One of the biggest changes with the Tax Cuts and Jobs Act that affected business clients was the qualified business income (QBI) deduction.
RENO, Nev. — Many of the new federal tax laws enacted in late 2017 required tax preparers in Northern Nevada to scramble during the recently closed tax season and diligently plan with their clients on how best to approach the multitude of changes.
The Tax Cuts and Jobs Act signed into law in December 2017 was the largest overhaul to the tax code in decades. While large businesses hailed the new reduced 21 percent corporate tax rate, smaller businesses and pass-through entities such as S-corporations and sole proprietorships were left swimming in murky waters as their accountants navigated the ramifications of the code changes.
Travis Clark, CPA and managing shareholder for Albright & Associates of Reno, says that most business clients ended up in a more favorable tax situation, but it wasn't without a lot of extra legwork and planning.
“The biggest concern with almost all my clients was the unknown of where they would land and what the benefits or detriments would be with the tax law changes,” Clark says. “They didn't understand what the ramifications would be upon them, and until we got into it and saw what was going on we didn't know as tax preparers because each situation was so different.”
Dissecting the qualified business income deduction
One of the biggest changes that affected business clients was the qualified business income (QBI) deduction, which allowed deductions of up to 20 percent on qualified business income, as well as 20 percent of qualified real estate investment trust dividends. In most cases, Clark says, the QBI deduction proved beneficial and created additional tax deductions, but it wasn't easy to calculate.
“It lacked guidance from the IRS,” he says. “We now have some proposed regulations, but not everything has been finalized on the application of how it is going to be indefinitely. By the time we get it all figured out, it is going to sunset and revert back to something else anyway.”
Many of the businesses working with Albright & Associates are flow-through entities such as a partnerships, S-corporations or sole proprietorships, and the QBI required those clients and tax preparers to put in a great deal of analysis and planning to best determine the structure of their salaries and business entity in regards to the QBI, Clark says.
Teela McCullar, director of Barnard Vogler & Co. CPAs, says many of her clients also are pass-through entities, and the 20 percent QBI deduction allowed on their individual tax returns proved tremendously beneficial.
But due to the uncertainty surrounding the QBI and other issues, CPAs en masse filed extensions on behalf of their clients in order to buy time and hopefully gain clarity from the IRS.
“Rather than take a position on a return that you will have to amend or fix, some clients just waited to see if additional guidance comes out,” McCullar says.
Being cautious of the dreaded ‘tax hangover'
Another key aspect in the planning stage was determining how to fully maximize the bonus depreciation rate, which received a boost in the last year.
Certain clients were able to zero out much of their income via depreciation from purchase of equipment, Clark says, whereas clients such as doctors or engineers who typically don't have much capital expenditures on an annual basis required different strategies.
However, Clark notes, businesses that were able to write off much of their income via depreciation had to be cautious of a “tax hangover” in subsequent years if they claimed the majority of their depreciation this current tax season. Some clients preferred a smoother depreciation rate where they are able to claim depreciation in subsequent years rather than frontloading.
“That is one of the pieces we really focused on and looked at, trying to plan not just for this year and next year but oftentimes several years down the road,” he says. “Clients in a growth mode will expense a lot of that up front, while clients that are a more mature company typically want to even out their deductions.”
Other changes targeted companies housed in opportunity zones. Some businesses in opportunity zones could reap significant windfalls through tax-exempt gains if they reinvest capital gains back into an opportunity zone. Like much of the new tax laws, Clark says, there simply wasn't much guidance regarding the tax structure around opportunity zones.
“Clients who happen to be in opportunity zones are reinvesting money into new buildings or doing significant retrofitting,” he says. “That helps in our area, especially in the downtown corridor. If it's planned right they've got the potential for a lot of benefits – but it's another case where clients should sit down with their CPA to make sure they are approaching investment in opportunity zones in the correct manner.”
Even the little deductions can have impacts
McCullar says this tax season was truly a mixed bag due to some little-discussed deductions that impacted some clients more than others.
For instance, companies that provide meals to employees were no longer allowed a 100 percent deduction for those meals – the new rate was halved. That negatively impacted clients that typically bank on receiving that full deduction, McCullar says, and some businesses may change their strategies this year based on the increased tax liability.
Another tweak to the code that raised some eyebrows was removing the deduction for providing paid parking for employees. While downtown and Midtown are the only places in Reno that charge for parking, the law still stung for a handful of clients, McCullar says.
Clark says the overarching theme of this tax season was the lack of formal guidance from the IRS.
“Whether it was IRS regulations, forms coming out late or forms not properly flowing from one to another, we look forward to better guidance and regulations written from the IRS,” he says. “There's still lot of murky information about how things will be handled, whether it's the qualified business income deduction, to excise tax on charitable compensation and related entities – there's still a lot of things that are unclear.
“We do a lot of planning to figure out the best scenario without putting undue risk on a client,” Clark adds. “I wish there was more clarity, but it gives us time to reach out to clients and have discussions that maybe we wouldn't otherwise, and not knowing what was going on really got some of these clients to be more proactive.”
-->RENO, Nev. — Many of the new federal tax laws enacted in late 2017 required tax preparers in Northern Nevada to scramble during the recently closed tax season and diligently plan with their clients on how best to approach the multitude of changes.
The Tax Cuts and Jobs Act signed into law in December 2017 was the largest overhaul to the tax code in decades. While large businesses hailed the new reduced 21 percent corporate tax rate, smaller businesses and pass-through entities such as S-corporations and sole proprietorships were left swimming in murky waters as their accountants navigated the ramifications of the code changes.
Travis Clark, CPA and managing shareholder for Albright & Associates of Reno, says that most business clients ended up in a more favorable tax situation, but it wasn't without a lot of extra legwork and planning.
“The biggest concern with almost all my clients was the unknown of where they would land and what the benefits or detriments would be with the tax law changes,” Clark says. “They didn't understand what the ramifications would be upon them, and until we got into it and saw what was going on we didn't know as tax preparers because each situation was so different.”
Dissecting the qualified business income deduction
One of the biggest changes that affected business clients was the qualified business income (QBI) deduction, which allowed deductions of up to 20 percent on qualified business income, as well as 20 percent of qualified real estate investment trust dividends. In most cases, Clark says, the QBI deduction proved beneficial and created additional tax deductions, but it wasn't easy to calculate.
“It lacked guidance from the IRS,” he says. “We now have some proposed regulations, but not everything has been finalized on the application of how it is going to be indefinitely. By the time we get it all figured out, it is going to sunset and revert back to something else anyway.”
Many of the businesses working with Albright & Associates are flow-through entities such as a partnerships, S-corporations or sole proprietorships, and the QBI required those clients and tax preparers to put in a great deal of analysis and planning to best determine the structure of their salaries and business entity in regards to the QBI, Clark says.
Teela McCullar, director of Barnard Vogler & Co. CPAs, says many of her clients also are pass-through entities, and the 20 percent QBI deduction allowed on their individual tax returns proved tremendously beneficial.
But due to the uncertainty surrounding the QBI and other issues, CPAs en masse filed extensions on behalf of their clients in order to buy time and hopefully gain clarity from the IRS.
“Rather than take a position on a return that you will have to amend or fix, some clients just waited to see if additional guidance comes out,” McCullar says.
Being cautious of the dreaded ‘tax hangover'
Another key aspect in the planning stage was determining how to fully maximize the bonus depreciation rate, which received a boost in the last year.
Certain clients were able to zero out much of their income via depreciation from purchase of equipment, Clark says, whereas clients such as doctors or engineers who typically don't have much capital expenditures on an annual basis required different strategies.
However, Clark notes, businesses that were able to write off much of their income via depreciation had to be cautious of a “tax hangover” in subsequent years if they claimed the majority of their depreciation this current tax season. Some clients preferred a smoother depreciation rate where they are able to claim depreciation in subsequent years rather than frontloading.
“That is one of the pieces we really focused on and looked at, trying to plan not just for this year and next year but oftentimes several years down the road,” he says. “Clients in a growth mode will expense a lot of that up front, while clients that are a more mature company typically want to even out their deductions.”
Other changes targeted companies housed in opportunity zones. Some businesses in opportunity zones could reap significant windfalls through tax-exempt gains if they reinvest capital gains back into an opportunity zone. Like much of the new tax laws, Clark says, there simply wasn't much guidance regarding the tax structure around opportunity zones.
“Clients who happen to be in opportunity zones are reinvesting money into new buildings or doing significant retrofitting,” he says. “That helps in our area, especially in the downtown corridor. If it's planned right they've got the potential for a lot of benefits – but it's another case where clients should sit down with their CPA to make sure they are approaching investment in opportunity zones in the correct manner.”
Even the little deductions can have impacts
McCullar says this tax season was truly a mixed bag due to some little-discussed deductions that impacted some clients more than others.
For instance, companies that provide meals to employees were no longer allowed a 100 percent deduction for those meals – the new rate was halved. That negatively impacted clients that typically bank on receiving that full deduction, McCullar says, and some businesses may change their strategies this year based on the increased tax liability.
Another tweak to the code that raised some eyebrows was removing the deduction for providing paid parking for employees. While downtown and Midtown are the only places in Reno that charge for parking, the law still stung for a handful of clients, McCullar says.
Clark says the overarching theme of this tax season was the lack of formal guidance from the IRS.
“Whether it was IRS regulations, forms coming out late or forms not properly flowing from one to another, we look forward to better guidance and regulations written from the IRS,” he says. “There's still lot of murky information about how things will be handled, whether it's the qualified business income deduction, to excise tax on charitable compensation and related entities – there's still a lot of things that are unclear.
“We do a lot of planning to figure out the best scenario without putting undue risk on a client,” Clark adds. “I wish there was more clarity, but it gives us time to reach out to clients and have discussions that maybe we wouldn't otherwise, and not knowing what was going on really got some of these clients to be more proactive.”
