Tax professionals are busy trying to put their tax planning and accounting software to work, but many still find themselves unable to fully trust it.
“We pay good money for software, but basically, we don’t trust our software this year. You cannot trust the software this year,” Glen Birnbaum of Heinold Banwart Ltd. told Tax Notes.
The software used by Birnbaum’s firm comes from an external provider and is updated weekly. Recently, however, there was a “pretty big glitch” related to how unadjusted basis immediately after acquisition is calculated for S corporations, he said.
According to Birnbaum, patch notes for the software said the problem would be fixed by March 17, but S corporation returns and Schedules K-1 for shareholders are due by March 15.
Tax software developers have a “herculean task” before them as they try to incorporate new provisions like the section 199A passthrough deduction or the section 163(j) interest expense limitation, and overall, the software is doing a good job, Birnbaum added. “But we’re double-checking it; we’re just making sure,” he said. “We have our own spreadsheets to kind of sanity-check it.”
Martin E. Mooney of Frost Brown Todd LLC said calculating the new passthrough deduction or interest expense limitation is straightforward enough, but that once more businesses are added in, it quickly gets messy.
“I think eventually the software here will work. But I do think, at least early on, you can't just plug in the numbers and say, ‘Here you go,’” he said.
Choose Your Own Adventure
For Damien Martin of BKD LLP, tax planning after the Tax Cuts and Jobs Act bears a resemblance to the Choose Your Own Adventure children’s book series.
Martin said he was working on an internal project to try to come up with standards for taking challenging positions, such as when the taxpayer needs to disclose a position.
“The Choose Your Own Adventure book was actually what I kept thinking of, like gosh, it’d be nice to have this: go here, skip to page whatever, and then find out you died — you are no longer a [qualified] trade or business,” he said.
Martin said he created a flowchart for section 199A — “199A on a page” — demonstrating all the branches that require factual determinations.
“You can’t necessarily just start dropping in some numbers,” Martin said. “You have to have that forward thinking at the beginning to think, ‘OK, wait a minute, which direction are we going here? Do we really think we have a trade or business?’”
Software Solutions
Martin said he’s been working on a project to develop internal tools for doing the calculation, including a Microsoft Excel-based macro program to use in conjunction with more traditional tax planning software.
The technical aspect of developing that program was the least challenging part, Martin said. The more time-consuming aspect was how to lay out the calculations and nuances of the new tax provisions.
Effective tax planning will require both humans and software, according to Mooney. For example, in an S corporation, the owner-employee can pay themselves wages to be more likely to get the 199A deduction, and software is well positioned to handle that, he said.
But when dealing with multiple businesses and trying to separate out the specified service trades or businesses, “that’s a judgment call somebody’s going to have to make before you start the software running,” he said.
Glenn Dance of Grant Thornton LLP described how he used his recent background as a special counsel in the IRS chief counsel’s office to conceptualize the proposed section 163(j) regs.
“I used my decoder ring to translate all of that into English,” Dance said, and then he “explained it to the millennial who fed it into the spreadsheet they were developing.”
The result was a tool for calculating partnership allocations of the components necessary to get the section 163(j) deduction right, according to Dance.
He explained that the provision’s instructions require information to be put on K-1s so that partners can calculate the 163(j) limitation at the partner level. The tool takes raw partnership data and turns it into a line-by-line printout of the various items necessary for the partner’s K-1.
“It’s been kind of fun,” Dance said.
‘Giddyup’
The prospect of future changes, both regulatory and statutory, can shift a tax planning scenario in unexpected ways that need to be tracked and accounted for.
Dance said he’s not overly concerned about a potential regulatory about-face, particularly on the interest expense limitation.
The proposed section 163(j) regs were largely taxpayer favorable, and “the good thing about a proposed reg that is taxpayer favorable is that you can rely on that bad boy,” Dance said.
Even if the regs change before they go final, the proposed regs can be relied on in the interim, so that taxpayer-favorable positions can be taken without much risk to partnership-related filings, he said.
“I've been telling people, if you like these proposed regs — and here are all the reasons why you should — then giddyup, let’s just have some fun,” Dance said. “Get the K-1s out and don’t fret about it so that your K-1s are late, because that makes nobody happy.”
Practitioners feeling overwhelmed by the scope of new guidance can take solace in the fact that IRS auditors probably do as well.
“Auditing these things isn’t going to be that simple for the IRS,” Mooney said. “I don’t know if the agents are going to be all that familiar with all this stuff either. So it’s a double-edged sword.”
After the IRS issued final section 199A regulations to its first tranche of guidance late on a Friday in January, Martin and his team met right away the following week to evaluate how they needed to change their planning tools and what projects needed to be added. The final rules didn’t make many substantive changes, but there were “definitely some nuances that needed to get modeled and added in,” he said.
Perhaps more important is keeping an eye on the big picture, according to Martin. With section 199A scheduled to expire in 2026 and full expensing beginning to phase out after 2022, “you’ve got to think about the cash flow impact, interplay with other code sections and limitations, and this layered-on complexity,” he said.
For the past year, practitioners have been in the weeds determining all the nuances of the new provisions, but what will be needed is a multiyear approach to modeling any sort of planning technique, Martin said.
“It’s the big picture that I think is going to be the valuable one,” he said.
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