The IRS reports that approximately 70% of taxpayers have taken the standard deduction on their federal income tax return in recent years. Under the Tax Cuts and Jobs Act of 2017 (TCJA), that figure may rise to over 90%, according to the White House Council of Economic Advisers. The TCJA increased the standard deduction and reduced taxpayers’ ability to itemize, making the standard deduction relatively more appealing. Logically, the more people take the standard deduction, the lower the demand for professional tax preparation.
Furthermore, tax preparation services have spread from CPA firms to financial advisors, insurance professionals, and individuals using specialized software. Altogether, tax preparation is likely to become a less profitable activity for CPA firms.
The good news is that, because of the TCJA and other current developments, new potential sources of revenue are opening up for CPAs. Some CPAs already have done well by offering specialized expertise in estate planning for IRAs, or in college funding. Below are some possible areas where CPAs and staff members might be able to offer valuable assistance to particular individual and business clients.
Taxpayers in affected states may wonder whether they should utilize SALT workarounds, and they will naturally turn to CPAs for advice.
Individuals who are business owners can choose between pass-through entities (including sole proprietorships, S corporations, partnerships, and LLCs) or regular C corporations for their entity choice. Pass-throughs now offer the possibility of a qualified business income (QBI) deduction of up to 20% of reported income under the new Internal Revenue Code (IRC) section 199A. There may, however, be QBI deduction limits for high-income individuals and for some types of businesses.
C corporations still have the disadvantage of possible “double taxation” on corporate and personal income, but the corporate tax rate has been reduced to a flat 21%. The calculations involved in comparison can be complex, but CPAs can offer true value by learning the fine points of the new QBI rules and applying them to clients’ situations. Indeed, this area so important and complex that a large enough CPA firm might consider designating a specialist to help clients make informed decisions.
The TCJA limited state and local tax (SALT) deductions to $10,000 on single and joint tax returns. For many, large SALT payments will become much more expensive after tax. As a result, some individuals and business owners may be interested in moving to other jurisdictions, where SALT outlays will be lower.
For such taxpayers, CPAs could develop a specialty of cost comparison after a hypothetical relocation. How much would actually be saved after SALT obligations are reduced? Would other costs offset the savings? How practical would a move be, considering work and family situations? Should people tethered to a job in a high-tax area start to plan now for a move after retirement?
Many states with above average income or property taxes have adopted measures designed to lessen the impact of the $10,000 cap on SALT deductions for their residents. For example, taxpayers may be able to contribute to a state-sponsored charity, taking a federal tax deduction in return for a credit against state income tax.
This approach has not been welcomed by the IRS. Proposed regulations that were released recently would reduce the federal tax deduction by the amount of the SALT credit if that credit exceeds 15% of the contribution. Taxpayers in the affected states may wonder whether they should utilize such SALT workarounds, and they will naturally turn to CPAs for advice. Thus, CPA firms in states with high tax rates should have one or more tax professionals keeping up with state legislation on this topic.
Under the TCJA, IRC section 179 expensing is now set at $1 million per year, with no phaseout until annual purchases reach $2.5 million. In addition, equipment outlays that do not qualify for IRC section 179 first-year deductions can be deducted under 100% first-year bonus depreciation. Bonus depreciation now covers used as well as new equipment, in most cases.
Depreciation has been a good area for specialization, and the increased opportunities for immediate tax deductions make the topic even more interesting. Individuals who own small or mediumsized businesses might be particularly interested in knowledgeable advice.
Individuals might welcome insights on the changes caused by the new tax law, such as the limit on SALT deductions, which can make property taxes more costly, and the entity choice between S corporations or LLCs for investment property. In addition, the TCJA has created “opportunity zones,” which offer tax deferral, tax reduction, and tax exemption to investors.
Realized capital gains now generate a 180-day window for investors to reinvest those gains into opportunity zones, which consist of thousands of federally approved low-income census tracts in all 50 states. The gains, which can come from any type of asset, can be deferred until as late as 2026. Investors’ basis may be increased, reducing the deferred gain, on a subsequent sale. Moreover, any gains from the opportunity zone venture will be tax-free upon sale, after a 10-year holding period.
As mentioned, more individuals will now take the standard deduction, and those who do will not receive any tax benefit from charitable contributions. Therefore, CPAs can offer creative ways to recoup some tax advantage from donations, even for those taxpayers who take the standard deduction.
This issue won’t be as pressing for individuals 70½ or older. Instead of direct donations, they can make qualified charitable distributions (QCD) from their IRAs. Donors will benefit by reducing taxable required minimum distributions, effectively creating deductions from income they otherwise would have reported.
Younger individuals might want to double up contributions in alternate years if that will take them above the standard deduction threshold and lead to itemizing, where donations are deductible. Contributions to donor-advised funds can be frontloaded for many years, with the same impact as doubling up, but potentially on a larger scale. Another tactic might be to donate appreciated assets to a charitable remainder trust for a large deductible contribution, avoidance of capital gains tax, and favorably taxed lifetime cash flow.
Private School Funding
For many years, paying the high costs of a college education has been a key concern of parents with school-age children. Some CPAs and CPA firms have established strong niche practices in this area. Even though private school tuition has increased sharply, parents may be willing to pay the cost if local public schools are unappealing. Therefore, CPA firms may benefit by offering expertise in funding K-12 education as well.
The TCJA allows taxpayers to withdraw money from IRC section 529 college savings plans to fund pre-college education, up to $10,000 per student per year. Running K-12 payments through a 529 plan might generate state income tax credits or state income tax deductions, with meaningful tax savings. Interested parents likely will be pleased to learn whether such a strategy makes sense for them.
The TCJA also added IRC section 965, requiring certain foreign corporations and foreign subsidiaries of U.S. companies to declare all foreign income deferred after 1986 as U.S. income. The resulting amount will be taxed at a 15.5% (cash) or an 8% (other assets) rate, and the taxes may be repaid over eight years. This provision, which is complex, will affect many companies that do business outside the United States. Thus, many clients and potential clients will be interested in working with a CPA who can help with compliance.
Eldercare and Disability Issues
Some CPA firms have formed alliances with eldercare law firms and other specialists in eldercare or special needs planning. CPAs can add value in areas such as fiduciary income tax returns, guardianship accountings, and trust accountings. Moreover, opportunities to serve as a trustee of a trust or the executor of an estate can arise for CPAs who are active in eldercare. Individuals without family members who could serve in these capacities may turn to their CPA, or to a CPA who has been recommended by their attorney. Similarly, some people will name their CPA to serve as their agent under a power of attorney.
The TCJA did not directly affect the tax code provisions related to long-term care. Nevertheless, this seems like a good area for CPAs to emphasize, as baby boomers move into their 70s. Some clients will be interested in learning more about financing long-term care for themselves of for their elderly parents.
A key trend here is the steep decline in traditional, stand-alone long-term care insurance policies. Sales are down sharply because of steep premiums and the possibility of future increases, all to pay for long-term care that might never be needed. Thus, hybrid policies are gaining ground. In a hybrid policy, the term covers life insurance policies and annuities that can provide cash, possibly tax-free, if the contract holders needs long-term care. If care is not needed, the contract holder has an insurance policy or annuity, so someone will receive a benefit from the money spent on premiums.
Beyond long-term care insurance, CPAs might look into specializing in residential long-term care issues. This could include becoming familiar with local nursing homes, assisted living facilities, and developments with varying stages of care available.
With the federal estate tax exemption now set at over $11 million (effectively over $22 million for a married couple), few individuals will need help in this area; indeed, old plans may have to be undone. For example, individuals who set up irrevocable life insurance trusts to pay estate tax may no longer want or need to maintain those trusts. Specialists who can help with such issues may prove to be very valuable.
State estate tax and inheritance tax issues may be another area where CPAs can provide worthwhile insights. What’s more, estate planning can go well beyond dealing with estate taxation. Other concerns include the following:
Is financial information organized in such a way that assets may pass easily at death? Most people would fail this test, and this is certainly an area where CPAs can assist.
Some CPA firms have established a legacy division to organize records to aid the executor after the death of the individual. Survivors will benefit by having to spend less time and money gathering records, so the resulting demand could make this a profitable venture for CPAs.
The federal gift tax exclusion is now $15,000 per recipient, per year. Savvy planning can help individuals use this exclusion to minimize paperwork or maximize gifting, perhaps of discounted assets.
Revocable or irrevocable trusts can serve many purposes. Asset protection is often a prime benefit. Considering the extended appreciation of equities and real estate in recent years, along with low investment yields, individuals with a philanthropic bent could be interested in a charitable remainder trust.
Many CPA firms acquire a license to sell insurance. With or without a license, accounting firms can review individuals’ insurance needs for personal and property coverage.
CPA firms might want to encourage selected employees to pursue a personal financial specialist (PFS) or a certified financial planner (CFP) designation. Such a credential could bolster efforts to establish a presence in the specialties mentioned in this article.
CPA firms may have the ability to develop asset management expertise in house. Otherwise, it is possible to work out an arrangement with another firm that can provide investment advisory services.
CPA firms may want to focus not only on specialized niches, but also on holistic financial planning. Clients will appreciate turning to one trusted firm for help with investments, insurance, college funding, retirement planning, portfolio drawdown, estate planning, philanthropy, and more.
Representation in Tax Controversies
Many CPA firms have established departments that focus on helping individuals involved in disputes with federal, state, and local taxing agencies.
Deciding to provide expertise in one or more of these and other areas is only the beginning. CPA firms must decide who the experts will be: one individual, a designated team, or an outside company. Considering the multiple areas of potential specialization, small CPA firms might want to join forces with similar practices, forming a network in which the participants share particular expertise with other members.
Regardless, providing valuable advice on various topics often requires the acquisition of knowledge. If the individual or individuals acting as subject matter experts will be in house, education may be necessary. The AICPA and other providers offer a variety of programs on various topics.
Other Areas Where Specialization Might Pay Off
- IRC section 199A; choice of entity
- Cost segregation and depreciation
- State tax authori ties (tax controversy)
- Advance directives
- Asset allocation
- Asset titling
- Cost segregation
- Elder care
- Employee benefits
- International taxation
- Retirement planning
- Senior issues
- Wills and powers of attorney
- Specific industries (e.g., healthcare, real estate)
- Types of insurance
- Long-term care
In addition, the fact that a CPA firm has specialized knowledge should be disseminated to clients. E-mail may identify the firm’s experts and list their accomplishments; in addition, interviews, blogs, or by-lined articles can be posted on the firm’s website.
Firms may be able to develop creative ways to promote their specialties. For example, a firm with many auto dealers as clients wrote a memo describing the impact of the TCJA on auto dealers, and the National Automobile Dealers Association liked the memo so much that it was distributed to the association’s members.
If an accounting firm has many clients in a particular industry, such as health-care or real estate, preparing such a memo for each specialty could improve relationships with those clients and result in exposure to potential new clients in that industry. Spreading the word across different media can help position a CPA firm as a source of wisdom in a rapidly changing environment.