Higher Standard: Will New Deduction Rules Hit Arkansas Tax Pros?

Higher Standard: Will New Deduction Rules Hit Arkansas Tax Pros?
Brian Thompson, a Little Rock CPA, has reconsidered his initial views on whether tax pros will suffer as itemization falls and filers embrace a higher standard deduction. (Kerry Prichard)

Doing your own taxes can be like changing your own motor oil, Little Rock CPA Brian Thompson says. Even if it’s simple, it can be a mess.

Thompson, the immediate past president of the National Society of Accountants, used the oil change analogy in considering this year’s tax changes, including a nearly doubled standard deduction that could cut business for tax preparers.

Will filers, freed from the tedious chore of itemizing deductions, see the new standard as a chance to do their own returns?

“Increasing the federal standard deduction will certainly affect the industry, but maybe not as much as I originally thought,” said Thompson, a partner in Bailey & Thompson Tax & Accounting.

The new $12,000 standard deduction for individual will no doubt cut some itemizing, which 30 percent of filers did last year, according to the Internal Revenue Service.

But Thompson and several other tax professionals are unsure how many will make the switch, particularly the first year after the biggest federal tax revision in three decades.

“It may be like someone considering changing their own oil: Yes, you can buy oil and a filter at the store and change it yourself,” Thompson said, “but sometimes it’s more convenient to pay a professional so that it gets done and it’s right, no matter how simple it may appear.”

Thompson’s point that simplicity is far from the only factor in seeking tax help was echoed by several tax pros consulted by Arkansas Business, from the accountancy agency level to storefront offices like H&R Block and Jackson Hewitt that feature low-cost tax preparation and quick loans guaranteed by future tax refunds.

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The standard deduction increase was one of the biggest changes for individual filers in a generational tax overhaul passed by Congress in December 2017. The Tax Cuts & Jobs Act significantly eased the tax burden on U.S. corporations and many individuals.

The standard deduction, the amount taxpayers can deduct from income before computing taxes owed, is now $12,000 for single filers, $18,000 for heads of households and $24,000 for married couples filing jointly.

Several popular federal tax deductions are also now gone or reduced. State and local income taxes, sales taxes and property taxes are no longer fully deductible, for instance.

“Some tax professionals will see a slight drop in their business this tax season on account of some of the simplification,” said Cindy Hockenberry, director of tax research and government relations for the National Association of Tax Professionals. “Some are expecting an increase in business because taxpayers in general don’t know how this new law will affect them. They will need a tax pro to explain.”

Simplification itself is a matter of dispute. Just ask George Harris, who heads franchisee Sirrah Inc. of Little Rock and manages of 75 Jackson Hewitt stores employing 240 tax preparers in Arkansas and Texas. Harris says the promised “postcard” for easy returns actually comes with six attachments. “The tax law went from 70,000 to 77,000 pages of code, so it certainly hasn’t gotten any simpler,” he told Arkansas Business.

Uncertainty on how employers applied the law’s new payroll withholding formula will add to the confusion, Harris predicted, and doubts are inevitable with any new tax structure. “It’s always called tax simplification, but any kind of change is usually good for the income tax business,” he said.

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Harris and Thompson both said Arkansas still allows many of the deductions now limited by the IRS, and Arkansans might find itemizing worthwhile on state returns while forgoing it federally. “Arkansas has a smaller standard deduction and also still allows those deductions that were done away with by the federal government,” Thompson said.

Taxpayers must weigh whether keeping up with supporting documents for state deductions is worth their time considering the far smaller proportional tax benefit on the state level. Some will do their own taxes now, Thompson said, likely with “software off the shelf or online rather than going to a tax professional. Most tax returns are completed with tax software in this day and age.”

The nonpartisan Tax Policy Center expects the number of itemizing taxpayers to fall from 30 percent to perhaps 10 percent a year, though estimates vary widely. More than a third of taxpayers do their own returns with digital tools like TurboTax, according to a 2015 survey by GOBankingRates.com. Nearly 30 percent of respondents said accountants filed their taxes, and 11 percent said they relied on friends or relatives. More than 8 percent go to storefronts.

“Tax pros are indispensable when it comes to helping clients save tax and use the tax laws to their advantage,” said Hockenberry of the NATP, a trade organization of 23,000 tax professionals with headquarters in Appleton, Wisconsin. She predicted that more taxpayers will file their own returns, but the effects will differ for various tax businesses.

“If a tax professional’s business is comprised largely of these types of filers, their business may suffer,” she said. “However, this is not the only impact of the recent changes. There remains huge opportunity for those pros who are looking to increase their gross revenue and client base.”

She urged filers with college-age children to particularly seek out tax help because instead of a personal exemption for children and dependents, qualifying taxpayers will be entitled to a credit. They’ll also have to understand rules for deducting tuition costs and calculating their credits, Hockenberry said.

Businesses will also still profit from tax help, Hockenberry said. “Clients owning an interest in a pass-through entity such as a partnership, S corporation or sole proprietorship are entitled to a new deduction of up to 20 percent of the qualified business income,” she said.

But again, nothing is quite plainly simple. “Such terms as ‘certain’ business and ‘qualified’ business income need an expert to interpret and explain,” Hockenberry said. “There was a lot of hype in the news about this tax law being a simplification of the rules, but there is nothing simple about this deduction, who qualifies and how it’s calculated.”

Between accountants and storefront preparers, tax pros help more than 35 percent of filers get through tax season. H&R Block Inc. is the largest in an industry with revenue of about $11 billion a year. “We’re No. 2, Jackson Hewitt,” said Harris, who registered Sirrah Inc. with the Arkansas secretary of state’s office in 1998. The company was named Jackson Hewitt’s Franchise of the Year in 2006. At that time, Sirrah operated 57 locations.

One of the keys to growth has been providing services that clients need, like access to their tax refund money early through what used to be called holiday loans, Harris said. The loans are nearly equal to the calculated tax refund and are guaranteed by that money. The IRS does not distribute refunds before Feb. 15, Harris said, “forcing people to wait longer for their refunds; so we have programs to get that money to them.”

Loan customers lead the pack early, in January and February, Harris said. “March customers want quality service, and they want to make sure their taxes are done right.”

Expectations for an exodus of tax preparation customers may also overlook the force of habit, said Thompson, whose business off Stagecoach Road provides tax and accounting services for individuals and businesses, as well as payroll services and compliance work for small businesses.

“I see many clients who are never going to do their own tax return, no matter how simple it may be,” Thompson said. “Doubling the standard deduction isn’t going to change their mind.”