How States May React to Federal Tax Reform

I hope you had a great Christmas, and are looking forward to 2018.

Last week, the President signed tax reform (H.R. 1) into law making the most dramatic overhaul to our federal tax code since 1986. I normally focus on state taxes, but I have been analyzing the federal tax reform changes for specific clients and doing some ghost-writing. 

Here I want to provide you with some predictions as to how the states may respond to some of the main business federal tax changes.

1. New federal tax law allows 100% expensing of short-lived capital investments, such as machinery and equipment (for 5 years) - applies to qualified property placed in service after 9/27/17 and before 2023. States will most likely NOT conform to this provision and require businesses to add-back the federal deduction.
2. New federal tax law raises Section 179 small business expensing cap to $1 million with a phaseout starting at $2.5 million. States will most likely NOT conform to this provision and require businesses to add-back the federal deduction.
3. New federal tax law eliminates net operating loss (NOL) carrybacks while providing indefinite net operating loss carryforwards, limited to 80 percent of taxable income. Most states don't use the federal NOL and compute their own state NOL, and thus, will most likely not conform to this change. However, there are a handful of states that use the federal NOL and do not compute a separate state NOL. These states will have to make a decision as to whether to conform to the federal changes. I think these states will most likely conform. (For more info on state NOLs, see my previous post)
4. Under the new federal tax law, research expenses are required to be amortized and the domestic production deduction (Sec. 199) was repealed. States will most likely conform to these changes.
5. The new federal tax law creates a new 20% deduction for pass-through entities. The calculation for this new deduction is extremely complex and has several limitations. States that are impacted negatively (i.e., obtain less tax revenue) by this deduction will most likely NOT conform. (Here is a link to an article by the Tax Foundation - Pass-Through Deduction Won’t Flow Through to Most States)

Those are the top 5 business tax changes (other than the tax rate changes and tax changes for foreign income) that I believe the states will address specifically. 

Have a Happy New Year and remember - you can't keep doing the same things and expect a different result! Change can be good. Start now.

Why do you keep going after things you don't care about?

Why do we keep going after things we don’t care about? Why do we naturally lean toward conformity and towards checking the boxes or doing what everyone else is doing? Why is it so hard to be truly innovative? To truly follow what you desire deep down to do?

I want to save the world. I want to make life better and business better. I want to make it easier for small and large businesses operating in multiple states within the U.S. I want to make federal tax and state tax law more effective in accomplishing its objectives while being less burdensome on businesses. I want to make the state tax profession something that is fun and valuable. Something that makes a state tax professional jump out of bed with enthusiasm. Something that will make the state tax professional work all night long if necessary. Not because they have to, but because they want to. They must do it; because they are solving problems so important. So valuable. So appreciated; that they must and want to do it.

I want to work with others that are fun to work with – meaning; they are hard workers. They value initiative. Value treating people with respect. Value giving people responsibility and authority to get things done. I don’t want to waste time. I don’t want to spend my time doing tasks and going to events that are simply busy work or a waste of resources. I don’t need golf events. I don’t need happy hours. I don’t need fancy offices (although I like them). I don’t need game rooms or sleep rooms. I need to work and solve problems and then spend time with my family. I don’t need egos. I don’t need competition. I need productive collaboration and knowledge sharing. I don’t need dress codes or rules that don’t matter. I need technology tools and colleagues focused on getting things done, not checking boxes or meeting number goals. I want to get paid for getting work done, not putting in hours. I don’t need an award. I don’t need networking events. I need one-on-one relationship building opportunities.

Do you agree? What do you want to do? What must you do? What will you do?

Can We Have A Real Conversation?

I have been working as a solo state tax consultant, researcher & writer for the past 4 years (I have 20+ years of experience in total). This solo life is a lot of work. It takes commitment and self-discipline to work when no one is telling you to. It takes more hours than you thought. It takes making the time to 'get' the work and 'do' the work. It is constant. You don't get paid if you don't work. I have been very successful (making more money than I did when I worked for someone else), yet I fantasize about re-joining a firm. I also fantasize about creating something totally different than what currently exists in the world of state tax. I want to make state taxes exciting. Fun even. I want to create passive income. I want to create freedom for other state tax pros. I want state tax to be less burdensome for start-ups and middle-market companies. These (smaller) companies need state taxes to get out of the way so they can truly prosper. Fortune 500 companies have teams of tax pros and large firms begging to help them. They also have the means to get that expertise. I hate the ego and competition in larger firms. I hate feeling like a number. Can we change this?

YOU NEED THIS TO AVOID THIS. YOU NEED THIS TO RESOLVE THIS. YOU NEED THIS JUST IN CASE OF THIS. YOU NEED THIS TO STOP THIS. YOU NEED THIS WHEN THIS HAPPENS.

Simplicity. Straight-forward. Clarity. Certainty. Essential. Valuable. - these are words that describe what we need as business (and tax professionals). Everybody is trying to sell you something based on fear (or pleasure), but mostly fear. Such as "You need this to avoid this. You need this to resolve this. You need this just in case of this. You need this to stop this. You need this when this happens. You need Us. You need our product. You need me. I am the best. I am the best fit for your situation."

How do you know if you really need 'this'? How do you find the right solution? The right consultant? The right firm? The right resource at the right time? How do you become the right resource? How do you sell yourself as the right resource at the right time? What are you and why do I need you?

Keep it simple. Sell your unique story and skills. Sell you. Better yet, make the client's goals your goals. Make the client your story. Make the client the hero. Be a facilitator of growth, of solutions, of success. Happy Monday! Peace.

Are You Attending the Paul J. Hartman SALT Forum in Nashville? Are You Prepared for the Robots?

I don't always learn something from CPE, but I always learn something when I talk to others at a CPE event. If you will be attending the Paul J. Hartman State and Local Tax Forum in Nashville, TN on November 6, 7 & 8, please let me know. It might be beneficial for us to talk. We can talk career, technical, practical, technology, etc. Regardless of what we talk about, it is always good to talk to fellow colleagues to get a better handle on the pulse of state taxation. Agreed? Comment on this post or send me a message and we can schedule a meet-up. If I get a big number, we can always reserve a restaurant or meeting room to have real discussions, not rehash what we already know. For example, what will be the real impact of technology on our profession? (robotics, artificial intelligence, blockchain, etc.). Everybody talks about these things like it is a good thing. It will move people from doing routine tasks and free people up to be real advisors. My question, what if everyone in a corporate tax department doesn't want to be an advisor? What if they like doing the routine tasks? Skill sets, interests, strengths need to be addressed. We need to be proactive in developing our skills to always be relevant. What do you think? What are you doing in regards to the technology wave?

Technology advancements are not about the corporation. They are about people. Real people doing real jobs. Supporting families. Supporting growth. Providing real value to the economy and public. What will technology do to our profession? Is it really a good thing? Are you embracing it or putting your head in the sand?

Can Knowledge Management Make Your State Tax Practice More Profitable?

WHAT’S THE MOST VALUABLE ASSET IN YOUR FIRM?

The expertise and knowledge of your employees.

ARE YOU EXPERIENCING THESE CHALLENGES?

Are you not doing enough with the state tax knowledge you produce?

Is the quality of work and time to deliver too dependent on who is doing the work?

Are you writing off billable hours because people keep reinventing the wheel and not taking advantage of existing experience and expertise?

Are you suffering from information overload from an increasing variety of online and offline sources?

Does your firm have a document or knowledge database, but sometimes neither documents nor people find their way to it?

WHAT IS KNOWLEDGE MANAGEMENT?

Knowledge management is getting the right information to the right people at the right time, and helping people create knowledge, and share, and act on information in ways that will measurably improve the performance of the firm and its clients. It is about connections. Connecting people with information and connecting people with people.

SOLVE REAL BUSINESS PROBLEMS

Knowledge management is about creating, capturing, organizing, making accessible, sharing, and reusing information relevant to a firm’s professionals and business model. However, knowledge management is more than content management. Knowledge management is about solving real business problems. It’s about meeting your firm’s need to capture and reuse expertise in efficient and transformative ways to solve client challenges quickly and effectively. It’s about unlocking knowledge trapped "in-between the ears" of your firm’s experts and making it easy to locate the appropriate expertise within your firm.

STATE TAX KNOWLEDGE MANAGEMENT?

Accounting and law firms can build a better, more sustainable, more profitable state tax consulting practice by improving the quality, consistency and efficiency of the firm’s state tax advice through implementing and executing knowledge management.

Silos exist at every firm, whether large or small. Collaboration has to climb over the barriers of ego and competition. The 'One Firm' motto is often just that, a 'motto.' Everyone is taught to be a 'know it all,' but the problem is - no one can know it all. State tax is one of those fields where every question is a research question. In addition, it always helps to run the question by someone who has experience with the state or has connections within the state involved. Consequently, finding the applicable legal authority and the internal or external expert is prudent = Knowledge Management.