Practitioners Describe an Exceptionally Vexing Tax Season

By:
Chris Gaetano
Published Date:
Jul 16, 2019

iStock-898172562 Tax Cuts and Jobs Act

This year’s tax season was one for the ages, according to practitioners at firms across the state, who were faced not only with an entirely new tax landscape, but also government shutdowns, software issues and a number of other headaches, as they worked their way through the 2019 busy season.

One of the main challenges cited by practitioners this year was in implementing the Tax Cuts and Jobs Act’s (TCJA) numerous provisions. The 2017 legislation created dramatic changes in the tax code, such as the elimination of most personal deductions, the introduction of new business tax credits and revised rules regarding international taxation.

Barry S. Kleiman, a tax principal at Untracht Early LLC, and a member of the Taxation of Individuals Committee, said that before even implementing any of these new rules, he needed to make sure that clients fully understood what doing so would actually mean.

“So, the corporate tax rate went down,” he said, leading many of his clients to say, “We should be a corporation!” But, Kleiman would explain, “You’ve got to think about the double taxation issues and other things.”

Kleiman said that this year, there were a lot of people who had read articles on the internet about this or that deduction, but whose understanding was not complete. For example, while many people came to him regarding the 20 percent deduction for pass-through entities, not everyone was aware of the income limitations that came with it.

Orumé A. Hays, a sole practitioner and chair of the Small Firms Practice Management Committee, concurred, saying that there were several clients who seemed bewildered at the news that, for instance, they could no longer deduct certain expenses or that they went from generally getting a refund to owing taxes.

“It was almost as if it was all news to some clients, making one wonder how many people actually paid attention during the tax deliberations,” she said.

Beyond educating clients about it, Richard Greenfield, a tax manager at Citrin Cooperman and another member of the Taxation of Individuals Committee, said that calculating the 199A deduction was a challenge by itself, particularly where it concerned whether a client’s business was the appropriate type. Under the law, certain “specified service trades or businesses” (SSTB) are disqualified from receiving the deduction past a certain income threshold. Greenfield said that there were sometimes cases when it was difficult to determine whether a business actually fit that category.

“You had to figure out whether your client was a specified service business or was a qualified business for the deduction, so you really had to nail down exactly what they did. Sometimes, [clients] would say something sort of vague, and [before it] didn’t matter, but now it did matter,” he said.

For instance, in previous years Greenfield may have put down a client as being a consultant because that’s what fit the best, but this year, they needed to really drill down as to what, specifically, their company did, because consultants fell into the SSTB category, and “you didn’t want to misclassify them.”

Not everyone found the pass-through deduction as difficult, though. Barbara E. Bel, a PKF O’Connor Davies, LLP, partner and a member of the Closely Held and S Corporations Committee, found it to be an interesting intellectual exercise that had a big positive impact for her clients this year. When it came to closely held companies, she said that a bigger difficulty was in recalculating with a reduced meal deduction and an eliminated entertainment deduction.

“This year, entertainment was disallowed, so we had to get back to clients to separate out what was a meal and what was nondeductible entertainment, and that was only one small example of what created extra time for preparers,” she said.

Scott M. Cheslowitz, a partner at Rothenberg & Peters, PLLC, and another member of the Closely Held and S Corporations Committee, said that he had done a lot of preparation last year to make sure that he was ready, and had already calculated out several projections for clients taking the 199A rules into account. He added, however, that there were still real-life situations that introduced ambiguities, which, he said, needed to be addressed through IRS guidance.

The TCJA didn’t just present headaches for public accountants. Jack Vivinetto, CFO of Sugar Foods Corporation and a member of the CFO Committee, said that his own company’s staff were working very hard to untangle what was and what was no longer allowed in the post-TCJA landscape.

“The 2017 TCJA came with a fair amount of compliance and accounting issues that kept the controller’s department up late at night—namely, accounting for [travel and expense], parking lot studies and a host of expenses that were no longer tax deductible,” he said.

While there had been talk at his company of changing over to a C corporation last year, Vivinetto said that, based on the double taxation effect, it was better for it to remain as an S corporation. He said that his company benefited quite well from the TCJA, as it took advantage of the 199A deduction, as well as the 100 percent bonus depreciation and the generally lower tax rates.

New forms, new software, new problems

On the individual tax level, another issue that seemed to come up for practitioners was the new Form 1040. The Treasury Department introduced the redesigned form last year, saying that it was a much simpler document that could now fit on a postcard. Greenfield ruefully noted, however, that while the form itself may be less crowded, it was only because many items were shifted to the attached schedules, which became a pain to deal with this year.

“It took much more time to look at a return because you had to look all over the place, where all the information was coming from, and it was just completely unnecessary to do what they did. They want to make a postcard-sized return, when people aren’t even filling [out] paper returns anymore. … And they took paper returns that should be smaller and made them larger by attaching all these schedules,” he said.

Kleiman reported a similar problem, saying that “we’re all used to seeing the Form 1040 how we normally see it,” but “now, it’s a lot of flipping back and forth to the schedules.”

But even outside of the new form, there seemed to be several other issues this year. Many practitioners reported that, just as they were dealing with the new tax law changes, so too were their software providers. Kleiman said that even though there’s IRS guidance on many of the provisions, such as Section 199A, there’s still a lot of gray area, and since the software providers weren’t as familiar with all the changes, his firm didn’t want to rely entirely on the software this year to make its calculations.

Greenfield experienced something similar, saying that the software wasn’t always doing the calculations correctly, which means, “You actually have to figure it out off the return. You had to do it manually and plug the number into the return.”

Samuel D. Katz, a sole practitioner and a member of the Small Firms Practice Management Committee, also contended with entirely new tax software this year. He said that this issue, combined with all the changes from the TCJA, meant that “we put a lot more people on extension this year than in the past.” This year, he said, his firm wanted to take more time to make sure that all the “i’s were dotted and all the t’s were crossed.”

Other matters

Both Kleiman and Cheslowitz also mentioned the impact of the government shutdown at the end of last year and the beginning of this one, which largely shuttered the IRS, as well as other agencies. Cheslowitz said that, “through no fault of their own,” IRS staffers had to “play catch-up” when it came to providing service and support for practitioners. Kleiman said that the shutdown didn’t affect services such as the practitioner hotline as much as it did correspondences, since the IRS was unable to respond to any of them during that time. When the shutdown ended, the government needed to still clear the buildup of old correspondences as new ones continued to come in.

Another issue reported by practitioners was that, with the decoupling of New York’s tax code from the federal one last year, it was no longer a matter of just plugging information from the federal into the state return, but rather, of controlling for exceptions. Ironically, sometimes, this difficulty came from clients who were educated about the federal TCJA changes. The problem was that they were less informed about the decoupling.

“Some clients didn’t think they needed to give us the information anymore, because they thought they weren’t going to itemize, but they could still itemize for New York state purposes,” Greenfield said. The decoupling “also made it more difficult to review [returns] because you would have things under NYS IT-196 and look at it, [then] look at Schedule A, and then [back to] IT-196 for items still on 196 but not on Schedule A anymore, so it was like double work.”

Bel said that many large clients with complex investments didn’t get their information in to her firm until about March, which meant compressing almost all of her work into just five or six weeks, which then also affected other returns—such as those for individuals and smaller businesses—that her firm still needed to do. While she conceded that clients often procrastinate and are just trying to do the best they can with what they have, this year’s delay was particularly long. 

A taxing year

Overall, some NYSSCPA members said that this year was unusually intense, given the confluence of all the other factors. Cheslowitz said that this season took his firm down to the wire, something that didn’t normally happen. Bel characterized it as “one of the most challenging tax seasons I’ve ever had in my career.”

On the other hand, some CPAs, like Hays, were more sanguine. While the TCJA changes were quite challenging, she didn’t find the season that drastically different from what she normally dealt with.

“Apart from the effects of the TCJA, tax season was the same: Clients still procrastinated to the last minute, and when they finally get around to submitting all their documents, they wanted their tax returns prepared ‘immediately.’ Some clients procrastinated into extensions, and they are still procrastinating,” she said. “Still, we love our clients!”

 

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