Accounting
Big tax changes promised in Trump administration
President-elect Donald Trump offered up a long list of promises during his campaign, and next year will bring a major test with the upcoming expiration of many of the provisions from his first administration’s Tax Cuts and Jobs Act of 2017.
“No one has a crystal ball on what’s going to happen here, but certainly it’s a little bit clearer based on a Trump victory than it would have been based on a Harris victory,” said Brian Newman, a tax partner at Top 25 Firm CohnReznick in Hartford, Connecticut. “Obviously the big point is going to be either to extend or to make permanent TCJA provisions.”
Trump has also called for lowering the corporate tax rate, which was supposed to be made permanent with the TCJA. He has proposed to lower it to 20%, or 15% for companies that manufacture their products in the U.S.
“Going from 21% down to 20% may be a much easier sell than layering on something that would get the corporate rate down to 15%,” said Newman.
Trump has also called for bringing back 100% bonus depreciation. “Right now the bonus rate is at 40% and scheduled to go down to 20% next year,” Newman continued. “There’s been a push to get that back up to 100%. If that occurs, we’ll be talking to our clients for year-end tax planning about deciding on whether to delay placing an asset in service a month or two if, in fact, we think that we’re going to go back to 100% bonus, versus buying something this year and placing it in service this year. There are always transition rules. That’s something that we have to be cautious about. That’s something that is going to be closely watched, because it could have a significant impact on clients.”
On the other hand, parts of the TCJA could be jettisoned. Trump has also called for eliminating the act’s $10,000 limit on state and local tax deductions, also known as the “SALT cap,” for individuals, or raising it.
KC McGinnis/Bloomberg
“It’s an easy discussion to tell clients, if you have property taxes to pay, you’re probably better off paying the property taxes January 1 versus December 31 in the hopes that something does get passed,” said Newman. “You might get a benefit for it, versus now in 2024 you know you’re not going to get a benefit.”
The treatment of R&D expenses involves another provision of the TCJA that could be eliminated. “The last couple of years, taxpayers have had to capitalize their R&D costs and then amortize them over a five-year period,” said Newman. “That’s had a significant impact on compliance and the bottom line of taxable income. Trump has said that he would like to get those expenses currently deductible again, which would be helpful for businesses that have R&D expenses.
The Section 163(j) limitation on business interest could be another area where TCJA provision would be eliminated. “Currently, your adjusted taxable income does not include adding back depreciation and amortization like it did in the first few years of the TCJA. President-elect Trump has said that he would be in favor of going back to an EBITDA calculation so that you can add back your depreciation and amortization, which would make the limitation less painful for clients. That’s another area that I think you’re going to see some tax law changes.”
Some of these business tax changes were passed by the House earlier this year as part of the Wyden-Smith Tax Relief for American Workers and Families Act of 2024 but never got through the Senate because of disagreement over other provisions, such as expansion of the Child Tax Credit.
Trump has also called for not taxing income from tips, Social Security and overtime, as well as eliminating taxes on firefighters, police officers and members of the military.
However, that could encourage people to reclassify their income as the tax-exempt kind.
“It will always be interesting to see exactly how those things work and how they’re calculated, because everyone’s always looking to maximize what income is not subject to tax or may have lower tax rates,” said Newman. “But you have to make sure that you know, things are properly defined, and that ultimately, you know, we have a clear guidance on what the calculation should be.”
Trump has also called for eliminating the stock buyback excise tax for public companies that buy back their own shares of over $1 million in a taxable year. “Right now, there’s a 1% tax on that,” said Newman. “The Biden administration has proposed increasing that to 4%, but President-elect Trump has said that he would be in favor of eliminating that tax.”
He believes the qualified business income deduction under the TCJA will also be closely watched, “People would be looking for that to either get extended or made permanent,” said Newman. “That’s a 20% deduction on certain flow-through income, which has been very beneficial to people who it applies to. Unfortunately, it does not apply, for the most part, to accountants and other professional services organizations.”
Trump has also called for doubling the standard deduction as it was in the TCJA. That could cause even fewer people to itemize their deductions. “There’s a good amount of people who don’t itemize because the SALT cap is limited to $10,000 and then if you don’t have large home mortgage interest or other itemized deductions, you’re not getting over the standard deduction threshold as it currently stands,” said Newman. “If you double the standard deduction, there will be less and less itemizers, and those types of deductions don’t become as valuable.”
That may prompt donors to reduce their charitable contributions if they can’t itemize the deduction.
Trump has also called for other tax breaks, such as tax credits for family caregivers taking care of parents or loved ones, and allowing those who buy an automobile made in the U.S. to write off the interest on their car loans.
All those tax breaks may prove difficult for states that rely on income taxes from their residents and can’t afford to let their deficits run wild. “Year after year, the state tax liabilities on transactions and income are becoming more and more a larger component of the total tax burden of both companies and individuals,” said Newman. “One of the things that states like to do is decouple from federal provisions. We always want to keep in mind, even if you get new provisions at the federal level, if they’re not already decoupled, you may get decoupled on provisions for the state. For instance, if President-elect Trump is successful in exempting, say, overtime pay, you may get a lot of states decouple from that, and the states will still tax that.”
Trump’s tax policy will also depend on what Congress does and how much control Republicans will be able to exercise, especially in the House.
“Tax was not the focal point of the campaign, and when it did emerge as an issue, former (and future) President Trump presented tax policy ideas largely in broad strokes, though he also had no small number of new ideas for voters to consider,” said Jonathan Traub, managing principal and tax policy group leader at Deloitte Tax LLP, in a statement. “Of course, tax legislation generally originates in Congress, not the White House, so any new tax laws enacted will bear the imprint of the legislative branch with its many competing interests and priorities. And, just as importantly, the ability of the Republicans to use budget reconciliation to fast-track major tax and spending bills to the White House depends on the outcome of a handful of uncalled House races around the country.”
Captive audience; some disagreement; game of 21; and other highlights of recent tax cases.
Barrington, Illinois: Tax preparer Gary Sandiego has been sentenced to 16 months in prison for preparing and filing false returns for clients.
He owned and operated the tax prep business G. Sandiego and Associates and for 2014 through 2017 prepared and filed false income tax returns for clients. Instead of relying on information provided by the clients, Sandiego either inflated or entirely fabricated expenses to falsely claim residential energy credits and employment-related expense deductions.
Sandiego, who
He was also ordered to serve a year of supervised release and pay $2,910,442 in restitution to the IRS.
Ft. Worth, Texas: A federal district court has entered permanent injunctions against CPA Charles Dombek and The Optimal Financial Group LLC, barring them from promoting any tax plan that involves creating or using sham management companies, deducting personal non-deductible expenses as business expenses or assisting in the creation of “captive” insurance companies.
The injunctions also prohibit Dombek from preparing any federal returns for anyone other than himself and Optimal from preparing certain federal returns reflecting such tax plans. Dombek and Optimal consented to entry of the injunctions.
According to the complaint, Dombek is a licensed CPA and served as Optimal’s manager and president. Allegedly, Dombek and Optimal promoted a scheme throughout the U.S. to illegally reduce clients’ income tax liabilities by using sham management companies to improperly shift income to be taxed at lower tax rates, improperly defer taxable income or improperly claim personal expenses as business deductions. As alleged by the government, Dombek also promoted himself as the “premier dental CPA” in America.
The complaint further alleges that in promoting the schemes, Dombek and Optimal made false statements about the tax benefits of the scheme that they knew or had reason to know were false, then prepared and signed clients’ returns reflecting the sham transactions, expenses and deductions.
The government contended that the total harm to the Treasury could be $10 million or more.
Kansas City, Missouri: Former IRS employee Sandra D. Mondaine, of Grandview, Missouri, has pleaded guilty to preparing returns that illegally claimed more than $200,000 in refunds for clients.
Mondaine previously worked for the IRS as a contact representative before retiring. She admitted that she prepared federal income tax returns for clients that contained false and fraudulent claims; the indictment charged her with helping at least 11 individuals file at least 39 false and fraudulent income tax returns for 2019 through 2021. Mondaine was able to manufacture substantial refunds for her clients that they would not have been entitled to if the returns had been accurately prepared. She charged clients either a fixed dollar amount or a percentage of the refund or both.
The tax loss associated with those false returns is some $237,329, though the parties disagree on the total.
Mondaine must pay restitution to the IRS and consents to a permanent injunction in a separate civil action, under which she will be permanently enjoined from preparing, assisting in, directing or supervising the preparation or filing of federal returns for any person or entity other than herself. She is also subject to up to three years in prison.
Los Angeles: Long-time lawyer Milton C. Grimes has pleaded guilty to evading more than $4 million in federal taxes over 21 years.
Grimes pleaded guilty to one count of tax evasion relating to his 2014 taxes, admitting that he failed to pay $1,690,922 to the IRS. He did not pay federal income taxes for 23 years — 2002 through 2005, 2007, 2009 through 2011, and 2014 through 2023 — a total of $4,071,215 owed to the IRS. Grimes also admitted he did not file a 2013 federal return.
From at least September 2011, the IRS issued more than 30 levies on his personal bank accounts. From at least May 2014 to April 2020, Grimes evaded payment of the outstanding income tax by not depositing income he earned from his clients into those accounts. Instead, he bought some 238 cashier’s checks totaling $16 million to keep the money out of the reach of the IRS, withdrawing cash from his client trust account, his interest on lawyers’ trust accounts and his law firm’s bank account.
Sentencing is Feb. 11. Grimes faces up to five years in federal prison, though prosecutors have agreed to seek no more than 22 months.
Sacramento, California: Residents Dominic Davis and Sharitia Wright have pleaded guilty to conspiracy to file false claims with the IRS.
Between March 2019 and April 2022, they caused at least nine fraudulent income tax returns to be filed with the IRS claiming more than $2 million in refunds. The returns were filed in the names of Davis, Wright and family members and listed wages that the taxpayers had not earned and often listed the taxpayers’ employer as one of the various LLCs created by Davis, Wright and their family members. Many of the returns also falsely claimed charitable contributions.
Davis prepared and filed the false returns; Wright provided him information and contacted the IRS to check on the status of the refunds claimed.
Davis and Wright agreed to pay restitution. Sentencing is Feb. 3, when each faces up to 10 years in prison and a $250,000 fine.
St. Louis: Tax attorneys Michael Elliott Kohn and Catherine Elizabeth Chollet and insurance agent David Shane Simmons have been sentenced to prison for conspiring to defraud the U.S. and helping clients file false returns based on their promotion and operation of a fraudulent tax shelter.
Kohn was sentenced to seven years in prison and Chollet to four years. Simmons was sentenced to five years in prison.
From 2011 to November 2022, Kohn and Chollet, both of St. Louis, and Simmons, who is based out of Jefferson, North Carolina, promoted, marketed and sold to clients the Gain Elimination Plan, a fraudulent tax scheme. They designed the plan to conceal clients’ income from the IRS by inflating business expenses through fictitious royalties and management fees. These fictitious fees were paid, on paper, to a limited partnership largely owned by a charity. Kohn and Chollet fabricated the fees.
Kohn and Chollet advised clients that the plan’s limited partnership was required to obtain insurance on the life of the clients to cover the income allocated to the charitable organization. The death benefit was directly tied to the anticipated profitability of the clients’ businesses and how much of the clients’ taxable income was intended to be sheltered.
Simmons earned more than $2.3 million in commissions for selling the insurance policies, splitting the commissions with Kohn and Chollet. Kohn and Chollet received more than $1 million from Simmons.
Simmons also filed false personal returns that underreported his business income and inflated his business expenses, resulting in a tax loss of more than $480,000.
In total, the defendants caused a tax loss to the IRS of more than $22 million.
Each was also ordered to serve three years’ supervised release and to pay $22,515,615 in restitution to the United States.
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The American Institute of CPAs is still concerned about the Public Company Accounting Oversight Board’s new firm and engagement metrics standard, despite some modifications from the original proposal.
During a board meeting Thursday, the PCAOB
Under the new rules, PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer will be required to publicly report specified metrics relating to such audits and their audit practices. The metrics cover the following eight areas:
- Partner and manager involvement;
- Workload;
- Training hours for audit personnel;
- Experience of audit personnel;
- Industry experience;
- Retention of audit personnel (firm-level only);
- Allocation of audit hours; and,
- Restatement history (firm-level only).
The AICPA reacted cautiously to the announcement. “We’re still studying the components of the final firm metrics requirements but, as we stated in our comment letter to the PCAOB this past summer, these rules will place a significant burden on small and midsized audit firms and could lead some to exit public company auditing altogether,” said the AICPA in a statement emailed Friday to Accounting Today. “This is not just conjecture: a majority of respondents (51%) to a recent survey we did of Top 500 firms with audit practices said they would rethink engaging in public company audits if the requirements were approved.”
The PCAOB it made some modifications to the original proposal in response to the comments had received since April:
- Reduced the metric areas to eight (from 11);
- Refined the metrics to simplify and clarify the calculations;
- Increased the ability to provide optional narrative disclosure (from 500 to 1,000 characters); and,
- Updated the effective date. (If approved by the SEC, the earliest effective date of the firm-level metrics will be Oct. 1, 2027, with the first reporting as of September 30, 2028, and engagement-level metrics for the audits of companies with fiscal years beginning on or after Oct. 1, 2027.)
The AICPA welcomed those changes but doesn’t think they go far enough. “We’re glad the PCAOB took some comments to heart by extending implementation dates, particularly for smaller firms, and lowering the number of required metrics,” said the AICPA. “But the potential consequences of the remaining requirements — reduced competition and market diversity in the public audit space — are a significant risk. We hope the SEC will give these unintended outcomes the weight they deserve before giving final approval to the requirements.”
The Securities and Exchange Commission would still need to give final approval to the standard, as well as the new firm reporting standard. Last week, the PCAOB decided to
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