The Trump administration last week released a high-level plan for significant changes to the U.S. Tax Code – ones which, if effected, could translate into significant changes to the work performed by professional tax preparers.
The seven key tenets to the plan are as follows:
1. Reducing the seven marginal tax brackets to three.
2. Doubling of the standard deduction for each filing status.
3. Repealing the Alternative Minimum Tax.
4. Eliminating the additional 3.8 percent capital gains tax installed by the Affordable Care Act.
5. Eliminating all itemized deductions save for mortgage interest and charitable giving.
6. Repealing the inheritance tax.
7. Slashing the corporate and other business activity tax rates from 35 percent to 15 percent.
Should all of these provisions become law, tax professionals in public accounting will face some significant changes to their business models; namely, the long-held hourly billing paradigm. The vast majority of public tax professionals still rely on individual tax preparation services for a majority of their revenue; therefore, this rather drastic simplification to individual tax preparation will almost certainly lead to less time spent on individual engagements and, in turn, less billable time appearing on client invoices.
Specifically, the elimination of the majority of itemized deductions, the doubling of standard deductions (rendering itemization irrelevant for many filers), and repeal of the AMT will reduce the time investment required for information collection from clients as well as time spent on the actual preparation and review of returns.
Furthermore, following a spring tax season where, for the first time, IRS-published figures for e-file receipts indicated a downward trend in professionally prepared individual tax returns – yet a continuing upward trend in self-prepared tax returns – a significant simplification of individual taxation may accelerate the trend toward do-it-yourself tax solutions.
In regard to the elimination of the inheritance tax, because filing of Form 706 has increasingly become the domain of legal professionals steeped in estate planning, tax professionals in public accounting should see only a very marginal impact to their overall compliance revenues from this factor.
More positively, the slashing of the business tax rates will almost certainly yield a great deal of advisory opportunity for those tax professionals willing to seize it -- but it will come with its share of challenges and amplified potential perils.
Tax professionals should begin an analysis of their existing customer base to assess revenue risks and opportunities inherent in their current business model and clientele, first by assessing the fee split between individual and business engagements, which will provide an initial indicator of potential risk of loss among individual clients. A further analysis should include identifying which clients would likely cease to itemize in light of the new standard deduction amounts or otherwise become significantly simpler preparation engagements.
Particularly in the face of significant potential loss of individual clients, professionals should begin identifying opportunities for added value to bundle into the tax preparation engagement, such as tax planning or benchmarking services, and begin marketing to these at-risk clients announcing the availability of these added services – well in advance of next filing season. Most importantly, however, tax professionals should start thinking more seriously of a transition to a value-priced revenue model, as opposed to the traditionally hourly-billing model, and assessing client invoices from the most recent filing season to compile a pricing schedule.
From a more opportunistic perspective, tax professionals should prepare to position the advantages of various business structures and prepare for clients who seek them out armed with little more than vague notions of how they might be able to save money. Business and compensation structure will gain a new focus as an opportunity area for advisory services to clients with some degree of flexibility in their compensation agreements.
The “employee vs. contractor” classifications and corresponding debates are likely to take center stage as tax rates on wages may in some cases significantly exceed the tax rates in effect for business activities such as sole proprietorships. Professionals will need to take special caution to attempt to create more optimal tax positions for clients, while nonetheless respecting the IRS’s rules for independent contractor vs. employee classification as laid out in Publication 1779. Carefully navigating the nuances and pitfalls of the ever-complicated U.S. Tax Code and accompanying regulations is nothing new for tax professionals, however, and related consulting and advisory opportunities will abound.
Overall, assuming these provisions become law, those firms who plan for these changes have a large opportunity to seize, but those who fail to do so may find themselves subject to a significant reduction in tax compliance revenues.
Updated May 6, 2017 at 3:36PM: An earlier version of this article indicated that the decrease in business tax rates was limited to corporations, whereas current iterations of prospective legislation indicate this would apply to businesses regardless of entity structure. This article has been updated accordingly to refine the projected impacts to the profession.