By now, everyone is well aware of the Tax Cuts and Jobs Act (TCJA), signed into law by President Trump in 2017. What many are still not aware of is how tax reform may affect them. The 2017 postcard-sized 1040 form was intended to simplify the filing process; however, only those taxpayers with limited sources of income and little to no deductions will be able to use this approach. Taxpayers with multiple sources of income and deductions will be required to file additional schedules, pages and worksheets for varying situations caused by the new tax law, and for this reason, the time and cost associated with tax preparation is likely to increase with this year’s tax return.
The TCJA may have simplified tax preparation for some taxpayers, from the perspective that they will no longer have to itemize deductions, by simply increasing the standard deduction and lowering tax rates. But at the same time, this new tax act has brought about a variety of permanent and temporary tax changes, modifying the rules of the past.
The TCJA has also given tax practitioners and taxpayers a brand-new curve ball to sort through—a deduction for income from pass-through activities. What that means for the tax preparer is that Section 199A (otherwise known as the pass-through business deduction) allows for a deduction of up to 20% on business-related income from sole-proprietorships or business entities. While this is beneficial in reducing the overall tax rate for non-corporate taxpayers, it will require more time to compile the information needed to ensure the deduction is maximized.
Even the IRS has acknowledged that these new pass-through rules will add at least $1.3 billion in compliance costs over the next ten years. In early August 2018, the IRS issued proposed regulations for Section 199A in a mere 184 pages! The regulations included lengthy explanations regarding how to report and navigate the new compliance. As the laws continue to evolve, new IRS guidance will continue to be released. So much for simplifying the tax process for many taxpayers!
Who are the taxpayers that these new changes will actually affect? They are mostly individuals with qualified trade or business, including income from some partnerships, S corporations, trusts and estates, as well as individuals with rental real estate. It’s important to note that 95% of businesses in the U.S. are pass-through entities, so this new code section does have a broad impact for many small business owners. The complexities of the deduction will differ in each individual circumstance, depending on the income thresholds and the type of business. Tax professionals across the country will spend countless hours figuring out the quirks of this new section and how to effectively apply it for their clients. And the irony is that deduction is not permanent; it is only in place until 2025.
As a business owner, you always want to be certain that you’ve taken advantage of all tax deductions and legal opportunities to save taxes or money. While there may be more work on our end to prepare your 2018 income tax returns, the good news is that this additional exploration typically means a lower tax bill for you, even after considering the additional preparation fees.
We all want the tax filing process to be smooth and efficient, while taking advantage of all opportunities to minimize tax. The reality is that under the new tax laws, this may not be as simple as a postcard.
Here are 7 additional reasons it will take longer to prepare your tax returns this year:
- A state where you must file hasn’t fully adopted the TCJA.
If the state for which you must file an income tax return didn’t automatically conform to the TCJA, two sets of rules will have to be applied to federal and state income tax returns.
- You may now be able claim the Child Tax Credit under new child tax credit rules.
If you previously earned too much money to take advantage of the child tax credit, you may now qualify, thanks to the TCJA. Your tax preparer will have to perform additional tasks now under preparer due diligence regulations, asking additional questions, documenting responses, reviewing documents and completing new forms and worksheets.
- You will file as Head of Household.
Preparer due diligence regulations are expanded to 2018 returns claiming the head of household filing status. Your tax preparer will have to complete a due diligence form to claim this filing status.
- You have a home equity loan.
Home equity loan interest can no longer be deducted under TCJA, but the IRS has said that the interest is deductible if funds were used to buy, build or substantially improve the home that secures the loan. Additional time will be required for your tax preparer to ask the right questions and provide explanations of the changes in the law.
- Your business qualifies for beneficial accounting method changes.
If your business has average annual gross receipts of $25 million or less, beneficial accounting method changes can be made under the TCJA. You can use the cash method of accounting and won’t have to maintain complex inventories or use the percentage-of-completion method to account for certain small construction contracts. To change this, your tax preparer will have to file IRS Form 3115, which can be cumbersome and time-consuming.
6. Your business spends money on meals and entertainment.
Entertainment expenses are no longer deductible, but the IRS has clarified that 50% of business meals can be deductible if food or beverage is purchased separately from entertainment (or stated separately on one or more bills, invoices or receipts). If your accounting system lumps meals and entertainment together, additional work will be required to separate deductible meal expenses from nondeductible entertainment.
- Your business provides paid family and medical leave.
The TCJA provided a new tax credit for employer-paid family and medical leave. While more time will have to be spent calculating the credit and reporting it on Form 8994, there is a benefit. The credit is equal to 12.5% of the amount of wages paid to qualifying employees on family and medical leave, but you must pay at least 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percent by which the payment rate exceeds 50%.