Hold everything: What clients need to know about new withholding rules

Some clients, it now seems certain, will feel one of the Tax Cuts and Jobs Act’s most significant changes for 2018 in the spring of 2019: sticker shock on their tax bill or refund. And it also seems certain that preparers can do only so much warning.

“Taxpayers have not looked at their withholding for 2018. I’ve promoted them doing a tax check-up [but] many are going to be upset at the end of the year when they don't get a bigger refund or actually owe,” said Marilyn Meredith at Michigan-based Meredith Tax Service.

“I won’t tell them ‘I told you so,’ even though I should,” said Morris Armstrong, an Enrolled Agent and registered investment advisor at Armstrong Financial Strategies in Cheshire, Connecticut. “Through normal communications, it’s been suggested that they do a tax checkup on their pay stubs and no one really wants to do it, even for free. They don’t want to take the time. I’m hoping that April showers are avoided when they see their results.”

“We’ve been telling clients to check their withholdings but I seriously doubt people will,” said Patrick O’Hara, an EA in Poughkeepsie, N.Y. “It’s human nature to want more in your check but there will be more disappointment when they end up owing.”

The office of Kerry Freeman, an EA at Freeman Income Tax Service in Anthem, Arizona, called every client for a mid-year review of withholdings; only about 15 percent took advantage of this service. “I’ve found that many clients really don’t understand how withholding affects the tax return and are shocked with either the balance due or the refund,” Freeman said. “We feel that most of our clients have not checked their withholdings for 2018 … We sense that many of our clients have been lead to believe the new tax law would be favorable to their overall tax situation but in reality may face a quite different situation,” said Gail Rosen, a CPA and shareholder with Wilkin & Guttenplan in Martinsville, N.J. “This, coupled with the withholding tables reducing tax withheld, should have them concerned. We’ve made a concerted effort to contact clients whose reduced withholding we project will not meet their actual tax liability for 2018.”

Many under-withhold

More than one in five taxpayers will under-withhold their taxes in 2018 under changes mandated by the TCJA , according to a recent report from the federal Government Accountability Office -- though the number of under-withheld taxpayers under the new law is only three percentage points higher than the GAO estimate of what it would have been under previous law (18 percent).

Some clientele seem more susceptible to problems with withholding. “I work in a high Earned Income Tax Credit neighborhood, and I believe most of my clients are expecting a bigger refund this year with no changes to their withholding,” said Rick Reynolds, an EA in Utica, N.Y. “I’m worried about my middle-class clients who have no children. Many of them are used to filing a Schedule A. With the new tax laws they may not have enough deductions. Couple that with them losing their exemptions and their refund will go down or amount due up. In that case,” he said, “I’d definitely tell them to adjust their W-4s at work – assuming they can figure out the new and complicated W-4.”

“Don’t know what I will tell them next time, especially if the new W-4 remains as it is in the last draft,” added Paul Knapp of Exact Income Tax Service, in Santa Fe, Texas.

“Many people always complain about the tax breaks that the wealthy have,” Armstrong said, “but I find that the higher-income people simply pay more attention to their tax situation – better records and compliance.”

‘Only one client’

The IRS has launched an awareness campaign urging all taxpayers to check withholding to head off a higher tax bill or penalty in 2019, reminding taxpayers that reform increased the standard deduction, removed personal exemptions, limited or cut other deductions, and changed rates and brackets.

Preparers have also tried awareness programs. “Our office discussed withholding with every client during this past tax season,” said Marilyn Heller Ayers, a CPA in Brick, N.J. “We used our software to take a look at how the new laws would affect their bottom line. In addition, we asked every client to contact us over the summer with updated paystubs so we can review their withholding and make sure they’re not caught off guard when we file their 2018 return. I think we are in good shape.”

“When I did clients’ 2017 return, I discussed the new withholding guidelines. In July, I sent letters to all of my clients … re-explaining that the withholdings for 2018 are significantly less and offered to do a withholding check free of charge,” said Kathy Hawboldt of Hawboldt’s Tax Service, in Louisville Kentucky. “Only one client has taken me up on the offer. When I do taxes for 2018, I’ll explain to clients that any surprises were expected and that’s why I sent the letter. I’ll also re-explain what I already told them.”

Laurie Ziegler, an EA at Sass Accounting in Saukville, Wisc., reviewed the withholding for any interested clients as part of completing 2017 taxes. “Through both our website and electronic newsletter we continue to encourage clients to have us do a projection,” she said.

“As part of my 2017 tax presentation, I printed a projected federal tax worksheet for 2018 showing the differences for them under the new tax laws,” said preparer Eric Hansen in Omaha, Neb. “Tried to be proactive.”

“Clients depending on me for payroll services have had their withholdings systematically adjusted. Those that do not have been accordingly advised,” said John Dundon, an EA and president of Taxpayer Advocacy Services in Englewood, Colorado. “Most follow through and have made adjustments, many have not. Those [finding] themselves surprised will be advised to engage my payroll services going forward.”

“A few clients have called and asked about their withholdings and how it will affect their 2018 tax returns. I asked them if they want me to do an estimate based on the projected income, withholding and deductions, and come up with a refund or balance due,” said preparer Andrew Piernock at Piernock Accounting and Tax Services, in Philadelphia. “Most of them, their refunds are much lower than 2017. I explain to them to change their W-4 and take out additional withholding. I definitely,” he added, “charge for this service.”

Source: accountingtoday.com Written by: J. Stimpson

Finding the opportunity in the opportunity zones

Opportunity zones could be the single biggest tax break in decades, but the topic is not yet well known to many CPAs, and that lack of knowledge could end up costing your clients millions.

The Tax Cuts and Jobs Act, passed by Congress in the final days of 2017, introduced transformative changes to key areas of the Tax Code, many of which garnered a great deal of attention in the media and the professional accounting community. The TCJA also created the lesser known IRC Sections 1400Z-1 and 1400Z-2, which could have an enormous impact both on your clients’ tax liability and on economically distressed communities throughout all 50 states of the U.S. The new Opportunity Zone program, which consists of Opportunity Zones and Opportunity Funds, has the power to accomplish this. At a high level, the goal of opportunity zones is to promote investment of the estimated $6.1 trillion in unrealized gains held privately in the U.S. into the development of low-income communities across the country in exchange for federal tax advantages only available through the new Opportunity Zone legislation.

What are Opportunity Zones and Opportunity Funds?

As outlined in Section 1400Z-1, Opportunity Zones are census tracts generally composed of economically distressed communities. The census tracts are nominated by state governors and the mayor of the District of Columbia and certified by the Department of the Treasury. Up to 25 percent of census tracts in each state and the District of Columbia that meet the qualification requirements defined in Code Section 45D(e) are eligible. Areas certified as qualified opportunity zones retain their designation for 10 years, and to date, there are more than 8,700 qualified opportunity zones in the US. Code Section 1400Z-2 goes on to define opportunity funds as investment vehicles that aim to invest at least 90 percent of their capital into “qualified opportunity zone property,” which is defined as qualified opportunity zone stock, partnership interest, or business property located in designated census tracts. Investors have 180 days to roll a capital gain into a qualified opportunity fund in order to realize several important tax benefits:

A temporary tax deferral for capital gains reinvested in an opportunity fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or Dec. 31, 2026.

A step-up in basis for capital gains reinvested in an opportunity fund. The basis of the original investment is increased by 10 percent if the investment in the qualified opportunity zone fund is held by the taxpayer for at least five years. It is increased by an additional 5 percent if held for at least seven years, thus excluding up to 15 percent of the original gain from taxation.

A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years. This exclusion applies to the gains accrued from an investment in an opportunity fund, and not the original gains invested into an opportunity fund.

To see exactly how much more an investor can save, compare a $100,000 capital gain rolled into a traditional stock portfolio versus an opportunity fund both earning a 7 percent annual return. After ten years, net of taxes, the total return on the stock portfolio would be 32 percent. Meanwhile, the net, after-tax return on the opportunity fund investment would be 73 percent. On an after tax basis, opportunity funds could mean a two times higher return on investment as compared to a traditional stock portfolio. As you can imagine, such potential return premiums are attracting interest throughout the investor community.

While there are still some unanswered questions on opportunity zones, the rules and processes are designed to be straightforward with minimal friction. Opportunity funds not only provide exceptional tax benefits, but also hold the promise to be simpler, lower maintenance, and less expensive than alternative tax incentives like tax credit programs and 1031 exchanges. The provision is more of a tax election, rather than a tax program, and that should ease the burden on investors.

The unique appeal of opportunity funds

It is important to note that opportunity funds are not just for real estate clients. Gains from the sale of stock, a company and even cryptocurrency can be rolled into an opportunity fund. Did your client sell their business this year? Are they currently working through estate planning? Are they attempting to finally exit a 1031 exchange and get access to principal after years of exchanging? This tax legislation could be a cornerstone of a client’s tax planning strategy.

It is critical that CPAs know about and understand the benefits of opportunity zones, as clients will undoubtedly begin turning to their CPAs with questions as this legislation begins to receive more attention. More importantly, some of your most eligible clients might not be aware of the benefits of this legislation. Due to the time-sensitive nature of this tax incentive, you can be proactive in talking to your clients about the potential benefits of this entirely new and emerging tax advantage.

Source: accountingtoday.com Written by: G. Agarwal

What does the Supreme Court ruling on online sales tax mean for small business owners?

The Supreme Court ruled in June that states have the authority to require businesses to collect online sales tax on purchases even if the business does not have a physical presence in the state. Previously, businesses were only required to collect sales tax in states where they operate physically. Though some major online retailers like Amazon were already collecting sales tax nationwide, the decision has implications for small to midsized businesses that must adapt to remain compliant.

It’s not all bad news for business owners. While small businesses with an e-commerce presence may now be looking at a significant incremental compliance obligation, smaller brick-and-mortar operations who have always been required to collect sales tax are hailing the decision as providing long-overdue competitive equity. There are also some upsides for online retailers:

• You have some time. It takes time for states to react to such rulings and make the necessary changes to enable the collection of a new tax. While some states have been readying their processes in anticipation of the ruling, most will have work to do before enacting any major changes. In the meantime, it’s wise to get in front of this by locating the tools you need going forward.

• Some states already have enacted, or will likely enact, thresholds above which the tax will be triggered. Thus, if your activity in a particular locale is below an ordained dollar or transaction level, you may be exempt.

• The Streamlined Sales and Use Tax Agreement. Twenty-four states currently participate in this agreement, which in addition to standardizing some of the supporting tax calculation and submission protocols also provides for free sales tax compliance software for retailers under certain circumstances.Though the Supreme Court’s decision has been made, there are areas that small online retailers will still need to keep an eye on:

• Retroactivity: Some states may be tempted to look to collect these taxes not only going forward, but retroactively.

• Federal standardization: Policy makers grasp how challenging it will be to stay on top of the multitude of state and local sales tax rules. As such, the Supreme Court ruling may prompt Congress to finally enact a standardized federal policy — though this may be politically unlikely for now.

• Potential impact on general business taxes: Some states don’t levy income taxes on businesses without a brick-and-mortar location within their borders. This decision may spur these states to reconsider that stance given the opportunity for incremental revenue.

Though some effects of this ruling are unknown at this time, business owners can take steps to prepare. Assess the impact, evaluating where your main out-of-state sales come from. This will give you a sense of where you may want to focus your compliance attention.

Source, www.accountingtoday.com Written by: M. Trabold

Tech will lead the way with new lease accounting guidance

Accounting professionals, as the stewards of financial information, have a unique opportunity to take the lead in adopting the new lease guidance and implementing lease accounting software. Approaching the adoption methodically, which includes collecting data, making policy decisions, and applying operational realities, accountants play a distinct role in developing the processes and implementing the systems that guide an organization into the future. In doing so, accountants can help companies capture the benefits of enhanced, centralized processes, improved lease management and increased data visibility that ultimately lead to cost savings and more accurate financial data and disclosures.

One of the keys to realizing these benefits is for accountants to embrace technology as part of the implementation process. Unlike cumbersome and error-prone spreadsheets, lease accounting software that is effectively implemented will allow accountants to efficiently analyze vast amounts of asset data and make informed decisions. Empowered by the centralized data from the lease accounting software, accounting professionals are positioned to add valuable insights on lease spend, advise on both operational and financial decisions and provide more in-depth and accurate financial analysis.

Selecting and implementing lease accounting software

Lease accounting software, when judiciously selected, enables accountants to help their organizations capitalize on streamlined data. At the highest level, the most appropriate solution will come from a financially stable vendor with lease experience and be SOC 1 compliant. When evaluating software options, understanding your company’s business requirements is critical. Specific items to consider include the lease portfolio characteristics, international reporting requirements and foreign currency translation needs. To cement the selection process, users need to be able to easily input data, navigate the modules, and produce disclosure reporting.

Beyond ensuring that a solution meets your company’s requirements, a system should be easy to implement. Employing a lease accounting system requires organizations, specifically accountants, to coordinate cross-departmental teams that will assess the current state and inform the development of future state processes around procurement, month-end close journal entries and asset management. Leading the implementation presents a strong opportunity for accountants to move beyond the numbers and partner with upstream functions that often do not understand how their processes impact financial information.

Enhanced, centralized processes

Creating more efficient, centralized processes to not only collect information but to accurately input data into a system will pay dividends. On the front end, by working with procurement and operations, accounting can implement processes that ensure compliance with the new standard. This approach paves the way for accountants to be the Center of Excellence and subject matter experts for advising both operational and financial decisions. For example, as part of a monthly or quarterly process, accountants can utilize a lease system to provide more timely and accurate analysis of lease spend, ultimately leading to cost savings and an improved bottom line.

Additionally, the new guidance has a significant impact to the financial statements and disclosures, requiring accountants to thoughtfully strengthen internal controls and improve reporting processes. For instance, lease information that previously resided only in the footnotes is now presented as a liability that will be subject to increased scrutiny from internal and external stakeholders. Through heightened attention and robust processes around lease terms and details of lease transactions, accountants can make certain the financial statements under the new guidance are accurate.

Improved lease management

Lease accounting software and centralized lease management allows accountants to monitor and make educated decisions on lease events. Typical events include amendments to add or remove assets, altering length of term and middle- or end-of-term options such as terminations or renewals. Specifically, with lease accounting software, companies can produce standardized and customized reports to assist in presenting actionable information. A common benefit to these operational reports are their assistance to inform decisions on whether to renew or end a lease agreement prior to the lease end date, ultimately reducing unwanted month-to-month lease expenses which may have previously gone unnoticed.

More complete and accessible lease data will position accountants to assist their companies with proactively managing assets. To illustrate, lease versus buy decisions may oftentimes be uninformed because of the lack of data and decentralized lease management, resulting in inefficiencies and overspending. The centralized monitoring of lease events will help inform lease versus buy strategies that produce efficiencies and cost savings related to common challenges like evergreen leases, vendor management for similar leases and end-of-term options such as lease extensions.

Increased data visibility

Cross-departmental collaboration and an effective lease accounting software implementation will lead to a more cohesive and efficient data flow. This improved workflow creates on-demand access into lease data and knowledge sharing between previously disconnected areas of an organization like purchasing, real estate, IT and accounting. Currently, accountants are often delayed in receiving information that could impact timely journal entries. In the case of leases, communication about a new contract may not occur until after the month closes, resulting in catch-up entries and the risk of misstatements in financial reporting. With a new lease accounting solution and efficient workflow, accounting groups will have visibility into upcoming and recently transacted agreements to influence management with concrete financial analysis on lease spend.

As accountants take leadership roles in the adoption of the new guidance and the system selection and implementation processes, companies will realize value from enhanced, centralized processes, more robust management of leases and more in-depth visibility to lease data. These improvements provide accountants with the opportunity to provide their companies with analysis and insights on critical capital-asset procurement and spending. Ultimately, successful adoption of the lease guidance will yield cross-departmental collaboration and efficiencies, more cost-effective lease decisions, and increased accuracy in financial reporting.

Source: accountingtoday.com Written by: Bill Maloney

Blockchain: A 'significant evolution' accountants can't afford to ignore

Blockchain might be the most buzzworthy word in accounting today, if its prominence at the Accounting and Finance Show L.A. last week is any indication.

Multiple sessions covered the emerging technology, with one keynote speaker, Robert Massey, a partner at Deloitte, giving a primer on the hot topic.

“Blockchain is one of the most significant evolutions we’ve seen,” said Massey, who leads the Big Four firm’s cryptocurrency and blockchain practice globally. “Blockchain is to value as the internet is to information. It’s an exponential change, to share information between decentralized parties, in real time. It decentralizes the ability to record information, and enable transactions. It’s the next step in the evolution of commerce.”

Massey finds it helpful to think of blockchain as a “big shared ledger” -- more specifically, “a distributed ledger which allows digital assets to be transacted in real time, in an immutable manner.”

Smarter agreements

Members of another panel on blockchain focused more on how accountants should plan to harness the technology within their practices.

Practitioners should start with educating themselves on the blockchain, all panelists agreed. David Cieslak, chief cloud officer and executive vice president at business consulting firm RKL eSolutions, suggested that firms add a blockchain leader, while Ron Quaranta, chairman of the Wall Street Blockchain Alliance, recommended seeking resources on the topic from the American Institute of CPAs.

“Technology has disrupted the profession previously — this is not a new conversation,” said Danetha Doe, founder of financial mentorship program Money and Mimosas. “It’s the speed of the change. The next generation is adopting quickly, and you’re going to start to see a shift in the profession … how blockchain can be applied to different use cases outside the box.”

“All of us need to be thinking a lot more about value, and a lot less about tasks, [which] are often much more transactional,” said Cieslak. “Blockchain is really going to accelerate that. How can we leverage the technology to bring that greater value?”

It was a question asked frequently throughout the two days of the Accounting and Finance Show, with speakers attempting to provide guidance on a bold, and still mysterious, new frontier. But the technology’s novelty and unrealized potential only energized both panelists and attendees.

The conference’s thought leaders were most enthusiastic about blockchain as it related to new ways of conducting business, such as its use in smart contracts.

Smart contracts take “key terms in a legal agreement, and embed [them] in software, creating link dependencies in the agreements,” Massey explained in his keynote session. He offered the example of a farmer buying crop insurance, which will pay him if it doesn’t rain for 100 days.

Smart contracts utilize blockchain to connect to outside, trusted “sources of truth” to facilitate, enforce and verify terms of an agreement, thus removing the need for third parties or middlemen. In Massey’s farmer example, one of those sources of truth would be regional weather data.

“Blockchain is very effective connective tissue,” Massey explained. “We see, in all industries, the use of smart contracts enabling better relationships.”

Smart contracts “are happening organically anyway,” he continued. “It’s not just the systems, but the organizations that are decentralized. It’s likely now that transactions are validated somewhere other than where management is sitting.”

“There’s a real variety of use cases, and those are what are super-exciting,” said Cieslak during the panel discussion. “Some of what is going to be done with blockchain, has never been done before.”

The implications are especially exciting for certain industries, like the recording industry, an example many speakers cited when describing how intellectual property, like songwriting credits, can be coded into blockchain-enabled smart contracts. Speakers and panelists urged attendees to educate themselves on the technology and assess how it can apply to their clients and industry verticals.

“Every company innovation in this space is putting forth solutions,” said Massey. “In L.A., in entertainment, in media, [you can] lock down intangibles like the rights of a song or movie. What if you lock that down in a blockchain solution, before you had to pay for it? It’s a significant evolution in song and movie rights. It’s hitting every industry. It’s relevant to every single one of them. Think about your clients, and what’s relevant to them.”

Crypto, currently

Many people are familiar with blockchain as the technology behind cryptocurrencies like bitcoin and ethereum, and Deloitte's Massey dedicated a portion of his session to addressing those virtual currencies, as did other panelists at the conference.

All panelists stressed the status of cryptocurrency as property, based on guidance issued by the Internal Revenue Service in 2014.

Stephen Turanchik, an attorney in the tax practice at law firm Paul Hastings, spoke about the perplexing nature of cryptocurrency taxation during another conference session. He explained that virtual-currency exchanges are not required to report to the IRS, so “a lack of detection, and the ability to hide it, still exists.” But, he continued, “if you think that gives you the license to commit tax fraud, think again.”

On July 2 of this year, the IRS announced its virtual currency compliance campaign, and it will be conducting more audits on virtual currencies, Turanchik warned the audience.

The IRS is also stepping up outreach and education efforts, and soliciting taxpayer and practitioner feedback for these campaigns. The service is urging taxpayers with unreported virtual currency transactions to “correct their returns as soon as practical,” Turanchik reported, though the IRS is not contemplating voluntary disclosure programs.

“The IRS simply doesn’t have the technical expertise to give guidance in this area,” Turanchik said. He cited a “John Doe” summons the IRS served to virtual-currency exchange Coinbase in November 2016, seeking customer data. Before the petition was granted, the IRS had to narrow the scope of the summons, to Coinbase users with accounts of at least $20,000 in any one transaction type, in any single year between 2013-15.

Overall, Turanchik explained, there is a “significant lack of transparency” in the cryptocurrency space, which he said keeps him busy, and provides big opportunities for tax preparers.

Source: accountingtoday.com Written by: Danielle Lee