The TCJA: A disruptive factor for the 2019 tax filing season

Editor: Ami Oppe, CPA, CGMA

For the 2019 tax filing season, the phrase “same as last year,” or SALY, will, in many cases, no longer apply. The tax legislation known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, enacted on Dec. 22, 2017, contains the first major overhaul of U.S. federal taxes in more than 30 years. This law is a significant disruptive factor that has cut off the SALY approach for many CPAs dealing with their clients.

The TCJA affects all types of clients — individuals, trusts, estates, corporations, and passthrough entities. It also affects clients of all sizes — sole practitioners, small businesses, middle-market companies, large multinationals (U.S. entities and foreign entities with U.S. operations), and tax-exempt entities. CPAs are rethinking their operating and business approaches as the needs of taxpayers have changed.

The impact of the TCJA on taxpayers varies and depends on the industry and the taxpayer. Most of the TCJA’s provisions became effective for 2018 and have various expiration dates through 2027. The TCJA created new tax rate brackets; eliminated personal exemptions for individuals; lowered the tax rate for corporations; changed deductions, credits, and exclusions; changed the individual alternative minimum tax (AMT) exemption and phaseouts; repealed the corporate AMT; changed compensation and benefits; and added new international provisions for businesses.

Keeping these changes in mind, CPAs may need to reassess the timing and content of their client data requests and organizer questionnaires. As a starting point, CPAs must stay up-to-date on the TCJA’s provisions, the status of IRS guidance and regulations, and potential future tax legislation including technical corrections. Year-end planning is a good time to evaluate tax filing statuses, tax filing positions, and choice-of-entity decisions, and to consider other actions that must be completed before Dec. 31.

CPAs should consider accelerating the tax filing timeline to allow more lead time for review and discussion with clients. This may mean holding client interviews and distributing organizers before year end. With change comes opportunity, meaning this is also a good time for CPAs to deploy new outreach for potential clients.

Impact on client base

Reviewing client lists now is critical for CPAs. Some individual clients may not see the value of having a CPA prepare their returns if they think they will no longer receive a benefit for itemized deductions. These clients as well as other individual clients still need an adviser to help them navigate the complex TCJA provisions and make the appropriate decisions. Projections and scenario analyses for clients could lead to increased services, more revenue, and additional value to clients.

Communication with clients is necessary to let them know they can still benefit from a CPA’s expertise for other tax and consulting services such as retirement planning, children’s college savings plans, and personal finance even if their tax return seems less complicated. Clients may not be aware of the financial planning services that many CPAs offer. CPAs should educate clients and seek ways to proactively address their full tax and personal finance needs.

Business clients are likely affected by a host of TCJA provisions that could have an impact on their after-tax profitability. CPAs are likely experiencing more outreach from existing and prospective business clients as they evaluate and plan for the potential tax cash flow impact of 2018 returns due to the TCJA.

Additional tax services incidental to tax return

Before year end, an important step for CPAs is to begin a dialogue with clients to educate them about the TCJA provisions relevant to them, confirm expectations, and provide advance notice of changes in requests and questionnaires. This dialogue could lead to additional tax services incidental to the tax return, such as:

• TCJA scenario planning: With the different tax proposals and debate leading up to the TCJA, many taxpayers sought scenario planning from CPAs before the law was enacted. The complexity of these services will vary based on each taxpayer’s situation. CPAs should perform a federal pre- and post-TCJA tax liability comparison, and review the TCJA’s effect at the state level, including analyzing U.S. state conformity (or nonconformity) with the TCJA.For individuals, CPAs should review clients’ tax filing status (e.g., married filing separately or jointly); itemized vs. standard deduction scenarios; and tax credit planning (e.g., for the child tax credit). For businesses, they need to review scenarios involving the 20% deduction for qualified business income (QBI); benefits and compensation scenarios (e.g., changes to fringe benefits, highly compensated employees, and retirement plans); international tax provision threshold testing, scenarios, and new data needs (for the base-erosion and anti-abuse tax (BEAT), global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the transition/repatriation tax).
• Assisting with payroll tax process updates (e.g., updates to payroll process/systems for new tax withholding tables).
• Reviewing payroll tax withholding (e.g., tax withholding reviews before year end to determine if any catch-up withholding is required).
• Choice-of-entity and U.S. entity election planning (e.g., scenarios for entity restructuring).
• Cost-segregation studies (e.g., analysis for bonus depreciation and immediate expensing rules).
• Data and accounting records updates (e.g., new data requirements; and extracting, analyzing, and mapping data from systems for tax calculations).
• Lobbying activities (e.g., comment letter preparation and Treasury and congressional monitoring engagements).

In addition, CPA firms have been conducting free client education events, such as hosting webcasts and industry roundtable discussions and supporting industry coalitions for lobbying.

Changes to information requests

Over the years, CPA firm clients have grown accustomed to providing certain receipts and other substantiation for their tax returns. With the TCJA changes, CPAs may find themselves receiving information they no longer need or insufficient documentation to make determinations on client tax return positions. Comparing each client’s prior-year deductions, exclusions, and credits against the TCJA changes is a critical activity to perform before year end.

These reviews will help CPA firms to appropriately update client organizers as well as identify and include new questions about client activities to optimize the time to review and organize client documentation and minimize client follow-ups. Updated client organizers will also help to save time and minimize inadvertent errors at tax return preparation time.

Additional inquiries may be needed to determine if a client is affected by exceptions, limitations, or expanded scopes of TCJA provisions. CPAs will need to ask questions aimed at determining whether clients are affected by changes to provisions affecting interest on home-equity loans, personal casualty losses, hobby expenses, like-kind exchanges, business entertainment and meal expenses, and personal property acquisition costs. A client may also need to provide information to clarify the nature of the taxpayer’s business income in determining whether the client is able to take advantage of the QBI deduction in new Sec. 199A.

Uncertainty

As with any law change, uncertainty is normal. Although guidance is not complete and likely will not be for a while, keeping clients aware of the progress will allow CPAs to collaborate with their clients. Individual and business taxpayers may be feeling overwhelmed by the plethora of TCJA talk and information being directed at them. Many clients would welcome the input of a CPA who can analyze and explain in plain language how the TCJA affects them personally.

While the TCJA is a disruptor for the upcoming tax filing season, it is also a major disruptor for CPAs. The complexity and uncertainty surrounding the new laws is requiring CPAs to significantly retool their skills and training and those of their staff. They must invest in upgrades or changes to tax tools and templates, and also rethink the needs of their client base. Some CPAs may view this as an opportunity to expand their practice and attract new clients, or to seek other long-term ­options for their firms or changes to their tax service offerings.

Steady advice

Now, more than ever, businesses and individuals are looking for guidance on complex tax issues. Hence, CPAs need to be prepared. The upcoming filing season may prove daunting for some clients and seemingly simpler for others. In any case, CPAs can rise to the occasion and continue to instill trust and value in their services. Clients will stay with CPA advisers who stay on top of the changes and provide coherent communication and advice on what those changes mean.

The views expressed in this column are those of the authors and do not necessarily reflect the views of EY.