On January 29, 2018, the American Institute of Certified Public Accountants (AICPA) sent a letter to the Internal Revenue Service (IRS) requesting clarification and guidance on a variety of provisions included in the Tax Cuts and Jobs Act (TCJA). In it, the AICPA identified three key areas that require immediate focus and attention: the deduction for qualified business income established under section 199A; procedures for making accounting method changes under section 481; and taxpayer relief from penalties resulting from the underpayment of tax.
The deduction for qualified business income has been one of the most discussed components of the TCJA. Allowing a taxpayer to exclude from gross income 20% of amounts deemed to be “qualified business income,” the deduction is limited to the greater of 50% of W-2 wages paid by the business or the sum of 25% of W-2 wages paid by the business plus 2.5% of the “unadjusted basis immediately after acquisition of all qualified property” of the business. While this is a simple calculation on the surface, the AICPA noted in its letter that the language fails to account for a number of complex business ownership structures and situations. For example, there is a lack of clarity as to whether or not taxpayers can group together active trades or businesses to increase W-2 and basis limitations. The statute also does not address whether business incomes and losses from separate activities should be netted to calculate the deduction. Given that new section 199A deduction is a high-profile provision of the TCJA, the AICPA hopes the IRS will work quickly to provide guidance on its application.
The AICPA has recommended to the IRS that it simplify the process to change accounting methods pursuant to the new law. A pertinent example is an overall method of accounting change (accrual to cash) made possible by the increase in the gross receipts test from $5 million to $25 million. The AICPA has recommended that the switch be an automatic change and that certain small taxpayers be exempt from filing Form 3115, “Application for Change in Accounting Method” altogether to streamline the process and ease the burden on both the IRS and taxpayers.
The AICPA has also requested penalty relief for taxpayers adversely affected by the new rules. While the majority of the TCJA’s provisions are not effective until tax years beginning on or after January 1, 2018, there are provisions that may increase a taxpayer’s liability for the 2017 tax year. Most notably, the AICPA highlighted that the section 956 deemed foreign income inclusion known as the “toll-charge” could create underpayments of estimated tax because calendar year corporate taxpayers made fourth quarter estimated payment for 2017 by December 15, 2017.
At Schneider Downs, we continue to monitor the situation and will keep you abreast of the ongoing dialogue between the IRS and AICPA on this issue. As always, if you have any questions about the new tax reform bill and how it may affect you or your business, please do not hesitate to reach out to your tax professional at Schneider Downs.