Tax planning for the inevitable downturn

More than one in four tax executives believe the economy will remain on the upswing for only one to two more years, according to new data from BDO’s "2019 Tax Outlook Survey," while 46 percent believe a slowdown will happen within a year — or is already happening.

While one to two years may be a long time for investors, it’s a short time for those tasked with tax planning responsibilities. With a market downturn likely drawing closer, now is the time for businesses to optimize tax savings and minimize total tax liability, according to Matthew Becker, managing partner in BDO’s national tax office.

“In the big picture, when we talk about total tax liability, we’re trying to frame every type of tax that an organization pays,” he said. “These include income tax, sales, property, payroll, state level, city level, and international taxes. But when we talk with tax executives, we find that income tax is a huge focus, and a lot times the other taxes that an organization pays don’t receive a lot of attention. And with the federal income tax rate coming down for corporations, the portion of total taxes that are related to non-income taxes has increased.”

By optimizing tax operations today, companies will have more time and resources to manage any potential broader economic challenges in the months or years to come. But getting ahead of a potential downturn means tax directors need to accurately understand their total tax liability and communicate it effectively to executive leadership, Becker explained. “Concurrently, tax executives should work to emphasize the importance of tax strategy throughout their organizations to strengthen collaboration and efficiency during both prosperous and challenging times,” he said.

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But tax professionals have a long way to go to understanding their total tax liability, according to the survey. Only 58 percent of survey respondents cited a “high” understanding of their companies’ total tax liability, with 32 percent saying their understanding is “moderate.”

Other key findings from the survey:

  • Federal tax reform and state and local tax changes weigh equally on tax executives. In fact, 46 percent say adjusting to the federal Tax Code will be their biggest challenge this year.
  • Following the Supreme Court decision in Wayfair, 65 percent of tax executives have re-evaluated their companies’ sales and use tax compliance.
  • As the tax function evolves, tax professionals’ digital and soft skills are deemed as important as their technical tax prowess. Among the top skills for tax professionals in 2019, 32 percent of survey respondents cited quickly adapting to tech changes, while 30 percent say the most important skill is the ability to communicate tax strategies to broader business stakeholder.
  • Automated processes are in high demand — 55 percent of survey respondents are focusing on automating processes in 2019, while 24 percent are implementing data analytics.

Becker sees BDO’s role as helping companies meet the demands that a slowing economy will generate. “In the big picture, corporations are paying less income tax, so in order to find savings in recessionary periods, organizations will have to look to other types of taxes when they do their tax planning,” he said. “It’s amazing, once organizations understand all of the taxes they pay, how significant the non-income tax is.”

“Often, organizations’ tax is driven by such a variety of activities that they really need strong technology to understand and track their total tax liability,” he concluded.

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