{"id":55793,"date":"2018-08-21t01:10:23","date_gmt":"2018-08-21t05:10:23","guid":{"rendered":"https:\/\/48e130086c.nxcli.net\/?p=55793"},"modified":"2024-08-14t09:30:24","modified_gmt":"2024-08-14t13:30:24","slug":"new-irs-sec-199a-rules-25-million-hours-of-new-work-and-its-all-billable","status":"publish","type":"post","link":"\/\/www.g005e.com\/2018\/08\/21\/new-irs-sec-199a-rules-25-million-hours-of-new-work-and-its-all-billable\/","title":{"rendered":"5 tips for seizing the new opportunities in sec. 199a"},"content":{"rendered":"
\"\"<\/a>
get the new\u00a0\u00a0<\/em>pdf ebook, with free updates:<\/span> learn more<\/a><\/span><\/strong> and\u00a0buy now<\/a><\/strong><\/span>.<\/span><\/figcaption><\/figure>\n

25 million hours of more work \u2013 and it’s all billable.<\/strong><\/p>\n

by stephen l. nelson
\nmaximizing sec. 199a deductions<\/a><\/em><\/p>\n

the new section 199a deduction surely counts as both a \u201cgood news\u201d and a \u201cbad news\u201d story\u2014at least for tax accountants.<\/p>\n

the bad news first<\/strong><\/p>\n

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.\u00a0further, 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.\u00a0\u00a0and the first wave\u2013just the first wave\u2013of regulations runs nearly 200 pages.<\/p>\n

you may also be interested in the pdf ebook, available for instant download:
\n“setting low salaries for s corporations”<\/span><\/strong><\/span>\u00a0<\/span>
\nbuy<\/a><\/span><\/span><\/strong><\/span> now<\/span><\/strong> or<\/span> learn more<\/span><\/strong><\/a><\/span><\/p><\/blockquote>\n

a comparison puts this all into perspective: the section 121 \u201cexclusion of gain from sale of principal residence\u201d statute runs just five pages. the section 121 regulations run 20 pages.\u00a0\u00a0and 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 \u201ctrades or businesses\u201d (a definition the statute and regulations blithely fail to supply),\u00a0truly up-to-date depreciable property records, and then precise accounting for both w-2 wages and partnership guaranteed payments.<\/p>\n

my honest guess? this first year unfolds as a slow-motion train wreck for many. sorry.<\/p>\n

but good news too<\/strong><\/p>\n

the good news about section 199a? the flip side of the coin.\u00a0probably 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.\u00a0\u00a0further, 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\u2013and let you bill at rates commensurate with the incredibly high value delivered.<\/p>\n

some accountants have even begun to whisper, \u201csection 199a will be like sarbanes oxley, but for tax accountants and small businesses.\u201d<\/p>\n

given the bad news and the good news, what can a cpa or cpa firm do to prepare\u2013other than learning this complicated new law really, really well?<\/p>\n

i have five ideas to consider:<\/p>\n

<\/p>\n

section 199a practice tip 1: size the revenue potential<\/strong><\/p>\n

start by sizing up the revenue potential.\u00a0the proposed regulations published the first week of august estimate dealing with section 199a on an individual\u2019s 1040 return takes slightly more than half an hour and that dealing with section 199a on a \u201crelevant pass-through entity\u201d such as an s corporation or partnership on average takes nearly three hours.<\/p>\n

further, the time required can run as\u00a0much as 20 hours for a \u201crelevant pass-through entity\u201d return.\u00a0if your firm (or your set of clients in a partnership) includes, say, 200 individuals with a schedule c or schedule e that may include section 199a, figure\u00a0that\u2019s an extra 100 hours of work during tax season.\u00a0\u00a0if you deal with 100 relevant entity tax returns that include section 199a, figure that\u2019s nearly an extra 300 hours or so of work.<\/p>\n

in summary, the revenue impact should be large: a firm or practice group with 200 individuals and 100 affected \u201crelevant pass-through entities\u201d can look forward to maybe 400 additional hours of work?<\/p>\n

at a rate such as $200 or $250 an hour, that\u2019s $80,000 to $100,000 of extra billing.<\/p>\n

section 199a practice tip 2: start creating tax season extra capacity now<\/strong><\/p>\n

related to the revenue potential, this point: this work surely will mostly occur during the coming tax season and then the \u201cecho\u201d extension season.\u00a0 accordingly, practitioners want to think now<\/em> about how to deal with this significant wave of high value but high complexity work.<\/p>\n

two ideas for you. first, look at dumping any penny pincher clients impacted by section 199a.\u00a0\u00a0no, i know. that sounds crazy. but if you or i have got hundreds of hours of extra work to do this coming tax season, we need to find free time wherever we can. and the first \u201cfree\u201d place to find the time? dump the folks who can\u2019t or won\u2019t pay for an extra two or three hours of return work.\u00a0 rather, focus on the 90% of your clientele who will only thank you (probably profusely) for doing an extra $200 or $500 or $1,000 of work that saves them an extra $5,000 or $10,000 of tax.<\/p>\n

a second idea: talk now to clients about the high likelihood that many returns, perhaps including their own return will need to be extended due to the extra workload required by section 199a.\u00a0\u00a0if you or i can push work out of february and march and into june or july, that may be another way to ease the\u00a0pressure.<\/p>\n

note: larger firms may be able to add senior staff, too. for many of us, unfortunately, that won\u2019t be a real option. (and again, note that the talent needed to deal with the new section 199a probably won\u2019t be easy to identify.)<\/em><\/p>\n

section 199a practice tip 3: alert clients to benefits and costs<\/strong><\/p>\n

well before year-end, we all want to alert affected clients to the giant benefit that section 199a delivers.\u00a0adding a tax deduction equal to roughly 20% of a business owners\u2019 income\u2014subject to complex calculations and limitations\u2014means the business owner simply doesn\u2019t pay income taxes on the last 20% of\u00a0profit\u00a0they make.\u00a0that\u2019s a huge deal. our and your best clients will save thousands, tens of thousands or more. and annually.\u00a0so let\u2019s educate clients that this new section 199a deduction counts as a really big opportunity.<\/p>\n

also, let\u2019s also educate clients that this new deduction burdens taxpayers and their accountants with astonishing complexity. and tons of extra accounting.<\/p>\n

section 199a practice tip 4: set stage for price bumps<\/strong><\/p>\n

from this point forward when talking with clients, i think we all need to set the stage for a price bump given the extra work of section 199a.\u00a0please don\u2019t give away this work for free. please don\u2019t dial down your inflation adjustment because of a bump due to section199a.\u00a0keep in mind, too, that clients with more complicated situations may need pre-year planning. s corporations probably need help with more appropriate salaries for s corporation shareholder-employees. partnerships with guaranteed payments or section 707(a) payments need to update the partnership agreement. entrepreneurs and investors with interests in multiple trades or businesses may need help identifying the individual trades or businesses they\u2019re in and each individual trade or business\u2019s profit, wages and depreciable property.<\/p>\n

and this awkward comment: think about the fact that we\u2019re going to need clients to do this sort of \u201cbetter\u201d accounting when many don\u2019t really have the ability to produce a robust balance sheet.<\/p>\n

a tangential point: some practitioners may want to create an \u201copt-out\u201d for taxpayers who don\u2019t feel they can justify paying $200 or $400 or $800 more for a tax return with a section 199a deduction. such an \u201copt-out\u201d seems like a far better approach than simply doing the work for free. or trying to take short-cuts so one can charge a cheap price.<\/p>\n

section 199a practice tip 5: count on new clients<\/strong><\/p>\n

a final comment: remember the treasury regulations for the tangible property regulations? the ones that for the 2014 tax returns would have required most small businesses and real estate investors to file a form 3115 to make the accounting method change triggered by the new regulations?<\/p>\n

many, many tax practitioners serving small business and real estate clients weren\u2019t able to get ready in time to deal with those regulations. a goat rodeo ensued.\u00a0in the end, luckily for these colleagues, the internal revenue service, under pressure from lobbying groups including the american institute of cpas, let tax practitioners off the hook.\u00a0in a mid-february notice (notice 2015-20), the internal revenue service said small businesses and real estate investors wouldn\u2019t need to file form 3115; people just needed to comply with the new law.\u00a0that meant, in the end, that cpas and other tax accountants didn\u2019t have a tidal wave of complexity and extra work to deal with at the last minute. and everybody survived.<\/p>\n

but this time surely will be different. the irs won\u2019t and can\u2019t give small businesses and tax accountants a mulligan on a statute that creates a special deduction for small businesses. the irs could change the rules last minute for a regulation. (i guess.) they can\u2019t rewrite a statute.<\/p>\n

but i\u2019ve gotten off track. here\u2019s the reason for this digression: possibly the tangential property regulations fiasco hints we\u2019ll have tax accountants able and ready to deal with section 199a. and other tax accountants either not able or not ready.<\/p>\n

and the folks who are ready should be able to pick up some great small business and real estate clients this coming year.<\/p>\n

 <\/p>\n