While the move to overhaul the tax system under the Trump administration’s tax reform proposal and the House GOP Blueprint may aim to greatly simplify taxes, it won’t mean there will be any less work for tax preparers. In fact, many CPAs could see an increase in their practice because of the planning opportunities that would arise.
Tom Wheelwright remembers the last big tax reform act of more than 30 years ago. “It was originally called the Tax Simplification Act of 1985,” said Wheelwright, president of accounting firm ProVision. “I was at the national tax office of what was then Ernst & Whinney, and I asked a senior partner how it would affect the profession. He had been there during the last big reform in 1954 and was told they would all lose their jobs. ‘But here we are in 1985 and we’re still here,’ he told me. The point is that reform won’t change tax preparation practice for CPA firms, and it will create planning opportunities because people have to change what they’re doing. For most accountants, it will turn out to be a windfall.”
“If it did pass in its proposed form, the low-end preparers might be in trouble, not the CPAs,” Wheelwright predicted. “Most of tax return preparation is accounting, so for the average CPA, the tax law would not affect them from the preparation standpoint. It does affect them by giving them opportunities for planning.”
“Somehow, complexity is always around,” observed Scott Kaplowitch, managing partner at the Boston-based accounting firm Edelstein & Co. LLP. “Any time the tax law changes there is more planning that needs to be done,” he said. “In the short term, before any change occurs, there will be a ton of planning necessary at year’s end in 2017, if the changes occur in 2018. Even if the estate tax is eliminated, there will be added complexity in the capital gains tax, or something else. There’s always something that needs to be planned for.”
RATE RAMIFICATIONS
Steve Henley, senior managing director and national tax practice leader at Top 10 Firm CBIZ MHM, likewise believes that an increased necessity for tax planning would result from reform. “If the estate tax is repealed, there will be complications in terms of unwinding the wills that clients have. So in the short term, reform might increase consulting, because clients’ wills are built around having an integrated estate and gift tax,” he said.
Henley believes planning opportunities would also be generated by the variance between the business tax rate and the individual rate. “If they apply the lower business tax rate to pass-through entities, but tax the individual owner at a higher rate on compensation, it might set off a stampede for business owners to incorporate to get the lower rate,” he said. “They have to find a way to deal with that if they allow an entity to convert compensation income to business income that would be subject to a lower rate. [Treasury Secretary Steven] Mnuchin said they would have a way to police that, but there haven’t been any details. One possibility would be a ‘safe harbor’ under a certain threshold. Policing the loophole could create complexity, particularly on the larger business returns.”
Another change that would create planning opportunities is the proposal in the House GOP plan to allow businesses to elect between expensing capital assets and deducting interest, Henley observed. “This would introduce some complexity for bigger returns. It all gets down to how they do this. Would it be all at once, or would there be a transition over a number of years, and whether they would have different thresholds like the 179 election.”
Other areas in the reform outline lend themselves to additional work for CPAs, Henley noted. “In applying the 15 percent rate to businesses, there would be a need for a ‘reasonable compensation’ study,” he said.
In the international area, Henley sees opportunities created by the move to a territorial system. “There would be some international structures that would need to be unwound from prior planning that might no longer have any use. And transfer pricing would still be necessary under a territorial system.”
HIT ON THE LOW END
True tax reform will impact the low end of tax preparation by increasing the number of people who don’t have to file or making filing a return simple enough that they can do it themselves, suggested Roger Harris, president of Padgett Business Services.
“We’ve already seen some of this with Millennials using software to prepare their own returns,” he said. “The idea of going to an office and sitting down one-on-one with a person is not the world they’re used to. There is the perception that if your life is not terribly complicated — it’s just a transaction that you can do online.”
“The key part is that, as life becomes more complicated, you will see more complex issues,” Harris observed. “A taxpayer might have K-1s from a partnership or S corporation, or have rental property or investments or a foreign spouse or kids in college. This all adds complexity to the return. If the return fits on a postcard, in some cases it will have to be a pretty big postcard.”
“Politicians can’t help themselves,” Harris added. “They want to give you something and the best way they can give it is through the Tax Code. For example, they want to make things simpler for lower-income taxpayers, but because they give them the Earned Income Credit, the taxpayers still need help.”
“Tax reform will likely affect the chain preparation outlets the most,” observed Larry Campagna, shareholder at Chamberlain Hrdlicka. “On the other side of the coin, many people that go to these places don’t know enough to do their own returns so the chains might not lose that so much.”
Chuck McCabe, president of Peoples Income Tax and The Income Tax School, agreed. “At the low end there will still be people who don’t have the knowledge to prepare their own return and are looking for a refund,” he said. “As long as there’s an Earned Income Credit, they will come in to have their return prepared by a preparer who will file for them without getting paid up front. The preparation fee will come out of the refund, which will be directly deposited into their account. This end of the preparation business won’t be affected by reform.”
“If it does pass, it might have a modest impact,” said John Hewitt, president and founder of Liberty Tax Service. “Less than 25 percent of people itemize, and less than half of them would be impacted.”
“But I don’t think it will pass,” he said. “The change in the standard deduction would bulldoze housing prices, because that’s one reason people can afford to buy a house. Their monthly payments will be different if they’re not tax-deductible. Charities will be decimated and housing prices would fall. People are jealous of the mortgage interest and charitable deductions. Once they understand what is happening there will be a tremendous lobbying effort against it.”
Wheelwright agreed that opponents of tax reform would mount a massive lobbying effort. “The tax law is a series of incentives, so anybody who has an incentive does not want reform,” he said. “A tax reform that lowers the tax rates takes away those incentives.”
“Any change in the tax law is always good for the profession,” observed Beanna Whitlock, a Reno, Nev.-based practitioner and educator, and former director of National Public Liaison for the Internal Revenue Service. “As much as we hated the [Affordable Care Act], it was great for us. Even with simplification it will be good because people don’t understand it.”
And a simplification of the federal tax system still leaves in place the state systems, Whitlock noted: “Even if the estate tax were repealed, the state inheritance or estate tax might apply. We have to watch and see what the states do.”
For those concerned about tax reform being passed by the August recess or before the end of the year, Wheelwright pointed out that it took six years to get to the Tax Reform Act of 1986. “Reagan got some legislation passed in 1981, and some more in 1982,” he said. “But it wasn’t until he was re-elected in a landslide that he was actually able to do tax reform.”
