Overall, clients will be encouraged to engage in year-round tax planning, as opposed to just showing up at tax return time. For example, Susan Tinel, an EA who owns and operates a firm in San Diego and has a mix of about 200 individual and business clients, sees an increase in interactions during the year. “You can provide more value to clients than you could before,” says Tinel. “Some clients are utterly lost under the new law. You can generate income by making connections.”
Although there are likely to be differences among firms, depending in part on the nature of your practice, here are three main areas of the TCJA to focus on that offer the greatest potential for revenue growth:
1. Itemized Deductions
The TCJA cuts income taxes for individuals, eliminates personal exemptions and increases the standard deduction, to name a few key changes in the new law. But perhaps the most significant development for individuals is the reduction and suspension of certain itemized deductions.
In particular, taxpayers in high-tax states like California, New York and New Jersey will bear the brunt of the new $10,000 annual limit on state and local tax (SALT) deductions. As a result, many long-time itemizers will be claiming the standard for the first time in decades. This may discourage them from making large charitable donations that won’t provide any tax benefit. Clients will be looking to their CPAs for guidance, notes Tenil.
The TCJA’s reduction in corporate tax rates and accompanying tax incentives are expected to fuel business growth and expansion. With proper planning, a business can make more money and pay less tax. And that’s where CPAs can dig in to assist business clients.
“The highest corporate tax rate for 2018 is reduced from 35 percent to 21 percent,” comments Francis Varrone, CPA, president and owner of an accounting firm in Montville, NJ with around 250 clients, mostly small business owners. “This is a substantial reduction and many companies will need to contact their CPA firms. Decisions will now have to be made to direct use of funds for expansion of facilities, equipment, payroll, research and development, etc.”
3. Qualified Business Income(QBI) Deduction
If the first opportunity is for individuals and the second is for business, you can consider the third target to be a hybrid. Under Section 199A, a pass-through entity, including sole proprietorships, can claim a deduction for up to 20 percent of QBI under a complex set of rules.
Varrone says that many of his clients don’t understand the Section 199A rules or know that the deduction is phased out for higher income individuals. Tinel, meanwhile, thinks that some clients aren’t even aware of its existence. It’s important to set up client meetings before the end of the year to get a grasp on how they will be affected and what can be done to maximize the deduction, when it’s available.
Furthermore, clients may want to re-evaluate what form of business ownership they should use. This may precipitate a switch, for instance, from C-corporation to S-corporation status. Of course, all the relevant factors must be taken into account.
As the prospectors in the 1800s used to say: “There’s gold in them thar hills.” We’ve outlined three of the golden opportunities for CPA firms this year-end under the TCJA. Do your homework on how to best assist your clients.
Next week we will discuss pricing strategies related to added services related to the TCJA.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...