How Tax Reform Could Lead To Accounting Headaches
In the aftermath of the GOP’s passing their tax bill last month, news publications have talked about how accountants will benefit from a bill which has seemingly failed to keep up with the GOP’s promises to simplify the tax code. The Washington Post reported about how accountants feel like rock stars as they find themselves swamped by a deluge of clients and contacts who want advice from someone knowledgeable and trustworthy.
But while accountants may benefit from increased attention and a flood of clients seeking to figure out how much they will be affected, there are real challenges in the code which will give us as well as our clients headaches in the short and long term. Old tax strategies will have to account for new realities, especially as accountants will have to account for not just the realities of the tax code, but in dealing with their clients who really know what the tax bill did because Zero Hedge said so.
Deferred Tax Assets and Liabilities
Next quarter’s earnings reports are going to be very bizarre.
Most corporations will benefit from the tax bill’s corporate tax cuts, but most corporations either have deferred tax assets, which accumulate on a balance sheet when companies take tax losses, or have tax liabilities which companies have underpaid taxes on depreciated assets. As American Banker notes, banks and other businesses have large deferred tax assets will have to shrink the size of an asset on their balance sheets because the tax rate will be lower, hurting their earnings numbers in the short term. Citigroup is expected to take a $20 billion earnings hit, with other losers including General Motors and Fannie Mae and Freddie Mac.
On the other end, companies with deferred tax liabilities such as Apple or Berkshire Hathaway will see their earnings jump as the lower corporate tax rates will lower the value of said liabilities. This means that in a few months, corporate earnings reports may be massively boosted by these changes to the tax code even though little has fundamentally changed. Accountants, their clients, and investors have to take care not to overreact to numbers which will generally be anomalous.
Accountants will have to work to make sure that those numbers are adjusted as soon as possible, and those who delve into financial advice must remind their clients about the problems with earning numbers which will appear this year thanks to the tax bill.
State Tax Policy
The GOP tax policy limits state and local tax deductions, and has been criticized by some for penalizing higher-tax Democratic states in favor of lower-tax Republican states. Accountants in higher-tax states will have to do more to help their clients keep more of their wealth.
Some potential strategies include shifting assets from higher-tax states to lower-tax states, and most importantly diverting your income into retirement assets such as your 401(k) or IRA. The latter strategy is particularly useful because when your clients finally retire and start drawing upon those assets, they pay the taxes of the area they are currently living in. This means that they can live in a high-tax state, like a New Mexico limited liability company, move to a low-tax state like Florida, and only pay Florida taxes. But regardless of what strategy you use, accountants will face a more difficult task helping their clients with the limitation of these deductions.
Some accountants may feel like rock stars now, but this upcoming tax season promises to be busier than ever. While that may be good for the accounting industry as a whole, this will only bring literal headaches to the actual accountants who already suffer from overwork and stress during this time of year.
There has been plenty of concerns about accounting’s toxic work culture over the years, with a 2012 survey of 1,200 accountants reporting that “Half of the accountants participating in a recent survey believe that an increase in working hours has had a detrimental effect on their health” in addition to 42 percent contemplating leaving their jobs. This has long-term effects for accounting firms. Accountants start thinking about leaving their firm if not the profession, and less healthy accountants make for less productive accountants.
The problems listed above does not mean that the tax reform bill is a flat negative for accountants. But at the same time, it is far too easy to declare that the bill is a win for accountants because it will mean more work without accounting for the problems which it will bring. Accountants will have to make sure that their clients understand how to lower their tax burdens by taking the appropriate steps and not overreact to hysterical claims, all while making sure that they stay in good physical and mental health. The next few months will hardly be smooth sailing.
Cost accountant with major focus in SAP/General Fund Enterprise Business System (GFEBS). Also, main functional inspector for accounting/finance audits for internal reviews as well as the Statement of Budgetary Resources audit initiative.