Growing Your Business

Tax Reform Mid-Year Tune up: What are the Pros Saying?

Tax Reform Mid-Year Tune up: What are the Pros Saying?

With all the changes we've been facing, we thought it'd be helpful to discuss a lot of questions surrounding tax reform and how it has impacted pass-through entities, employee classifications and business expenses. In this month's #TaxBuzzChat, we're having our Tax Reform Mid-Year Tune up discussion with industry leaders, tax experts and small business owners to address the following questions.

  • What has been your biggest Tax Reform surprise so far when forecasting 2018 and beyond with clients?
  • How are you advising clients whose income is approaching the taxable income threshold for the section 199A deduction? For example – filing separate?
  • If your client's business activity is an S-Corporation, what advice do you give related to reasonable compensation, especially in light of the 199A deduction?
  • Are you proactively talking to business owners about their employee classification procedures?
  • What is your best advice when a company has misclassified workers in the past?
  • Does your state employ the ABC criteria in determining whether an individual is an employee or independent contractor and how does that impact the advice you give your clients?
  • With tax reform changes affecting deductions for business entertainment expenses, do you see your clients altering their entertainment budgets or status quo?

These are just a few of the questions the pros discussed and debated in today's very active live Twitter chat session.

We know how busy everyone is, so thank you to everyone who took the time to participate! Be sure to check out the highlights of the chat below.

@TaxBuzzOnline will be hosting a #TaxBuzzChat on Twitter the first Wednesday of every month at 10am PT/1pm ET, but because the first Wednesday next month lands on the 4th of July, our next chat will be Wednesday, July 11th. Don't miss out on the next hot topic! Tweet us if there are topics that you'd like to chat about or have questions about.

We have a lot to go through today, so lets get started! Q1. What has been your biggest #TaxReform surprise so far when forecasting 2018 & beyond with clients? You can add A1, A2, A3 to your answers so others can follow along. Also, don't forget to add #TaxBuzzChat to your tweet! pic.twitter.com/mRZO42SNgx

A1 - the 199A 20% business deduction.  So many hurdles to get over, and outcome is tied to the individual's total tax picture.  #taxbuzzchat

A1. Most surprising for me was the fact that those in the 25% Tax Bracket in TY 2017 sometimes ended up owing $$ in TY2018. #TaxBuzzChat

A1. Their general lack of understanding of the 199A deduction. Many believe it is a business deduction taken on the business schedule and have no clue the qualifications for the credit are based on 1040 #taxable income.  #taxbuzzchat

A1 - Trying to work through the Section 199A deduction for clients, since we don't have any guidance yet from the #IRS. #TaxBuzzChat

Brian, not just Section 199A, didn't you find it annoying to to say that of a lot of other tax events as well? #TaxBuzzChat

A1 - Trying to get the old tax rules out of your head, as well as for your client. #taxbuzzchat

I really should drop off my old copy of the code from my Intro to Federal Income Tax class at the recycling bin! #taxbuzzchat

I'm a bit of a #tax hoarder, but I'd hang onto that for a bit. Tax law tend to recycle themselves in the IRC every few years. #taxbuzzchat

A1. Something I found interesting was the extent to which different state laws are based on federal tax law (wrote about Hawaii's alternate financial institutions tax and how it's impacted by #taxreform here: https://t.co/T3cydWEcZW) #taxbuzzchat

Yes - the state conformity is important to review in your state.Naturally, California doesn't conform #taxbuzzchat

Yes, the states are leaving us guessing in many cases (New York) #TaxBuzzChat #taxreform #taxtips

Good morning everyone. A#1  So far, most of my clients are not adversely affected. Some may benefit.

A1. The largest #TaxReform surprise...taxpayer, divorced in 2017, remarking that income likely to fall in 2019 and future years and asking should they seek a significant modification to their 2017 alimony agreement in 2019.#taxbuzzchat

A1 (cont) Projections show taxpayer will lose ability to deduct alimony even though original agreement pre-Act.  With significant modification of new agreement could be a "start over" and lose ability to deduct and former spouse to report.  #taxbuzzchat#taxreform

(A1) I have been surprised continually by the variations in who wins and who loses with #taxreform.  Lots of variables and lots of nuances.#TaxBuzzChat #taxreform #taxtips

Q1: The fact that over 90% of the tax planning (about 70 total) results in a reduction in taxes, some because of no AMT, others because of extended child credit and tax table adjustments.  #taxbuzzchat

#taxbuzzchat Q1 Working with the new Standard deduction and how it corresponds to the new tax brackets. Also how many will gain child tax credits that were phased out before.

The next few questions will be about #TaxReform Pass Through Entities.

Q2. How are you advising clients whose income is approaching the taxable income threshold for the section 199A deduction? For example – filing separate? #TaxBuzzChat pic.twitter.com/BoF9MWZhco

A2 - I've had a couple client plan to get married when one of the partners is a high wage earner and the other is a low wage earner. It makes a big difference!

Also, I have a client discussing divorce just for tax planning purposes. #TaxBuzzChat

As if we didn't do enough marriage counseling already!!! 🙄#TaxBuzzChat

A2. As others on this thread have chimed in, being fully aware of the facts and circumstances is very important! #taxbuzzchat

A2. Yes, running a Filing Optimization Scenario is a good idea. For some changing #EntityType would be a good idea as well if that gets them into a lower C Corp tax bracket. #TaxBuzzChat

A2 - obviously trying to reduce taxable income like additional retirement and HSA contributions.

A2 - Repetition.  If we aren't actively managing our clients accounts, the best way for us to advise them is through repetition.  A constant reminder via letters, emails and phone calls... especially as the days tick by.

A2. Reduce income - IRA's have never been better used than to reduce income.  Any manner adjustments to income can be made.  Planning after page 2 of the form 1040 is lost #TaxBuzzChat

A#2 - setting appointments up with clients who are potentially affected, good or bad, by 199A #taxbuzzchat

A2. The advice depends on a number of things including the type of business activity, whether the taxpayer provides and is paid services and if they reside in a community property state. No one shoe fits all advice.  #TaxBuzzChat

A#2 I just picked up the 2018 Tax Tools for the 199A computations - haven't had time to try them yet #taxbuzzchat

#taxbuzzchat A2 Like every year I call and try to sit down with every client. More time directed to the self employed and pass thru clients this year. Planning is so important this year.

A#2 - Congress - REALLY needs to address the employee bus expenses and casualty losses. Not reasonable to lose those deductions #taxbuzzchat

A2. Yes, running a Filing Optimization Scenario is a good idea. For some changing #EntityType would be a good idea as well if that gets them into a lower C Corp tax bracket. #TaxBuzzChat

Q4. If your client's business activity is an S-Corporation, what advice do you give related to reasonable compensation, especially in light of the #199A deduction? #TaxBuzzChat pic.twitter.com/WPRtX29mH4

A4. The requirement to pay reasonable salaries have been an issue for S-Corps but now that issue takes on more significance… Of course the issue is Salaries are not included for the Section 199A deduction… the net profit of an S-corp after salaries is #TaxBuzzChat

A4 - well, always address "reasonable." But I don't know how that will change in 2018 with 199A. We have time before year-end #taxbuzzchat

A4. Nothing has changed on reasonable compensation - no matter the federal #tax classification reasonable compensation is required and #IRS has never had more authority to reclassify distributions or other forms of payment to compensation in the S corporation. #taxbuzzchat

A4. (cont) #Payroll tax audits are up, with specially trained RA's to handle only the payroll issues. Penalties on #TaxPros are a part of the exams. #taxbuzzchat

A4 - First and foremost we have that conversation, repetitively. I give them guidelines, but it is ultimately their decision.  #taxbuzzchat

#taxbuzzchat A4 I am guessing that "Reasonable" will be even a bigger moving target for audit. I see this will become a tax course case in the future.

A4. It is a balancing act. If the taxpayer's taxable income is above $315K/$156.5K thresholds the W-2 wages increase the “wage limitation” but reduce the QBI. And then there is the reasonable compensation issue. #TaxBuzzChat #taxtips #taxreform

A4 yes payroll audits. That's why I am focusing on that issue in an upcoming VCSP webinar https://t.co/xaJMkejdRs #taxbuzzchat

A4.  I think reasonable compensation is going to be a highly scrutinized and disputed issue - even more so with 199A.  It's more important than ever to make reasonable and defensible decisions about compensation structure.  Cannot let tax reduction dictate.

@taxbuzzonline re A4 - I can definitely see this happening! #taxbuzzchat

Agree with you here. Plus tough client discussion. #TaxBuzzChat

A4. I have always advocated an S Corp owner take reasonable comp, better this than the IRS slap you with payroll taxes. Post-TCJA, matters are going to get complicated with how it will work vis-a-vis the #199A deduction. The calc is complicated. #TaxBuzzChat

A4: Since there are services that for a small fee will calculate a reasonable compensation by using tables, etc., it is worthi it to calculate minimum reasonable comp then make a corp retirement plan calc (an IRA may be a better altrenative now.) #TaxBuzzChat

Let's shift gears and discuss employee/independent contractor classifications

Q6. Are you proactively talking to business owners about their employee classification procedures? #TaxBuzzChat pic.twitter.com/nPjHRjFbyR

A6. With the #TCJA and the focus of Section 199, employees are valuable, but the key goes beyond the TCJA, what does the law say. If you control that individual, they are your employee. #IRS in their audit procedures are approaching this issue very proactively.  #taxbuzzchat

A6 (cont) In states with an income #tax, the audit potential is doubled. States don't have to follow the fed, but the fed will always follow the states lead.#taxbuzzchat #taxtips

A6. Not talking to owners, but I am interested in how this will impact a lot of orgs in the DC area that have a big mix of FT employees and contractors #taxbuzzchat

A6: It is such a big deal, and the penalties seem fierce.  Also most of our business is in #California, so yes we lean heavily on "Employee."#taxbuzzchat

A6. Absolutely! I am in #CA and the state #SupremeCourt just ruled on a case essentially adopting the #ABC determination criteria used in other states. Can be a big problem for many. #TaxBuzzChat

#taxbuzzchat A6 This has become the biggest fight between the tax professional and the taxpayer. Classification issues will increase and some clients wont learn until the IRS stops them.

A6 (cont.) why such a fight for the good advice.

A6. There is great temptation to classify as independent contractors, but the facts and circumstances dictate the classification.  If you think #IRS is tough on this issue, try meeting up with NYS Department of Labor.  Now employees are also wanting to change.

A6. This has always been the case with my corp clients post ACA and/ or clients setting up a new business. Employee classification now becomes even more important post-TCJA due to the Wage calc in the #199A deduction. #TaxBuzzChat

A6: Entities with lots of 1099 contractors will be facing much more payroll tax issues going forward, especially in CA with new rules in place. I have already had one new client starting treating contractors as emplpyees (she was burned by WC audit before.) #TaxBuzzChat

Q7. What is your best advice when a company has misclassified workers in the past? #TaxBuzzChat #taxtips #taxchat pic.twitter.com/Jd9ruJZAwq

A7. Misclassification of workers in the past - recommendation is to fess up early in the year, take a reduced penalty for making things right with #IRS and do it before IRS comes to you.  It is called the Voluntary Classification Program (VCSP) #TaxBuzzChat #taxtips #VCSP

A7. 1. Common Law factors – Section 3121(d)

2. Consider Section 530 “relief” (Revenue Act of 1978)

3. Department of the Treasury, Internal Revenue Service, Independent Contractor or

Employee? Training Materials, Training 3320-102 (10-96) TPDS 84238I.#taxbuzzchat

A7... continued

4. Study @LeereamsSr course on Independent Contractor #taxbuzzchat #misclassification #taxreform

A7: We have a three strikes and your out rule.  New client, we make them aware, 2nd year client, we put it in writing as a warning. 3rd year client, and still purposefully neglecting.. they're out. #TaxBuzzChat

A7. If they qualify, file Form 8952 Application for Voluntary Settlement Classification, take the small hit and avoid the big hit if the #IRS catches them. #TaxBuzzChat #taxtips

I call this the 'getting right with God' move, haha #taxbuzzchat @taxbuzzonline

#Businesses - If you are in payroll #tax trouble here is some sound advice. #TaxBuzzChat https://t.co/uDMLRHqvJw

A7. What @beanna_whitlock said.  It's important to take a good hard look at getting back into compliance and staying there.  Don't forget your state DOL.#taxbuzzchat #taxchat #taxreform #SmallBusiness

A7: Make sure you comply going forward is the best situation.  If they get audited in back years bite the bullet and hope the penalties are low. #TaxBuzzChat

A7. We quote George Harrison's "Taxman" and let it simmer...🤓 smh....JK, this is the most common mistake new/ old business owners make, I think as Tax professionals we need to educate and help the business correct matters and move on..#TaxBuzzChat

Q9. Does your state employ the ABC criteria in determining whether an individual is an employee or independent contractor and how does that impact the advice you give your clients? #TaxBuzzChat #taxreform #taxtips pic.twitter.com/DkA8UaBlWG

A9. My state doesn't care as we have been liberated from the blow of state income tax #TaxBuzzChat

A9: CA adopted this year, which will cause problems for many companies issuing 1099s here. #TaxBuzzChat

A9. The ABC test criteria used by many states is far more restrictive than the Federal and the states are generally far more aggressive over the issue. I suggest they be prudent, don't back themselves into a corner.  #TaxBuzzChat

#taxbuzzchat A9 Here in AZ we are under staffed and is often overlooked by employees looking for remedy when Misclassifieds.

A9. Not certain off the top of my head if Virginia goes by the ABC criteria exactly, but this is the description the state provides: https://t.co/lOZIho8GD9 #taxbuzzchat

A9: Leadership - Culture starts at the top.  Do you want your employees, or do you want independent contractors running your business? #TaxBuzzChat

#taxbuzzchat A9 (Cont.) However the advise is the same for Federal or State classification. Do it Right!

A9.  Some post #TaxBuzzChat research for me on NYS and the ABC test.  New York is tough, tough, tough. #taxbuzzchat #taxreform

A9.  Here is New York's landing page for indepdent contractor status:  https://t.co/eABC52CPYS

Last question about #business expenses!

Q11. With #taxreform changes affecting deductions for business entertainment expenses, do you see your clients altering their entertainment budgets or status quo? #TaxBuzzChat pic.twitter.com/FWlUvmnE6o

A11. No… Prudent #entertainment is necessary for #business… they will just not have to lie about it anymore on their #taxreturns #TaxBuzzChat

A11 - We've already broke out the accounts from M&E to Meals, and Entertaiment.  Set up KPIs to track the separate expense so clients can see for themselves. 

But it's really tough for #Hollywood clients. #TaxBuzzChat

A11. Larger companies are absolutely complying.  It is the smaller ones that have not gotten the message and still think taking a customer out to lunch (or a friend they claim is a customer) is still deductible that will be a problem.  #taxbuzzchat #businessexpenses #taxtips

A11. (cont) The entertainment issue will be a big issue for pyramid based companies where those involved think they can deduct tons of entertainment expenses…big surprise. #taxbuzzchat

A11.  There is a lot of confusion on this issue.  Many businesses have structured their marketing and networking efforts around deductible business entertainment.  TCJA is a big shock.

A11. I've heard casual chat from friends who say that this change is already in the works at various offices, so yes. Definitely going to be easier for me to snag tickets, haha.  #taxbuzzchat

No clients for me except myself & as a small biz/solopreneur, I'm doing what I need to do for my business and, as always, keeping good records as we await #IRS clarification on TCJA M&E. #taxbuzzchat https://t.co/szcbAgpYaW

#taxbuzzchat A11 Status Quo, We advise till blue in the face, however the taxpayer will push the limits in thier idea that "the other guy is doing it, Why can't they"?

A11. Entertainment is not a huge issue for my clients. But what the regs will indicate is entertainment is keeping me up at night. 

Ex: Client comes in from Singapore to meet w/ me - I fly to Las Vegas to meet. Dinner to discuss tax issues of international business. #taxbuzzchat

A11 He suggests Caesar's Palace that has a dinner/show. No way to designate - is it part deductible, non-ded.? Now this one keeps me up at night. Can I offer my client a bottled water?  Sure you say. But what if it is Perrier? Are bubbles a little too entertaining? #taxbuzzchat

A11.  Also the line between business meals and business entertainment is not always well-defined.

everybody needs to remember at tax time their mom's advice about not jumping off a cliff just because everyone else is doing it! #taxbuzzchat

A11: With most of my clients mainly concerned with business meals, not many have entertainment issues - some season ticket orders may be reduced or halved to Lakers and Rams plus concert tickets. #TaxBuzzChat

I literally laughed out loud at this last part! But in all seriousness, if you have a German client who's used to fizzy water at all times, would that be considered entertainment? Very confusing! #taxbuzzchat

Has it been an hour already? That was quick! Thank you all so much for taking time out of your busy schedule to tweet and chat with us. Recap will be up soon and we'll keep you posted on the next #TaxBuzzChat topic! Have a great day everyone.

— TaxBuzz.com (@taxbuzzonline) June 6, 2018

To see the full chat session, click here.

We had a great time chatting with our participants on such a hot topic. Feel free to use our #TaxBuzzChat hashtag or tweet us at @taxbuzzonline if you have any additional questions you'd like answered.

We'll be hosting #TaxBuzzChat the first Wednesday of every month at 10am PT/1pm ET for our monthly discussion on all things tax and accounting. Hope you can join us in July!

share this post
Search for matches...
TaxBuzz Staff

TaxBuzz Staff

Our experts cover the hot topics in tax, personal finance and business planning. Follow us on @taxbuzzonline to get the latest updates year round.

Recommended Professionals

In the face of economic uncertainty, TaxBuzz is the industry's most up-to-date tax information.

Join 60,000 who get our weekly newsletter. No spam.

Need help selecting a firm?

Use our specialized search engine and get matched to the best accounting and tax firm for your needs.

Related Posts

Latest Posts