It’s been said that tax professionals never take a vacation -- there are always new issues facing them around the bend. This year, more issues are lurking around the bend than in most years. And many still face filing deadlines for extensions, which are up this year by 8 percent over last year. There are a number of issues that should keep tax pros tuned in for the remainder of the year.
“One of the key challenges is guidance that will continue to come out regarding the 2017 bill,” said Ed Zollars, a CPA, instructor and author with Kaplan Financial Education. “The only final regs that came out were with regard to Section 199A [the pass-through deduction]. “They’re sitting on proposed regs in some areas like Section 163(j) [limitation on the deduction for business interest expense]. Who knows what the IRS will do in response to comments?”
“The [Qualified Opportunity Zone] regs are also still in proposed form,” he continued. “There are two sets of them. There are also areas like the cap on business losses on individual returns. There are no regs at all on these, The Blue Book says wages are not business income, but the IRS form includes them in a list of business income. That’s not a minor issue -- if you have an executive with large W-2 income, whether that’s business income or not makes a big difference. Those are areas of the TCJA. There are a whole bunch of other areas for which people will be waiting for guidance.”
Non-Tax Cuts and Jobs Act areas that could impact tax pros include the continued fallout from the Supreme Court decision in Wayfair, according to Zollars. “The Kaestner case [slated to be decided soon by the Supreme Court, on the issue of whether the Due Process Clause prohibits a state from taxing a trust based on the in-state residence of a trust beneficiary] could further the answer as to when a state may tax something -- in this case, income tax. Is Wayfair a signal that states will be given carte blanche to do what they want? At the oral arguments, it looked like the Court was trying to come up with a narrow decision based on details specific to trust law. But sometimes the court’s opinion doesn’t seem to relate to what was asked at oral argument.”
Malware affecting compliance software is an issue for tax professionals, given the downing of a major vendor during tax season, according to Zollars. “It’s now happened twice,” he said. “It’s a concern because a lot of firms are considering moving to cloud-based software, which is often strongly suggested by the vendor.”
The retirement bill currently proposed in Congress could make a big difference in planning for high-net-worth individuals, according to Zollars. “If they actually pass the bill, it will make changes in tax planning for certain clients,’ he said. “The ‘stretch IRA’ will be shortened. If it passes in its current form, the taxpayer will no longer be able to name grandchildren as beneficiaries of a Roth IRA and stretch it out for a long period of time. It will also upset a number of plans already inplace that depend on a stretch IRA.”
“It seems as though we’re still working our way through some of the overriding issues in the tax law,” said Steve Mankowski of Mankowski Associates CPA LLC, the immediate past president of the National Conference of CPA Practitioners.
“The IRS has been doing its best at providing guidance, but there are areas where Congress needs to step in,” he indicated. “Congress has been very slow at coming up with technical corrections. Looking toward the end of the year, our concern is that, if they do come out with technical corrections toward the end of the year, it will be difficult to address them with our clients form a compliance perspective, as well as taking the time to properly plan and take advantage of any potential benefits for our clients.”
“The same theory holds for tax extenders,” he added. “Congress has been very adept at coming out with late-year extenders, and there’s still the potential for that. The problem is that while it’s nice they may extend certain provisions, we’re hesitant to advise our clients during the year based on an extension that might not happen.”
The phaseout levels for the Section 199A deduction can be a benefit or a penalty where there are two owners, Mankowski suggested. “The circumstances for two owners within a business can be vastly different for both owners if one is single and one is married,” he said. “The phaseout could be a benefit or a penalty in both situations.”
Withholding is an issue that needs to be dealt with, and it’s not just the new draft W-4, according to Mankowski. “They changed the tax tables in mid-to-late-February 2018,” he said. “So the new tables weren’t in effect the whole year. If taxpayers made no change in their withholding, they ended up with significantly less tax withheld. But if they don’t make the change in 2019, that’s 12 months under the new tables. They will end up with even less tax withheld, and will get lower refunds or larger tax bills.”
“At this point last year, business owners and CPAs weren’t fully versed on how things would play out under the TCJA,” Mankowski noted. “But now, it’s imperative that they sit down and come up with a game plan to make sure the business is run from a tax-efficient standpoint, and minimize personal tax liability as well.”
Although this year has had more than its share of natural disasters, tax deductions are no longer available unless the loss was in a federally declared disaster area, Mankowski noted. “It’s a shame, because there are people placed at a severe disadvantage physically, financially and emotionally, who think at least they will get some tax relief. But that’s been pretty much taken off the table,” he said.
Wide awake
This past filing season was a wakeup call for many taxpayers, indicated Steve Moskowitz, CPA, of San Francisco-based Moscowitz LLP.
Preparers should first go over a client’s return to find out what opportunities they missed under the new law, according to Moscowitz. “This was the first year under the new law,” he said. “A lot of people couldn’t put theory into numbers until they went to their preparer and were told, ‘It’s too bad you didn’t do it this way.’ So many lost out on the Section 199A deduction when they could have made a few changes in the way they did business and taken a partial deduction.”
Moscowitz cited an orthopedic surgeon who thought that because he was in a specified group, he was ineligible to take the deduction. “He could own a business selling spare parts to the patient,” he suggested. “This would qualify a significant portion of his fee for the deduction.”
“Likewise, a non-specified service sole proprietor could turn the business into an S corporation,” he said. “If the business makes $1,000,000, and the taxpayer pays themselves a salary of $400,000, they can reduce the amount they pay tax on by 20 percent. By the simple act of incorporating and paying yourself a salary that is double the deduction, they pay tax on 80 percent of the profit instead of 100 percent. You would be amazed at how many people missed this.”
Roger Harris, president of Padgett Business Services, agreed. “Now is the time to look at what we can do to prepare for next year,” he said. “A lot of guidance is out and we don’t have the pressures of tax season over our head. But there are more than the usual amount of extensions, so tax season hasn’t ended for a lot of professionals.”
Tom Wheelwright, president of WealthAbility, believes the IRS has done a great job of coming out with regulations. “The real challenge for professionals is to read and understand them,” he said.
Wheelwright cited bonus depreciation, the pass-through deduction, and Opportunity Zones as areas on which to focus. “These are important areas, and they’re areas of potential confusion,” he said.
The issue of independent contractor-versus-employee is shifting, according to Barbara Weltman, author of “Small Business Taxes 2019.” “Under the previous administration, the DOL and the NLRB tended to classify workers as employees,” she said. “Under the current administration, they are more likely to be treated as independent contractors. The recent classification of Uber drivers as independent contractors is an example.”
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In the aftermath of tax season, practitioners need to look ahead to broader concerns.
