A State By State Accounting Guide

How the Trump Administration Wants to Change Business Tax Codes and What this Could Mean for CPAs

Posted February 16th, 2017 by admin and filed in Uncategorized

Donald Trump singled out tax preparation firm H&R Block on Wednesday as the only likely detractor of his administration’s new tax plan, but his words were a shot across the bow of CPAs and accounting firms all across America.

“H&R Block probably won’t be too happy. That’s one business that might not be happy with what we’re doing,” Trump told a gathering of retail association executives. These two quick sentences rapidly sent the company’s stock plummeting to end the day down 2.6 percent.

The president’s point was that a simplified tax code—which is a core tenet of his four-page tax reform plan—would not likely require much in the way of expert assistance in tax planning and preparation, marking a sharp contrast to the current tax code. What wasn’t stated was that this message is just as true for mom-and-pop CPA firms on Main Street as it is for corporate giants like H&R Block.

The president’s point is well taken, but can his plan truly deliver a simplified business code? And what are the likely implications for CPAs conducting business under the new administration?

The Plan Is Really More What You’d Call Guidelines Than an Actual Plan

Individual tax reform has the lion’s share of attention in the plan since it will affect the greatest number of taxpayers. The changes to the business tax code are less substantial and much is left to the imagination. This has been a boon to the stock market, with business leaders and investors embracing their own interpretation of what this will mean for the bottom line, but wishful thinking is not the same as actual tax reform.

Here’s what’s clear about the proposed plan:

  • Cut corporate tax rate from 35 percent to 15 percent
  • Possibly allowing entities currently required to pass-through income to participate in the lower corporate rates
  • Full expensing of capital investments
  • Elimination of most other business deductions
  • Repeal of the corporate Alternative Minimum Tax

The top-line read on President Trump’s tax plan for businesses is a significant reduction in corporate taxes – from the current 35 percent corporate tax rate to a 15 percent cap.

The proposal also seems to be promising that rate to small businesses now filing as entities taxed on a pass-through basis and not currently eligible for corporate rates.

The president’s plan also comes with a hit: corporations would no longer be able to defer taxes on foreign income, but would be fully taxed on all income worldwide. Although the effective rates and income from this policy are debatable, it would eliminate an enormously complex aspect of corporate tax planning and filing that keeps many CPAs in business.

A one-time repatriation event at a reduced 10 percent rate is also part of the plan, although details are sketchy. The overall intent would be to allow a grace period for businesses currently taking advantage of overseas tax structures to return their money to the U.S. at a lower rate. Should it occur, the repatriation event will have the lights burning late at many tax accounting firms over the ten year period it is allowed as accountants work through the details of unwinding complex multinational corporate structures designed expressly to invert corporate tax liabilities.

Much of this can easily be recognized as a shuffling around of deck chairs in the service of obtaining significant rate reductions, a pattern familiar from past proposals like the Tax Reform Act of 1986. As evidenced by the fact that tax-accountancies still enjoy a robust business, and have been steadily raising their fees in recent years, CPAs should never take promises of simplification and reform at face value.

CPAs Know That the Devil is Always in the Details of the Tax Code

The essential reason for this is that the President, of course, does not set tax policy: Congress holds the power of the purse, and is responsible for modifying current corporate tax structures.

Although Republicans control both houses of Congress, the party has shown few signs of cohesiveness on big picture legislation required to pass tax reform, with President Trump openly criticizing a key point of the House Republican plan just last month.

In fact, the House plan and the Trump plan are at odds on one of the most important points of either plan: instead of expanding taxation of U.S. corporate business interest overseas, the House plan would in most cases eliminate it entirely in favor of a European-style VAT consumption tax.

Moreover, the House plan is, at least ostensibly, designed to be revenue neutral, whereas every neutral analyst has scored the President’s plan as producing a substantial increase in the national debt. Deficit hawks in Congress are not likely to let such a discrepancy slide, which sets up any tax reform legislation for a major fight even within the Republican Party. And that’s before accounting for potential Democratic resistance, a potential deal-breaker since Senate Democrats retain the ability to filibuster legislation that does not meet with their approval.

It’s hard to imagine any tax plan surviving first contact with the opposition in this environment, let alone passing into law as is.

Regardless of How the Cards Fall, the Future is Bright For CPAs

In fact, if history is any guide, the compromises that will be required to actually transform any of these proposals into law will only serve to increase the complexity of the tax code, perhaps making it even more complicated than it already is today.

President George W. Bush promised, in his 2005 State of the Union speech, to look over the tax code “top to bottom” and to produce a fair and easy-to-understand system. That year, the report generated by the bipartisan Advisory Panel on Tax Reform he appointed shares a number of similarities with both the Trump proposal and the House plan, including:

  • Fewer tax brackets
  • Elimination of certain credits and deductions
  • Trend toward consumption-based taxation (with the House plan)

Of course, none of those proposals were actually implemented. Instead, taxes and tax planning have only become more complex over the past decade.

Still, it is possible that the tax code becomes so radically simplified that it reduces the need for professional tax preparation and planning services. But even if that happens, it’s important to look at the aspects of the code that will not be changing.

Importantly for CPAs, neither the White House nor Congressional plans completely eliminate deductions or the various preferential rates for capital gains and qualified dividends, all of which may require expert analysis for accurate tax preparation.

And some of the proposals are outright beneficial to tax accounting firms. For example, the provision that allows pass-through entities to adopt corporate tax rates is likely to create a whole new crop of independent contractors who hope to take advantage of the lower rates. This could represent a new batch of potential clients who may not have ever needed professional tax advice and filing services before.

The restructuring of capital investment taxation and other rules around capital gains will also force some businesses to review and revise their investment strategies. This is bread and butter work for CPAs, who can expect to be closely involved in finding and implementing strategies to minimize tax liabilities under the new system.

Although the specifics of preparation and filing may change, perhaps even radically, accountants are adept at adjusting to new IRS provisions and will take the changes in stride.

Before the Storm is When the Horizon is Darkest

In the short term, however, all this confusion is an unmitigated benefit. With no concrete terms on the table yet, clients must consider a wide range of potential implications and planning options, all of which will require professional input and advice from CPAs.

And partly because of these discrepancies and the lack of fleshed-out and negotiated detail in either of the plans, it’s entirely possible that this confusion could last for years. As the administration finds itself absorbed in other important matters, tax reform legislation could be shuffled quietly to the back of the queue behind foreign affairs, Obamacare repeal, or other matters that demand attention. Interestingly, the uncertainty itself provides some level of guarantee for accountants, who will be asked to sift through the tealeaves of every Tweet and official announcement to interpret the tax planning implications.

The potential downside to all this soothsaying is that no accounting professional can accurately foresee all the twists and turns that are likely to emerge from a final plan, even if one should eventually pass Congress and be signed into law.

In the wake of any changes that may actually be implemented, CPAs are likely to do well even over the longer term. Whether the actual alterations effectively simplify the tax code or not, there will be an intermediate period of adjustment. Change is hard, even if the change is to a simpler structure. It will take professional accounting services to help businesses adjust to the new state of affairs, regardless of what it turns out to be.

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