Although CPAs have been through the first year of the Tax Cuts and Jobs Act (TCJA) and are addressing the various tax law changes that were finalized in January 2019, there are still plenty of topics and questions practitioners are trying to tackle before going into the next tax season. The AICPA National Tax Conference is a two-day conference in Washington D.C. that provides the opportunity to address these questions and discuss with other practitioners across the country to gain insight and understanding.
WELCOME TO THE LAND OF OZ (OPPORTUNITY ZONES, THAT IS)
It’s an area that probably received less focus than Section 199A or other tax law changes that occurred. Through the TCJA, the purpose of the opportunity zone program is to encourage economic growth and investment in designated low-income and distressed communities derived from federal income tax benefits to taxpayers that would invest in business within these certain zones or areas.
This program targets investors wishing to sell an existing capital investment; however, it allows these investors deferrals of realizing their capital gains potentially until the end of 2026. To do so, the investors must roll the gain from their original capital investment into a Qualified Opportunity Fund (QOF) within a certain time period. Under this program, this allows for the potential to shield federal income tax up to 15 percent of the gain on the original investment and alternatively 100 percent of the gain representing the appreciation in value of the Qualified Opportunity Fund.
In many ways, opportunity zones seem like a great way for taxpayers to defer income and allow taxpayers to invest these capital gains into their communities. With any tax deferral consideration such as opportunity zones, there are additional considerations such as how long the funds must be in the QOF, the economic risk of depreciation rather than appreciation, and the uncertainty of what tax rates could be in the future. Communication and considering all elements of opportunity zones are critical to determining if they are appropriate and reasonable to recommend.
ON THE “FRINGE” OF REGULATIONS
It might seem unusual to dedicate an entire session at the AICPA National Tax Conference to fringe benefits that encompassed such topics as meals, entertainment, dues and parking, but it is a reality. It was a review of updated tax regulations related to deductibility and the reporting requirements of such areas. For instance, meals and entertainment generally seemed like a very straightforward concept with few exceptions. However, under the updated regulations in some instances these expenses might be fully deductible, partially deductible or not deductible at all based upon various circumstances and conditions. This makes accurate accounting and reporting for these various types of expenses more challenging from an accounting perspective.
Parking and commuting costs have also become more complex. Generally, commuting costs are nondeductible, although certain topics were brought to light through various scenarios such as an employees’ safety due to working late hours and the location of the business. Additionally, this session examined parking benefits for employees of not-for-profits and determining the associated unrelated business income tax liability required to be reported.
K-1 CHANGES ARE COMING YOUR WAY
If as CPAs we felt we needed more of a challenge on top of the tax law changes, then why not include changes to the pass-through entity forms as well? You may notice changes made to the 2019 Schedule K-1 forms, particularly to partnerships. The Partnership Schedule K-1 form now includes:
- An additional check box for disregarded entities has been added and must name the owner of the entity.
- The capital account analysis has been modified and specifically states “Tax Basis Capital.”
- The check boxes for the accounting basis being represented on the K-1 have been removed.
- Reporting of the partner’s share of unrecognized Section 704(c) gain or loss is a new section on the first page.
Additionally, pass-through entity Schedule K-1s for partnerships and S Corporations will now include more check boxes related to at-risk and for passive activity purposes, not previously provided. The reporting for the qualified business income deduction will also be reported differently than it was in its initial year of potential deduction.
THE LIMITATION OF LOSSES
With the recently enacted excess business loss rules, additional considerations are now needed to examine the extent of the potential losses. We already have to distinguish and calculate the losses regarding:
- Partnership and S corporation for basis calculations
- At-risk rules
- Passive loss rules
- Excess business loss rules
Even though most practitioners consider all of these loss limitations methods, it becomes increasingly more complex to accurately assist clients and organizations from a tax planning perspective due to the various levels of limitations that arise. Under Section 461(l), excess business losses are not allowed as a deduction in the current year. Instead, they are carried over as part of a taxpayer’s Net Operation Loss (NOL). These excess losses are equal to the aggregate deductions of a taxpayer attributable to all trades or businesses over the aggregate gross income or gain for the taxable year attributable to trades or businesses, plus $250,000 additional loss (or $500,000 for those taxpayers filing jointly). The amount of allowable losses is adjustable for inflation.
TAX CONSEQUENCES OF CANNABIS BUSINESSES
"Regardless of your personal perspective, [cannabis] is receiving more attention and practitioners need to understand how to apply these regulations to advise any potential clients professionally."
This topic has become more controversial with some states legalizing marijuana, and there are neighboring states to Indiana that permit this type of business to be conducted. Currently, there are 11 states that permit the adult use of cannabis and 33 states that allow these substances for medicinal purposes. Regardless of your personal perspective, this topic is receiving more attention and practitioners need to understand how to apply these regulations to advise any potential clients professionally.
For these types of businesses, any deduction for ordinary and necessary business expenses is disallowed. This means the overall effective federal tax rate for cannabis businesses can potentially reach 70 to 90 percent. These businesses are audited by the IRS at a rate two to six times higher than other non-cannabis businesses. Statistically, cannabis retail businesses are audited similar to the largest corporations having in excess of $100 million of assets.
IT’S NOT JUST TAXES: SOCIAL SECURITY AND MARRIAGE
Yes, the conference is primarily based around tax concepts and regulations. However, there are other sessions offered that could be construed as being indirectly related for tax purposes. For instance, one session focused on planning and advising clients how they could maximize their social security benefits.
This is an area many CPAs may not consider or get heavily involved in. Sessions like this one are value-added concepts that could be reviewed and considered from a financial and tax planning perspective. Some of underlying topics discussed dealt with looking at the primary versus lower earning spouse to consider when to apply and draw social security benefits. This includes looking at their current age and when they would reach the full retirement age of 62.
Similar to the Internal Revenue Code, the Social Security Administration has terms that must be understood. For supplemental clarity, looking at the qualifications and definitions of those taxpayers include the marital status:
- Spouses who are married at least 12 months
- Surviving spouse that has been married nine months
- Qualified divorce/ex-spouse, who has been married 10 consecutive years
Court cases were also discussed regarding these qualifications, and it was noted there could be situations where multiple qualifying ex-spouses would have to be considered. Survivor benefits and the amount of eligible benefits available were also addressed.
ADDITIONAL TOPICS COVERED
In addition to what I’ve highlighted, the AICPA National Tax Conference included sessions related to:
- Use of tax data analytics
- International tax updates
- Special considerations for real estate purposes
- Monetizing assets
- Executive compensation considerations
- Handling of IRAs
- Trust, estates and gift tax considerations
In addition to the regular breakout sessions, the conference also included an address by IRS Commissioner Charles Rettig who commented on the future of the IRS and technological aspects. Not only were current regulations and standards discussed, but future methods and ideas were also presented so that as professionals we are more prepared to assist our clients and businesses.
If you or other members of your firm are significantly focused in the tax arena as a CPA, the AICPA National Tax Conference may be one to attend to benefit from a wide array of perspectives and viewpoints.