April Walker: On today's podcast, learn what you need to know about the Tax Bill.

Hi, everyone, and welcome to the AICPA's "Tax Section Odyssey" Podcast, where we offer thought leadership on all things tax facing the profession.

Today's episode is a joint collaboration with the AICPA's PFP podcast.

I'm delighted to have with me today two guests.

One is a frequent guest of the show, Mark Gallegos.

Mark is a partner at Porte Brown in the Chicago area.

Welcome, Mark.

Mark Gallegos: Thanks for having me April.

April Walker: Joining us for the first time today is Bob Keebler.

Bob is a partner with Keebler & Associates in Green Bay, Wisconsin.

Bob is a frequent speaker on these topics, but it's my first time snagging him to talk on this podcast.

Welcome.

Thank you for joining us, Bob.

Robert Keebler: Great to be here, April.

April Walker: Today we're going to talk about all the things we have going on in the tax world.

We're all wrapping our heads around the latest tax legislation that's currently sitting with the Senate.

To start off, we're going to talk a little bit about timing, and what's important about that is today is Monday, June 23rd, and that's important because things are certainly moving and shaking pretty quickly and we anticipate there could be changes any day, anytime now, any minute.

We think this is a good conversation to have where we'll talk through if you're already getting client calls, if you're wanting to reach out to specific clients, that's the purpose of today's conversation, not to really do a deep dive on all the nuances of the House bill and of the Senate language.

That's not what we're trying to do today.

We're just going to try to give you some talking points in the interim before we get all the final language shaken out.

Mark, let's talk about what could be coming up and where we are, what we know, and what could be the next steps.

Mark Gallegos: As we know the House passed H.R.1 Bill prior to Memorial Day and now it's been with the Senate.

They released their language of the bill last week and now it has to go through a series of steps on the Senate side.

Remember, this is reconciliation.

They're using the Senate's Byrd Rule and there's a whole process where they go through the Senate parliamentarian and have to go through a whole set of steps before they can get to the vote.

Now, whether the vote happens this week or not, we'll see, but that process has to happen.

Once they vote on it, let's just say they vote on the current language, then it'll be up to the House and the Senate to join both bills because at the end of the day before it could go to the president to be signed into law, both bills have to mirror each other, they have to be identical.

There are provisions that are different, and they'll have to work those differences out in the process.

April Walker: We'll be monitoring that very closely as we go.

Bob, just to start us off as we're thinking about the language that we've been reviewing for the House and for the Senate, what are a few things that stick out to you of importance, you think to your client?

Robert Keebler: I think the estate tax provisions are going to be very important.

We'll talk about that.

Opportunity zones come back to life in 2027, so that will be important.

Rates stay the same, that will undoubtedly influence Roth conversions.

Mark's promised he'll talk about it a little bit.

There are some minor changes in AMT, maybe not so minor, but we have to explore that.

Of course, we can't ignore SALT, and we'll go through a technical explanation of that.

But the phaseout on SALT in the House Bill creates an anomaly where the rate could actually jump from 37 to 47% during that phase out.

If that's the math, CPAs all across America have to be able to do those calculations to say to someone, "hey, working from 64-66 doesn't make sense because you're giving too much of your income to the government.

You can cut down your hours and not be in a 50% plus state and federal rate." I think that's one thing that we'll talk about when we finally get something signed by President Trump, but it's going to be something that we have to have at our fingertips, that knowledge.

April Walker: Hopefully there'll be some software to help with some of those calculations, I'm just trying to think of having to do those phase outs and the thresholds.

But yes, it is important and it's important to not wait until the law is signed, next spring, I'm trying to do tax returns.

That's really too late for a lot of your clients.

Let's start off with the rate example, then, Bob.

Let's talk about what you see as an important discussion item around the rates.

Robert Keebler: Well, right now, I believe both bills with some nuance with the 37% rate, which we'll jump over till we get a final bill, but the rates stay the same.

It calls into question in 2025, 2026, 2027, 2028, do we work on Roth conversions?

Anticipate everything we do has to be done with the backdrop that the American political pendulum will continue to swing and rates at some point in time may go up.

Do we do something strategic in the meantime?

Because I represent, many people with large IRAs and it's a reasonable question.

Do you try to get onto the roth side of that equation?

That's something that everybody should have in the back of their mind.

April Walker: I know we were talking about it a lot when we were not sure what was going to happen before the election and with TCJA expiring.

Lots of discussions around that.

I just like to think about it as we as advisors are always going to be valuable in whatever political climate it is.

I try to look at it from a positive perspective rather than it's constantly changing, which is the truth also.

This is a little bit of a complex topic, I apologize for making you go into it, but we're going to lump in together.

Again, because the purpose of today is we're not talking about all the details, we're just talking about what you need to know around QBI, the SSTB, and whether that is a factor or not in the bill and in the language, and also SALT, what is going on with the SALT deduction and also PTET.

I gave you a lot of acronyms to work through there, Mark, but we're here to support you.

Mark Gallegos: That's great.

These all go together.

These are questions I'm getting daily, emails, phone calls, and even people that I don't know are calling me about it.

Just to clarify QBI, Section 199A under the House proposal, they would increase the deduction from 20-23% and that deduction would be made permanent.

Then for SSTB, the phase out rules would be there, what we've seen already that we've been dealing with since 2018.

Under the Senate Language, the deduction would remain at 20% and also be made permanent.

However, the phase out amounts are increased or basically expanded, and so it gives more people the ability to take advantage of that.

But again, these are things that are important, but when you get into beyond the flow through entity of S corps, partnerships or even sole proprietorships, and now you're looking at the SALT cap.

This is a very important area that is probably a hot topic when it comes to tax.

We know that since the Tax Cuts and Jobs Act, we've been capped at $10,000 for every individual.

Under the House Bill, the cap was increased to $40,000 and there's a phase out that starts when modified adjusted gross income is greater than 500,000 then it could start phasing that 40,000 down to 10,000 that's the House Bill.

Under the Senate Bill, they left the cap at $10,000.

I think with the idea in the Senate Finance Committee proposal, they state that this provision is available to be negotiated.

Meaning, look, we're going to leave it at 10 and we're going to have to talk about what this means because we know there's members in Congress in both the House and the Senate that are in favor of increasing it and are also not in favor of increasing.

When you tie that back to 199A, and you say, how as a S corp shareholder or a partner in a partnership, how do I get to take advantage of that?

Well, the workaround that we've been dealing with for a while is called PTET, the pass-through entity tax.

This has been a great thing in many states.

But under the House rules, the individual SALT deduction, remember, is going to $40,000 under their proposal.

The PTET SALT deduction is tied to Section 199A deduction.

The issue there is that it still follows the SSTB, the specialized service trade or businesses, so those accounting firms and law firms, and medical practices, doctors, etc., they would also be subject to this and lose out on that deduction, so this is something that I know the AICPA has really taken a grassroots movement of really trying to advocate for and try to do some real work to try to get this changed.

When the Senate language came out last week, the changes there were that all pass through entities may deduct PTET up to the unused portion of your SALT cap so let's just say 10,000.

Let's just say I was only able to deduct $6,000 on my personal tax return.

I'd still have $4,000 of SALT cap to use up and then you were able to take the SALT cap plus the greater of $40,000 or 50% of the PTET benefit.

There would be a calculation that you'd have to go through to model out, hey, if I'm an S corp owner, I own 100%, I make a million dollars in whatever state I'm in, if I make the election, what is the benefit that I get to deduct?

These are the questions that are coming in, and this is where modeling to try to determine, hey, how much can I deduct?

What is the tax benefit and savings?

Are there things in place that I should be doing?

One of the discussion points that I've been having with certain clients is choice of entity.

Should you still be an S corp or partnership?

Or is there another choice of entity that may make sense to you?

Again, we don't have to pull the trigger now, but these are the fluid conversations that I'm having, and I think advisors out there really need to start looking at.

Because again, at the end of the day, there's a lot of moving parts here, and to know how do I maximize tax deductions along the way, which at the end of the day puts money back in those shareholder partners pockets is key.

April Walker: Thanks for walking us through that.

Just clarifying question for me, the SSTB language is not in the Senate language, but there is still an adjustment necessary.

Sounds like the PTET calculation in general was fairly complicated.

Every state was different so this just seems like piling on a little bit maybe?

Mark Gallegos: Well, the House Bill makes it specific that, hey, if you're an SSTB, you're really losing that benefit on the PTET.

On the Senate side, it applies to you regardless of whether you're a qualified business or an SSTB.

They've taken that off the table, but they've created a two tier formula that still may limit you along the way.

April Walker: Got it.

That's really helpful.

Again, we're just waiting to hear definitely there's going to be more conversations because that has to be aligned before the bill is finalized and sent to the president to sign.

Bob, now let's talk a little bit about estate tax and what you're seeing in this proposed legislation that either makes you excited, makes you pause.

What have we got going on in the estate world?

Robert Keebler: Well, a tale of two cities.

Mark and I live about 150, 200 miles apart, and in Illinois, he has to deal with a state estate tax.

In New York, you have to deal, etc.

In those states, CPAs are really going to be required to continue to know all these rules.

On the federal level, though, this bill takes us to 15 million times two for a married couple, $30 million, with portability still in place.

Less than one out of 400 or 500 Americans are going to have to deal with an estate tax.

We have to square into that, and that's going to change a lot.

Now, we still have a tremendous wealth transfer in the next 25 years but also deeper than that, we have to remember this political pendulum will swing, and we could always have the exemption go back down, we don't know what that looks like.

If you're at 50 million, you can't just walk away.

You have to do some financial planning and say, what do I need to live on?

How much excess capital do I have and then you need to make those gifts.

That's going to be very important for CPAs to be involved in those calculations.

Not on how much is the estate tax, the estate tax on 50 million is 50-30 times 40%.

An eighth grader could do that.

The difficult calculation is I have 50 million, my wife and I need x number of dollars a year to live on.

This is our mosaic of assets, and where do we draw from and what do we give away?

What are the basis considerations?

That's where tax CPAs and people on the PFS side really have to get involved in these equations because many times our friends on the legal side aren't really equipped to run those projections for people, and we need to do those.

April Walker: For sure.

Again, I think it just brings up another opportunity to be able to have the conversation around planning for retirement, planning for what your life means when you're no longer here on this earth.

Nothing groundbreaking in changes in the estate tax, but just another opportunity for us to have that conversation.

Let's switch back to Mark, and let's talk a little bit about R&D, Section 174, which has been a topic of conversation for lots of years now.

I believe it expired at the end of 2021, if I'm remembering that correctly.

The provisions are a little bit different for the House and the Senate.

I think exciting news, I think it's a good business provision for us, but there's also some retroactivity in there, which could cause some complications, so Mark, walk us through what we need to know about Section 174 R&E.

Mark Gallegos: Yes, 174 has been a thorn in many of my clients sides since the end of '21, when we were advising them, hey, this is about to happen, and they're like, are you serious?

then they started to see the real impact, and they're like, well, when is this going to reverse?

Well, we finally got to at least language that says we want to do something about it.

In the House Bill, they allow full expensing for domestic R&D costs from January 1st, 2025 through 2029.

However, the foreign R&D remains, you got to capitalize and amortize over the 15-year period.

The Senate language, though, they allow also the full expensing for domestic R&D from January of '25.

The one thing they added into theirs was that the Senate Finance Committee proposal would provide small business with the option to apply this change retroactively back to 2022 when we started initially capitalizing this and you'll be able to adjust that through amended returns.

This is a great idea to say, not only do I not have to expense under the Senate language in '25, but I can go back to '22, '23, '24 and either amend the returns to accelerate the remaining amortization that I haven't been able to take yet, or maybe they come up with some other caveat for us to do that.

Either way, it's a great movement in the right direction for those clients that every single year are saying to me, can we please get this changed?

Obviously Bob and I don't create the laws, we just interpret them and help you advised what to do to make it better.

Robert Keebler: Mark, can we just sidebar on that for a quick second?

Mark Gallegos: Yeah.

Robert Keebler: Twenty-two returns.

Walk me through the immediate statute of limitations concerns.

Because tick tock, three years?

Mark Gallegos: In theory, let's just say I have an S corp and I filed my '22 S corp return on March 15th of 2023.

If you had to amend, unless they gave us provisions, and we'd have to wait for Treasury to give us guidance on that.

But I only have until March 15th of 2026 in order to amend that return, which depending on when this bill would get done and approved and it's effective for 2025, as an advisor, you would have to move fast in that regard.

These are things that the AICPA, as guidance comes out, they will be all over providing tools and resources to make sure you're up to speed.

But that's a great question, Bob.

Depending on what Treasury does or unfortunately, sometimes we have to wait for Treasury to give us the guidance.

We could be headed down a road where we're going to have to move fast to get that done.

April Walker: Then the potential complication of partnerships who are in the partnership audit regime, who are not able to amend their return.

What does that mean?

Most of these are going to be pass through entities.

You've got pass through entity and an individual return to amend.

Lots of complexity there.

Certainly we'll be following that and trying to provide whatever assistance we can on the nuances of all of that.

Mark Gallegos: The positive from this is that it seems like we're headed in a good direction for 174 that does provide a great benefit to the average taxpayer that is stuck capitalizing.

April Walker: I heard so many times about some of these smaller businesses that were not expecting this.

It was a huge cash flow issue, so I'm excited to be able to provide help for them.

Bob, I think you mentioned as we were planning for this, talks about opportunity zones.

There are some changes in this legislation around opportunity zones, some potential opportunities, opportunities to advise on these provisions.

Tell us what you're thinking about in this area.

Robert Keebler: Sure.

There are differences between the House and the Senate Bill, and Mark and I can cover those, and the AICPA will cover those when they're ironed out.

But here's what you really need to know.

For clients to invest in opportunity zones, they're still going to have a 12/31/26 recognition event.

Then beginning January 1st, 2027, we're going to have a new round of opportunity zones, and they may well be expanded, certainly under the Senate Bill.

I think what's interesting is the planning that surrounds the gains that will ripen in December of 2026, and then trying to position gains.

If somebody's thinking of selling their business, and they might well think about waiting until close in January of 2027, a year and a half from now, if they would roll that into an opportunity zone.

If they were entrepreneurial and they saw a project they really wanted to get into.

I think that's where we have to start playing chest not checkers.

April Walker: That's a great point.

While we are waiting for final language and for the bill, it's good to have these things on your radar as you're thinking about if you've got clients on extension, you're trying to wrap up their 2024 returns, it might be a good opportunity for you to have some of these conversations.

Mark, reviewing the language, I also noted energy credits.

The wording is a little bit different and we're not sure how it's all going to shake out.

Mark Gallegos: I think at a high level, we've gotten used to, since the Inflation Reduction Act, the number of credits that have come into play, and you've seen starting in the '24 tax filing season that people have taken advantage of.

But some of these there have been some changes in Section 25C for energy efficient home improvement credits.

Under the House Bill, it terminates for property placed and service after December 31st of 2025.

The Senate language, it terminates for expenditures made after 180 days after this law is enacted.

That's something that, depending on where they come to an agreement on, could kick in, not very far off into the distance.

Same thing with Section 25D for residential clean energy credits, the same rules would apply.

In addition, something that's important out there is the Section 25E, the previously owned clean vehicle credit.

Again, also terminates after December 31st of '25, the Senate language is in alignment with that.

I think one big one I'd point out that affects certain taxpayers is Section 179D.

That's the energy efficient commercial buildings deduction, and this is a permanent deduction that provides great value out there.

The House Bill did not address this.

However, the Senate language says it terminates deduction for 179D for property that begins construction more than 12 months after the law is enacted.

That is something that if, hey, I'm someone that wants to take advantage of this or I'm definitely planning on it, you might want to put on your radar to say, well, at least the Senate language is talking about terminating this 12 months after enactment.

We need to talk about how this can work or not.

I think these are things that I want to make sure on people's radar, especially if you're thinking about, hey, I want to enact in this project because I'm going to get all these great energy credits along the way.

Well, let's look at the laws and where things are headed and just keep it from an advisory standpoint, make sure we're telling the right thing.

April Walker: Yes, great.

One other last thing that I have on my list, and then I'll make sure that you guys don't have anything that I didn't have is the bonus depreciation, 179 depreciation.

What changes do we have there?

Who wants to talk about that?

Mark.

Mark Gallegos: Bonus depreciation.

Again, Tax Cuts and Jobs Act had us at 100%, and then remember, it started phasing out by 20% a year.

The House Bill, it reinstates and extends 100% bonus depreciation for qualified property that's acquired between January 19th of 2025 and December 31st of 2029.

Then it basically restores the full expensing from a broad range.

The Senate Bill language is in alignment with the House on that.

100% is back in play.

We like that.

Section 179, which a lot of taxpayers, especially smaller, take advantage of.

Under the House Bill, the proposal increases that maximum deduction to 2.5 million per year, and the phase out kicks in at four million in total assets purchased.

The Senate Bill is in alignment with that as well.

In addition, there's something about qualified production property, manufacturing property that was never in the Tax Cuts and Jobs Act.

Under the House Bill, they would allow bonus depreciation on manufacturing property where construction begins after January 19th, 2025 and before January 1st of '29, it must be placed in service prior to 2033.

And on the Senate side, it would be the same provision, but the property placed in service has to be before January 1st of 2031.

There are nuances there.

But the key, I think, no matter what we're looking at is clients come to us all the time and say, hey, I'm a small business.

I'm thinking about buying new machinery, new equipment, investing in new technology.

How quickly can I write that off?

It's time value of money, the Bonus Depreciation, (section) 179, however we want to look at it.

I think these are great provisions that are headed in the right direction, just like we saw with the 174.

But again, we can always see these things change, and that's why paying attention to these tools and these resources are key to make sure we are advising properly where we're at today.

April Walker: That checks off all the items on my list.

Bob, do you have anything that we didn't cover that seems important to you?

Robert Keebler: Well, Mark touched on it.

My final thought would be choice of entity is going to have to be reviewed, especially in the SSTB world because if I can deduct my income taxes in a C corp, but not in an S corp or partnership, the math may change.

The thing is, I'm not sure how much national guidance we're going to be able to give on that because a CPA student in Florida and a CPA in California could have the same situation and view it totally differently, and both be right.

That's going to be just a lot of 50 different Excel spreadsheets, one for each state, I think.

April Walker: Yes, that sounds fun.

Mark, anything that I left out that you'd like to talk about?

Mark Gallegos: I think we covered all the main topics that are key.

I think my takeaway from all this is that modeling, talking to your clients, this is a great I call it opportunity season.

This is the best time to start contacting your clients, even if you don't think you need to talk to them.

Now's the time to talk to them.

Tell them about what's happening.

Make sure they're aware of it and that you've got their best interest, maybe modeling out scenarios like Bob talked about entity choice.

But really looking into all these provisions, see, how does that affect their business?

How does it affect them individually?

Really looking through that and paying attention to what the AICPA is putting out almost on a daily basis of additional information.

Because as things change, and we know they will, we want to make sure that you are going to the right resources to stay on top of this.

I think that would be the best takeaway from it.

April Walker: That's great.

In closing on these podcasts, the name of our podcast is Tax Section Odyssey, so I like to think about us taking a journey together towards a better profession.

In doing so, I like to hear about my guest other journeys outside of the world of tax.

Mark, I'll start with you since you know this question was coming.

[LAUGHTER] What journeys are you taking these days?

Mark Gallegos: Well, the speaking at different conferences is always amazing because I get to meet wonderful people and build great relationships.

But on a selfish note, I've mentioned before, I love to go to the outer banks, North Carolina with the family, and I'm doing that again in July for a week.

I'm always excited about it because the beach is like my solace to decompress from whatever's going on, even with the tax bill in the works and just enjoy life at a different speed.

April Walker: I'm excited for you to come to my neck of the woods.

What about you, Bob?

What travel plans do you have on the horizon or a trip you'd like to go on?

Robert Keebler: Well, a trip I'd like to go on is to go to Australia, but that probably won't happen in the next six months, but big project we have right now is there's companies like Holistiplan and FP Alpha, which are bringing tremendous advances in technology to the tax world, which is enabling non-CPA financial planners to enter this fray.

The big challenge in my mind, on the CPA side, is to instill tremendous collaboration there, where the technology will allow some of the numbers work to become work that CPAs no longer have to do.

But looking at how this all ties together from a code and regs perspective, still has to be in the hands of CPAs who have been properly trained.

It's a matter of instilling that cooperation.

We probably have about 24 months, maybe 18 months before that horse is totally out of the barn.

From the work I've done, teaching and lecturing to financial planners, most financial planners, they want to be, but they're not aware of what they can and should be doing and what needs to be given off to a CPA.

It's a very big project.

April Walker: Yes.

We'll continue to beat that drum and say technology is wonderful, and I lean into technology every day, more and more.

But what I can bring to the table with my advisor nature and our personal relationships.

A computer can't do that, and a non-CPA can't do that, either.

Thanks so much.

It was delightful to spend this time together and get your insights.

Maybe we'll do it again.

Once the bill is signed, we'll have a Part T.

Again, this is April Walker from the AICPA Tax Section.

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