What’s the most common tax-related question or concern you’re hearing from your clients?
Chen: With more stringent, and sometimes more convoluted tax requirements and regulations, compliance season simply gets tougher every year. More manual interventions, such as collection of paper-based or non-integrated records, chair-swiveling reconciliations and the manual line-by-line field checking that tax software unintentionally creates are just a few examples. The expanding regulatory complexity and increasingly manual processes are compounding the already long days of tax season. The effects of TCJA are still evolving and shaping new tax strategies in businesses of all sizes. These are the biggest issues our clients are struggling with.
Reinbold: Taxpayers are interested in staying abreast of the ever-changing tax landscape and avoiding the ambiguity and uncertainty embedded in change evolution. Understanding tax reform changes is important, especially for companies with global operations and pass-through entities. There’s also a focus on planning for the impact of recent tax and financial reporting changes to revenue recognition rules. Additionally, the extension of otherwise expiring tax benefits is top-of-mind this time of year, as is whether we’ll see a fix so certain improvements are eligible for bonus depreciation. Of course, quantifying the impact of the changes on the client’s tax position and analyzing new opportunities to increase deductions and credits mitigates some concern.
Diamond: For tax years 2018 and 2019, clients primarily focused on understanding and modeling how the income tax provisions of TCJA impacted them personally, as well as their businesses. Individual taxpayers have now begun to shift their thoughts to utilizing their remaining gift exemption—how and in what way should this powerful tool be leveraged? For 2020, an individual’s lifetime exemption has increased to $11,580,000. With the increased lifetime estate, gift and generation-skipping transfer tax exemption expected to sunset at the end of 2025 and uncertainty in the political landscape, taxpayers’ thoughts have moved back to estate and gift-planning basics. We’re working closely with clients to review and reexamine their wealth transfer plans, and to discuss whether they want to make additional gifts to use their increased lifetime exemption.
As 2020 begins, what opportunities still exist for individuals or businesses to reduce their 2019 taxes?
Diamond: With respect to trust filers, a trustee may consider a 65-day election, which allows the trustee to treat distributions made within the first 65 days of the new year as if the distributions had been made in the preceding year. The purpose of this election is to allocate tax attributes, such as income items, away from the trust to the beneficiaries. This may be beneficial if the aggregate tax paid on the distributed funds would be less if taxed at the beneficiary’s marginal income tax rate than it would be if it was taxed at the trust’s marginal income tax rate. The trustee can also allocate some or all of the trust’s estimated tax payments to the beneficiary to align the taxes paid with the income recognized.
Reinbold: Businesses can review existing accounting methods and determine if a change would accelerate tax deductions or defer income. For example, businesses that historically capitalized prepaid insurance premiums may file a change to deduct these amounts upon payment. There may be opportunities for a 2019 tax year deduction for compensation and benefit amounts paid in 2020. Employer contributions to a qualified retirement plan that are made up to an employer’s 2019 tax return deadline may be deductible in 2019 if various requirements are satisfied. Another opportunity relates to bonus and equity compensation paid in 2020 that potentially can be deductible in 2019.
What are some new tax planning opportunities for small businesses?
Reinbold: Businesses with average annual gross receipts of less than $25 million can use more favorable accounting methods, including the overall cash method of accounting, and more favorable, potentially easier methods of accounting for inventory. Changing to one of these methods may accelerate deductions or defer income. Sole proprietorships, partnerships and S corporations may be eligible for the new qualified business income deduction. Individual owners of these businesses with adjusted taxable income beneath a specified threshold amount are not subject to the wage and property limitations that commonly reduce the otherwise available deduction. The SECURE Act of 2019, designed to aid Americans’ ability to save for retirement, expands the small employer credit for pension start-up costs and adds a new small employer credit for new auto-enrollment retirement plans. The paid family and medical leave credit has been temporarily extended, making it available for the 2020 tax year. Policies and practices should be put in place now to claim the credit this year.
How can small businesses integrate forward-looking tax technology solutions?
Chen: We advise these businesses to focus on data accessibility and connectivity, and to integrate business platforms such as inventory and stock, transactions, billing and invoicing, banking and payroll, that can generate tax-significant data with ease. Solutions exist—including smart phone applications—that allow you to digitize records for things like charitable donations as the donations happen, share them with your accountant, and digitally categorize them for tax deductions. By focusing on creating universal access anywhere, anytime, anyhow through cloud-based solutions, businesses can be much more proactive—not only in their tax compliance, but also their tax planning and business decision-making.
Reinbold: Small businesses value simplified, streamlined and smart tax processes. Crowe offers technology solutions that do just that, while also helping clients mitigate risk, meet deadlines, simplify tax processes, leverage artificial intelligence and get insights through analytics. For example, our K-1 Navigator helps pass-through entities with multiple investors and state filings mitigate cumbersome tax reporting. It’s an adaptable, secure, web-based tool that captures data, analyzes responses, prepares packages and expedites delivery. It streamlines preparation and filing, simplifies data collection and review, and improves accuracy and quality control by capturing important investor data directly at the source.
What recent tax changes do manufacturers need to consider?
Reinbold: The way inventory costs are capitalized has changed, and there’s an alternative, simplified method of accounting that certain taxpayers can use. It especially benefits taxpayers where inventory is weighted more to raw material goods. The rules generally disallow certain negative adjustments where book costs exceed tax costs, like book depreciation greater than tax depreciation. However, a taxpayer that changes to the new modified simplified production method of accounting, has gross receipts less than $50 million, or uses the simplified resale method can now incorporate negative adjustments, thus yielding a lower absorption ratio.