The 2010 filing season promises to be unique both in the amount of advice sought by clients, and in the volume of analysis and planning necessary to service them.
"It will be like none that we've ever seen," promised Lewis Taub, tax director at the New York office of RSM McGladrey. "We're at a crossroads. The economy is recovering but not all of our clients are recovering. It's very important to be cognizant of clients' situations where they're kind of recovering but still showing wounds."
"There will need to be increased planning as a result of the tax law changes we've already seen, and the ones we expect to occur during the year," added Greg Rosica, CPA, tax partner at Ernst & Young and a contributor to the Ernst & Young Tax Guide.
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As a result of changing economic conditions and the Tax Code, preparers have to ask questions they never had to ask before, Taub noted. "Typically, you don't ask questions like, 'Did you restructure your debt this year?'" he said. "Now you have to ask that, because it can be a taxable event. The client doesn't realize that it has very significant tax implications."
"For example, a company owes the bank $10 million, it goes to the bank and restructures the loan to $8 million. The $2 million difference is forgiveness of debt, which is a taxable event," he explained. "Now the payments on the debt are less, but the business is hit with a tax bill of 35 percent, or $700,000. Code Section 108(i) says you can make an election to defer that income to the year 2014. Not only do you not have to pick it up now, you can spread it over five years, from 2014 through 2018. It's in effect for forgiveness of debt in 2009 and 2010, so it will impact returns this year. And if you're not speaking to clients about it, the election will be lost." It may seem like a no-brainer to make the election to defer, but the decision requires some real analysis, particularly in the case of an S corporation, he noted.
Net operating losses are another item that will require analysis, said Taub. The expanded provision, which allows most businesses to carry back losses five years, rather than two, requires the election by the due date of the 2009 return, he emphasized.
WATCHNG THE ELEPHANT
Planning for the future will be a challenge this filing season, agreed Barbara Rosenbaum, CPA, CVA, an executive vice president of Gumbiner Savett Inc. "There are a bevy of 2009 changes that will impact a lot of taxpayers. The NOL carryback options, the sales tax deduction, and the homebuyer and education credits are among these. It will take some focus this filing season, because you don't want to miss opportunities for your clients."
"Of course, the elephant in the room is the estate tax repeal," she observed. "The pundits said we wouldn't get here - the estate tax rules would be fixed before 2010 - but they were wrong. Now they say that there will be a fix this year and it will be retroactive. One of our clients passed away on January 11, so there's an estate tax return due in nine months. We don't know whether these will have been addressed by then, so there's a lot of 'what-if' analyses to do."
