversations are going to be the most fun. The 1202 versus pass-through, let's make sure you understand your options.
Speaker 01:And so it sounds like you can almost, it's a powerful benefit that, you know, being able to lave that gain, it sounds like, so you can kind of prorate it earlier. Y eah, that's right.
Speaker 01:Interesting. Yeah, that's really cool. So it's obvious that like there are a lot of opportunities to continue strategizing, to continue really assessing, understanding the landscape and make sure that even when it comes to something like the structure of our business, thinking about even that level and then, you know, R&D and opportunities there. But just talking about innovation, you know, research and development and innovation, you know my effort on these podcast series is to always try and discuss relevancy and just tell us the question we should always be asking ourselves is, are we relevant? One thing that I really like about your practice group is just your leveraging of technology. Just not only is that the tax environment changing regularly or significantly at periods of time.
Speaker 02:Yeah, daily.
Speaker 01:Yeah, it seems. But definitely that the technology landscape is changing rapidly and how you're kind of using a lot of those kind of generative AI tools to assist with research functions. Can you kind of talk me through what that looks
Speaker 02:Yeah, generative AI for sure is helpful in the research. But I mean, you know, I think I alluded to it at the very beginning. It's more about it's data, right? I mean, we have a good, clean data system inside. And so that helps us interpret, you know, what is impactful to our clients. And, you know, I think that that's the most important thing going forward. You know, if you're, if you're a firm that's not used, you know, really leveraging your data at the end of the day, you're going to fall behind. And that's, you know, I think that's how we are most helpful, right? Is, Hey, we, we know your situation and that's, that data is going to help, you know, and we're, we're working to collect even more data points, right? So it's the more data we have, the more valuable we're going to be AI and Chat GPT. That's all going to be part of the journey.
Speaker 01:Well, and I think those are important points. This is not, just so much as like there's this new technology on the block and it just solves the answers. It's structuring the entire environment correctly. Like you said, making sure that we're analyzing the right data in the right format, in the right way, and importantly, having good governance policies around the data, which I know is a really important aspect of your group. But then it's also how are we using, driving, steering that? Because it always makes me think of I'm a big chess fan. I love losing a game of chess. And back when chess engines started getting more and more powerful and it became like this battle of the human versus the machine. But very quickly, we all realized that it's really when you pair a grandmaster with a strong engine that the real magic happens. It's that partnership of the technology and the person that really shines a light. And that's exactly how you're navigating it, right?
Speaker 02:I think you hit on it. I think it's the partnership. You know, it's not AI is going to replace me as a research function or an advisor function. It's we're going to be so good together. And, you know, to kind of use, I mean, ChatGPT as an example, we don't put questions in ChatGPT. We don't put client information in ChatGPT. But I'd be lying if I didn't say I put a tax question in there, right? Just to see what it spit out. And some of the times spit out is a pretty good answer, right? And so, but some of the times it just, just lies, right? It makes up a fake, you know, revenue procedure or revenue ruling, and you kind of have to steer it back to, no, no, no, let's actually get to the right answer. And so to the, you know, going back to the partnership thing, right? I mean, your client is probably going to be using these tools, but you know, our job as advisor, I think in the future, right, is you're almost translating what the situation really is, what the desired goals are, and, you know, kind of guiding AI along with your experience to the right answer. And I think, you know, that chess analogy is great. It's the perfect situation where I have the experience, this has enormous background of information, we are going to be very useful together. And I think the client will benefit.
Speaker 01:Well, do you find value in just a client going out and trying out those tools and maybe just given a first pass of a tax question to just like the public facing Chat GPT?
Speaker 02:I would say the Chat GPT is very taxpayer favorable. So, you know, I certainly would Google or Chat GPT a tax answer if I didn't know the question, if I'm a client, right, just to see what my baseline is. And, you know, I don't think it's I think it's harmless to ask it, ask your advisor, compare and contrast, right. But, just you asking of a tax question may not be your actual tax situation, right? So I think that's the disconnect of, yeah, ask it a question. It might give you a great answer. It might give you references that don't exist. So, you know, and we're struggling with that internally, right? I mean, it is, we know it's a tool of the future. We know we have to kind of educate it, but... We're going to use it. I mean, that's going to happen.
Speaker 01:Yeah, you can do that. You can do like that. Yeah, that's right. We'll get you the biggest refund you've ever seen, ChatGPT. That's right. So probably it's kind of like those medical websites then where it's useful to kind of go out and get some context, some initial research. But then when you meet with your doctor, like probably listen to the professional. Yeah, generally, yeah. Awesome. What else is going on in the environment? Just when it comes to the world of tax and the technologies and the regulations and the laws, just is there anything else interesting happening that you've been keeping track of?
Speaker 02:I mean, you know, we're really paying attention to what's going on with the IRS. Obviously, kind of, you know, pretty significant headcount reductions there. You know, some of the funding got pulled back for them. So, but, you know, I would say they're obviously at the same time going to invest heavy in technology, right? So, you know, I think it's our job to make sure we kind of mirror that investment and understand from a client perspective, you know, what that needs to look like in the future, right? Because the audit of the future does not look like an audit now. I think it's going to be very much more technology data driven. And also just from an IRS, you know, hey, taxpayer help perspective, right? What does that look like in the future? I mean, and so I think, you know, working on those problems and making sure our clients understand, you know, are not our data pain points, but pain points that might become an issue when they're paired up with IRS data pain points in the future.
Speaker 01:So Brent, when you're talking about like, you know, the IRS making investments in technologies and kind of even evolving the audit process, are you thinking like when it comes to like analytics and stuff that as soon as we file a return that they're going to be doing more of that kind of stuff or?
Speaker 02:Yeah that's exactly right so I think you know and they're doing that to a degree now right so there are certain I'm sure analytical points that the IRS you know looks at and that's how they're going to audit things and probably more so in the future. Right. You see the the blips against certain other clients of similar type, similar sizes. And, you know, those are the outliers. So they're going to ask the questions. And, you know, our job on our end is to kind of ask those same questions like, why are there outliers? You know, it could be a good thing, right? I mean, you know, we could have credits that we've applied for that, you know, other people forgot about. And so it's kind of managing and viewing those outliers, having explanations for them, because, you know, I think in the future, you're going to look at. It's going to be more exact, you know, what the IRS is auditing. It might not be your whole tax return. It might just be this line item that they just, they don't understand, right?
Speaker 01:T hat makes me think of, you know, I had an episode with Aleisa Howell about the nonprofit environment. And we talked about like different watchdog organizations that are kind of taking on a lot of the nonprofit public data and routing it through all these metrics and analytics and whatnot. And something Aleisa and I discussed was, you know, not managing to those metrics, but being able to explain them. You were kind of almost describing a similar situation with these. It's not like managing to avoid the red flags and going through this process in order to just prevent them from happening, but just knowing they might happen. We want to be aware of those and let's understand why to make this smoother
Speaker 02:Well, it helps with our analysis process too, right? I mean, if we have established a baseline for your industry or your size or your structure, now we know what the IRS is looking at. We know what we need to be looking for and you plan from there. So I think that's the benefit.
Speaker 01:And with their investments in technology, I wonder if it would be a matter of time where it's our AI talking to their AI, the client's AI with our...
Speaker 02:That is not too far in the future, which is ridiculous.
Speaker 01:But it'll be that partnership, the AI with the people driving it. Well, Brent, this was a great conversation. I really appreciate you joining me for the episode. And for everybody who listened in, thank you. If you have any follow-up questions about what we discussed today or any other business challenges you're navigating, please don't hesitate to reach out to us at www.mjcpa.com.