Episode 7: Host Jim Ray interviews Alisha Harper BU Associate Professor of Accounting and Eric D. Scott (BU ’06), Managing Director of Global Compliance & Reporting for EY (Ernst & Young LLP). Today’s episode has
an accounting theme based on Now, Next & Beyond, which we borrowed from EY.
Segment 1: The Now (PPP and the Consolidated Appropriations Act “CAA”)
The CARES Act brought us the PPP loans and the Employee Retention Tax Credit. The Consolidated Appropriations Act provided additional PPP loans addressed deductibility issues related to those loans, in addition to an expansion of the Employee Retention
Tax Credit. Later, the American Rescue Plan Act of 2021 (“ARPA”) was launched.
Both small and large businesses took advantage of the PPP loans. There were actually 3 major pieces of legislation passed in a relatively short period of time. The rules were being written in real time and the rules for forgiveness were
also forthcoming. The question of expense deductibility regarding expenses covered with PPP loans was on the minds of many business owners.
Congress was initially caught off guard by the deductibility question. Luckily, the legislative process worked and the law was changed to allow for expense deductibility for the PPP-utilized funds, in addition to allowing the loan proceeds
to remain forgivable.
The Employee Retention Tax Credit was implemented to help employers keep people on payroll. This is a payroll tax credit for 2020, which was extended via the CAA through mid-2021 and again via the ARPA for the remainder of 2021. This
is a refundable credit, which is fairly advantageous for businesses. The rules for this credit were somewhat fluid, which made planning and implementation difficult.
Segment 2: The Next (Legislative Process and Biden Administration Proposals)
The legislative process is messy. Even if a bill passes and gets signed into law by the president, it’s not over. For instance, in 2017 the Tax Cuts and Jobs Act (TCJA) was enacted, but regulatory packages related to the Act are still
being released.
The fluidity and messiness of the tax changes have been particularly confusing for accounting students. Alisha was literally teaching students from the TCJA analysis, after its enactment, because the text books weren’t current on this topic.
How long will the current rules remain in place? How will the legislative process alter what we “know” now? Students are struggling to cope with the regulatory environment. Eric commented that at times, the words in the
statute and the regulatory packages are in conflict. This only compounds the problem. He offered an example about how he deals with it with EY staff, in the real world. The best way to approach it is to read the wording of the statute,
then go onto the regulations. It’s about building a foundation and deciding how it should be applied for a particular client. It’s not always black and white.
The Biden Administration’s Build Back Better plan is still being implemented. There were many changes put forth during the campaign. However, both Alisha and Eric agree that whatever tax policy changes end up being implemented, they
won’t happen quickly.
One idea initially floated is to increase the corporate tax rate from 21% to 28%. Additionally, there was talk of repealing the deductibility of advertising expenses for pharmaceutical companies. The Global Intangible Low-Tax Income (“GULTI”)
for foreign income is part of the TCJA and could also be impacted by the Biden administration changes.
In Episode 3 of the Bellarmine on Business podcast, Jim, Dr. Frank
Raymond and Carl Hafele also spent a lot of time discussing what we thought might happen, based on the Biden campaign’s talking points.
Segment 3: The Importance of Modeling
Modeling is basically the exercise of generating various scenarios and determining how the current environment impacts your business financials. Modeling can help a company make better-informed decisions. Change is constant. Having a
game plan to deal with that change is a good strategy.
There is some optionality to the tax code. You may have elections, but the option you choose will have consequences. If you later decide you want to change one or more of those elections, if it’s even possible, it can be complicated
(and expensive).
The Employee Retention Tax Credit (ERTC) is a benefit, but businesses must be careful how that credit is calculated when a PPP loan is involved. It was important to run the numbers (e.g. model) the scenarios of how you might elect to use one or
both of these relief measures. It’s possible that the business may have left money on the table if careful consideration was undertaken.
The Business Interest Expense Limitation was an updated in the TCJA. Initially, it imposed a limited on your interest expense by not allowing it to exceed a certain amount of your adjusted, taxable income. It can limit the interest a business
is allowed to deduct in a given year. Because the 2020 pandemic negatively impacted many businesses, the provision was updated to allow businesses to elect to use the 2019 adjusted, taxable income (which might have been higher), thus allowing
for the deductibility of more interest expense. It’s important to model the scenarios to understand what’s best for your company’s situation.
Alisha discussed how an important way for her student to understand modeling is by analyzing a choice of entity decision. They get the opportunity to see how tax rates and changes will apply to the various business entities.
Segment 4: The Beyond
The day to day role of accounting professionals is changing. The modeling and advising capability makes them vital to the success of a company (small, medium or large.) Businesses need to be nimble. Being able to make informed decisions
can be a competitive advantage. The environment is going to remain very dynamic.
Scott recommends accounting students should work hard to get a foundation set and learn how to read the tax code. This skill set will enable you to be able to build on that foundation. You’ll be equipped to be dynamic and equipped to
deal with the changes that will inevitably come. You’ll be able to help your clients to plan for the beyond.
Scott closed with a few comments on student loan forgiveness, based on the ARPA. It provides that if student loan debt were to be forgiven (2021-2025), the forgiven student loan debt would be excludable from income. This does not forgive student
loan debt, but it does seem to lay the groundwork for potential forgiveness of the debt. Normally, if loan debt is forgiven, it’s counted as gross income.
If you’d like to contact Eric Scott, his office phone number is (502) 585-6554. The company website is EY.com. His office address is:
Ernst & Young LLP
Suite 1200
400 West Market St.
Louisville, KY 40202
To contact Alisha Harper, her office phone number is (502) 272-8471 and you can learn more about her at: https://www.bellarmine.edu/rubel-school-of-business/faculty/
Disclaimers:
The views and opinions expressed during the Bellarmine on Business podcast do not necessarily reflect those of Bellarmine University, its administration or the faculty at large. The episodes are designed to be insightful, thought-provoking and entertaining.
This discussion is not intended, and should not be relied upon, as tax, accounting, or legal advice. Ernst & Young LLP expressly disclaims any liability in connection with the use of this discussion or its contents by any third party. The views
expressed by the speakers are not necessarily those of Ernst & Young LLP or other members of the global EY organization.
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