Expertise Beyond the Numbers

Q&A: Tax Experts Weigh in on a Change-Filled Tax Season

SC&H Group tax experts Jim Wilhelm and Greg Horning knew this tax season would be unlike any other in recent memory. The Tax Cuts and Jobs Act (TCJA) took effect, instituting the biggest change to tax law since 1986, according to Wilhelm. Add a record-long government shutdown that closed the IRS’ doors near the height of tax season, and you have the makings of what Horning called: “a tough season.”

Wilhelm and Horning participated in a Q&A, recapping the recent tax season.

Horning: Fortunately, the team at SC&H was better prepared than most. We did a nice job of planning in advance. The number of surprises was very limited.

To prepare, our groups spent more time in CPE [professional education for CPAs] in 2018 than any era in my memory, by multiples of hours. The firm held in-house trainings, hosted external speakers, attended webinars, listened to podcasts and read a lot of tax code. It was a lot of reading. We did a little “divide and conquer.” Then groups would present their thoughts or a summary of the research.

Armed with an in-depth understanding of how these regulations’ reverberations would hit clients, the team entered the season ready to lead clients through this new financial reality.

There Are Four Types of People

Horning: The TCJA impacted almost everybody. But the groups impacted roughly comprised four categories.

This year there were folks whose returns got simpler and they saved. These were generally people with lower incomes who received a significantly increased standard deduction and got the double benefit of simplified compliance with the law and a lower tax burden.

Some clients had simplified tax returns regardless of their income. This happened to people with limited mortgage or charitable donations. But because of the elimination of the dependency exemption, they ended up paying more tax under the new law.

Business owners who received the Qualified Business Income (QBI) deduction experienced a more complex return but paid less tax but those who didn’t qualify for the QBI deduction may have paid more due to factors such as interest in foreign businesses or interest expense limitations.

International Tax Reform Hit Hardest

Wilhelm: International tax reform posed problems for clients. Last year a transition tax for companies, such as Microsoft and Apple, that earned money overseas encouraged companies to bring the money back to the US. But the consequences backfired on individual investors. They — the individual investors who own interest in privately held foreign companies — were a dolphin that got caught in the net.

At the non-corporate level, it is painful. Individuals will pay more tax by having an interest in a foreign country than a corporation will. If Microsoft is going to pay a certain amount in taxes, why should someone at Microsoft who invested in a fund pay double?

Horning: The international tax reform was good for soundbites from Congress, but the reality is it has made compliance more difficult and more expensive. The guidance came out relatively late and while they increased the complexity and the tax-revenue side of the equation they didn’t receive their expected repatriation of cash. Legislators expected trillions of dollars to come back. Last I heard it was less than 20 percent of what they published. None of the clients affected are very happy about it.

Wilhelm: This was a really complex issue that probably didn’t get enough time when they crafted the law. The “surprise results” will likely lead to a lot of discussion going forward.

Other Changes of Note: K1 Changes and a Slight Increase in Maryland

Wilhelm: Referring to the IRS’ Schedule K1 changes, if you are a small or midsized business you probably found out this year whether you had a good firm. I could see some of these firms did not understand the changes. Firms were probably just overwhelmed. For a number of clients, we had to go back and recommend revisiting partnership agreements to maximize the QBI deduction under 199A. There will be cleanup for clients who didn’t do that.

The tax front was quiet in Annapolis this year. Not much happened vis-a-vis taxes, which in and of itself is news. However, a “backdoor tax increase” meant everyone paid more Maryland tax. More regulations regarding business interest expenses should be coming out this summer.

The Waiting is the Hardest Part

Wilhelm: Sometimes waiting to act can be harder to deal with than any complex change to the US tax code. Guidance from the IRS on final regulations for the QBI arrived in January. I would have preferred September. That was an issue. But it was better than March.

Horning: I delayed filing some clients’ returns hoping Congress would act to extend tax credits and deductions that expired in 2017. But the bill that would have extended these provisions failed to pass. The costs under consideration included home mortgage debt deductions, mortgage insurance premium deductions, energy credits, and deductions for tuition and school fees. Waiting was futile, as ultimately Congress did nothing about it.

Expect More Changes Ahead

Horning: There are going to be new tax forms coming next year since the IRS didn’t have time to develop the appropriate tax form for the 199 deduction.

Wilhelm: The AICPA and the American Bar Association have notified the IRS of changes they’d like to see for next year’s processes.

Horning: There will be more guidance coming on issues, such as the definition of what constitutes a “trade or business”.

Wilhelm: Dealing with this season’s changes presented a challenge with some consequences you didn’t expect. However, our firm did a great job learning and applying the reforms.

Our clients expect a certain level of service and they got it. There is still more to be learned. We are not done for sure.


SC&H Group’s tax team is keeping a close eye on new information as it is released, and will provide updates when available. As always if you have any questions about this past tax season, or how to begin planning for future tax planning, please contact us.

Financial Planning + Wealth Management