Accounting

Economists call for trashing the QBI deduction

Published

2 months ago

October 3, 2024

A sizable tax deduction for the qualified business income of pass-through entities faces potential expiration next year. A panel of university economists and one of the most influential think tanks in Washington said lawmakers should either make big changes or let it go away.

Five economists were asked last month at a Brookings Institution event about which action they hope the next Congress and White House will take on the many parts of the 2017 Tax Cuts and Jobs Act that will sunset at the end of next year. Four of the economists called for the elimination of the so-called 199A deduction for pass-through income. The fifth spoke more generally, advocating for “rescinding some of the tax-rate cuts in the upper part of the income distribution,” which is a common criticism of the impact of the pass-through deduction.

Policy experts, financial advisors, tax professionals and their clients may know the deduction better as “the small business pass-through giveaway,” as the moderator, David Wessel, a Brookings senior fellow in economic studies who is the director of the Hutchins Center on Fiscal and Monetary Policy, referred to it on the panel.

“‘Small business’ with, like, quotes,” Eric Zwick, a professor of economics and finance at the University of Chicago Booth School of Business, said to laughter from the audience. “We should be very clear these [are] like, closely held, potentially quite large businesses with, like, very, very rich owners, many of them. So I think we should be very careful about using that word ‘small’ in a value-sensitive way.”

The others advocating for getting rid of the deduction of up to 20% of the qualifying pass-through income included William Gale, co-founder and co-director of the Brookings and Urban Institute’s Tax Policy Center; Kimberly Clausing, the chair of tax law and policy at the UCLA School of Law; and Naomi Feldman, an associate professor of economics at the Hebrew University of Jerusalem’s Department of Economics, who called the 199A break a policy “that was really put in to placate the small business lobby” that “was really done for political purposes.” The speakers pointed out the high cost of extending the expiring provisions of the law — which could hike the federal budget deficit by more than $4 trillion over the next decade.

“I think the main thing is we’ve got these huge budget deficits, as far as the eye can see,” said the fifth economist on the panel, Williams College Chair of Economics Jon Bakija. “We need to do some things that are going to restore enough revenue to pay for the government. And I think rescinding some of the tax rate cuts in the upper part of the income distribution is probably worthwhile for that purpose.”

With this year’s election looming in the background as the determining factor on what will happen to the Tax Cuts and Jobs Act on its deadline date at the end of 2025, the economists acknowledged that the voters and, ultimately, the elected officials would get the final say. While liberal and left-leaning think tanks have slammed the 199A deduction as too heavily beneficial to the wealthy at a large price tag estimated to be as much as $608 billion on its own through 2033, right-leaning and conservative groups argue that the policy boosts small businesses and provides parity for the rates paid by pass-through entities as compared to corporations.

Limits on the deduction to, say, business owners with less than $500,000 in total income “would result in a tax increase on one of the major sources of jobs in our nation, directly hurting workers and the economy,” according to a report earlier this year by the U.S. Chamber of Commerce. The business advocacy organization has called for legislation making the deduction permanent.

However, the complicated existing guidelines relating to the types of businesses that can get the deduction and the levels of qualifying income that make them ineligible has contributed to the fact that there are many entrepreneurs who could have claimed the deduction haven’t applied for it, according to a February report by the nonpartisan Congressional Research Service. The available research indicates that “the deduction may have stimulated no more than a modest rise in investment” during its first two years in effect in 2018 and 2019, the report said.

“It is unclear whether the deduction, combined with the temporary individual income tax cuts under the 2017 tax law, has boosted demand for labor in the noncorporate sector,” it said. “The deduction’s complexity increases the cost of compliance for taxpayers who might benefit from it, although it is not clear to what extent. There is also uncertainty about which businesses qualify for the deduction. Some lower-income taxpayers may not claim it because of the complexity and compliance cost. Many upper-income pass-through business owners may claim the deduction, but only with the assistance of tax professionals.”

Amid that murky picture of the impact of the policy, the economists on the panel shared some suggestions for potential adjustments to the deduction.

“You could change the deduction, I guess, if you wanted to keep it and make it cost less,” Zwick said. “You could make it a smaller deduction. But there are lots of phaseouts and phase-ins of some of the rules. The wage and capital requirements there, some of those could be adjusted to basically exclude more firms. I think there are a lot of firms that are on the barrier between the specified service, skilled types that probably shouldn’t get it, versus like other types of firms that, for some reason, like, we think should get it. Those could be tweaked to, like, basically shrink the number of firms that benefit from the preferential rate.”

A shift in focus of the tax breaks for pass-through income could further alter the impact of the deduction, Gale said on the panel.

“The general approach would be not to cut the rate — which is what the deduction does — but to switch it to an investment incentive,” Gale said. “Making a rate cut just is a nonstarter from an efficiency perspective, so making it an investment incentive instead would help some.”

Regardless, the choice in this year’s presidential election between former President Donald Trump, a Republican who has indicated he would extend the 2017 tax bill he signed into law, and Vice President Kamala Harris — a Democrat who has called for continuing the provisions only for those with incomes below $400,000 — will exert more influence than any economist. Down-ballot races in Congress add another layer of uncertainty about the deduction.

“You notice, I asked them what they thought should be done,” the moderator, Wessel, said. “I didn’t ask them to predict what will happen, because if I wanted to predict what happened, I wouldn’t get five economists on a stage.”

The economists praised some aspects of the law, such as limits to the deduction for mortgage interest payments and a higher standard deduction that has led to less itemization across the board. In general, lawmakers ought to “forget 199A and all the bad stuff” so that they can “get all that revenue back” and “start doing the nice parts of the reform again,” Clausing said.

“I’m not sure we can afford the rate cuts, regardless of any silly pledge about $400K or not,” she said. “It’s not clear Americans will even notice their taxes going up. The vast majority of them — they didn’t notice when they went down.”

Accounting

IRS reforms bring relief, but Trump win clouds future plans

Published

1 hour ago

November 18, 2024

Business Finance News

Enjoy complimentary access to top ideas and insights — selected by our editors.

The latest wave of changes out of the Internal Revenue Service includes a host of relief measures, from disaster assistance in the wake of Hurricane Milton to halting the practice of immediate penalties for late reports of foreign gifts and inheritance. But with the results of the presidential election, much is uncertain about the IRS’s path forward.

Throughout his campaign, Donald Trump made repeated pledges to institute tax breaks for caregivers, domestic car purchases and U.S. citizens living overseas, with further considerations towards excusing police officers, firefighters, and both current and retired military members from paying taxes.

Following Trump’s Nov.5 win, cementing his return to the White House in 2025, many across the accounting profession are now in a “wait and see” period to see which pledges, if any, he makes good on.”The Republicans’ control of the Senate makes it much more likely that Republicans will be able to implement many of Trump’s proposed tax policies, such as making parts of the expiring 2017 [Tax Cuts and Jobs Act] provisions permanent,” said John Gimigliano, principal in charge of the federal legislative & regulatory services group within KPMG’s Washington National Tax practice, in a statement.

Funding for the IRS has been a particular point of contention for the Republican party, as seen with reductions in backing from the Inflation Reduction Act of 2022.

“IRS funding is at significant risk right now,” including both “the annual appropriation funding as well as the remaining IRA funding,” said Rochelle Hodes, principal at Top 25 Firm Crowe LLP’s Washington National Tax Office.

“The only question for me on funding is, will any portion of the funding remain available for taxpayer service-related improvements at the IRS?” Hodes said.

Hodes went on to highlight the Tax Cuts and Jobs Act of 2017 as the first major priority for the incoming Trump administration, followed close behind by determining “how will the cost of that endeavor be determined,” she said.

“If the view that is held by several Senate Republicans wins the day, then the cost of extending the expiring provisions will not be counted under those particular budget rules that are created dealing with extending current policy. … If, however, that view is not adopted, then there is a high cost just to TCJA, and so any other provisions with cost will sort of stretch the boundaries of what many in Congress would be comfortable with,” Hodes said.

Below is a compilation of noteworthy items out of the IRS last month.

IRS is cutting late filers of foreign gift forms a break

Article by Michael Cohn

National Taxpayer Advocate Erin Collins speaking at the AICPA & CIMA National Tax and Sophisticated Tax Conference in Washington, D.C.

IRS executives announced last month that the agency will halt the automatic penalty process against taxpayers who delinquently file forms reporting foreign gifts and inheritance, following outcry from the American Institute of CPAs and National Taxpayer Advocate Erin Collins.

“By the end of the year the IRS will begin reviewing any reasonable cause statements taxpayers attach to late-filed Forms 3520 and 3520-A for the trust portion of the form before assessing any Internal Revenue Code § 6677 penalty,” Collins wrote in a blog post last month.

The IRS followed up the change by emphasizing that it will begin reviewing the reasonable cause statements provided by taxpayers who late filed Forms 3520, Part IV, prior to assessing any penalties.”This favorable change will reduce unwarranted assessments and relieve burden on taxpayers by giving them the opportunity to explain their situation before the IRS assesses a penalty,” Collins said.

IRS issues new benchmark for Sustainable Aviation Fuel Credit

Article by Jeff Stimpson

Guidance released by the IRS last month established the Sustainable Aviation Fuel Credit at $1.25 to $1.75 for each gallon of sustainable aviation fuel in a qualified mixture.

Qualified mixtures are required under the credit, which was created by the Inflation Reduction Act, to have a reduction of at least 50% in life cycle greenhouse gas emissions in order to be eligible.

This change is the most recent entry in the saga of the SAF credit, with other notable entries like Notice 2024-37 allowing fuel producers to employ the 40BSAF-GREET 2024 model when calculating their greenhouse gas emissions reduction percentage for the credits.

Tax-exempt groups avoid filing requirement for 2023 corporate AMT form

Article by Michael Cohn

The IRS and the Treasury Department granted a joint filing exception on Oct. 23 for tax-exempt organizations, excusing them from submitting a Form 4626, “Alternative Minimum Tax – Corporations,” for tax year 2023.

Both agencies said tax-exempt organizations, while not required to file, should still maintain a Form 4626 in their records as documented proof of whether or not they are indeed an applicable corporation for purposes of the AMT and if so, for determining any corporate AMT liability. Liable entities will need to pay the tax and record the amount paid on Part II, Line 5 of Form 990-T, “Exempt Organization Business Income Tax Return.”

The return of PTIN season

Article by Jeff Stimpson

The expiration date for tax professionals’ Preparer Tax Identification Numbers is close at hand.

Both tax professionals and Enrolled Agents have until Dec. 31 to renew or obtain their PTIN for 2025 at $19.75 for the service. Those who currently have a PTIN will be notified by the IRS’s Return Preparer Office of the deadline in the coming weeks.

Read more: PTIN renewal season kicks off

IRS releases annual inflation adjustments for 2025

Article by Michael Cohn

The IRS issued its annual inflation adjustments on Oct. 22 for the 2025 tax year, featuring increases in standard deductions, tax credits, fringe benefits and more due to inflation.

These modifications are applicable to income tax returns filed in the 2026 tax season for the prior year with the agency’s Revenue Procedure 2024-40 outlining all of the changes to more than 60 tax provisions.

Featured dollar-amount changes that are of express importance to filers include standard deductions.

For single taxpayers and married individuals filing separately for tax year 2025, the standard deduction climbs to $15,000 for 2025, an increase of $400 from 2024. For married couples filing jointly, the standard deduction rises to $30,000, an increase of $800 from tax year 2024. For heads of households, the standard deduction will be $22,500 for tax year 2024, an increase of $600 from the amount for tax year 2024.

Accounting

How to Create an Effective Invoice Process for Small Businesses

Published

2 days ago

November 16, 2024

Business Finance News

How to Create an Effective Invoice Process for Small Businesses

A well-designed invoice is crucial to ensuring timely payments, maintaining consistent cash flow, and building strong client relationships. Invoicing is more than just paperwork—it plays a key role in the financial health and professional image of a business. When invoices are clear and professional, they encourage prompt payments and minimize disputes. Poorly constructed invoices, however, can result in delays, misunderstandings, and even missed payments.

The Basics of Professional Invoicing

Crafting a professional invoice begins with the basics. Essential elements should include the business name, logo, and contact information. Each invoice should be assigned a unique invoice number—using a format like “2024-01-001” (year-month-number) helps in keeping them easily organized. Additionally, clearly stating the issue date and due date is vital for clarity.

Creating Clear Service Descriptions

A detailed service or product description is the core of an effective invoice. Specificity is key—list the quantities, rates, and applicable taxes for each item. Assuming that clients recall the details of a service can lead to confusion; clarity prevents disputes. Invoices should include subtotals for each category and a bold final amount due, ensuring that the payment amount is easily identifiable. Additionally, it’s crucial to outline accepted payment methods and provide clear instructions for how payments should be made.

Avoiding Common Invoicing Mistakes

Sending invoices to the wrong contact is a common error that can lead to unnecessary payment delays. Maintaining an up-to-date database of client billing contacts and payment preferences can prevent these issues. Confirming who is responsible for accounts payable before sending invoices is a prudent practice.

————————————————————————————————-

Stanley Quencher H2.0 FlowState Stainless Steel Vacuum Insulated Tumbler with Lid and Straw for Water, Iced Tea or Coffee, Smoothie and More, Peony, 30oz

>>> Order Your Stanley Quencher Now<<<

_{Paid ads at no cost to buyer}

————————————————————————————————–

Importance of Timing and Payment Options

The timing of invoice issuance can impact payment speed and client relations. Invoices should be sent promptly upon project completion to ensure timely payments. Establishing and adhering to a regular invoicing schedule fosters consistency and reduces delays.

Offering multiple payment options can further expedite payments. Clients often expect flexible and convenient payment methods. While digital payments like ACH transfers and credit cards may incur small fees, the benefits of faster payments usually outweigh the costs. Many businesses have seen significant reductions in average payment times by offering online payment solutions.

Leveraging Technology for Invoicing

Technology can greatly enhance the invoicing process. Reliable invoicing software can automate routine tasks such as issuing recurring invoices, sending payment reminders, and tracking outstanding payments. However, it is important to remember that technology is not infallible. Regular human oversight is necessary to identify potential errors that automated systems might overlook.

Essential Checklist for Invoice Accuracy

Consistency in the invoicing process is critical. Creating a checklist for invoice preparation can help maintain accuracy. Key items to verify include:

Confirming correct client details.
Checking all calculations for accuracy.
Ensuring the stated payment terms align with agreements.
Reviewing client preferences for invoice delivery.
Double-checking the applicable tax rates.

This checklist serves as a final review before sending any invoice to ensure it meets professional standards.

Implementing Effective Follow-up Procedures

Prompt follow-up on overdue payments is a necessary component of an effective invoicing system. Sending a gentle reminder around 15 days after the due date, followed by a firmer notice at 30 days, can often encourage payment without damaging client relationships. Maintaining a record of all communications related to payments is essential for clarity and documentation.

Conclusion

An efficient invoicing process not only facilitates timely payments but also reinforces professionalism, showing respect for both the business’s work and the client’s time. A clear, consistent, and well-maintained invoicing system directly impacts financial stability and client satisfaction. By focusing on accuracy, timing, and communication, businesses can significantly improve their cash flow and strengthen professional relationships with clients.

A successful invoicing strategy lies in keeping the process simple, ensuring consistency, and always maintaining a professional standard. This disciplined approach to invoicing contributes to better financial outcomes and more enduring client partnerships.

Accounting

PCAOB calls off NOCLAR standard for this year

Published

2 days ago

November 15, 2024

Business Finance News

Facing a backlash from audit firms over its proposal to toughen the standards for failing to detect noncompliance with laws and regulations, the Public Company Accounting Oversight Board has decided to delay action on the standard this year.

The PCAOB proposed the so-called NOCLAR standard in June, with the goal of strengthening its requirements for auditors to identify, evaluate and communicate possible or actual noncompliance with laws and regulations, including fraud. However, the proposed standard provoked resistance from a number of auditing firms and state CPA societies like the Pennsylvania Institute of CPAs and spurred a comment letter-writing campaign organized by the Center for Audit Quality and the U.S. Chamber of Commerce that was supported by prominent business trade groups like the American Bankers Association, the Business Roundtable, the Retail Industry Leaders Association and more.

Earlier this week, the PCAOB issued staff guidance outlining the existing responsibilities of auditors to detect, evaluate and communicate about illegal acts. The PCAOB was slated to finalize the NOCLAR standard by the end of this year, but after the election it has put the standard on hold for now, anticipating the upcoming change in the administration in Washington, D.C.

“Following the recent issuance of staff guidance, the PCAOB will not take additional action on NOCLAR this year,” said a PCAOB spokesperson. “We will continue engaging with stakeholders, including the SEC, as we determine potential next steps. As our process has demonstrated, the PCAOB is committed to listening to all stakeholders and getting it right.”

One reason for the change of plans is that the PCAOB anticipates changes in the regulatory environment under the Trump administration, especially in the Securities and Exchange Commission, which would have to approve the final standard before it could be adopted. The Trump administration is likely to replace SEC chairman Gary Gensler, who has spearheaded many of the increased regulatory efforts at the Commission and encouraged the PCAOB to update its older standards and take a tougher stance on enforcement and inspections. President-elect Trump, in contrast, has promised to eliminate regulations, and Gensler’s push for increased regulation has attracted the ire of many in the financial industry.

According to a person familiar with the PCAOB process, no further action is expected until further consultation with the SEC under the incoming administration can take place.

Questions have arisen over whether the PCAOB might decide to repropose the standard with modifications given the amount of opposition it has attracted. That is to be determined pending review of the comment letters that have been received, as well as a roundtable from earlier this year, along with responses from targeted inquiries from firms in their approach relating to NOCLAR.

PCAOB board members Christina Ho and George Botic were asked about the NOCLAR proposal on Wednesday at Financial Executives International’s Current Financial Reporting Insights Conference, and Ho acknowledged the pushback.

“We’ve heard strong opposition from the auditing profession, public companies, audit committees, investors, academics and others,” said Ho. “The PCAOB has received 189 individualized comments to date on that proposal. This proposal now has the third highest number of comment letters in the history of PCAOB. That did get a lot of attention. Commenters overwhelmingly called for a reproposal or withdrawal of the proposed standard so that that is definitely something that I am looking at a lot, and I also voted against the proposal. I have spoken to various stakeholders, including investors, audit committee chairs and members, and some preparers as well. The question I got asked repeatedly was, what problem is PCAOB trying to solve? And the people I spoke to believe that there have been improvements in financial reporting quality over the past 20 years, and that obviously is consistent with the CAQ study noting a consistent decline in restatements. While there’s always room for improvement, they noted that a balance is necessary between increased investor protection and increased auditor implementation costs that are ultimately passed on to issuers, and that the NOCLAR proposal lacks such a balance. That is what I have heard from the comment letters, so that pretty much summarizes what I have seen, and I’m still obviously thinking about it.”

Botic noted that the proposal came before he joined the board, but he referred to the staff guidance that had been issued earlier in the week by the PCAOB on the existing requirements.

Last week, the PCAOB updated its standard-setting and rulemaking agendas before the outcome of the election was known. Now with the uncertainty over the regulatory environment, the PCAOB is mindful of the difficulty of having the SEC decide on whether to approve it, especially if the five-member commission becomes evenly split among two Republican members and the two Democrats if Gensler departs or is ousted. The PCAOB feels the SEC needs adequate time to review and educate itself on the proposed standard, rather than having to jam it through a two-two commission, especially with the amount of engagement that will need to take place given such an important standard, according to a person familiar with the matter.

The PCAOB expects it to remain on the docket for 2025 but doesn’t want to try to jam it through this year. However, the PCAOB announced Friday that it has scheduled an open board meeting next Thursday, Nov. 21, on another proposed standard on firm and engagement metrics, which has also provoked pushback from many commenters, but is still slated to be finalized this year.