By BECKY GILLETTE
The Tax Cuts and Jobs Act (TCJA) was the first major federal tax overhaul in over 30 years. It affected taxpayers of all sizes—individuals, corporations, trusts, estates, and pass-through entities, said Blair J. Waggoner, CPA, tax senior manager, HORNE Wealth Strategies, Ridgeland.
While it was enacted in December of 2017, the 2018 filing season was the first for all the changes to take effect.
“Chaos and confusion ensued,” Waggoner said. “This was multiplied by new tax forms, slow guidance and clarification from the IRS on the new rules, and a government shutdown that further postponed final regulations being issued so that taxpayers could actually know how to plan for these changes.”
The biggest issue for the 2019 filing season (2018 tax returns) was the delay of information—especially concerning the Section 199A 20 percent Qualified Business Income deduction (QBI) for small business owners related to pass-through entities. Proposed Regulations were issued August 2018—more than halfway through the year to which the regulations would apply.
Waggoner said final regulations for Section 199A were not issued until January of 2019. “To further complicate that, due to the delayed issuance of regulations, the IRS allowed for taxpayers to use either the proposed or final regulations—but not a combination of both,” she said. “Clear as mud??”
The 199A “specified service trade or business” restriction limited the amount of taxable income those in “professional service” businesses could earn and still be eligible for the deduction. It was clear that attorneys and doctors fell into this category, but “consulting” and “brokerage services” were also included.
Waggoner said the following issues had to be considered: What constitutes a consulting business? What if the taxpayer only has a small amount of the business dedicated to consulting? Would all income be subject to the limitation then? Were real estate and insurance agents and brokers in that category? Does a taxpayer’s activity rise to the level of a “qualified trade or business” to even be able to take advantage of the new business deduction?
“Taxpayers and CPAs were left with more questions than answers at times,” Waggoner said. “Now with a full tax season under the new laws behind us, we are better equipped to begin filing season for 2019 returns. Final regulations issued at the beginning of 2019 allowing us to help clients with more accurate, proactive planning for 2019 instead of working with multiple scenarios depending on how final regulations played out. We know how the new tax brackets and other changes to exemptions and deductions affected withholdings and estimated tax payments, and we have helped clients better plan for that.”
Waggoner said what has worked in the past may not apply any longer, which raises more questions: Does your business structure still make sense given the changes? Should your accounting method change from accrual to cash?
“The changes we saw this busy season create a huge disruption in the tax world that brings about a great opportunity to rethink how we serve clients and allows us to provide higher level planning to meet their changing needs,” she said.
While 2019 is shaping up to be much quieter related to tax law changes, Waggoner said there are always ways to plan ahead and take advantage of the changes we saw in 2018:
*Defer or accelerate income/deductions. If you run a cash basis business and profit is trending higher for 2019 than in 2018, you may consider deferring revenue during the last part of the year to reduce your 2019 taxable income. Another solution would be to pre-pay some 2020 expenses. On the flip side, if your business is expected to make more in 2020 than in 2019, you might consider accelerating income and holding off on paying those expenses until after the New Year.
*Don’t forget the QBI threshold is based on taxable income, so consideration should be given to the applicable threshold when determining whether to accelerate or defer income and deductions.
*Increase wages. A business’s W-2 wages impact the QBI deduction once the taxable income threshold is met, so increasing W-2 wages may allow for a more favorable deduction assuming the deduction outweighs the increased payroll tax liability.
*Buy equipment. Take advantage of more favorable depreciation rules that went into effect with the TCJA by purchasing needed equipment and placing in service by Dec. 31, 2019. Section 179 expensing was increased to $1M (from $500k) with an increased phase-out of $2.5M. Bonus depreciation was increased to 100 percent (from 50 percent) for assets purchased before Jan. 1, 2023.
*Consider a retirement savings plan. Business owners have multiple options for employer-sponsored retirement. The amount an employer can contribute, investment options, and ease and timing of setup differs among the plans. You will want to consult with your tax advisor to determine the best option for your business.
Ted B. Edwards, CPA, member, Haddox Reid Eubank Betts PLLC, Jackson, agrees thing are clearer than they were this past April and 2019 returns should be easier to prepare than 2018 returns.
“However, with the overall complexity of the Internal Revenue Tax Code, there are still many areas that are not ‘black and white’,” Edwards said.
Edwards said effective year-end planning involves not just looking at the current year, but also the next year at a minimum. This will help determine whether to accelerate income into the current year or defer income into next year, when you have that flexibility.
“Likewise, it will help to determine whether to accelerate deductions or defer the deductions,” Edwards said. “With the increased standard deduction and so many more taxpayers utilizing the standard deduction (instead of itemizing deductions), acceleration or deferral of itemized deductions, such as charitable contributions, becomes more important. In other words, you may want to consider ‘bunching’ deductions for a particular year so as to have enough to itemize in that year, even though you may take the standard deduction in either the year before or the year after.”
He also recommends that if you have an investment portfolio, consider whether it would make sense to sell loss stocks to maybe offset gains that have already been realized. You can always wait 31 days and buy the loss stock back if it is an investment you want in your portfolio.
“If you will have enough deductions to itemize, you may want to consider making charitable donations of appreciated stock,” Edwards said. “You get to deduct the value of the stock without having to pay tax on the appreciation. Make sure that all required minimum distributions (RMD) from retirement plans are taken before the end of the year to avoid penalties for not doing so.”
The IRS says that most taxpayers got a $2,000 return for 2018 taxes and that they might choose to not withhold so much. Even though it certainly makes economic sense to reduce your withholding and get a smaller refund, many taxpayers like to get a “nice” refund when they file their tax return.
“So, my guess is more people have left their withholding as is,” Edwards said.
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