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Why US tax reform is good and bad for accountancy firms

US tax reform

Accountancy firms face a double-edged sword as they get to grips with President Donald Trump’s sweeping new tax reforms.

The complexity and scale of the reforms will present new opportunities for tax specialists to help clients understand and respond to the many provisions contained within the law, according to US tax experts who share expertise within Praxity Global Alliance.

However, the new system could also mean higher tax bills for US-based accountancy firms and professional services.

The opportunity

Commenting on the business potential of the reforms, Rob Wagner, Managing Partner of BKD’s National Tax Service, says “accounting firm tax practices, especially international tax practices, should have a great opportunity to help US and foreign taxpayers understand and implement” the new tax code.

He says the “significant complexity” in the tax reforms will require “significant analysis” on the part of tax experts, adding: “Companies will need to rethink and possibly restructure their supply chains and this will require assistance from international tax and transfer pricing specialists.”

His comments are echoed by Tifphani White-King, head of International Tax Services at Mazars USA, who highlights the important role of accountancy firms sharing knowledge on international tax affairs through Praxity.

Sharing know-how

She says: “Accountancy firms have a plethora of options to assist clients with their domestic and international tax needs. As such, all Praxity participant firms should stay front and center in the marketplace educating clients on US tax reform and related advisory and compliance opportunities.”

Judging by the early analysis of the new tax code, the business community faces a daunting task negotiating the business provisions which are likely to impact many calendar financial statements.

Rob Wagner says the tax reform “could flip US tax planning on its head” as companies will now need to consider structures that move operations and intangible property into the US rather than designing structures and supply chains to defer US taxation by generating profits offshore, adding the caveat “however, companies may be reluctant to move their IP back to the US as the US tax laws can change when another political party takes office”. He adds: “US international tax professional will be in high demand to help US businesses address the multitude of changes.”

Bill Armstrong, head of International Tax Services, Moss Adams, says the complexity of the tax reforms will be further complicated by compliance burden. He adds: “The new tax law is anything but a simplification of the system for businesses. Many of the provisions add new reporting and disclosure requirements while there are fairly few modifications to reduce the compliance burden. This will mean that at least part of the tax saving from a reduced rate will go towards compliance. Further, there are several material changes to US tax policy, namely worldwide taxation vs. modified territorial taxation, which will require taxpayers to modify their tax strategies, their record keeping and internal processes in order to find a new equilibrium.”

The downside

Despite the opportunities to help businesses navigate the complexities of the tax reforms, accountancy firms fare poorly under the new law in terms of the way professional services firms are taxed. In fact, the way the tax reforms have evolved leads Rob Wagner to assert “there almost seemed to be a bias against professional services organizations like accounting firms in developing the legislation”.

He explains: “Most accounting firms are organized as partnerships which are pass-through entities and as such are not subject to income tax in the US. Instead, the owners of pass-through entities pay US and state income tax on their allocable share of the pass-through entity’s profits. The new tax law excludes professional services organizations from a 20% pass-through deduction from income availed to other pass-through entity owners. Among the many provisions is a significant cutback of the state income tax deduction. Therefore, the tax base of owners in a professional services pass-through entity will likely increase.” 

Note that all opinions expressed in the article are the personal viewpoints of the tax professionals quoted and do not necessarily reflect the official policy or position of BKD, Moss Adams, Mazars USA or Praxity.