Amid the constant swirl of geopolitical events, inflation rises, interest rate hikes, supply chain hitches … there’s a curtain that hides how businesses are really holding up. Accountants get paid to peek behind it.
From that privileged position, leaders in the accounting industry report that companies appear to be performing well and experiencing decent revenue growth — in spite of the barrage of unfriendly trends.
So, why are they still nervous?
Alan Sobel, managing principal of the New Jersey offices for CLA, or CliftonLarsonAllen, has picked up on a disconnect between what the business metrics say and how business owners are actually feeling.
“My sense in talking to clients is that, generally, their businesses are doing well, and we mostly see that looking at all the indicators,” he said. “But there’s still uncertainty about the future. And even if we’ve managed to avoid a recession — although some say we’re in one — people are concerned about what the next few years could hold.”
All the now-familiar world events — the war in Ukraine, the situation in Israel — have been a matter of concern for accounting firm clients, Sobel said. Putting aside the horrifying details of the conflicts themselves, clients wonder what this might mean for energy costs in the future, what the supply chain fallout will be and how cracks might start to show in the global economy.
“Couple that with continually rising costs and things of that nature, and it weighs on clients, even if they’re doing relatively well themselves,” Sobel said.
Accountants, for their part, have their own apprehensions. A survey released by the New Jersey Society of Certified Public Accountants in August, ahead of more recent events, indicated a vast majority of the region’s accountants expected the economy to either stay the same (44% of respondents) or worsen (an equal 44% of those surveyed) this year.
Ted Carnevale, a partner and New Jersey practice co-leader at Grassi & Co., employed the common “cautious optimism” phrase when asked about his thoughts on the market for the balance of the year.
Clients are chugging along. There are no warning bells going off. Even long-lasting supply chain woes are abating, he said.
Yet, he also notes some of the same client anxiety. Some of that is related to how inflation still has to be checked, which means higher interest rates could still be on the horizon. Expanding labor actions such as the United Auto Workers strike and looming government shutdowns don’t help.
“The geopolitical instability and the current (conflict) between Israel and Hamas has only added to that,” he said. “Hopefully, those situations work themselves out and we can get to a calm geopolitical environment. But, who knows what’s to come.”
The perspective from the investment banking side, gleaned from Jerome Fusco, managing director of Sax LLP‘s Sax Capital Advisors, is that concern over these escalations have sometimes figured into conversations involving mergers & acquisitions.
While it’s unlikely to cause parties to walk away from transactions, Fusco said the implications for debt, manufacturing and energy costs means there’s no doubt deals will have one more reason for extra scrutiny. Things move slower in times of uncertainty.
But, as he points out, the financial sector — and its clients — live in a different world today.
“Part of what continues to make people so apprehensive about the near-term future is they’re monitoring everything very closely,” Fusco said. “With social media, you can get as much instant news as you want and really go down rabbit holes.”
Looking ahead to the sunset
It might’ve just seemed like yesterday that accountants were getting clients adjusted to the country’s last major tax system overhaul, the Tax Cuts and Jobs Act. Accountants may remind you, however, that was five annual tax filing deadlines ago.
Time flies when you’re having fun.
Here’s an update: Some of those changes in that reform bill are fading away. Alan Sobel, a local leader at CLA, or CliftonLarsonAllen, said accountants are already preparing clients for provisions to “sunset” unless Congress acts before Jan. 1, 2026. That’s when certain exemptions will revert back to what they were in 2017, ahead of the Tax Cuts and Jobs Act’s implementation.
“And, from the point of view of an accountant, it’s hard to plan for that in a period of uncertainty in Congress, which, right now, can’t seem to get out of their own way,” he said.
The 2017 overhaul provided more latitude for wealthy individuals and families in estate planning by increasing the lifetime estate tax exemption. The gift amount not subject to federal tax went from just over $5 million for individuals to about $13 million, with married couples being offered doubled those amounts. The exemption is set to return to what it once was.
“Of course, this doesn’t affect everyone, but, for those fortunate enough to have the wealth — including business owners in this country who have accumulated wealth through investments and selling businesses — it does have an impact,” he said. “So, we have an opportunity over the next two years to plan to mitigate that … because the IRS doesn’t intend to claw back tax for gifts made prior to the higher exemption’s sunset.”
Another change reaching its expiration date within just over a year is the qualified business income, or QBI, deduction some business arrangements were eligible for. That tax reform effectively reduced tax bills by upwards of 20% for owners of pass-through business entities.
“Not every business, but a lot of them, benefits from this,” Sobel said. “And the expiration of that is more difficult to do planning around.”