It has been a year since President Trump signed into law the Tax Cuts and Jobs Act (TCJA). As outlined below, these sweeping new tax provisions are complex and extra time and resources are required to ensure we properly report each applicable tax situation.
- Tax Forms Have Changed and/or Have Additional Schedules. To accommodate the many changes made by the TCJA, tax returns have been revised. Often, the returns require information we didn’t have to collect in prior years. Also, the return for individuals (Form 1040) has received a dramatic makeover with a “postcard” look and six accompanying schedules.
- If You Have Business Income. We often may determine that you can deduct up to 20% of “qualified business income” from your sole proprietorship and/or pass-through entity. Although beneficial, the deduction may be reduced or eliminated by a complex set of rules. More time will have to compile the information needed to ensure we maximize your deduction.
- Your State Probably Hasn’t Fully Adopted the TCJA. States react differently to changes to federal tax law. Your state probably didn’t fully or automatically conform to the TCJA; therefore, we may have to apply two sets of rules to your federal and state income tax returns. This will require additional preparation time on our part.
- You May Now Be Able to Claim the Child Tax Credit. Historically, many earned too much money to take advantage of the child tax credit. However, thanks to the TCJA, many now qualify for the credit. Although you may benefit greatly from the credit, it requires us to perform additional tasks under the preparer due diligence regulations. We’ll have to ask you additional questions, document your responses, review documents, and complete a new form with accompanying worksheets.
- You May File as Head of Household. The TCJA expands the preparer due diligence regulations to 2018 returns that claim the head of household filing status. We’ll have to spend some extra time asking you questions and gathering additional information to make sure you qualify for this status.
- You May Have a Home Equity Loan. Now that the TCJA is law, many can no longer deduct interest on a home equity loan. However, the IRS has said that such interest is deductible if the funds were used to buy, build, or substantially improve the home that secures the loan. Additional time will be needed to trace the proceeds of your home equity loan.
- Your Business May Qualify for Beneficial Accounting Method Changes. Because a particular business may have average annual gross receipts of $25 million or less, it can make beneficial accounting method changes under the TCJA. After making these changes, your business can use the cash method of accounting and won’t have to maintain inventories or use the percentage-of-completion method to account for certain small construction contracts. We’ll have to make these changes for you by filing IRS Form 3115, which can be cumbersome and time-consuming.
- Your Business May Have Interest Expense. Thanks to the TCJA, the deduction for net business interest is now limited to 30% of adjusted taxable income. This limit is reported on new IRS Form 8990 and must be reflected on the owners’ Schedules K-1. This will require additional preparation time. There are a few exceptions to the limit; however, additional time will be needed to make sure you qualify for an exception.
- Your Business Probably Spends Money on Meals and Entertainment. Unfortunately, entertainment expenses are no longer deductible. However, the IRS has clarified that 50% of business meals are deductible if food or beverages are purchased separately from entertainment (or stated separately on one or more bills, invoices, or receipts). If your accounting system lumps meals and entertainment together, we must perform additional work to separate deductible meal expenses from nondeductible entertainment.
- Your Business May Provide Paid Family and Medical Leave. The TCJA provided a new tax credit for employer-paid family and medical leave. Although we must spend additional time to calculate the credit and report it on new IRS Form 8994, it will be worth it. The credit is equal to 12.5% of the wages paid to qualifying employees on family and medical leave. However, you must pay at least 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percent by which the payment rate exceeds 50%.
Based on these considerations, we’ve heard and now see that fee increases will more than likely be incurred to prepare 2018 federal and state income tax returns for all too many taxpayers. The good news is that more work on the practitioner’s end typically means a lower tax bill for the client, even after considering a possible fee increase. The profession’s consensus, and Werdann DeVito LLC agrees, is generally this increase is necessary due to the additional time required to comply with the new rules and to ensure advantage is taken of all opportunities to minimize your tax.