By Eli Sherman
Anyone who thought the new tax law would result in a simpler tax code would be sorely mistaken.
If anything, parts of the sweeping new law are more complex than prior law, and accountants are eagerly awaiting federal regulators to interpret the language, so they can appropriately advise their clients.
“The bad news is that I don’t believe anyone will be filing their tax returns on a postcard,” quipped Jay Sattler, managing partner at regional accounting firm BlumShapiro, which has offices in Rhode Island.
Sattler was one of six panelists at the Providence Business News 2018 Tax Reform Summit on Jan. 23. He discussed how the new tax law is impacting Rhode Islanders. The panelists largely suggested individuals and business owners take advantage of whatever parts of the tax law are clear now, and then adapt to future changes as they happen.
The event, held in partnership with BlumShapiro at the Crown Plaza Providence-Warwick in Warwick, was attended by more than 200 business owners, tax professionals, lawyers and others.
“We’ve spent the last three months digesting and analyzing tax reform and there’s a significant amount that’s still hanging out in the wind that we don’t know yet,” Sattler said. “It’s amazing some of the issues … that they didn’t address and didn’t define.”
Sattler was referring to Congress, which in December passed the tax legislation subsequently signed into law by President Donald Trump. The language of the law includes some clear-cut provisions, such as the corporate tax rate being lowered to 21 percent from 35 percent, marking the largest one-time cut in U.S. history.
But other parts are less clear and will remain so until the Internal Revenue Service writes regulations interpreting the hastily put-together legislation.
“Regulations are going to come out on a topic-by-topic basis,” Sattler said. “The more-complicated issues might not come out for six months. They might not come out for a year.”
Dean Zerbe, managing director at Texas-based alliantgroup, was a keynote speaker. His firm advises U.S. companies and certified public accountants on how to take advantage of federal and state tax credits, incentives and deductions.
Prior to joining alliantgroup in 2008, Zerbe was senior counsel and tax counsel to the U.S. Senate Committee on Finance. He worked on tax legislation that was signed into law in 2001 and 2003, along with the Jobs Bill in 2004 and the Pension Protection Act.Zerbe made note of the complexities of the new tax law.
“Reform is kind of a misnomer on this, in the sense that if you think of reform as simplification – that’s not this bill. This is [more complicated],” Zerbe said.
The summit covered a variety of tax-related topics that change based on sector, income levels and geographic locations. Panelists focused on the 20 percent reduction available to pass-through companies, including LLCs, S corporations, partnership sand sole proprietorships.
Most pass-through companies, representing a large portion of Rhode Island’s business community, will benefit from the 20 percent reduction, with some caveats based on how companies count wages.
The new law also eliminates the corporate alternative minimum tax, which the business community is touting as a win. The tax, known better as the AMT, made it tough for businesses to lower tax bills below 21 percent.
From an international perspective, the panelists seemed bullish about the U.S. shifting to a territorial tax system and allowing a one-time repatriation of corporate cash held abroad. The changes could make the U.S. more competitive with other countries and result in an influx of repatriated cash, according to the presenters.
“Some people are calling this a tax holiday because it’s going to allow companies to bring earnings back to the United States,” said Alan Osmolowski, BlumShapiro partner.
The provision has already yielded results. Apple Inc., for instance, announced it would bring back the majority of $252 billion in cash it held abroad, and make a one-time tax payment of $38 billion on the repatriated cash.
Overall, the new tax law offers business owners – big and small – potential avenues to boost bottom-line figures. Companies across the country are already touting the benefit, and many are sharing some of that wealth with employees and charitable foundations.
From an individual standpoint, however, the outlook is not as rosy.
“Don’t be surprised if some of us in the middle see no tax cut,” said Lynn O’Marra, principal at BlumShapiro.
O’Marra discussed a variety of ways the new tax law could impact individuals and families.
The results, she said, could vary based on income, marital status, number of children, and how state and local governments might adjust local tax codes to make up for any reductions realized in federal tax revenue.
Many individual provisions under the new tax law sunset after 2025 – an arbitrary time set for purposes of accounting – and the result is an added $1.5 trillion to the national deficit, according to federal budget officials. What that means is that while most Americans will see a reduction in taxes next year, the benefit disappears after 2025.
The reductions for businesses, meanwhile, are permanent.
At the same time, it’s largely unclear how the deficit will be shored up, if at all. There’s widespread concern it will eventually result in the raising of future local and state taxes and the cutting of safety-net programs.
Both results could hurt individuals and families with low incomes.
“We know for sure that lower-income folks are going to pay the heaviest price for this. It’s going to result in a serious restructuring of the safety net,” said Douglas Hall, director of the Economic Progress Institute, a Providence-based progressive think tank.
Hall joined the EPI in 2015 after spending five years serving as the director of the Economic Analysis and Research Network at the Economic Policy Institute, a Washington, D.C.-based policy think tank.
“State governments will have to step in to fill those safety nets because there will be less money coming from the feds,” he added.