&l;p&g;At first blush, you might think I&s;m a little late to the game with my annual &q;New Year&s;s Resolution&q; post. But my delay was actually a stroke of strategic genius. By waiting a few days to publish,&a;nbsp; I was allowing ample time for all of your &l;em&g;original&l;/em&g; goals for 2018 to fail miserably. And look at you now: It&s;s only January 5th, and you&s;re already back on gluten. You&s;ve given Jim a second chance. And you told the guy at the gym that you needed a full refund because you tore a muscle that, according to the latest medical research, does not actually exist.
&l;img class=&q;dam-image getty size-large wp-image-900179380&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/900179380/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; NEW YORK, NY – JANUARY 1: Fireworks explode in Times Square on New Year&s;s Eve on January 1, 2018 in New York City. (Photo by Stephanie Keith/Getty Images)
But you can still salvage 2018. You can still leave the year a better person than the one who entered. Now, I can&s;t whip you into shape, or get you to put down the pizza, or convince you that Jim is the worst (and he is), but I can make you a better tax professional. All you need to do are these five things:
&l;strong&g;Embrace the Moment&l;/strong&g;
No, no…I&s;m not suggesting that we put down our phone and spend more time with our kids. That never works, and for good reason. After all, the stuff on Twitter is far more interesting than anything Junior has to say.
What I am suggesting, however, is that as tax professionals, we look at the recent overhaul of the tax law not as a burden, but as an opportunity. Allow me to explain what I mean with a little story:
A few months ago, my 8 year old boy was invited to a birthday party at the local bowling alley. It wasn&s;t one of those &q;drop off and bail&q; parties, so I had to stick around for the duration. I didn&s;t know any of the other parents, so the prospect of killing two hours with 10 total strangers quickly grew uncomfortable, made only more so by the fact that like any tried-and-true tax guy, I&s;m inherently anti-social to being with.
Eventually, the conversation among the adults turned where it always does when no one knows what else to say: discussing what we do for a living. When it was my turn, I fessed up: I was a CPA who made my living in the tax law.
All life was &l;em&g;immediately&l;/em&g; sucked out of the conversation. Hell, if there had been a live band playing, it would have come to a screeching halt, like Otis Day did in Animal House when Otter, Boone, and Flounder walked into the Dexter Lake Club. Needless to say, there were no follow-up questions about what a day in my life was like; the people driving the conversation couldn&s;t move on fast enough.
That&s;s when things went from bad to worse. The next guy? Well, he turned out to be a magician. That&s;s right, a freaking&a;nbsp;&l;em&g;magician. &l;/em&g;He explained that he spends his time performing acts of deception and sleight-of-hand, and while it sounded awesome when he said it, when you really stop and think about it, it isn&s;t all that different from what we do.
But that didn&s;t matter. Instantly I became invisible. For the next two hours, all of the attention was lavished upon this poor-man&s;s David Blaine, with the lowly tax guy exiled to the darkest corner of the bowling alley.
But here&s;s the thing: if that same exact party were to be held this weekend,&a;nbsp;&l;em&g;all the attention would be on me.&a;nbsp;&l;/em&g;No one would care about the magician; in all likelihood, the other parents probably wouldn&s;t even discover he&a;nbsp;&l;em&g;was&a;nbsp;&l;/em&g;a magician, because the remainder of the two hours would be spent peppering me with questions.
Why the change? It&s;s exceedingly rare for the tax law to rise to the forefront of the public consciousness, but that&s;s exactly where we stand at this moment. &l;em&g;Everyone&l;/em&g; is talking about the new law, trying to understand who wins, who loses, and what can be done to make sure they land among the former rather than the latter.
And when people find out what you do– whether at a networking event or a dinner party or a bowling alley — they are going to look to you to separate fact from fiction. And you&s;ll have two choices.
You could respond with, &q;I&s;ll worry about the 2018 law when I prepare those returns&a;nbsp;&l;em&g;next year;&a;nbsp;&l;/em&g;for now, I&s;ve got my hands full with 2017 law.&q;&a;nbsp;That, I would suggest, would be a poor decision. After all, what does it say about you when everyone has an opinion on the new tax law EXCEPT for the very person who gets paid to have an opinion on the new tax law? It&s;s not a good look.
I would implore you instead to choose Option #2: to be able to respond to any and all questions by speaking intelligently about those aspects of tax reform that have garnered so many headlines over the previous months — the pros and cons of the budget reconciliation process, static versus dynamic scoring, the elimination of personal exemptions and critical itemized deductions, the new deduction for business owners, you get the idea…. You do&a;nbsp;&l;em&g;that, &l;/em&g;and you just may win yourself&a;nbsp;a new client or three.
Of course, that isn&s;t going to be easy. You&s;ll have to do the legwork, and hopefully, that process has already begun. But once you&s;re up to speed, don&s;t shy away from the spotlight. After all, this isn&s;t going to last.&a;nbsp;Before you know it, the fuss over tax reform will quiet to a whisper, and we tax pros will resume our rightful position as social lepers. But until then, don&s;t hide from it; embrace it.
&l;strong&g;Get a Fresh Start&a;nbsp;&l;/strong&g;
OK, maybe you&s;re not the&a;nbsp;&l;em&g;most&a;nbsp;&l;/em&g;technical person at your firm. Your copy of the Code is currently propping up your second monitor. When you hear someone in your office talking about &q;hot assets,&q; you&s;re certain a sexual harassment allegation is imminent. And the closest you&s;ve ever come to a Private Letter Ruling was leaving an on-line review for one of those &q;It really happened to me!&q; submissions to Penthouse.
But guess what? The law you largely ignored throughout your career is dead. A new law has risen. And there is absolutely nothing preventing you from righting your previous wrongs and absolutely&a;nbsp;&l;em&g;owning&a;nbsp;&l;/em&g;this version of the Internal Revenue Code.
Since President Trump took office, the Republicans have lauded their control of the White House, House and Senate as presenting a once-in-a-lifetime opportunity for tax reform. And now that the Tax Cuts and Jobs Act has been born from that opportunity, the new tax law presents a &l;em&g;once-in-a-career opportunity for you. &l;/em&g;
Think about the old law — sections like 351 and 754 and 263A — these are long-established provisions, with decades of regulations and administrative rulings and judicial precedent standing between you and a strong understanding of how they work.
And sure, those provisions still exist, but now we have brand NEW provisions, where the only thing keeping you from being the foremost authority on the subject is a few hours of your time and the willingness to get your hands dirty. There are no regulations. There is no case history. All we&s;ve got at this point is legislative text and a conference committee report. So dive into Section 199A, and figure out how the new &q;20% deduction of qualified business income&q; works. See if you can make sense of who gets the new $500 dependent credit. Gain an understanding of what assets are eligible for 100% bonus depreciation.
And while normally, learning the tax law is extremely intimidating, in the current climate, it&s;s actually quite&a;nbsp;&l;em&g;freeing&l;/em&g;; at this point in the law&s;s evolution, no one can really dispute your interpretation of a brand new provision, because we don&s;t have any guidance to say that your interpretation is incorrect. Feel free to declare yourself the preeminent national expert on, for example, the new interest limitation rules, and at least for the time being, your reign will go unchallenged.
So with a little bit of time and effort, you can completely reinvent yourself, from the person who&s;s greatest value to his office is the proximity of his home to Dunkin&s; Donuts, to the leading expert on a critical area of the new law that everyone&s;s talking about.
&l;strong&g;Expand Your Mind&a;nbsp;&l;/strong&g;
In the coming months, we tax professionals are going to need to open up our collective minds and think about things differently than we have in decades.
&l;em&g;What type of entity should we use to operate our business?&a;nbsp;&l;/em&g;
It&s;s a question we get constantly from clients; not just for new ventures they might form, but also as it relates to an ongoing enterprise. After all, as businesses grow and evolve, our clients look at the huge body of tax law and wonder: with so many different rules, what is the likelihood that the same choice of entity that worked for me five years ago still works today? Throw in the fact that the tax law has been completely overhauled, and their anxiety becomes palpable.
And here&s;s the thing: for the past 31 years, the choice of entity for the majority of our clients has been a binary one: they will be an S corporation, or they will be a partnership (LLC).
Why? It&s;s simple, really. With the repeal of the General Utilities doctrine as part of the Tax Reform Act of 1986, the &q;double taxation&q; inherent in operating as a C corporation simply became too punitive. Think about the pre-2018 corporate landscape: corporate-level income was taxed at 35%. A subsequent distribution of cash was taxed to the shareholder at a top rate of 23.8%. And courtesy of General Utilities repeal, a distribution of appreciated assets by a corporation to a shareholder was treated as if the corporation &l;em&g;sold those assets&l;/em&g; for fair market value.
Meanwhile, owners of S corporations and partnerships pay tax on the income earned by the business only &l;em&g;once,&l;/em&g; at the owner level, at a top tax rate of 39.6% under pre-2018 law. Compare that to the pre-2018 effective two-level federal tax rate on owners of C corporations of over 50%, and it&s;s easy to see why C corporations have long been relegated to the entity choice of last resort.
But no more.
As of January 1, 2018, the top corporate rate plummeted to 21%. The cash method of accounting is now available until average gross receipts exceed $25 million. Tack on the benefits of the new 100% asset expensing rules, a top corporate rate of 21% on personal service businesses, the doubling of the estate tax exemption, and perhaps most importantly — the fact that NO ONE understands the new deduction available to flow-through owners that was meant to allow them to retain their competitive advantage over C corporations — and courtesy of the recent reform process, C corporations are going to become &l;em&g;very&l;/em&g; attractive to many businesses, at all stages of the life cycle.
Consider also, that there were pre-existing benefits afforded only to C corporations that tax reform did nothing to dilute: For example, the ability to provide tax-free fringe benefits to shareholder/employees, and an exclusion from gain on the sale of stock held longer than five years under the recently-expanded Section 1202.
Add all these things up, and C corporations can no longer be an afterthought. Every tax professional must look at every client and ask a question that as recently as ten days ago likely would have been unthinkable: &l;em&g;should this client be a C corporation?&a;nbsp;&l;/em&g;
&l;strong&g;Dive Into Section 1202&l;/strong&g;
Speaking of Section 1202…if C corporations are really going to enjoy a resurgence — and they are — you&s;ll want to get to know this provision a little better.
Section 1202 provides an exclusion from gain upon the sale of &q;qualified small business stock&q; (QSBS). It is nothing new; it&s;s just that until recent years, it has largely been toothless. Prior to 2010, if you sold QSBS stock,&a;nbsp;&l;span style=&q;text-decoration: underline&q;&g;50% of the gain was excluded under Section 1202&l;/span&g;.&a;nbsp; While that sounds wonderful, the remaining 50% of the gain was subject to tax at 28%, meaning the tax rate on the total gain was 14%. This offered only a 1% benefit over the long-term capital gain rate of 15% that was in place at the time. Couple this with the fact that 7% of the gain was also treated as an AMT preference item, and Section 1202 was rendered&a;nbsp;a rather useless provision.
In 2010, however,&a;nbsp;Section 1202 was amended to provide that&a;nbsp;QSBS stock acquired after September 27, 2010 &l;span style=&q;text-decoration: underline&q;&g;would be eligible for a 100% exclusion when sold&l;/span&g;&a;nbsp;That&s;s right…where else in the tax world do you get to sell the ownership of a business for cash and pay NO TAX? It can happen under Section 1202, but before you can enjoy its benefits, you have to understand how it works.
We&s;ll keep it brief here; the most important thing to know is that only the stock of a C corporation can qualify as QSBS. S corporations don&s;t make the cut; neither do partnerships. But if you form a C corporation, provided that:
&l;/p&g;&l;ul&g;&l;li&g;The corporation has assets of less than $50 million from the date of formation through the moment immediately after you receive your stock,&l;/li&g;
&l;li&g;You acquire your stock at &q;original issuance,&q; meaning you get the stock directly from the C corporation in exchange for cash, property, or services,&l;/li&g;
&l;li&g;The corporation is not a disqualified service business, meaning it is not in the field of health, law, accounting, or any business where the principal asset of the business is the skill or reputation of the owner or employees, and&l;/li&g;
&l;li&g;You hold the stock for five years before selling…&l;/li&g;
…then upon sale, you can exclude 100% of the gain, subject to a limitation of the GREATER OF: 1. $10,000,000, or 2. 10 times the basis of the stock.
Now it all starts to make sense. If the corporate rate is down to 21%, and there is the potential to sell C corporation stock after five years without paying tax, well…now we know why C corporations are going to become so attractive. Sure, with the double taxation regime still in place, a C corporation might &q;lose the battle&q; each year relative to flow-through entities by paying slightly more in tax, but when the owner of that C corporation sells stock and is able to exclude the gain under Section 1202 — an exclusion that is simply not available to owners of S corporations or partnerships — that client will have ultimately won the war.
So how should you start the process of learning about Section 1202? In the interest of shameless self promotion, &l;a href=&q;https://www.forbes.com/sites/anthonynitti/2015/11/23/tax-geek-tuesday-reminding-you-that-the-gain-on-that-sale-of-stock-may-be-tax-free/#13bcebd02a38&q;&g;how about you check out this Tax Geek Tuesday&l;/a&g;?
I&s;ll admit it; I had a really tough time with this one. How can I, in good conscience, encourage you to join Twitter when I dream of quitting the social networking site EVERY. SINGLE. DAY.? Because if you want to be a good tax pro, the reality is, you need to jump on board.
Let&s;s start by stating the obvious: Twitter is a pit of despair. It gives a voice to everyone, and while that sounds amazing in theory, in practice, it&s;s damn painful to read. If you were so inclined, every few minutes you could hop on a thread and discover a new person whose very existence horrifies you. It&s;s racist, misogynist, and full of awful, awful people who want nothing more than to stoke fires and then watch the world burn.
But you know what? You can ignore all of that, and you should. You can join up and only follow&a;nbsp;a handful of leading tax minds, and it will prove to be an invaluable resource. I don&s;t know what I would have done throughout the&a;nbsp;tax reform process if I couldn&s;t continuously check in on the real-time updates from Capitol Hill provided by Richard Rubin of the Wall Street Journal. Or how I would have gotten a handle on the economic impact of the various proposals without the Twitter feed of Scott Greenberg of the Tax Foundation. Or if I would have truly appreciated the prodigious amount of loopholes in the new law without the tireless tweets of Lily Batchelder at NYU and Victor Fleischer at the University of Colorado.
Tax twitter is an amazing place; even with reform over, it continues to reap tremendous dividends. Courtesy of the platform, some of my most trusted contacts are people I&s;ve never met. If I find myself pondering an area of the law, I can simply float a hypothetical, and sit back and watch as a tremendous discourse unfolds, 280 characters at a time.
So do yourself a favor. Go to Kelly Phillips Erb&s;s recent &l;a href=&q;https://www.forbes.com/sites/kellyphillipserb/2017/12/31/top-100-must-follow-tax-twitter-accounts-for-2018/#7ff1b5f4184a&q;&g;list of the Top 100 Tax Twitter accounts to follow&l;/a&g;, and ping &s;em off, one-by-one. Trust me when I say you&s;ll learn far more than you could imagine.
And if you need a break from Tax Twitter, feel free to deviate into General Twitter, where you&s;ll be provided a window view of the end of civilization.
But, hey, make and fulfill these five resolutions, and at least you&s;ll be a better tax pro when nuclear winter arrives.