Among CPAs, it’s common to hear a major piece of tax legislation called “The Accountants’ Full Employment Act” -- and the Tax Cuts and Jobs Act is no different.
Having passed in the Senate in the early hours of Wednesday, and with only a purely procedural second vote in the House due Wednesday morning, the legislation was originally aimed at simplification, but will, in fact, leave many taxpayers more in need of expert advice than ever.
“Most tax bills do provide additional business to accountants because of the planning work that is required,” said Steve Danner, a tax partner in the South Florida practice of Cherry Bekaert. “The new law contains some very complex provisions that will require additional work in determining what is the best course of action for our clients.”
“There are a lot of moving parts, so it has never been a more important time for taxpayers to get with their accountants and model out scenarios of options this year versus next year,” said Bill Smith, managing director of the National Tax Office at CBIZ MHM.
Tax reform will bring plenty of the kinds of changes that call for professional tax advice, according to Jeffrey LeSage, Americas vice chairman of tax at Big Four firm KPMG LLP. “A new code will mean not only new regulations, but also new approaches to tax planning, new compliance and reporting standards, and changes to integration with international and state and local taxation,” he said.
“Companies will need to move quickly to respond to the vast changes expected in the Tax Code and the layers of new rules that will become effective at different times,” he added. “Of particular importance, if the bill is enacted before year-end, calendar-year companies will need to reflect it in fourth quarter and year-end financial statements.”
Jamie Fowler, national managing partner for Tax Services at Grant Thornton, agreed. “The corporate rate cut would require the recalculation of all tax attributes for financial statement purposes. If the bill is signed before the end of the year, this is a huge undertaking that needs immediate attention,” she said.
And doubtless, a technical corrections bill will follow on the heels of the TCJA. “There will be technical corrections -- a lot of them – on the bill,” said Stuart Gibson, counsel at Schiff Hardin in Washington, D.C., and former senior litigator in the Tax Division of the Department of Justice. “There’s no way they’ve got everything right. They drafted this on the fly.”
“The conference bill lets Trump keep his “Two for One” executive order, [two regulations must be removed for every new regulation that is added],” Gibson observed. “One reason they got rid of all of the deductions on the individual side is to free up space. To comply with the two regs out for each new reg, all the rules around individual deductions will go away. The IRS will need to issue new regs around specific issues.”
Just to learn the provisions of a technical corrections bill or study the regulations will take effort and create work for accountants. While it is normal for a major tax bill to beget a technical corrections act, the speed with which this one was drafted, plus the last-minute changes, almost certainly will require voluminous legislative language to correct its mistakes. And although the IRS may comply with the Trump two-for-one mandate, expect the regulations explaining the law’s provisions to be long and detailed.
And it may take a while for any technical corrections bill to be passed, according to Roger Harris, president of Padgett Business Services.
“When you have huge pieces of legislation you expect a technical corrections act to come back and fix things,” he said. “But with bills so political – the Democrats on health care, and the Republicans on tax reform – it’s harder to get those done. They want to leave the other part hanging out there with the problem.”
First things first
The IRS will have its hands full just deciding which provisions require new regulations first, noted Jim Brandenburg, tax partner at Sikich LLP. “They will need to get guidance out for practitioners as well as businesses very soon. They may issue some guidance in the form of Q&As rather than full-blown regs, at least at the beginning. And transition provisions and effective dates will add tremendous complexity.”
One upside of the act is that it is mostly forward-looking, so it won’t unduly affect the upcoming tax season, according to Cherry Bekaert’s Danner: “The effect on the upcoming tax season will not be significant as almost all of the provisions are effective in 2018. Those provisions that are effective beginning in 2017 will require additional work.”
That said, he did have some strategies for whenever the bill finally passes: “I will tell clients to pay any 2017 state income taxes before the year end and pay any real estate taxes now if they were planning put it off until 2018.”
Tom Wheelwright, founder and chief executive of accounting firm ProVision, has already prepared a revised checklist of things to suggest clients do by year’s end:
- Prepay 2017 state income taxes.
- Accelerate any of your children’s unearned income into 2017 (rates go up in 2018).
- Push business income to 2018 (rates go down in 2018, plus deduction).
- Buy and place in service an electric car (tax credit expires at end of 2017).
- Recognize any possible business losses (they will be limited in 2018).
- Prepay investment expenses and tax prep fees in 2017 (nondeductible in 2018).
- Pay any moving expenses related to a job in 2017 (the deduction is eliminated in 2018).
- Sell any business processes or patents before the end of the year (this will be treated as ordinary income in 2018, and is capital gains in 2017).
- Wait to buy a business vehicle until 2018 (depreciation on luxury autos goes up substantially in 2018).
Ed Mendlowitz, a partner at WithumSmith+Brown, noted the many changes and complexities the act creates in business taxation, and warned practitioners to study up on the new rules. “They’re making a major change, a real change,” he said. “They actually discriminated against different types of businesses.”
In particular, he pointed out that service businesses like accounting firms may suffer some adverse effects: “They separated heavily capital-intensive businesses from businesses that are service businesses. They ignore that services employ working capital. Capital can be employed in the form of inventory. Service businesses are investing heavily in artificial intelligence. My firm has a very large investment in artificial intelligence. They’re ignoring that service businesses are doing that. They’re ignoring that service businesses are growing. Those growing businesses need capital in the business just to fund growth. A service business needs to buy real estate. If you’re an accounting firm or an architecture firm you have to spend a lot of money building offices. These are issues that are going to be coming.”
“One issue, of course, is for businesses to take advantage of the full expensing by buying and placing tangible assets in service by Dec. 31 to take advantage of the higher entity and pass-through effective rates this year (the provision applies for assets after Sept. 27),” CBIZ MHM’s Smith. “Another is to be wary of advisors advocating paying 2018 state income taxes in 2017, as the committee report expressly killed that option.”
John Karaffa, whose practice is limited solely to professional athletes, says that most athletes will benefit from lower tax rates, but if they live in a high-tax state they will be paying more overall. “It’s too much to make up, even with the lower federal rate,” he said.
He is advising his clients to prepay a number of items before the end of the year. These include agent fees, personal assistant fees, business manage fees, training expenses, state and real estate taxes, financial advisor fees, charitable donations, and tax preparation fees.
Both Wheelwright and Karaffa suggest advising clients on the benefits of doing business as a C corporation.
This makes sense, according to Grant Thornton’s Fowler. “Corporations are set to get much better rate relief than pass-through businesses like partnerships and S corporations,” she said. “Many pass-throughs will need to assess whether it would be beneficial to convert. However, this is not an easy analysis. It depends on many factors, including whether owners work in the business, how much earnings are distributed, and any succession plans.”
Michael Cohn and Daniel Hood contributed to this article.
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