Two tax seasons at once
With just a month of early returns under their belt, practitioners are already facing issues and uncertainty regarding the Tax Cuts and Jobs Act. “It’s almost like dealing with two tax years at the same time during busy season,” said Marc Azar, a partner in the Atlanta CPA firm Smith & Howard. “We’re having conversations with all our clients as to the effects of tax reform on their 2018 taxes. It’s enough to get their 2017 taxes done, let alone figure out the implications of the TCJA on their 2018 taxes.”
“And I have yet to see the postcard they promised,” he added.
“We’ve been focused on explaining the new law to clients,” seconded Jeff Call, a partner at Top 100 Firm Bennett & Thrasher. “We’re spending 85 percent of our time with clients exploring what they should be doing to take advantage of the new provisions that might be beneficial, or working around them to mitigate any negative aspects of the law.”
“The biggest issue is the taxation of qualified business income at 20 percent for pass-through entities,” he said. “The biggest limitation is the cap on state and local taxes. When you run the numbers, the ones that do the best are the pass-through business owners, if they qualify for the 20 percent deduction. Business executives are losing some deductions, but still are better off because of the reduction in tax rates. The only ones worse off are those in super high-income-tax states like New York or California, or who have significant real estate taxes, because they’re now limited to a deduction of $10,000.”
“The limitation on deductions is not too much of a surprise, because people have been hearing about it for a while,” he explained. “Some that think they’re losing under tax reform are wondering if they should take dramatic actions to change their lifestyle, such as leaving a high-tax state, or downsizing their home.”
But they’re more inclined to make changes in their business structure than in their personal life, Call said. “Owners of pass-through businesses face the question of whether they would be better off by switching the business entity structure to a C corporation in light of the new lower corporate tax rate.”
“In general, moving to a C corporation does not make sense unless the taxpayer is leaving all the income in the business and does not plan to exit from the business soon,” he said. “If the business owner plans to sell, most buyers prefer to purchase assets because they can get goodwill amortization and depreciation and avoid any existing liability. But the seller will be worse off because of the double level of taxation.”
This filing season has been unique in that accountants had to start in December 2017 to understand the new law and prepare to explain it to clients, observed Jonathan Gorski, a partner at Edelstein & Co. LLP. “Right now, we’re heavily fixated on the March 15 deadline for partnerships and S corporations,” he said. “We have to file those returns first before we dive into individual returns. Most small-business owners are re-evaluating their entity structure under the new law to make sure that they’re in the correct form. There are some cases where, if a company is going to retain income in the business and not distribute it to shareholders, it may make sense to switch from an S to a C corporation because of the lower tax rate.”
The loss of the alimony deduction is an issue that clients contemplating or in the middle of a divorce need to understand, Gorski noted. “Under current law, alimony is deductible by the payor and includible in income of the recipient,” he said. “But for divorces finalized after Dec. 31, 2018, alimony will no longer be deductible by the payor, and will not be included in the income of the recipient. There may be some motivation for parties to a divorce to get it finalized before the new provision becomes effective.”
Already, firms are compiling lists of glitches in the new law, but that’s to be expected, according to Dustin Stamper, a director in Grant Thornton’s Washington National Tax Office: “The bill was written very quickly and on the fly. The good news is that most of the provisions are effective for 2018, so we should not see issues until next year’s tax returns.”
The Bipartisan Budget Act of 2018, signed on Feb. 9, 2018, contains a number of tax provisions that retroactively extend certain tax breaks for 2017, Stamper noted. “Some returns may have been filed before the bill was passed,” he said. “Among the extenders are the exclusion for the discharge of mortgage debt, the deductibility of mortgage insurance premiums, and the deductibility of qualified tuition,” he said.
“The IRS will continue to have its hands full with the way funding has stagnated over the past several years,” Stamper said. “Filing season is harder when Congress adjusts the law retroactively during the season. It has to make changes to its software to reflect the changes, with fewer staff available.”
There were steep declines in tax-related identity theft in 2017, according to the IRS. However, it warns that identity thieves are looking to steal more detailed financial information to help provide a more detailed, realistic tax return to better impersonate legitimate taxpayers. “Because they need more personal data, cyberthieves increasingly are targeting tax professionals, human resource departments, businesses and other places that have large amounts of sensitive financial information,” the IRS warned. “The IRS continues to see a number of these schemes in attempts to get taxpayer W-2 information from tax professionals and employers.”
The IRS introduced a pilot program in Georgia, Florida and the District of Columbia several years ago in which taxpayers could apply for a PIN even if they had not been the victim of identity theft. “Several of our clients went online and requested a PIN,” said Smith & Howard’s Azar. “It’s on a volunteer basis — we had an e-mail blast and talked to clients we knew would be interested. But we don’t know who received the PIN. The important thing now is to make sure they tell us about it when they come in to file, or their return will be rejected.”
The delay in issuing refunds, a result of the Protecting Americans from Tax Hikes Act of 2015, still causes some taxpayer frustration, according to Tynisa Gaines, assistant director of The Income Tax School. Under the PATH Act, the IRS is prohibited from releasing refunds for taxpayers claiming the Earned Income Tax Credit or the Additional Child Tax Credit prior to Feb. 15. Actual access to refunds was delayed until the end of February.
Many preparation offices have their fees withheld from refunds, observed Cathy Mueller, director of Peoples Income Tax and Business Services: “Offices that focus on those types of clients are a month behind in their revenue because they don’t get paid until the refund is released.”
She observed that when comparing the same number of days of filing, there is an increase in the number of returns received and accepted in 2018 as compared to 2017. “All of our offices are up in numbers of returns,” she said. “We’ve been marketing the idea that taxpayers should consult a tax professional this year to prepare for next year. On our newsletter and on social media, we’re encouraging people not to self-prepare.”
A just-released survey from tax preparation chain Jackson Hewitt underscores the feeling that tax professionals are necessary now more than ever. It found that millennials and EITC taxpayers tend to have more worries around taxes and tax reform than any other group. Thirty-four percent of respondents who file their taxes with online software are concerned they won’t get the most from their return because they didn’t visit a tax professional.