How to Prepare Your Accounting Clients for the Tax Cuts and Jobs Act
The 2019 tax season is rapidly approaching, and with it come the new rules introduced by the Tax Cuts and Jobs Act.
Although the bill was signed in December 2017, most of its changes went into effect after January 1, 2018. This means that tax season 2019 will be the first one to really see the new regulations in action.
Regulatory changes often make confused taxpayers turn to their accountants for advice. Come January, small businesses that don’t have the means to keep an accountant on payroll will flock to your firm, desperate for help with their tax returns.
What Businesses Think
BDO USA conducted a survey among public company board members to find out what they think about the tax reform. Altogether, 61% of board members noticed a positive change thanks to the new regulations, while 39% saw no changes at all.
Regarding their outlook on their business, 64% of board directors replied that they haven’t amended their business strategy because of the new tax law. On the other hand, 11% of directors are raising their employees’ salaries while 17% invest more capital.
When asked about their knowledge of their business’ tax responsibilities, only 44% of board members claimed to have a strong understanding of their tax liabilities and how the new regulation affects their tax strategy.
What Accountants Can Do
Accountants need to have a thorough understanding of the new regulations. Your clients will look to you for advice and assistance when filing their 2018 taxes. Prepare yourself now and be ready when the storm hits early next year.
Here are the most important changes your small business clients need to be aware of.
Corporate Tax Rate
The corporate alternative minimum tax (AMT) has been eliminated, and the corporate tax rate has been lowered to a flat rate of 21%.
Qualified Business Income Deduction
The IRC Section 199A allows taxpayers to apply for a deduction of up to 20% from their qualified business income (QBI) until the 2025 tax year.
QBI can be earned as income via sole proprietorships, partnerships, S corporations and LLCs (apart from C corps). However, QBI excludes businesses from certain specified service fields, like accounting, healthcare, consulting, finance, and law, unless the taxable income is below $157,500 for individuals or $315,000 for a married couple.
Domestic Production Activities
The deduction for domestic production activities (IRC Section 199) is eliminated.
Purchase Price Deduction for Equipment
According to Section 179, business owners can deduct the full purchase price of IT equipment and office supplies from their taxes.
Net Operating Losses
The deduction for net operating losses (NOL) that arose after 2017 is limited to 80% of taxable income. However, NOL can be carried forward to following years while carryback is eliminated.
Business Interest Deduction
For income earned after 2017, business interest deductions are limited to 30% of the adjusted taxable income. However, surpluses may be carried forward.
Conclusion
Aside from the ones mentioned above, the new regulation introduces many other changes that may or may not affect your clients.
Just like with many other business and accounting tasks, including building app stacks, talent acquisition, and payments, there is no “one size fits all” solution when it comes to taxes.
Since all businesses (and their tax returns) are unique, accountants need to make sure they know all the specifics before giving advice or filing tax returns. Use the time that remains until the start of tax season to learn the new rules and find out how to best use them to assist your clients.
