What are clients’ biggest questions about reform?
Tax reform’s dizzying array of changes seemed to confuse preparers, lawmakers and the IRS alike. But amid all the new laws, which one stands out to clients?
As with the Tax Cuts and Jobs Act itself, answers can vary widely.
“Many are concerned with the non-deductibility of unreimbursed employee business expenses, along with other expenses that were subject to the 2 percent [AGI rule],” said Chris Hardy, an Enrolled Agent at Georgia-based Paramount Tax and Accounting.
“For individuals, it’s the lack of exemptions and particularly how that will affect taxpayers such as college students whom parents would normally claim but [who] still need to file their own return,” said EA Laurie Ziegler at Sass Accounting in Saukville, Wisconsin.
Burbank, California, CPA Brian Stoner finds clients chiefly concerned about two things. First, SALT limitations: “In California, almost every homeowner has way, way over $10,000 in real estate, state income taxes and personal property taxes,” he said.
And second, personal exemptions: “Especially if they have two or three dependents,” Stoner said, “but many will qualify for the Child Tax Credit because of a much higher income limitation or family credit on a lot of the dependents – so I have some good news for them.”
Client professions key
Many of Stoner’s clients are also in entertainment, paid by some of the large entertainment payroll companies. “Some are going to lose $30,000 to $60,000 in itemized [deductions] because unreimbursed employee business expenses are no longer deductible, plus financial advisor and tax preparation fees are also not deductible,” he said. “Many entertainment clients are looking into forming corporations as production companies to continue to deduct many of these expenses.
New York EA Phyllis Jo Kubey likewise has many clients in the performing arts. “While they’re freelancers, because of union contracts with many venues they’re treated as employees for some work, receiving a W-2, and as independent contractors, receiving a 1099-Misc for other work,” Kubey said. “Since they’re doing the same thing, they’re tremendously confused about what’s an employee business expense – no longer deductible under TCJA – and what’s a business expense related to their [self-employed] income [that is] deductible under TCJA.”
Another wrinkle: Some clients think that they can deduct nothing anymore. “I have to keep reminding them what is and isn’t deductible for 2018,” Kubey said. “My clients are also confused, even with detailed explanations and 2018 tax projection worksheets I’ve provided, about whether they’ll still itemize deductions.” In New York City, where real estate carrying costs are dizzying, “even with the SALT limitation many will still itemize their deductions on what used to be Schedule A,” Kubey said.
Another major confusion for clients remains one pivotal detail of reform’s pass-through income deduction. “Lots of clients have expressed concern and confusion with the new 199A deduction,” said Jake Alexander, an EA and owner of Alexander Financial in Largo, Florida. “There’s been a lot of confusion for them establishing who qualifies for it, what it means if they do and how it will affect them.”
“Certainly for my small businesses, it’s 199A,” Ziegler added. “There are so many questions about how it works and who it includes, especially in light of the exclusion for certain professions.”
Recently proposed regs do attempt to narrow the scope of service businesses ineligible for the deduction. “Ineligible consulting business” has been limited to businesses that provide advice and counsel, for example. Experts say tricky areas remain when an activity rises to the level of a trade or business, and possibly banking when banks provide multiple services beyond lending and paying interest on deposits.
John Dundon, an EA and president of Taxpayer Advocacy Services in Englewood, Colorado, sees the most questions over the definition of a “specified service, trade or business,” which is key to the new pass-through income deduction. “The proposed regulations are less than fully clear, and many industries are not addressed or incompletely addressed,” he said. “As an example, the practice of law is deemed to be an SSTB, but what if all the lawyer did was trust administration, work that does not require a law degree? Is that lawyer performing duties [that are] an SSTB? Many think not.”
Post-reform, no matter their questions, “clients will need a lot of hand-holding from their tax pros as we go into the 2019 filing season for 2018 returns,” Kubey said.