2020 tax filing season preview
As CPA tax preparers ready their practices for the 2020 filing season, they are making the usual adjustments to staff schedules, training, and other necessary measures. They might be facing this tax season with greater assurance than last year, when they first began to apply myriad tax law changes under the legislation known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. While many unclear points have been resolved by guidance in the past year, many more remain, and applying the new guidance may in some cases raise previously unanticipated questions. The previous tax season involved getting acquainted with the TCJA. This year will no doubt entail applying that knowledge with perhaps greater efficiency and more thorough insight into all its repercussions, CPAs said.
"I expect tax preparation season 2020 to involve learning about new regulations that have been issued, refining our knowledge of the tax law changes, and identifying additional planning opportunities based on our understanding of the new tax law," said Alex Masciantonio, CPA, a senior tax manager with Gunnip & Co. LLP in Wilmington, Del.
A big unknown, however, is how well the IRS and tax software providers will provide the administrative and practical support and software design needed to make this tax season as trouble-free as possible. Roger Yule, CPA, rates the last tax preparation season as the worst ever in his 34 years as a tax practitioner in terms of difficulty and disruption, primarily due to fresh complexities in his field of international tax compliance.
"I had hoped a year ago that it would be better," said Yule, a tax services manager at Wipfli LLP in Tinley Park, Ill., near Chicago. After all, he said, the 2018 preparation season had collided with the Sec. 965(a) Subpart F deferred foreign income inclusion ("transition tax") that had to be quickly calculated for the last tax year beginning before 2018, and the first tax installment paid.
But not only did the following 2019 filing season thrust preparers into some unfamiliar territory, it gave them less time to traverse it, with the IRS out of commission until the start of the season because of the longest government shutdown in U.S. history. While the prospects for another shutdown in late 2019 and early 2020 are unclear as of this writing, it is not out of the realm of possibility. Regardless, a longer-term trend toward a later beginning of tax season for other reasons has compressed the work time available up to April 15, while returns generally have become more complex, Yule noted.
In 2019, however, there were relatively few new tax law changes, while the IRS brought out guidance in a number of areas.
"So, hopefully, the IRS will be working on updating and correcting things," Yule said. Much will also depend on how well the tax software providers incorporate the TCJA changes into forms and calculations, he said, adding that many lapses in that regard were evident in preparing 2018 returns. Whether and how state income tax laws continue to conform to TCJA changes is an ongoing area of potential uncertainty, and handling carryovers of excess amounts under TCJA provisions makes the work of adaptation far from complete, as well.
Thus, practitioners are in many cases reviewing those points for some of the more common issues they're likely to encounter. What follows is a short summary of a select few, noting especially where guidance has been issued in the past 12 months.
INDIVIDUAL RETURN ISSUES
SALT limitation: The new provision of Sec. 164(b)(6) limiting individual deductions of state and local taxes (SALT) to $10,000 and disallowing deductions for foreign real property taxes paid is likely to continue to be a source of discontent for taxpayers, particularly in high-tax states where, for some clients, the formerly unlimited deduction would have made the difference in whether their total itemized deductions exceeded the basic standard deduction for tax year 2019 ($12,200 single, $18,350 head of household, and $24,400 married filing jointly). For a handy reference for these and many more of the most common thresholds, limitations, and other amounts for 2019, see the "Filing Season Quick Guide — Tax Year 2019."
The IRS has issued guidance that largely squelches some of the suggested workarounds for preserving some form of federal tax reduction equivalent to any amount paid in excess of the deduction limitation. In June, the IRS issued final regulations (T.D. 9864) that circumscribed one popular solution in which states moved to allow their residents to treat certain contributions to public programs as charitable contributions under Sec. 170, which the IRS regards as a prohibited substantial benefit in return. Under Regs. Sec. 1.170A-1(h)(3), if a taxpayer makes a payment or transfers property to or for the use of a state or local authority and the taxpayer receives (or expects to receive) a state or local tax credit in return, the taxpayer must reduce any federal charitable deduction for the contribution by the amount of the state or local tax credit received or expected to be received.
Two glimmers of possible favorable treatment remain, however: (1) a payment for which taxpayers may take a deduction, as opposed to a credit, on their state or local tax return, may still be considered a federally deductible charitable contribution; and (2) a state or local tax credit that does not exceed 15% of the payment may be disregarded as de minimis. In addition, the Service allowed some relief for taxpayers who had hoped, in vain, to circumvent the limit in this way. The relief allows these taxpayers to recharacterize the payment as a SALT payment in the year the credit is applied, allowing excess credits (those not applied in the year of the payment) to be carried over and treated as a payment in the year in which they are applied (Notice 2019-12). The safe harbor, however, applies only to payments and not to transfers of property.
For a potential workaround for the disallowance of foreign real property taxes paid, see Yule's article, "Tax Practice Corner: The TCJA and Foreign Real Property Taxes," JofA, Dec. 2018.
More due diligence: During 2018, the IRS issued final regulations under new Sec. 6695(g) (T.D. 9842) and revised Form 8867, Paid Preparer's Due Diligence Checklist, and worksheets in the Form 1040 series to reflect the addition of head-of-household filing status to the tax benefits requiring certain due-diligence measures by preparers (the others are the child tax credit, additional child tax credit, American opportunity tax credit, and earned income tax credit). While these assurances by preparers might seem pro forma — that they did not know or have reason to know that any information was incorrect by which they determined eligibility for, and the amount of, the credits or filing status; to make and document reasonable inquiries and responses; and to retain certain information for three years — a lapse here could be costly. The penalty for failing these requirements is $530 per credit or filing-status item, for returns filed in 2020.
Suspension of miscellaneous itemized deductions: The TCJA disallows (for tax years 2018 through 2025) miscellaneous itemized deductions for individuals under Sec. 67 (those deductions otherwise subject to a threshold of 2% of adjusted gross income). As with the SALT limitation, taxpayers and their advisers might explore for 2019 tax year returns alternative ways of seeking tax-advantageous treatment for these expenditures. A common such deduction in the past has been unreimbursed employee expenses, such as for travel away from home, automobile expenses, home office (for the convenience of the employer), and tools and supplies. Clients accustomed to deducting these expenses are well advised to seek reimbursement instead through an employer's accountable plan, where available.
"Discussions with clients were often needed in this area to reset client expectations," said Masciantonio, adding that many clients "were unpleasantly surprised" by this change.
Many individual taxpayers might rue the loss of deductibility of investment expenses, i.e., expenses for the production or collection of taxable income that would otherwise be allowable under Sec. 212(1) or for the management, conservation, or maintenance of property held for the production of income under Sec. 212(2). Investment interest expense is still deductible under Sec. 163(d) (limited to net investment income), however. Deduction of hobby expenses (limited by hobby income) also is suspended, as are tax preparation expenses — of special interest to return preparers long used to entering their fees here.
Most of the guidance in this area has been on the deductibility of trust and estate administrative expenses under Sec. 67(e)(1) (expenses paid or incurred in connection with the administration of an estate or trust that would not have been incurred otherwise) or Sec. 67(b) (which defines which expenses are and are not miscellaneous itemized deductions). As the IRS clarified in Notice 2018-61, these expenses are still deductible, despite the prohibition on the deduction of miscellaneous itemized deductions in Sec. 67(g).
Increased amount and phaseout range of child tax credit: Clients with dependent children — including, for a lesser credit, those over age 17 — can be reassured by their CPA preparers that the increased child tax credit can go a long way toward offsetting the loss or limitation of deductions as mentioned above (see "Broadened Definition of Sec. 152 Dependents," JofA, July 2019).
BUSINESS RETURN ISSUES
Sec. 199A QBI deduction: Who doesn't like telling clients they can get a 20% deduction? The qualified business income (QBI) deduction can allow CPAs a bit of vicarious satisfaction.
"After discussing the new rules with clients, I was able to identify planning opportunities to increase the wage and property limitations and therefore the QBI deduction for the 2020 tax preparation season," Masciantonio said. Those rules have been discussed often in these pages, including in Masciantonio's article, "Tax Practice Corner: The QBI Deduction for Rental Real Estate Activity," JofA, Aug. 2019. The safe harbor for rental real estate activity that had been proposed in a notice when that article was written is now outlined in Rev. Proc. 2019-38.
This was one area where tax software hadn't fully kept up last tax season, but this year should see improvements, Masciantonio said. The firm experienced problems with QBI deduction statements, as well as the proper calculation of the Sec. 163(j) interest expense limitation on new Form 8990, Limitation on Business Interest Expense Under Section 163(j).
Sec. 168(k) 100% bonus depreciation: Final regulations (T.D. 9874) issued in September adopt 2018 proposed regulations for 100% bonus depreciation with a few changes. This TCJA amendment boosted the first-year percentage up from 50%, for property placed in service in tax years ending after Sept. 27, 2017, through 2022, after which it is scheduled to phase down progressively over the next four years and then out. Like the QBI deduction, bonus depreciation and the trade-offs inherent by comparison with Sec. 179 expensing and normal depreciation add more points of analysis and counsel for CPAs and their business clients. The IRS also issued Rev. Proc. 2019-33 in July, which governs late elections and revocations of elections for certain property acquired by the taxpayer after Sept. 27, 2017, and placed in service or planted or grafted, as applicable, by the taxpayer during its tax year that includes Sept. 28, 2017.
Sec. 448(c) gross receipts test for cash method of accounting, more flexible accounting for inventories, etc.: See "Relief for Small Business Tax Accounting Methods," JofA, Jan. 2019, for more on this TCJA simplification for qualifying small businesses (generally, those with $26 million (for 2019) or less in average gross receipts for the tax year and two preceding years). Some business clients that can benefit may still need to elect method changes under these provisions. One potential issue that might be overlooked is the exclusion from these small business taxpayer provisions of any tax shelter, which includes a "syndicate," defined under Sec. 1256(e)(3)(B), in part, by the percentage of losses allocable to certain limited partners or entrepreneurs. In connection with this, see "A Quirk in the TCJA's Small Business Exceptions," The Tax Adviser, Dec. 2019.
Sec. 250 foreign-derived intangible income (FDII) and Sec. 951A global intangible low-taxed income (GILTI): "In my practice, the changes for FDII and GILTI were the most complicated to learn and comply with," Masciantonio said. With more study and by keeping abreast of new forms and guidance, he said, "I expect tax preparation season 2020 to go more smoothly. However, attention must be paid to potential additional regulations issued in this area and guidance from states regarding their treatment."
EDUCATION AND COMMUNICATION
To advance CPAs' practical application and understanding, Yule's firm, Wipfli, has built an internal "knowledge base" of articles and resources and has made a point of having junior tax staff submit questions to managers in the latter's particular areas of expertise when needed, Yule said. Similarly at Gunnip, 2019 has been a year of digesting the new regulations and refining practitioners' insights, Masciantonio said. And, in turn, educating clients on the new reality and the opportunities it brings will continue to be key to a successful tax season, they said. This has been especially true of information reporting issues involving foreign accounts, foreign trust and gift transfers, and foreign-owned U.S. corporations, the applicability of which can often go undetected by taxpayers and even some preparers, Yule noted.
The previous tax season provided an opportune time to make those informative client contacts, Masciantonio agreed. "Client education should continue as practitioners' understanding of the new tax law increases," he said.