Tax Bill Offers Tax Advisers a Stage for Deep Client Discussions

Tax professionals and their clients are waiting on the ultimate outcome of the Tax Relief for American Families and Workers Act, pending in the US Senate after passing the House with bipartisan support. The bill contains numerous provisions that could cause massive changes to tax returns that are due April 15.

While the Senate debates the provisions, practitioners who are in the middle of their busy season may want to consider these steps to navigate the uncertainty.

Determine which clients would be affected most significantly. Run a search in your tax software or scan through your client list to determine which provisions in the legislation would impact which clients if the bill becomes law. Review those clients’ profiles and quantify the impact.

To address the bill provision that would retroactively delay requirements to capitalize and amortize domestic research and experimental expenses under Section 174, consider running a query in your software to find the clients that incur research and development expenditures. Set a threshold to narrow down the list of clients. Compare the differences in tax savings by deducting versus capitalizing.

Clients that meet the small business exception aren’t subject to the limitation under Section 163(j) and therefore wouldn’t be affected by the potential changes in the law. In 2023, the small business exception under Section 163(j) only applied to clients with average annual gross receipts for the three tax years immediately preceding the current tax year not exceeding $29 million.

Query those clients that are above the $29 million threshold. Refine the search to identify clients that incur business interest expenses. Run the numbers to see the differences in the amount of business interest expense items allowed based on the different definitions of the adjusted taxable income and others in the bill impacting Section 163(j).

Weigh the pros and cons of filing now versus seeking an extension. With the advent of the centralized partnership audit regime, it’s become more costly and administratively burdensome to correct partnership returns.

Avoid it to the extent that you can. For clients that are structured as partnerships, you may want to file an extension then subsequently file the return soon after. This will provide you with the ability to file a superseded return if the law changes up until Sept. 15, 2024, (the extension due date) versus complying with the centralized partnership audit regime.

For corporations not subject to the centralized partnership audit regime, analyze whether to file and amend or to extend. If there are multiple state filings, you may want to extend. Some states may not conform to the new provisions.

For example, states may not conform to the bill addressing the bonus depreciation changes under Section 168(k). If there is less work and cost to file the corporate return timely, then you may want to file and then amend, if necessary.

Know the IRS has a mandate to fix. In some cases, the IRS may recompute the tax if the changes in the legislation go into effect. If the taxpayer files their 2023 return early and doesn’t compute their additional child tax credit according to certain provisions in the bill, the IRS will recompute the credit for the taxpayer.

The IRS will adjust for the statutory amount and the earned income calculation related to factoring in the number of qualifying children. The agency will use the information provided on the tax return to redetermine the credit. If the bill becomes law, consult with your tax adviser to ensure the IRS’s adjustments are accurate.

Pay attention to when the bill’s provisions go into effect. The bill includes provisions that aren’t effective until after Dec. 31, 2023. For example, for the child tax credit provisions, the inflation adjustments for the $2,000 statutory amount, and the earned income election won’t go into effect until taxable years beginning after Dec. 31. Therefore, they won’t affect the 2023 returns and shouldn’t postpone the filing of the return.

Talk to your clients. Set up a call with your client to discuss the bill in detail. When the Coronavirus Aid, Relief, and Economic Security Act came out, we shared PowerPoint presentations with our clients on all the various provisions.

The initial preparation took time, but it was worth the investment. It gave us an opportunity to check in with our clients, especially during such an uncertain time, and to identify CARES Act provisions that would benefit them.

Our clients appreciated our efforts to walk them through the provisions and help them optimate tax savings through the CARES Act, and the same should hold true for this bill.

With the recent tax scams and media coverage surrounding the employee retention credit, consider using the pending legislation as a platform to discuss ERC provisions with your clients. Because the ERC is claimed on business quarterly employment tax returns, you may not be privy to whether your client has claimed the ERC unless you have already discussed it with them.

Be prepared at the discussion to address the above items, as well as any additional items unique to the client’s facts and circumstances. Be open about the additional time and fees involved in amending the return as compared to extending the return. Determine the cost-benefit ratio. Our role is to serve as trusted advisers to our clients and to be thorough.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alyssa Rausch is a senior tax manager in EisnerAmper’s private client services group.

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