Business tax considerations amid economic headwinds

ARTICLE | November 01, 2022

Authored by RSM Canada

How can your tax function help you navigate economic challenges?

Businesses in all industries are feeling the strain of various economic factors. Inflation is putting pressure on cash flow. Labor market challenges are jeopardizing productivity. Supply chain impairments are increasing costs. Day one of RSM’s Tax Summit was designed to help you understand how taxes affect those dynamics and present opportunities to relive the strain.

Managing a company through a restructuring: A tax perspective

An operating business that takes time now to understand the tax ramifications of a debt restructuring could improve outcomes for partners or shareholders if such action becomes necessary amid intensifying economic challenges.

A restructuring or workout often involves a cancellation of debt income. Understanding what triggers a cancellation of debt income event, the exclusions that may apply and differences in how they affect corporations and partnerships could strengthen organizational decision-making, said Nick Gruidl, partner and leader of the M&A practice in RSM’s Washington National Tax group.

Indeed, entity type is a crucial distinction. For a transaction involving a partnership, for example, the impact is generally felt at the partner level. If the distressed business is a C corporation, the transaction is generally limited to the corporation.

One common source of a cancellation of debt, regardless of a company’s health, is the modification of a debt instrument. While the definition of modification can be quite broad, such an event is more likely to occur during challenging economic conditions like there are currently. They can include the deferral of interest payments and the extension of a maturity date, changes in interest rates and reduced collateral on debt.

If a cancellation of debt income event occurs, exclusions and deferral opportunities might exist. It’s important to understand, however, that when the COD event occurs at a partnership, the rules around insolvency and bankruptcy provide the exclusion at the individual partner level instead of the partnership level.

“This is often a surprise for companies that go through debt workouts without talking to their tax advisors,” said Patrick Phillips, principal in RSM’s Washington National Tax M&A practice. “Partners can get stuck with COD income without any cash to pay the taxes, and there’s no exclusion because the partners themselves are not in bankruptcy or are not insolvent.”

Managing margin amid inflationary pressures

Middle market companies are pivoting their operations to mitigate shrinking profit margins amid high inflation and the economic downturn.

“Margins are eroding—it’s not one thing, it’s many things,” said Casey Chapman, RSM principal and leader of the firm’s supply chain consulting practice. He cited extended lead times, higher trade and tariff costs and fluctuations in foreign currency among many supply constraints.

Fast-changing compliance regulations and indirect expenses such as value-added taxes and excise taxes are adding to cost pressures, along with workforce staffing and jurisdiction considerations, said Justin Silva, RSM tax partner and leader of the firm’s tax accounting methods and periods group. Now, more than ever, companies must have a clear sight line into their entire cost framework, he said.

Silva stressed that volatility in cost variables makes a strong case for reliable internal systems to analyze data from across an organization. “If your costs change month over month, and you were accustomed to quarter over quarter or year over year, how quickly is that data being reflected so you can analyze it and make a good business decision?

To hedge against global instability, some companies are drafting plans to move their supply operations out of China to other areas within Asia, as well as to diversify their supply chain, while others are divesting non-core assets, Chapman said. Silva said some businesses he serves are eliminating low-profit or high-cost products or services from their lineup.

Mike Fletcher, an RSM tax partner who specializes in supply chain issues, said he has seen a real emphasis and focus around pricing details built into supply contracts.

More robust costing models are now essential, the group said, noting that businesses with inventories are developing more complex inventory management strategies. In some instances, accounting methodologies are changing to relieve the tax burden, Silva said. At some clients, he observes a move toward equipment leasing rather than outright purchases, and a shift to the first-in first-out (FIFO) method of valuing inventories from last-in first-out (LIFO).

INSIGHT FOR THE CEO: If there is a silver lining to the unstable economic environment, it might be how it has been a catalyst for digital transformation, such as predictive modeling.

Silva said that while he sees companies finding alternative ways to incentivize investments in people through environmental, social and governance initiatives, he is seeing them accelerate digital transformation and adoption of technology that increases efficiency and improves data access points, regardless of costs.

Chapman noted that businesses are looking at demand planning and more artificial intelligence and machine learning solutions. There are data consolidation tools like enterprise performance management (EPM) systems and business intelligence systems that pull data from multiple sources and can be used to allocate costs systematically. Doing so will enable visibility to key factors such as cost changes and margin profiles. Managers can make quicker decisions around pricing, cost reduction initiatives and rationalization of products and potentially customers.

Workforce trends impacting employers

Businesses competing for talented employees seek to differentiate themselves by offering compensation packages that feature more than just salary. Whether those benefits include educational assistance, health and wellness support or shares of equity, or other incentives such as career development and ESG initiatives, understanding the tax implications can help an organization make decisions that support its business objectives and avoid surprise costs.

“Tax shouldn’t drive the conversations; your workforce strategies really are tied into your overall business strategy,” said Anne Bushman, partner in RSM’s Washington National Tax group and leader of the firm’s compensation and benefits practice. “But tax can’t be ignored, either.”

Tax implications of cash compensation usually are straightforward compared to those of other benefits. But even so, as Bushman noted, the trend toward hybrid and remote work has introduced additional questions, such as in which jurisdictions an employer might have reporting obligations.

Then, in addition to cash, a so-called total rewards package might include various benefits with tax treatment that is more complex.

“Some can be taxable, some can be nontaxable, some are deductible, some are nondeductible—it’s a crazy mix of all of that,” said Pete Berard, RSM senior director and leader of the firm’s employment tax practice.

Remote work, itself, as a recruitment and retention tool comes with a litany of tax considerations. From state and local income tax withholding requirements, to determining the so-called tax home of remote and hybrid employees, to applying the so-called convenience of the employer rule, the potential for unexpected tax obligations is higher for employers that don’t understand how laws apply.

INSIGHT FOR THE CEO: Tight labor market conditions represent an opportunity for businesses to keep their employees, said Marni Rozen, RSM director in the firm’s human capital management practice.

To that end, companies can engage in so-called stay interviews with content employees, as opposed to exit interviews with workers on the way out the door.

“They can tell you what’s in the secret sauce that’s working well, and you can do more of what’s working,” Rozen said.

The U.S. economy, inflation and direction of policy

The American economy is in the throes of a profound structural change that will bring a recession next year and force businesses to adapt to a new era of higher costs, according to Joe Brusuelas, chief economist of RSM US.

Brusuelas offered his perspective on the changing economy on Monday during his keynote address at RSM’s Tax in Motion: 2022 Tax Summit.

Brusuelas pegged the probability of recession at 65% over the next 12 months as the Federal Reserve continues its campaign of interest rate increases to tame stubbornly high inflation.

“The economy is in a precarious position,” he said. “Firms need to begin preparing for a downturn.”

Middle market firms, which have shown resilience in the early phases of the Fed’s rate hikes, will be facing reduced demand from businesses and consumers, tighter financial conditions and, ultimately, a slowing economy.

Brusuelas said that the Fed is committed to restoring price, and it will come at a cost, including the loss of at least 1.7 million jobs with the potential for more.

As painful as those job losses will be, though, Brusuelas said that this recession will most likely be milder than previous downturns and will last less than a year.

The good news is that the Fed’s efforts to reduce demand through higher rates will have the intended effect of lowering inflation, probably to around 3% next year, Brusuelas said, enough for the central bank to ease its rate hikes.

Brusuelas detailed the outlook for financial and labor markets, inflation and supply chain dynamics as the U.S. economy prepares for a new era of higher costs, higher interest rates and lower demand.

Keynote Presenter

Joe Brusuelas, | Chief Economist | RSM US

Joe Brusuelas is principal and chief economist for RSM US LLP, serving as a leading voice of the middle market and the U.S. economy.

View full bio >

Let's Talk!

Call us at (519) 426-5160 (Simcoe) or (519) 842-4246 (Tillsonburg) or fill out the form below and we'll contact you to discuss your specific situation.

  • Topic Name:
  • Should be Empty:

Source: RSM Canada
Used with permission as a member of RSM Canada Alliance

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.

Good Redden Klosler a proud member of the RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how Good Redden Klosler can assist you, please call us at (519) 426-5160 (Simcoe) or (519) 842-4246 (Tillsonburg).

Share This