Damien Martin, CPA and host of the Simply Tax podcast, talks about the 2020 tax filing season.
This post has been edited for length and clarity.
David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: 2020 filing season. This is the second tax filing season since the Tax Cuts and Jobs Act was enacted. Here to talk to us about it is Damien Martin. He's a director at BKD LLP and hosts the Simply Tax podcast. Damien, welcome to the podcast.
Damien Martin: Thanks for having me. It's good to be here.
David Stewart: Why don't you tell our listeners a little about yourself?
Damien Martin: I am a director at BKD. I'm an advisor primarily to family-owned and closely held businesses. That's my background, which we can layer in on how it was to apply these new provisions of the Tax Cuts and Jobs Act to that group. I also have played an integral part in our response and helping the firm really digest the provisions — whether that be templates or education. That's both inside our firm as well as outside. A number of tax hats that I wear in the firm, and that's the lens that I look at things from.
David Stewart: This is the second filing season under the TCJA. How did the first one go?
Damien Martin: I'd say it was definitely challenging. That is the word that I overwhelmingly hear. I talk to a lot of other practitioners as I go around speaking or as part of working with the podcast. Keeping up with all the change, understanding it and digesting it, and then really managing the areas of uncertainty was particularly the challenge that we had last year.
David Stewart: What lessons can you draw on from last year to use in this season?
Damien Martin: The biggest one that I generally repeat is that you can't just rely on the software. That's not a knock on the software companies at all. They actually did a great job of responding to and integrating and changing. For example, section 199A. We got the final guidance there in January last year, right as we were going into the filing season. There were a lot of changes like that that needed to be made to the software along the way.
So when I say "don't just trust the software," it is because it only knows what you tell it. You can't take things at face value. You have to make sure you understand it. In particular this year, going into the second filing season, is watching the carryovers. Softwares, a lot of times, will bring things over. Again, look at section 199A. We do have negative QBI carryforwards. Maybe your thinking has evolved around it or perhaps it didn't matter in the first year, but it does in the second year. Things like that are going to be very important to watch for as we're in this second year with the Tax Cuts and Jobs Act provisions.
David Stewart: Are there other specific challenges that you're currently facing or that you anticipate facing this year?
Damien Martin: Absolutely. In the area of Schedule K-1, when you're looking at passthrough entities, there's a number of the provisions, section 163(j) in particular, that you saw a lot of variation in the way that information was reported. I've had a lot of conversations with practitioners at different firms. There was a lot of differences in how you would see that information reported on K-1s. Same thing with the qualified business income deduction, and a few other areas as well. So whether you're issuing the K-1 or you're receiving the K-1, you have to go beyond the surface level and really understand what's in there and how it's been reported. There were a number of things that changed this year from last year.
Going back to qualified business income deduction, there's now a new form that's reporting it. The codes have changed, so keeping up with that and understanding that is going to be the challenge. You have to go beyond as the numbers on the page will go away. I think we're going to still have to deal with that.
David Stewart: There's guidance constantly coming out. Are you finding that clients are still confused?
Damien Martin: Definitely. I think clients are. I think, honestly, practitioners are. I was doing two presentations last week. One with a group of CFOs, and one with a group of practitioners. I would say that there are still challenges and confusion in a lot of areas for the practitioners. It really would vary depending on how much you had to deal with a different situation. I think the areas of confusion that practitioners still wrestle with are some of the areas where it's a little less cut and dry. Areas like the definition of a trader business.
We all know, and I know that you've had guests on the podcast who've talked about the fact that obviously there isn't one clear definition. It really depends on the facts and circumstances. That has been a frustration, but also an area of confusion for people in terms of understanding. In the real estate area, in particular, when it comes to the trader business definition, you're looking at a hundred years of case law. As a result of that there are some misunderstandings that continue on. So being careful and aware of that really becomes important.
On the taxpayer side, talking to that group of CFOs, I think there's still a lot of confusion around the meals and entertainment. For some reason it's front of mind. Being from Chicago, the line I often will say is how it impacted your Hawks tickets and whether or not you get the deduction for your Hawks tickets. I'll tell you, nothing actually gets a group of CFOs more interested in tax law changes than when you start talking about the deduction for their hockey tickets. I think there are still a lot of areas of confusion with that.
It brings us back to another point that is important to keep in mind. We had a lot of changes obviously with the tax reform changes, but we're still operating under many of the existing provisions of the tax law. The meals and entertainment area is a perfect example of that because you had exceptions under section 274 that are still part of the tax law, and they probably were misunderstood by a lot of people, myself included. I feel like my understanding of that area really evolved as we went through the first filing season. But there still is a lot of misconception and confusion around what really is deductible, what isn't deductible, what's 50 percent, what's zero percent entertainment. Even the fact that you still can have 100 percent deductible entertainment as long as you meet some of those exceptions under the existing tax law.
So I think there's a lot of confusion there. I think one that is maybe less confusing is another area that I expect to have some reactions to: the qualified transportation fringe benefit area. When talking to taxpayers about that area, that's probably the one that I got the most pushback on — personally, as well as those that I talked to. There's a sense of why is this limitation here? There was a little bit of shooting the messenger going on a lot of times because it doesn't resonate with people. Sharing this and giving the updates to this group of CFOs, I was still getting that. There's confusion over what is this? Why does it apply? The fact that we had a repeal as it applies to exempt organizations, with the year end spending bill, gives a notion of, "well, they got rid of that. I don't have to do that anymore." No, that's only for that context.
There was a lot to understand, a lot to digest. It's very understandable that there's a lot of confusion, but I think being careful about several of these areas and the source of the information is particularly important. I gave this advice to somebody, "you really have to be careful about the date of articles that you're reading when you're going to go in and refresh yourself on or take a deeper dive in on some of the provisions of the Tax Cuts and Jobs Act." The context was related to section 199A, because as our understanding of it evolved as we got the guidance, there were things that you would talk about in the beginning that now we know you can't do.
For example, the "crack and pack" was something that in the beginning people thought, "maybe this is something that can work." We all know with the guidance that that doesn't work. They put an anti-avoidance provision in there around that. That's a little bit more of a straight forward example, but just be aware of the source of the information because there is a lot of information out there. That's the overarching thing I would say and the advice that I'd give. I didn't even realize the wisdom of what I was saying as you have to watch the date on what you're reading and be mindful of the source.
David Stewart: If there was one area the IRS could clarify that would make your life easier, what would that be?
Damien Martin: That's a really good question. I almost want to say, "I don't know. How much time do we have here? Can we dig in?" But if I'm going to boil it down to one, I'm going to go with an overarching, more permanency in the provisions, particularly on the individual side. Obviously with these changes, the majority of individual subset after 2025. That's creating a lot of challenges when it comes to doing planning. Really in the post-TCJA environment, you have to take a multiyear, even multifaceted approach to doing planning. I work with a lot of closely held and family-owned businesses, as does my firm. So as you go through that, all of it funnels down to the individual return or maybe a fiduciary income tax return.
You're dealing with all these things coming down together on these returns, and you can't just take a one year approach because income may change over the period. You may have different facts. You're also going to have the fact that after 2022 we're going to see some changes with some of the provisions as they are under current laws. So the fact that we're not even certain of what the rate is going to be beyond 2025 really makes modeling very challenging. It makes some of this longer-term planning challenging. That is the one thing that I would try to change is to have that sense of permanence. When you're talking with somebody and trying to help them understand what this means for them, it is sometimes very overwhelming. Especially when you have to layer in the fact that I have to sometimes say it depends on what your crystal ball says for the future.
Of course we all know that tax law is only as permanent as it is until the next tax legislation comes along and changes it. There's always that nature. But the fact that we're already on the clock with some of these things creates a lot of challenges when trying to actually implement some of these planning techniques for individuals.
David Stewart: Coming at it from a slightly different direction, if there was one part of the TCJA you could get rid of, what would that be?
Damien Martin: I'm going to go with the qualified transportation fringe benefit piece because I think that is very difficult. There's a lot of work, and I don't mean this as a criticism since we have the guidance in that area. In the four-step process when you own or lease the parking lot, there's some gray areas. Sometimes you're going through the numerical gymnastics and running through all these calculations that at the end of the day don't amount to a very large number. That's one that's been challenging and has caught a lot of people off guard when it comes to actually applying it.
David Stewart: Speaking as a CPA, what piece of advice would you give to a taxpayer before they come to see the CPA? What do they need to do to be ready?
Damien Martin: The general advice that I give people is twofold. One is gather all of the normal things that you would, all the documents and things like that. There's the old throw them in the shoe box and bring them along to the CPA, which I will say that with a lot of technological advances we're able to avoid a lot of that. Now, we can go straight from the source documents. That's the straight forward stuff. That's the starting point. You need all of that information. Again, making sure the reporting is right.
Then thinking beyond that and thinking about some of the other life changes that happened during the year that maybe you don't necessarily think to mention to your CPA. Things like getting married and maybe getting separated. Or ones that you think of because you have to put the taxpayer's name on there and maybe you're not filing married, filing joint anymore, or maybe now you are. Those are a little bit more straight forward. New dependents are also a little bit more straight forward. But things like did you do an estate plan? Did you make changes to some of the retirement? Did you do some planning with beneficiary designations? Did you start a new investment? Did you get involved in a new activity? Move to a new state?
Those are some of the things that maybe on the surface didn't directly land in those documents. There's the tax forms that you gathered up to make sure they have this holistic answer. There's a lot of things in this post-TCJA world you can do to be more proactive, but you have to know about them on the front end. The more that you can bring the intersection of tax and life together is the best approach to take when it comes to getting ready for that meeting with a CPA.
David Stewart: Let's talk about your podcast. You host Simply Tax, and you launched roughly the same time that we launched our podcast here. Can you tell us a bit about it and its origin?
Damien Martin: It's been a passion project. It really started as part of my many hats that I wear with our firm. It started as an internal project to educate our people on some of the tax law changes and things that were coming down. When I started out my career as a professional, I always thought, "gosh, I wish I could get a deeper dive on something that's evolving" or be able to feed my tax mind. I also wanted it to be [playing] on my way to work or if I'm going to go for a jog or something like that. That was what I had always wanted. So when it came up that we were looking for ways to be able to provide that for particularly our up and coming developing professionals, I thought a podcast would be perfect for that.
So we started internally and went for about nine months that way. Then with the buildup of what ultimately was the Tax Cuts and Jobs Act, we ended up getting a lot of requests like, "Hey, I'd like to share that with somebody that I'm working with or another adviser." So we then flipped the switch and made it external as well. Generally the approach that we take is try to have practical conversations around all things tax. We throw in some non-tax related things as well because it's all related. Our core audience is somebody that's a taxpayer that's having to understand this stuff. We're focused on businesses, their owners, and their advisers, and all issues that relate to that mix, because at the end of the day it all does.
A goal of mine is always to try to help educate others on the tax law, particularly business owners or taxpayers, and help them better be able to understand what all these provisions mean for them at a personal level. That's really been the goal, and it's evolved from there. I've had some great opportunities to talk to tax people and pass along that practical "what does it mean for me" perspective.
David Stewart: Tax season is a busy time. How do you take care of yourself? What do you do to stay sane?
Damien Martin: I will say that it's evolved. Every year there's something a little bit different that I do. So I'll share my focus this year. I will also put out the giant caveat that I by no means am perfect at this.
This particular year I'm focusing on systems and trying to have systems for things. This has been a focus of last year as well. So what I mean by that is, and this goes back to David Allen's book, Getting Things Done. It's a very disciplined system for approaching all of the things on your to do list. I'm not going to profess that I'm far down that road. There is a saying that he has: open loops diminish outcomes. I think that's so true. There's a lot of things that are bouncing around in my mind during tax season. The way I try to keep sane is getting them all at least written down so that I can start to figure out what am I going to do with it and create actionable items for them. There's a lot of information in a very compressed period of time. That's one of them.
I think the other is being very intentional about fitting those runs in. That's the way that I do it. My advice to anybody is find your running, whatever that is. You have to take care of yourself because if you can't take care of yourself, it's really hard to take care of other people. How are you going to take care of your clients and those that are relying on you if you don't take care of yourself? I'll be honest, I love running and it's great but when the going gets tough, sometimes my natural inclination is to push harder. I have to log more hours trying to solve this tax problem I'm working on, or whatever it might be. That's generally the wrong answer. I have to get out there and make the time to run.
The third is trying to feed my mind. I found that there have been years where I've gone in the bunker. My friends will even joke, "well there goes Damien, it's tax season again. We won't see him for a couple of months." All the stereotypical things that you hear. I think if you truly put the blinders entirely on, you feel like you lose track of everything going on around you. Honestly, I feed my tax mind by listening to your podcast, things like that. You have to keep in touch with everything that's going on. Especially with all the changes that we've seen as of late, it's not possible to truly be able to always be thinking about all of these changes. It takes stepping back and feeding your tax mind to be able to put them into perspective, to think about them. I've had a lot of conversations with colleagues and other practitioners. The biggest fear last year, and I still have it, is what am I not thinking about that I need to be thinking about when it comes to preparing this tax return or helping this person with this consulting project? It's so multifaceted in these provisions of the tax law, and there's always been a lot of overlap in the interplay, which quite honestly I find very fascinating and I enjoy. At the same time you just feel like, "gosh, am I forgetting something? Am I not thinking about some angle here?" I think if you're not doing those things to self care, to stay sane, it becomes very difficult. So a multipronged approach to sanity perhaps for tax season.
David Stewart: I think that's good advice. Damien, this has been great. Thank you for being here.
Damien Martin: No, thank you for having me. I appreciate it.
You can listen to Damien's interview with Tax Notes Talk host David Stewart now on the Simply Tax Podcast.