Season Tax Season Preview
itemized deductions for nonbusiness state and local taxes deductions, including property taxes.
“That’s a big change. Folks in high-tax states, maybe like California or New York, may see that impact some of their clients because now there’s a limit on what you can deduct,” said Mike D’avolio, senior tax analyst at Intuit.
Many practitioners, like Andrea Parness, owner of A. Parness Co. CPA in Belle Harbor, N.Y., have been meeting with clients to run projections and manage expectations. “The big sticking point, initially, was the limitation on the itemized deductions. [In New York] we have huge real estate taxes and huge state and local tax ... People were really nervous. So, if my clients are nervous, that’s something that’s important and I’m going to focus on that,” Parness said. Using Intuit’s tax planner tool, Parness ran projections for clients to address client concerns. “We were able to show the clients that it wasn’t so horrible. And, in many cases, depending on if they were in an Alternative Minimum Tax situation, they might be break-even or slightly better off with the new tax law.”
Echoing the sentiment, Frank Stitely, managing member and partner of Chantilly, Virginia-based firm Stitely & Karstetter, said, “One of the biggest [concerns among clients] is how bad am I going to be hurt by having this cap on the state and local deduction, the $10,000 cap.”
In an attempt to avoid the new $10,000 limit, blue states like New York and Connecticut approved tax credit programs enabling individual taxpayers to make charitable contributions to state-run funds as a way to bypass the limit. But the move quickly raised eyebrows and, in August, the Internal Revenue Service and Treasury Department issued proposed regulations aimed at thwarting the charitable workarounds. Business taxpayers, however, who make business-related contributions to charities or government entities for which they receive state and local tax credits can generally deduct them as business expenses, according to the IRS and Treasury.
Meals and entertainment. Another provision on the radar screen is tax reform’s impact on business expense deductions for meals and entertainment. According to Roll, it’s an important issue for Bloomberg Tax subscribers: “That’s going to bring a whole new level of substantiation, so you’re going to have to segregate [the entertainment and meal expenses]. … Meals and entertainment is one of the hottest topics for our subscribers.”
Said Luscombe of Wolters Kluwer, “I think that’s going to be another complicating issue. The IRS has come out with some guidance on this that, I think, is fairly helpful on when can you separate meals from the entertainment activity and still claim the deduction.”
The new tax law eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. According to guidance issued by the IRS, taxpayers can still deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered “lavish or extravagant.” The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.
As of press time, proposed regulations from the IRS and Treasury clarifying exactly when business meal expenses are deductible and what constitutes entertainment had not yet been released.
Standard and itemized deductions. Starting in 2018, the new tax law nearly doubles the standard deduction to $24,000 for married individuals filing a joint return and $12,000 for single filers. This, coupled with the fact that a number of common itemized deductions have been reduced or eliminated, will likely mean that far fewer taxpayers will be better served itemizing deductions.
Tax practitioners will need to ensure their clients are aware and understand the change and also understand the importance of tracking itemized deductions expected in future years. “Taxpayers are conditioned to track all kinds of itemized deductions and now, more than likely, will be looking at a standard deduction. With the larger standard deduction, practitioners are going to have to spend more time explaining to their clients why it might be important to track itemized deductions for future years,” Roll said.
New Form 1040. The new postcard-sized Form 1040 replaces the current Form 1040, as well as the Form 1040A and Form 1040EZ. Despite its simplified appearance, the new form isn’t as straightforward as it seems.
“The end-user taxpayers were used to those old forms, so now it’s a change. There’s probably a little uncertainty,” said Intuit’s D’avolio. “Although this postcard does replace the old forms, it’s still not as simple as it looks. You have these supplemental schedules that accompany the postcard.” The Form 1040 may have shrunk, but the number of schedules has grown. During the summer, the IRS posted a draft version of the new Form 1040, along with six new schedules. This is on top of a number of traditional schedules that remain. Tax practitioners will quickly get up to speed on the new form but, again, communicating this change to clients will be a factor.
Having the right systems and tools in place is obviously essential for any tax firm, but this tax season technology will play an especially important role.
“Ultimately, firms will need to very readily look to technology to really solve this issue,” said Corey Greene, product manager of tax workflow at Thomson Reuters Tax and Accounting. A critical technology that is getting greater attention from practitioners, said Greene, is optical character recognition-related technology.
“One [technology] that is picking up steam now but still isn’t where it should be today is really Ocr-related technology,” he said. “If a firm is really spending any time at all manually inputting information from source documents, like 1099s and K1s, then they really need to evaluate the implementation of scan, sort and populate software out there that uses that OCR technology to automate these processes.” Greene also pointed to the importance of software integration and extensive importing and exporting capabilities.
Implementing a robust research and guidance solution is also essential this season, as it saves practitioners time and helps ensure clients have a clearer understanding of tax law changes.
Attracting and retaining top talent continues to be a major concern for many firms, and given today’s tight job market, could prove especially difficult this tax season.
”[The market is] at full employment and so that gets out to planning ahead, knowing the season is going to be compressed, getting your staffing in place and trained as best as you can. But [it also highlights the] importance of leveraging technology and automating as much as you can because it’s going to be hard to find good staff. It really will be. We, again, are truly at full employment. I think it’s going to be very tough to add temporary staff,” said Jim Mcginnis, executive vice president and general manager of the medium and large firm segment at Wolters Kluwer Tax and Accounting North America.
Christopher Picciurro, executive officer and co-founder of Sterling Heights, Michigan-based Integrated Financial Group, acknowledged that staffing is a “No. 1 concern” and said the firm has worked to reduce its reliance on seasonal work. “What we’ve tried to do is, with our seasonal team, make their tasks more administrative. Maybe they are the ones monitoring our client portals and pulling information into where it needs to go. [We] try to limit their direct interaction with clients and have our more permanent staff members interact with clients the most,” he noted.
“Staffing for public accounting, I think, is always an issue. It’s a lot of long hours and a lot of stress during busy season, so it’s always been a bit of an issue. We are trying to implement new technology to help recruit some of the staff,” said Johnson of Akin, Doherty, Klein & Feuge, referring to such technologies as cloud-based applications, video conferencing and texting.
While many practitioners are hopeful their proactive efforts will pay off, there’s no doubt the season will face headwinds. “I would say it will be a little more difficult season than most,” said Luscombe. “This is the first year we’ve had to deal with really all of these changes.”