The Complexities of Tax Simplification and Reform
These were the burning questions most CPAs had when entering the AICPA National Tax Conference in Washington D.C. November 12–13:
- What are all of the tax changes affecting me as a CPA due to the passage of the Tax Cuts and Jobs Act (TCJA)?
- How do I disseminate and convey this information to clients or other professionals?
- When will there be additional guidance on these new topics?
- How are the Internal Revenue Service and state authorities addressing these issues?
The list of questions and concerns could continue for a long period of time. As CPAs we have acquired various amounts of understanding and knowledge since the passage of the TCJA. The national conference provided an opportunity to engage, communicate and collaborate with other CPAs and professionals on the intricacies stemming from the new tax law.
Qualified Business Income (QBI) — The New Tax Frontier
The initial concept and idea seemed relatively simple. As a result of decreasing the corporate income tax rate to a flat 21 percent across the board, pass-through entities and sole proprietors needed to have some form of potential tax savings as well to be competitive. Without addressing the matter, many entrepreneurs and small business owners would probably have to re-examine their business structure. Hence, the Qualified Business Income Deduction was created. The notion was for pass-through entities and sole proprietorships to have their first 20 percent of related income be tax-free as a way of ‘balancing out’ the corporate income tax rate reduction.
In August 2018, proposed regulations were issued by the Internal Revenue Service in an effort to assist and provide guidance on the topic of QBI. Upon reviewing these proposed regulations, additional questions and concerns ensued from many CPAs:
- Is my business or client’s business allowed to take this deduction?
- What are the limitations of the QBI deduction?
- How do I determine how to calculate the QBI deduction?
- How should this be addressed from a tax planning perspective?
A large portion of time was devoted to the topic of QBI due to its origination in the TCJA and the various interpretations of the proposed regulations that were issued. The fundamentals of the QBI deduction were explored, along with more depth and review of the proposed regulations. In addition, breakout sessions were offered to review various case studies, demonstrating the calculation of QBI deduction and its various caveats, allowing for a greater and more in-depth understanding of how the deduction functions. As with practically any newly created tax law, there continue to be questions and considerations that will need to be addressed. The tax code does not always treat every instance from a definitive viewpoint; rather, there is often a large amount of ‘gray’ area that must be contemplated.
Business Entity Conversion Considerations
From the creation of the QBI deduction and reduction of the corporate income tax rate, other potential nuances developed as a result. During two other breakout gatherings offered, a panel of individuals were present for the purpose of addressing various factors or circumstances a business entity might consider converting from its current taxing structure to a C Corporation, or vice versa based upon the new tax law.
As with most tax planning and consultation matters, there is not a one-size-fits-all situation when exploring these opportunities. Various ideas were shared among the conference attendees, providing a very engaging and informative look at these opportunities. Many of these discussions were very detailed, with certain components capable of being applied to other instances or experiences.
The Revamp of the Beloved Form 1040
However you describe it, it seemed strange to hear the statement, “Your Qualified Business Income Deduction will be reported on Line 9 of the individual income tax return.” For those professionals with several years of experience, we often think of line 9 of the Form 1040 relating to dividends. Historically, CPAs would have considered a line number like this to be associated as an income item, while the lines for deductions began in the 20s.
That’s because the individual income tax form has been given a major overhaul compared to previous years. The main 1040 form itself only contains 23 lines, however additional new and applicable schedules may need to be completed for various income, deduction, tax and credit items. Not only do we have new and revised tax laws to address during the busy season, but also as professionals, we may have to assess best practices for preparing and reviewing these tax returns from an operational standpoint.
Address from the New IRS Commissioner
The AICPA National Tax Conference was the first public speaking engagement for the new Internal Revenue Service Commissioner, Charles Rettig, since being sworn in only a few weeks prior. A tax attorney from California, Commissioner Rettig provided insights and goals for the Internal Revenue Service. As stated in his address as a tax practitioner, he understood the frustrations from long hold times for phone calls and the lack of consistent treatment and handling of tax matters, to name a few.
One of the major initiatives the commissioner shared was the need to update and implement more technology into their current systems and processes. Currently the Internal Revenue Service is working with technology dating back to the 1960s. By implementing updated technology, this would increase efficiencies and potentially generate more revenue, while decreasing the overall cost and burden to the government and taxpayers that could be utilized in other areas.
Preparing for the Future of Tax
Even though the main focus of the conference was geared toward the various facets of tax reform, other topics addressed the evolving way CPAs conduct business through their tax knowledge. By considering certain technological elements within our profession, this actually can create more opportunities and ways to enhance the value of our services.
Last year, some of buzz created was related to cryptocurrencies due to the phenomenal rise of Bitcoin, among others. Although some of the cryptocurrency steam may have evaporated since last year, it still exists and CPAs need to understand it so they can guide and advise clients of how they should address these type of transactions.
Cryptocurrency knowledge can help create opportunities in:
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Specialization.
- Client education and investment strategies.
- Transaction management and support.
Tax data analytics is another area that can supply decision makers with relevant data, allowing professionals to make more informed decisions. Through the identification of certain forms of tax data analytics, possibilities include:
Indicating potential tax issues to be addressed proactively and quickly.
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Data mining.
- Audit risks.
- Offering outsourced “controller” type services.
It’s apparent that while attending a tax conference, the overwhelming concentration would focus strictly on tax. However, this session also discussed the encouragement and need for specialization in conjunction with the tax knowledge. The AICPA offers the Certified Information Technology Professional (CITP) credential. The purpose of the CITP designation acknowledges the CPA professional who has received additional training in the area of emerging trends, security, privacy, business solutions, IT assurance, and risk and data analytics.
To acquire the CITP designation, a four-hour computer-based exam must be completed. It is made up of multiple choice questions and is a nondisclosed exam, which means questions and answers are not published. In addition to passing the exam, a professional must have a minimum of 1,000 hours of experience relating to CITP topics. To maintain CITP designation, a minimum of 75 hours of CPE related to CITP knowledge areas must be obtained within a five-year period.
Non-Tax Reform Topics
Albeit, probably an unusual year for the conference due to the tax reform circumstances, there were plenty of other topics available and discussed during the conference, including:
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Offers in compromise.
- Fiduciary tax update and elections.
- Estate and basis planning.
- Transfer pricing resulting from TCJA.
- Elder and special needs planning.
- IT security and data compromises.
- Divorce taxation issues.
Even if your primary focus and experience had not been related to tax reform, the AICPA National Tax Conference provided many other opportunities to increase your knowledge and value as a CPA. For some CPAs and professionals, the tax arena may be considered a small role, but having a better understanding can enhance a business entity or personal strategies of others.