I think there is a strong chance that 10-20-30 years from now when we look back at the 2018 tax filing season we will specifically remember it. Some may remember it as the worst tax season ever and I think some will remember it as the best tax season ever. I think it might be like how everyone remembers the Halloween blizzard of 1991 in Minnesota. There was a huge blizzard on Halloween night in 1991, there is even a Wikipedia page describing that storm, apparently it was caused by the Perfect Storm the same one that they made a movie about. I was 6¾ years old that Halloween and if I remember it correctly I was dressed in a leopard costume (first time I dabbled in my love of big cats) that my grandmother had hand sewn; or maybe that was the year I was Robin and my younger sister who was 6 inches shorter was Batman; anyways it’s the kind of legend around here where every time you tell it the snow total increases, at this point I’d say it must have snowed 47 inches that night. Let me explain my perspective on the 2018 tax filing season and why it might be just as legendary.
It’s only January 18th as I write this, and I think we’ve done a remarkable amount to prepare our staff and our clients for the 2018 tax season and I’m proud of the preparation that we’ve put into this tax season, but that doesn’t change my thinking that it’s likely to be the craziest most legendary tax season of my life.
The Tax Cut and Jobs Act (TCJA) new tax bill was hastily crafted in December 2017 and contains many changes that apply for the 2018 year. Some of those changes are going to mean huge tax savings for people, others will have small tax savings, and some will owe more as a result of all the changes. It’s also the worst crafted piece of tax law I’ve ever encountered. We are still waiting on a technical corrections bill which has been needed for 13 months now, there are hundreds of changes needed. Perhaps the biggest issue in that technical corrections bill is a mistake which is going to cause some building improvements to be depreciated over 39 years instead of eligible for 100% bonus depreciation and a 15-year life. That’s a difference between claiming 2.5% depreciation or 100% depreciation on a building improvement. That’s an insane position to be in if your business had a major improvement of $500k. How do you plan for your business cash flow if you might get $13k of tax depreciation or you might be getting $500k of tax depreciation?
One of the new items in the tax bill is the incredibly complex Section 199A which is the 20% qualified business income deduction. We got proposed regulations this fall but we are still waiting for final regulations on which applies to every single taxpayer with a pass-through entity. That’s millions of taxpayers still waiting for final regulations on something which is very important to their tax situations. The 199A has a very broad application but it has zero history or court cases behind it to help shape the law and how it’s supposed to work.
Let’s not even begin to discuss the challenges for anyone with ownership of a foreign corporation. The toll charge rules in Section 965 are crazy complicated, but at least that’s a one-time thing. There is a new regime for taxing foreign corporations with a GILTI tax that’s just as crazy complicated but will apply every year into the future. Proposed regulations on both have come out but we are waiting on final regulations to guide taxpayers on the GILTI. It’s one thing for the Fortune 500 companies to deal with changes to foreign corporation rules, they have departments of people dedicated to it, but the rules also affect small taxpayers who have a simple interest in a small or medium sized company in a foreign country.
In Minnesota all these federal changes have not been adopted so lots of brand new forms were created to account for all the federal/Minnesota differences that are brand new. The MN Department of Revenue are doing their best, but it’s hard to overhaul your tax forms in one year and they are bound to make mistakes or leave areas of the tax law that are unclear about how taxpayers are supposed to handle their tax situations.
Many other states have similar situations where there might be no conformity or partial conformity, each state is going to be different which is a big headache for people that file in multiple states or who live in a state like MN where the nonconformity is a big deal.
All of those changes for the IRS and the states need to be incorporated into their own filing systems, which is going to mean delayed filing for certain forms or maybe delayed refunds or maybe issues with software vendors and efiling capabilities. I can’t say for sure, but with this much change there are bound to be administrative challenges that we haven’t yet thought of on a federal and state level.
On top of all the changes and complexity you have a government shutdown where much of the IRS has been furloughed for the past 27 days and counting. They say that refunds are going to be issued if the shutdown continues, but what about people answering the phone if you have issues? What about the people who are still writing the instructions to the new tax forms that need to be used with 2018 tax returns? What about the people working on the regulations explaining the brand-new aspects of the new tax bill? At a minimum those people haven’t been at work for 27+ days and they are 27+ days behind in their own preparations for tax season.
It’s short sighted to be doom and gloom when it comes to this tax season and write it off as the worst tax season ever. If you look a bit further all of those challenges contain opportunities if you are a proactive CPA working with clients to tackle these challenges. If you sit back and open up your tax preparation shop for 3 months a year I expect that these challenges are going to overwhelm your business. If you are one of the big box retail tax shops targeting individual taxpayers with compliance work once a year and not doing any planning or explaining or strategizing, then this tax season is probably going to be rough. I see opportunities for me and my firm that are far greater than the challenges.
For those who have spent the past year preparing, digesting the new laws, finding the planning opportunities and the possibilities that come along with tax law changes then this is the greatest tax season of possibility. Connecting with clients and explaining how the 2018 changes affect their tax situation is how you build deeper relationships and gain further insight to a client’s motivation, their business model, and their business strategy. Personally, I have found this to be an amazing opportunity so far and we haven’t even gotten to preparing the tax returns yet.
This is a time when you can reassess which type of tax entity is the best structure after considering the clients goals and future plans. Should they remain a partnership or is converting to S Corp a more attractive choice now? Do the C Corp tax rate reductions mean that a C Corp is finally a viable option? How does the QBI play into your decision of entity choice? Should you be reexamining itemized deductions with individual taxpayers and prioritizing paying off the mortgage or maybe utilizing a donor advised fund to create a large charitable contribution followed by the standard deduction? For many taxpayers this is the first time in their adult life that they need to look at the standard deduction and what that really means.
You can debate whether the changes are good tax policy or bad tax policy or if they favor the rich more than the middle class or if it favors big business or small business. You cannot debate that when all of these tax laws change it creates an opportunity to create a new strategy for how to best take advantage for each client’s specific tax situation. I’m going to leave the debating to politicians and focus on seizing the opportunities.
If you are a young CPA this tax season is a remarkable opportunity to level the playing field with the new items in the tax law like QBI or Opportunity Zones or GILTI where brand new sections of the tax law were created and no one has experience in those areas. There are other areas of tax law that were modified so substantially that unique opportunities exist and a young CPA could become the expert on accounting method changes or AMT or NOL limitations or business interest limitations or depreciation classifications. Taking the lead for a firm on one of those opportunities can create tremendous value for clients. It’s an opportunity to become an expert and to get in front of clients with unique planning ideas and supercharge your career.
Leading up to the Halloween Blizzard of 1991 the local broadcasters warned of a snow Armageddon as they always do when a storm rolls through here but looking back on it now it is remembered fondly as an exciting epic adventure that was the best Halloween ever. If you are connecting with clients on a deeper level, and connecting with the tax law on a deeper level, and explaining the tax law changes, and examining the new opportunities then I think this 2018 tax season can be remembered fondly as the best tax season ever. I’m going into this one dressed as the Ravenous Tiger and I’m prepared to seize the opportunities and it make it my best tax season ever.
If you have need assistance with your business or individual taxes please contact me at firstname.lastname@example.org.