Here's how to seize the new opportunities.
By Stephen L. Nelson
Maximizing Sec. 199A Deductions
The new Section 199A deduction surely counts as both a “good news” and a “bad news” story—at least for tax accountants.
The Bad News First
The bad news about Section 199A? The new deduction, according to the Internal Revenue Service, annually requires 25 million (that's 25,000,000) hours of additional work for the tax returns of 10 million (10,000,000) small businesses and investors. Further, the statute and just the first wave of proposed regulations confront taxpayers with striking complexity. The statute itself takes ten pages just to describe a tax break for unincorporated taxpayers equal to 20% of their business income. And the first wave–just the first wave–of regulations runs nearly 200 pages.
A comparison puts this all into perspective: The Section 121 “Exclusion of gain from sale of principal residence” statute runs just five pages. The Section 121 regulations run 20 pages. And this other reality: The Section 199A regulation relies on small businesses and their tax return preparers to perform good accounting: For example, accurate revenue and cost accounting by individual “trades or businesses” (a definition the statute and regulations blithely fail to supply), truly up-to-date depreciable property records, and then precise accounting for both W-2 wages and partnership guaranteed payments.
My honest guess? This first year unfolds as a slow-motion train wreck for many. Sorry.
But Good News Too
The good news about Section 199A? The flip side of the coin. Probably every small business and active real estate investor client you serve needs two to three hours of additional high-value tax work just to get the right deduction onto their tax return. Further, your high-income and high-net-worth clients will probably each need additional hours of pre-year-end planning, coaching, and maybe just general accounting services. These services should save some of these folks tens of thousands of dollars a year–and let you bill at rates commensurate with the incredibly high value delivered.
Some accountants have even begun to whisper, “Section 199A will be like Sarbanes Oxley, but for tax accountants and small businesses.”
Given the bad news and the good news, what can a CPA or CPA firm do to prepare–other than learning this complicated new law really, really well?
I have five ideas to consider: