The tax overhaul bill enacted in December, known as the Tax Cuts and Jobs Act, P.L. 115-97, made significant changes to the Internal Revenue Code and has been called the biggest tax reform bill since the Tax Reform Act of 1986, P.L. 99-514. The final bill made a speedy trip through Congress, being introduced in the House of Representatives on Nov. 1 and signed by President Donald Trump on Dec. 22. However, the bill was built on proposals that Congress has worked on for several years.
The bill will have wide-ranging effects on individuals and businesses — and on the CPAs who advise them — for years to come.
Mark Peterson, executive vice president—Advocacy, and Ed Karl, CPA, CGMA, vice president—Taxation, sat down with Kim Nilsen, the JofA's publisher, to talk about the impact the new law will have on practitioners, and the steps the AICPA took to advocate on behalf of the profession as the legislation was being developed.
This is an edited transcript of their conversation.
Congress seemed to race through the tax reform process. Was the bill really fast-tracked, or was it something that had been in the works more quietly for some time?
Mark Peterson: The answer is both. This discussion has been going on in earnest since 2013—2014, when then-Chairman of the House Ways and Means Committee Dave Camp [R-Mich.] had a proposal out. Because of the political dynamic, that bill was never going to leave the House, but a lot of the groundwork was starting to be laid at that point. There were multiple hearings. There were distinct pieces of legislation that were introduced for reaction.
And so there was a long lead-up to a short process. Once they decided on a package and once they made their commitment this fall to move forward, the actual legislative process was fairly short, when you think of a piece of legislation that impacts almost every sector of the economy. But some would say the lead-in to it was comprehensive, and the discussion started many years ago. Others would say the opposite. However, we had been involved in those discussions in a very thoughtful way, which was a great platform for us, because we already had positions, and we had some level of groundwork laid with the committees.
Ed Karl: Mark is correct about the Camp bill being an important way station, but it started even before that. About seven years ago, I was at a National Tax Conference, and Don Longano, who was then chair of our Tax Legislation and Policy Committee, was giving a legislative update at the conference, and I was sitting next to Pat Thompson, who was then the chair of the [AICPA] Tax Executive Committee. And Don started talking about tax reform, and it was really the first conversation about tax reform to come up. I looked at Pat and said, "We need a task force," and she said, "You're right." And so, we've had conversations going back seven years.
Having said that, there were items in the final legislation that didn't surface until maybe two months before the actual legislation passed. So, the last several months really were a whirlwind of items surfacing, changes to items, etc. There was quite a bit going on at the very end.
Could you talk about the role that the AICPA played in the process?
Karl: Well, it starts with our Tax Executive Committee, which is the body that is set by our governing Council to set our tax policy positions, but then there is collaboration between the Congressional and Political Affairs team and the tax team in terms of implementing the policies set by the Tax Executive Committee.
We had the benefit of utilizing the chair of the Tax Executive Committee, and there were several chairs. We started with Pat Thompson, and then Jeff Porter, Troy Lewis, and now Annette Nellen. So, we're talking about four Tax Executive Committee chairs who each have a two-year term, being in this process. Over seven years, all of these people were involved in helping us set our policy positions, testifying at hearings, submitting letters under their name to make sure that we draw the line in the sand in terms of what our positions are.
But then it gets a lot more in depth beyond that, particularly utilizing Mark's team and all the behind-the-scenes conversations, meetings, outreach for intelligence. We utilize the tax team for that as well, but a lot, a lot goes on behind the scenes.
Peterson: I would add, it's a comprehensive effort that utilizes the firms, utilizes the state societies, and utilizes the presence of our leadership during spring Council to take tax-related issues to Capitol Hill.
So, it has been a long-term, ongoing, comprehensive effort that has involved pretty much every segment of the profession.
What are some of the provisions in the bill that the AICPA advocated for?
Peterson: Foundationally, we are for simplification and making the tax code more administrable, make it easier for taxpayers and practitioners, and for good, sound tax policy. That's the foundation for everything, and there were some improvements made by this bill.
On top of that, we specifically engaged in issues that impact the profession as firms, as passthroughs and how those are treated. Regulatory requirements and other issues make it impractical for accounting firms to be anything other than passthroughs and partnerships. So, there were challenges there.
Ensuring the continuation of the cash method of accounting for tax purposes is one of them; the impact of the interest deduction was another one. The deductibility of state and local taxes was another issue that had a major impact, and then deferred compensation, which would have had huge ramifications on a partnership's ability to manage capital funds as it relates to their partners.
There were more issues, but those were five I would highlight.
Karl: I will say the process is going to move on quite a bit in terms of guidance, and our tax team is likely to spend years working on the guidance that comes out to implement this tax law. And as Mark talks about simplification as a foundation, that is absolutely true and will continue, and that's something that we do look at very carefully as we comment on the guidance that comes out.
Some of the law is quite complicated. Some of the guidance itself could be quite complicated, and we always push to try to help the government make simpler choices as they make decisions in the guidance.
When the tax reform conversation started a number of years ago, the centerpiece for tax reform was to lower the corporate rate. That centerpiece never changed. As you follow the last several months of tax reform conversations in Washington, lowering the corporate rate was very much front and center.
We've said all along, from the very beginning, that if they lower the corporate tax rate, then they have to do something for passthroughs. The vast majority of businesses in this country, including CPA firms, operate in a passthrough format. You cannot just incentivize C corporations without doing something to help passthrough entities. I think there are less than 2 million C corporations in this country, but there are more than 30 million passthroughs. So, they have to do something for passthroughs, and that is something that we have harped on every step of the way.
Peterson: We were very pleased and supportive of the expansion of the cash method. And language that would have been harmful as it related to the ability to use deferred compensation, which was in earlier versions, was removed. Modifications to the interest deduction were very helpful. We know there is frustration, particularly for those of our members that are in high-tax states, about the state and local tax deduction changes.
It really is a mixed bag. Again, very clear progress was made that was quite beneficial. But we feel strong disappointment in how service businesses were treated in the passthrough provision. The profession and other service businesses contribute a lot to the economy, and we felt we are just as important as those corporate manufacturing concerns.
Can you talk more about next steps as we turn to implementation?
Peterson: We were very engaged in the legislative process, and that started years ago, you know, hundreds and hundreds and hundreds of hours that went into the legislative process. But now our role with the tax-writing committees, with Treasury, with the IRS is to get the information to them that they need to craft the guidance. Our information is going to come from clients and from practitioners to address the implementation of this. That is going to be vital.
Karl: We already have submitted a letter, identifying a list of priority guidance that the IRS should issue. It's our ideas of the areas that the IRS should focus on in terms of issuing guidance. I think that letter is 10 to 12 pages long, and it's not comprehensive; it's just a start. There are many areas that we think need guidance.
And then, as the guidance starts coming out, we often will pick the issues that are the most important to our members and start giving feedback on that area.
Now, I will say that the flowthrough area is something really important to us. It has a direct impact on CPA firms. We've already formed a task force to start working on that area. So that's going on as well.
And I'll add a third area — and this is something that originally came up in the House Republicans' tax reform blueprint, in which they talked about a central part of tax reform being IRS reform as well. And IRS reform had to be pulled out of tax reform because of the reconciliation rules in the Senate. ... But that is moving separately, and it's something that is really critical for our members and something that we've worked on for a while, so we already have meetings set up.
We touched on this a bit earlier — but how far-reaching is the law?
Karl: It's the largest tax bill since the '86 Tax Reform Act, and, even with small tax bills, there are often areas that they find where there are issues in drafting the legislation. So, from another perspective, there is likely to be a long list of areas that will need technical corrections in terms of the drafting of the legislation. Areas, for example, where congressional intent is not clear or they realize that the drafting had some kind of an error in it, and it needs to be fixed.
As I said, that is a common occurrence with most legislation, and it gets fixed. With a bill this size, the list of areas that will require technical corrections is likely to be fairly long. And in such a contentious environment that we find ourselves in Washington today, the real question is — will they be able to pass a technical corrections bill? And if they're not able to, what is the impact? What impact does that have on the provisions in the law? Because, by definition, if it requires a technical correction, the IRS can't fix it with guidance. They may put out guidance to say, "Here's what you should do or not do until a technical correction bill comes out," but they really can't fix the problem.
So, from that perspective, I think that, again, because of the environment in Washington today and the challenge that Congress will have to pass a large technical corrections bill, it will be even far-reaching in terms of timing. It could go for a couple of years.
Peterson: We will be seeking input from the membership as we go into the implementation process. We will continue to advocate through that. I think it's important to note that we get input from the largest firms all the way down to small practitioners, along with the state societies.
Karl: We have a committee infrastructure of about 200 members, diverse members all over the country, from different-sized firms. We have academics. We have members from industry to try to represent what our membership looks like at large to speak on their behalf, to develop positions on their behalf, to identify issues that impact our membership.
And committees are heavily involved on a day-to-day basis in infusing us with the information that we need as Mark's team and as the tax team go to implement issues and work the advocacy area.
It's an ongoing process. After the '86 Act, we had changes virtually every year. As environmental factors change, as other issues come up, we're there every step of the way to keep an eye on things and to continue to advocate on behalf of our members. So, it's not an end game, it's a continuation.
To comment on this article or to suggest an idea for another article, contact Alistair Nevius, the JofA's editor-in-chief, tax, at Alistair.Nevius@aicpa-cima.com or 919-402-4052.
Read the law
The tax reform bill, P.L. 115-97, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, is also known as the Tax Cuts and Jobs Act. Read it here.
The AICPA Tax Reform Resource Center features news, resources, videos, podcasts, learning, and AICPA advocacy positions, available at aicpa.org.
The AICPA's advocacy e-newsletter, The CPA Advocate, is dedicated to keeping you informed about the AICPA's advocacy efforts on your behalf. See more at aicpa.org.
The Tax Adviser and Tax Section
The Tax Adviser is available at a reduced subscription price to members of the Tax Section, which provides tools, technologies, and peer interaction to CPAs with tax practices. More than 23,000 CPAs are Tax Section members. The Section keeps members up to date on tax legislative and regulatory developments. Visit the Tax Center at aicpa.org/interestareas/tax. The current issue of The Tax Adviser is available at thetaxadviser.com.