American Institute of CPAs president and CEO Barry Melancon discussed how the AICPA pushed for changes in the new tax law, with mixed success, during a speech at an Accountants Club of America meeting in New York on Wednesday.
“The tax act politically was one that simply the administration and the majority in both houses had to have occur,” he said. “There were certainly some things that could be done through the Administrative Procedure Act or executive orders, but there was not anything really that had passed through Congress that was part of the agenda, so tax reform, particularly the notion of reducing corporate rates, was a big political must from that standpoint.”
The process moved so quickly, however, and was kept within such a small group of Republican lawmakers, administration officials and their staff, that there was only so much the AICPA and its contacts on Capitol Hill could accomplish. “You had a situation where it was played really, really close to the vest,” said Melancon. “If you go back in time about six months before the bill was enacted, everything as to what was going to be in the bill was really controlled by just a few staffers and a couple of members of Congress. In fact, as we interacted with the members of Congress, CPAs and the Ways and Means Committee and the like, they had almost no insight except some broad principles.”
The AICPA was unable to dissuade lawmakers from excluding large accounting firms from the 20 percent pass-through deduction available to other types of companies after hearing Treasury Secretary Steven Mnuchin say accounting firms probably wouldn’t be able to get the tax break.
“We immediately jumped on that,” said Melancon. “We had meetings at Treasury. I signed a letter that really took the secretary on, and basically took the administration on being biased to the manufacturing and construction sector, as [opposed] to the service sector of the economy. All of you are probably well aware of this, but clearly the growth engine of our economy for the past couple of decades has been the service sector. In the end, we were unable to fully win that day.”
However, he noted that the AICPA was able to influence the legislation in some ways. For example, the AICPA had worried about lawmakers reviving a proposal from the Obama administration that would eliminate the cash basis of accounting. “That would have been a huge issue inside the profession and it would have been a huge issue inside many professions,” said Melancon.
Congress dropped the notion of adding a border adjustment tax as a way of paying for the steep reduction in corporate tax rates, but it needed to find other so-called “pay fors” to help offset the cost of the legislation to keep it below the $1.5 trillion level that Republicans in Congress had approved. One of the possibilities was getting rid of the cash basis of accounting.
“The revenue tag on that was about $26 billion, so we were very fearful until the very last moment that that wasn’t pulled off the shelf, sort of a legacy from a failed attempt by the Obama administration to get that change in the markup as a pay for on the corporate side,” said Melancon. “That was one that we were very much focused on, and it didn’t happen.”
Another provision it was able to stop was a change in the way structured retirement plans for firms would be taxed. The AICPA and a coalition of other professional organizations managed to get that proposal dropped. “We worked really hard and got that pulled out with our coalition,” said Melancon.
The AICPA also managed to get some modifications in interest deductibility. “We were able to get interest deduction predominantly still deductible at the entity level,” said Melancon.
While the AICPA was unable to win the 20 percent deduction for accounting firms, it did manage to get some changes in the phase-in rules to make them more workable. “There was going to be a phase-in rule that was going to allow this deduction under certain levels, under $400,000 of income,” said Melancon. “That was an attempt to make the lack of rate reduction issue not as bad for professional service firms. When the staff of the committee actually wrote the language of the bill, and if you made between $300,000 and $400,000 and lived in a high-tax state, the larger rate would start to phase out.”
But the legislative staff had done the calculation incorrectly. “It was a bizarre calculation,” said Melancon. “We went to them and showed them the calculation, and said this can’t possibly be your intent. This is not the right way to do this phase in. They said, 'You’re right, we didn’t intend to do this phase in,' so they went off to the backroom to modify it. Now the way they modified it was not the way we suggested they modify it, but the phase in started earlier and therefore the marginal rate issue was partially fixed. So it’s better than nothing, but it certainly doesn’t help from a high-level perspective.”
In the end, Congress decided to limit the deductibility of the state and local tax deduction as one of the major "pay fors" to offset the cost of the corporate tax cut. "I understand the impact of the elimination of the state and local tax issue, and probably many of us in this room do to a large degree," said Melancon. "The fact of the matter is, though, there are many residents in many states who actually see this as a fix to subsidizing certain high tax states and excessive spending in those particular states."
During his wide-ranging speech, Melancon also discussed many of the changes going on in the accounting profession, including the growing use of artificial intelligence, data analytics and blockchain. He predicted the technologies would change the structure of firms, just as the new Tax Cuts and Jobs Act will change the business model for many firms. With fewer taxpayers itemizing their deductions and just claiming the doubled standard deduction, more competitors will emerge to provide free tax preparation as a loss leader, as some brokerage firms are already doing for their clients. However, he told Accounting Today he does not believe that many accounting firms will be restructuring to become other types of businesses, such as technology companies or real estate service providers, in order to be able to qualify for the 20 percent pass-through deduction.
Melancon also pointed to changes in the mergers and acquisitions area for firms. Last year, 26 percent of the mergers were with non-accounting firms. Similarly hiring of accounting graduates has declined approximately 10 percent, as more firms hire employees with skills in areas such as technology.
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