Time for tax planning
With more than two months of filing in the rearview mirror, practitioners have seen some definite trends emerge. Foremost among them is the lengthening of client sessions to discuss tax reform.
“Almost every conversation begins with tax reform,” said Mark Kohler, CPA, Esq. “We tell them the bill has nearly no impact on their 2017 returns, and that it’s business as usual. Then they ask what they should be doing this year to save when they file their 2018 taxes.”
“We’re really doing two tax seasons in one,” echoed Beanna Whitlock, a San Antonio-based practitioner and educator, and former director of Internal Revenue Service National Public Liaison. “Especially the losers — when they learn they might pay more next year because of the disappearance of personal exemptions or some other deduction — they ask what they can do to mitigate the increase. It adds to the length of time to do returns, and our bill for doing returns doesn’t include tax planning for next year.”
“This is our Christmas season. There are a limited number of days for us to do the work we have to do, so extensions will increase this year,” she said, correctly — the number of extensions filed by early March had increased by nearly 8 percent over last year. “And this is our second year with the March 15 deadline for partnerships and S corporations. Those had to get done while other taxpayers were screaming for their individual appointments.”
“People either had a lot of questions about tax reform, or they didn’t know it existed,” agreed Roger Harris, president of Padgett Business Services. “The only thing they consistently knew was what they lost. We did have to spend time talking about what they will gain, what they will lose, and what they should do about 2018 taxes.”
“A lot of people are realizing that when it comes to planning, there’s not a lot that can be done proactively with 2018 taxes, unless they’re a business owner,” said Kohler. “But for the average American, there’s not much they can do to change their tax situation. The legislation is what it is, and you’re either a winner or loser on your personal return.” Kohler, a partner in an accounting firm and a law firm, is also senior tax advisor at software firm TaxSlayer.
“There are lots of changes on the business side,” he said. “The bad news is the impact of the elimination of the entertainment deduction. It makes it hard for business taxpayers to schmooze and win over new customers and clients. It will really impact the cost of doing business for the small-business owner.”
Linda de Marlor, president of Rockville, Md.-based Tax-Masters Inc., agreed. “We are all on pins and needles to see what happens about the enforcement of the entertainment part of the new tax law,” she said. “We are hoping it doesn’t impact too severely the restaurant industry, and self-employed people such as realtors, insurance salespeople, and professionals who might do a lot of entertaining. I predict that something will happen before the end of the year and that business entertaining will be allowed.”
“Meals are connected to the entertainment expense, at least in the eyes of the IRS,” said Kohler. “Meals that involve any entertainment experience will now be questionable, at best. And a lot of the 100 percent deductible food items are now only 50 percent deductible — things like donuts on Wednesdays, bagels on Fridays, the coffee maker and water cooler. These fringe benefits of food in the office are now only deductible at 50 percent.”
“The good news is the 20 percent pass-through Section 199A deduction,” he said. “The personal service business will see their benefit phase out when the owner hits certain limits.”
Kohler hasn’t been advising businesses to switch to C corporation status to take advantage of the corporate tax rate. “Just because the C corporation rate went down to 21 percent, it’s still a red herring,” he said. “The average small-business owner should stay away from the C corporation because of double taxation.”
For those living in high-tax states, the biggest impact is from the $10,000 cap on deducting state and local taxes, Kohler noted. “Individuals paying $50,000 or more in state and local taxes will see a huge impact on their federal tax liability,” he said. “I’m having consultations, almost on a daily basis, with clients that want to move their residence, domicile or business to a non-income tax state.”
“But this is all temporary,” he said. “It’s only for seven years — everything goes back to square one in 2025, depending on what Congress does in the interim.”
Other than a slight “hiccup” as a result of the extenders bill that was enacted after the start of this year’s filing season, the biggest part of Harris’ tax season has been explaining the loss of the deduction for donations to a college or university in exchange for athletic event seating rights.
“You make a donation to the Hartman Fund [associated with the University of Georgia], and if that donation is high enough you get a parking pass for home football games, but not all donors get a parking pass,” he explained. “After your donation, you then purchase game tickets in a separate transaction. The number of tickets you may buy and the location of your seats is based on the amount you contributed to the Hartman Fund. The deduction was for 80 percent of the donation, but the TCJA repeals this. They tried to get rid of the deduction in the 1986 Act, but coaches and athletic directors all over the country called their senators and persuaded them to take it out of the act.”
“There are two steps to the process,” he continued. “The donation had to be made before February 15, but some people made it before the end of the year. However, a lot made it after the beginning of the year, and I’m the one that gets to tell them that it won’t be deductible on next year’s returns.”
Many individuals made contributions to donor-advised funds before the end of 2017, according to Tim Tierney, CPA, Esq., professor of law and accounting at Bentley University. “There was a flurry of activity, because many thought the tax benefit would be limited or eliminated,” he said. “But it not only survived, it actually got better.”
A donor-advised fund is invested for tax-free growth, and the donor can recommend grants to charities going forward, while receiving an immediate deduction for the original donation to the fund. “There was a spike in contributions to these funds. The benefit is intact, but there is a limitation of 50 percent of adjusted gross income that donors can deduct on their return. However, if they wrote out a large check in 2017, there is a five-year carryforward for gifts that exceed the AGI limit,” he said.
Although the Alternative Minimum Tax on individuals wasn’t eliminated by the TCJA, it’s less onerous now than it used to be, according to Tierney. “This might prompt companies to come back to issuing incentive stock options,” he predicted. “They were popular 20 years ago but pretty much went away because they were picked up as an adjustment for the AMT. It’s a positive tax benefit because it encourages the long-term holding of stock.”