TCJA tips for next season
With an additional year to digest the Tax Cuts and Jobs Act, time spent preparing for and conducting client interviews will be different, and from a tax savings perspective more efficient, for the filing season ahead than from a year ago. “The good news is that we’re coming into planning season when at least we’re familiar with some of the guidance the IRS has given us,” said Ed Zollars, a CPA and instructor and author with Kaplan Financial Education.
Roger Harris, president of Padgett Business Services, agreed. “Now is a good time to sit down with clients. Last year at this time there were some things about the new law we didn’t know. Now we know what the law will be for the filing season ahead.”
For most practitioners, final guidance on the Section 199A 20 percent deduction for pass-through entities figures prominently as a planning tool. “Now we can start studying the proper business structure for our clients,” Zollars said. “Most taxpayers will probably decide not to change their business structure, but it should be considered again. With the corporate tax rate now set at 21 percent, they should justify why it doesn’t make sense to switch to C corporation status. Usually it’s not justified because double taxation will still exist.”
Given the nearly doubled standard deduction, preparers should consider whether a taxpayer will ever be able to itemize, Zollars suggested. “If the answer is always going to be ‘No,’ it takes a lot of things we used to do off the table, such as accelerating payments of expenses that would be itemized deductions. If a taxpayer is charitably inclined, it might be advantageous to bunch itemized deductions into a single year by either doubling up charitable contributions every other year if it helps the taxpayer get over the threshold, or you might look at options that could increase gifting in one year, such as putting money into a donor advised fund.” Some of the old standards still apply, he said. “If the client has a business and needs equipment, putting the new equipment in service before the end of the year allows them a deduction for 100 percent bonus depreciation. Preparers should also consider if retirement planning makes sense for their business clients. On the flip side, they should talk to clients who are employees about maximizing their contributions to employer retirement plans.”
No longer goodies
It may be advisable to educate clients that some planning techniques that used to work no longer make sense, Zollars noted. “These would include paying the fourth quarter of state income early, or accelerating payment of property tax. It doesn’t work on the federal side anymore, once a taxpayer is over the $10,000 SALT limit. It may or may not work at the state level — most states don’t allow a deduction for state income tax, but will still allow deductions for property taxes.”
The final guidance on 199A provides a real estate rental safe harbor, noted Vincent O’Brien, of Vincent J. O’Brien CPA PC. “We’re planning with clients to see who received the deduction last year, and if they didn’t, we want to see if there’s something they can change this year to qualify for the deduction. They might not have qualified last year because of the W-2 limit. They might be able to pay W-2 wages by changing the way they do business so they can qualify for this year.”
“For clients that owed tax in 2018, it’s a good idea to make sure they adjusted their withholding and have made estimated tax payments,” O’Brien suggested. “And once in awhile you come across a client that has a lot of personal deductions but has had a bad year and has losses. There’s not enough income to make use of available deductions. There’s still time for that client to think about converting a traditional IRA to a Roth IRA. The income that comes from the conversion can be offset by personal deductions that would otherwise go unused.”
Paul Miller, CPA, of Miller & Co. LLP, suggests that practitioners bone up on two areas likely to cause confusion — Section 163(j) on business interest expense limitation, and the GILTI, or global intangible low tax income, provisions regarding foreign income.
“The issue in applying the Section 199A rental real estate safe harbor is whether the rental activity rises to the level of a trade or business,” explained Beanna Whitlock, a tax practitioner and educator and former director of IRS National Public Liaison.
“The IRS has given a 250-hour safe harbor available for taxpayers who seek to claim the Section 199A deduction with respect to a ‘rental real estate enterprise,’” she said. “A rental real estate enterprise is defined as an interest in real property held to generate rental or lease income. It may consist of an interest in a single property or interests in multiple properties. The taxpayer or a relevant pass-through entity, such as a partnership, sub-S corporation or an estate or trust, must hold each interest directly or through an entity treated as separate from its owner, such as an LLC.”
“For rental real estate enterprises that have been in existence for less than four years, 250 or more hours of rental services must be performed per year, while for other rental real estate enterprises, the 250 hours of rental services must be performed in at least three of the past five years. To receive this safe harbor, the taxpayer must maintain a contemporaneous record, including time reports, logs or similar documents regarding hours of all services performed, a description of all the services performed, the date on which such services were performed, and who performed such services,” she said.
“Practitioners should take the time now to warn clients of hackers and scammers who have used their identity to not only steal refunds but to scam the tax system,” Whitlock said. “Clients should be encouraged to notify their practitioner now if they have had any identity theft issues, even if they were not tax-related. And practitioners should explain to their clients the actions they have taken to protect their clients’ tax data.”
More for businesses — like yours
Small businesses should consider the new larger deductions — up to $1 million — for purchases of new or used equipment, advised Jamie Canup, a partner at Hirschler Law in Richmond, Virginia. “In addition, bonus depreciation is still possible in 2019. Does it make sense for the business to acquire, before year end, property that qualifies for bonus depreciation? This provision disappears in 2020.” Another benefit for small businesses that won’t be around next year is the family leave tax credit, observed Canup: “It is available through 2019 for providing paid employee family leave. It will no longer be available in 2020.”
“Taxpayers with capital gains should consider rolling them over into a Qualified Opportunity Fund to take full advantage of the 15 percent step-up in basis, resulting in a reduction of deferred gain that is not recognized until the end of 2026,” Canup said. “Any deferred capital gains rolled over into a QOF after Dec. 31, 2019, will only qualify for a 10 percent step-up in basis. And any appreciation in the QOF investment held for more than 10 years is then not subject to tax.”
And for small-business owners whose business is tax preparation, the time is now to start marketing to gain new clients. ”Preparation businesses that do complex returns typically have close to a 90 percent customer retention rate over the prior year’s business,” said Chuck McCabe, president of Peoples Income Tax and The Income Tax School. “If their primary focus is on the lower-end returns — the ones seeking bank products to get refunds back faster — the retention rate is more in the 70 to 75 percent range. In either case, it’s important to market to make up for an erosion in the client list, just to stay even.”