With no major new legislation to deal with, it might appear that the upcoming filing season will be a smooth one. However, there are issues that could severely complicate matters, including legislation that has been around for some time, the Affordable Care Act, and the repair regulations issued in 2013 that are effective for 2014.
While much of the speculation since the mid-term elections centered on tax extender legislation, that issue appeared to have been solved just as we went to press, with the Senate passing a bill previously passed by the House that included $42 billion in tax breaks, most of which expired at the end of 2013. The legislation renewed the extenders retroactively for the 2014 tax year, with new legislation necessary for 2015.
"The IRS needs time to get its systems ready, and the states, and the software providers need time to get ready," said Roger Harris, president of Padgett Business Services. "Then there's the issue of how much time preparers have to deal with the ACA, which we've never done before. At a minimum, we have to ask everyone about coverage, whether they're individual or business clients. For the individual clients, either they have coverage and you check the box, or decide whether you're calculating a penalty or looking for an exemption. What percent falls in those buckets will tell us how much time we have to spend this year additionally that we didn't have to spend in any season before now."
"On the business side, there still has to be a health care discussion," he continued. "You have to ask about number of employees, whether they're over 50, or over 100 because of the safe harbor for this year, to find if they have to offer health insurance. You also need to know the number of employees to see if they qualify for the small employer health insurance credit." (To be an eligible small employer, the business must have no more than 25 full-time equivalent employees for the year.)
"The preparer has to make sure the plan they're buying qualifies, and then has to know their employee count and the average wage per employee. The [Small Business Health Options Program] part of healthcare.gov is not working yet, so they can still buy from a broker and it will qualify as a SHOP plan," he said.
IN OTHER NEWS ...
"Outside of the ACA and the potential for a delayed start, this is the first year for many clients to deal with the new repair regulations," he said. "And while they've been in effect all year, this may be the first time we've talked to business clients about them - where and how they make the deduction, and what policies and procedures they may have to put in place, or should have been in place, during the last year."
The repair regulations, which were issued in September 2013, went into effect at the beginning of the year, Harris observed. "In some instances, they require accounting method changes. It's unclear how many clients they will impact, and how many practitioners are actually aware of what they have to do. All of this will lead to two things: higher tax preparation fees and more extensions. It will be a tax season unlike any we've seen before."
"The repair regulations will be a huge issue," agreed Mark Luscombe, principal analyst at Wolters Kluwer CCH. "2014 is the first year that people were forced to comply with them. From my talking with accountants' groups, everyone is avoiding dealing with them as long as possible. For 2014, you have all these elections to make and accounting method changes to file, so it could be a real headache."
"Although the extenders might get resolved, the consensus is that they will simply extend them through 2014 and worry about renewing them again next year," he added. "With just a few minor exceptions, almost everything is included."
"The Affordable Care Act's impact on individuals is the big new issue for the year. Preparers will have to figure what credit or penalty the taxpayer is entitled to or will have to pay. There are three new lines on Form 1040 and a couple of new forms," he continued. "Form 1095-A regarding advance credit from the Exchange has to be filed this year, while Forms 1095-B and 1095-C are optional for this year, so taxpayers may or may not get these."
"There's been a lot of concern from tax professionals on how much they have to inquire behind what a taxpayer tells them," Luscombe noted. "Can they rely on what the taxpayer says? Probably the answer is that if the information given seems reasonable given the facts you know, then that's OK, but if you believe it might not be accurate, you probably have a duty to enquire further."
Luscombe doesn't foresee much of a problem with the delay in passing the extenders. "When you look at the draft forms the IRS has put out, they've pretty much addressed the repair issues and the ACA. They reserved lines for the extenders, pending putting back the old provisions, so it shouldn't be too complicated once the extenders pass to put everything together," he said.
WAIT, THERE'S MORE ...
One other issue that will have an indirect effect on return preparation this year is foreign asset reporting. "There's no change on the individual side, but the U.S. now has agreements with foreign banks to disclose U.S. account information," Luscombe said. "People who have been in the closet hoping that their foreign assets will not be discovered may be running out of time to come forward before the IRS finds them."
"It will be a really tough filing season," said Michael Greenwald, a tax partner at Friedman LLP. "The tangible property regs and the ACA, and the fact that the IRS budget is getting cut so they won't be able to provide the support they have in the past, all add up to a tough filing season ahead."
The firm has been working on the repair regulations for over a year, according to Greenwald. "We've put on five seminars for our general client pool, as well as for very large clients who have robust tax departments and have the ability to do the work themselves. Practitioners at some of the smaller firms have that wide-eyed look when we discuss the regulations. A lot of people were hoping they would go away, but that's not going to happen."
Preparers need to talk with clients about the current year, and how to make the decisions whether to capitalize or deduct, Greenwald said. "They need to let them know what elections need to be made. Some are annual elections, and some are one-time. There are certain accounting method changes that need to be implemented and reported on Form 3115, and they need to talk about that."
"Finally, you need to talk about scrubbing depreciation schedules," said McDonald. "You need to determine whether items that are capitalized should be written off based on the new regulations. It's very important because a lot of one-time opportunities to implement method changes for things that used to be capitalized and are now considered deductions. You have to look back on the depreciation schedule, and it has to occur with any tax year that begins in 2014. It's a one-time opportunity, and there's a tremendous amount of work involved."
"But the benefits are out there," he added. "It will be hard on both taxpayers and accountants, but there are benefits that make it worth your while."
GET THE WORD OUT
Of course, the retroactive reinstatement of the tax extenders dampens the economic effect that they were supposed to have in the first place, according to Jamie Canup, chair of the tax practice at Richmond, Va.-based Hirschler Fleischer.
"Businesses, and the individuals involved, need certainty for effective tax planning," he explained. "What we're probably going to find is that businesses may have made different decisions, had certain tax extensions been in place earlier than December. For example, with regard to the Research & Development Credit, big-ticket items may have been purchased earlier in the calendar year if there had been certainty with the R&D Credit. Hopefully, Congress will come back in 2015 to provide meaningful but also timely tax reform."
"While some of these tax extenders seem small to the average taxpayer, to those most closely impacted by the credit, they are a big deal," he explained. "For example, teachers, who often spend their personal money to purchase classroom supplies, value the Educator Expense Deduction that allows them to deduct up to $250 annually."
The ABLE (Achieving a Better Life Experience) Act, which passed as part of the tax extenders bill, will provide a new type of savings account for people with disabilities, according to Michael Sonnenblick, editor/author with the Tax and Accounting business of Thomson Reuters. "It is something that preparers should point out to eligible taxpayers. It applies to those who became blind or disabled before they reached the age of 26, and applies to those who are eligible for SSI or SSDI, or who have filed a disability certificate with the IRS."
Salim Omar, a Marlboro, N.J.-based CPA, said that it was important to begin discussions on the ACA and repair regs prior to tax season. "We've been having conversations on these with our clients as we met during the year," he said.
Omar believes that this tax season will mark the start of an upswing for small to midsized accounting practices. "As the economy gets out of recession, it's a really good time to be in practice," he said. "Those business owners who have survived will look to partner up with accounting firms to help them profit from the good times that are ahead."
