April 23, 2018

Trump’s tax overhaul complicates 2018 tax season

Patrick Duffany Tax Practice Managing Partner, CohnReznick

Q&A talks with Patrick Duffany, managing partner of accounting firm CohnReznick's tax practice, about this year's tax season.

Q. With the April 17th tax filing deadline behind us, accountants everywhere are breathing a sigh of relief. So, what were the dominant trends this tax season?

A. This certainly was an interesting tax season. Clearly, the most dominant trend this year was the volume of questions relating to the federal Tax Cuts and Jobs Act. While taxpayers were, as usual, trying to understand their 2017 tax position, most were also trying to understand how the tax reform legislation impacted them in 2017 and the years ahead.

For example, individual taxpayers were initially questioning if, in 2017, they could (or should) prepay state and local taxes before the $10,000 deduction limitation went into effect for them in the 2018 tax year, and if they should prepay any charitable contributions.

Business taxpayers were not only completing their 2017 tax provisions, but simultaneously trying to understand how the myriad tax changes impacted their 2017 results and what they needed to do as they looked forward to 2018. The real challenge for taxpayers and tax practitioners was, and is, the lack of clarity on some of these rules.

Q. Broadly speaking, how did the federal Tax Cuts and Jobs Act impact this tax season?

A. It was nuts. We had our normal tax season work, reviewed hundreds, if not thousands of pages of federal tax language, explanations, and history and tried to fill in the missing pieces, educate our staff on all the changes, and then worked with our clients to ensure they were informed about what mattered to them.

And, just when you thought you were caught up and understood the domestic federal tax rules, the international and state income tax issues relating to the federal tax law changes needed to be addressed, which created yet more work. Honestly, I'm glad this tax season is in the rearview mirror.

Q. More specifically, what impact did the federal tax law have on small businesses this tax season? What about larger employers?

A. The driving question from small businesses was and still is: What does tax reform mean to our business and its owners? Our clients were asking if they should change the way their business is structured to take advantage of some of the changes.

For example, starting in 2018, many small businesses will be entitled to a new "flow-through entity" deduction, but there are a number of complexities in determining this deduction. So, our clients have been asking if they should change how they pay the business owners and whether they should split the business into two or more segments?

Also, the rules relating to the deductibility of interest changed and now businesses, both large and small, are asking how to structure their cash needs, meaning would debt or equity be more beneficial. Keep in mind that we're also still waiting on guidance from the IRS to answer some of these questions.

Interestingly, there were many discussions relating to IRC Section 1202 stock, which is not a new provision. While Section 1202 was not changed as part of tax reform, it essentially provides for tax-free treatment of gains from the sale of qualified small business C-corporation stock, provided that the Section 1202 requirements are met. Surprisingly, for certain small businesses, a C-corporation may be a better tax entity choice than a flow-through entity, such as a partnership or S-corporation.

For many larger businesses the issues were similar, but with added complexity. For example, businesses with foreign operations and significant multistate filings had even more work to do. Complying with the "deemed repatriation" provisions, determining how much income was required to be included in the 2017 provision and the tax return, and whether to defer the tax due or pay in installments was time consuming.

Q. Tax filings provide a snapshot of the overall financial health of a company. How would you assess how Connecticut companies are doing?

A. My sense is that Connecticut businesses are doing better than last year, but I think there are still headwinds.

And I think the Connecticut budget situation has had a dampening effect on the Connecticut business climate. With that said, with federal tax reform being beneficial to most businesses and generally better economic conditions nationally, many of our clients are optimistic and looking to acquire new businesses and reinvest profits in their business.

We are hoping for a strong 2018.

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