Sterling Management Comments: Proposed Changes to Tax Code Could Cause Trouble for CPAs

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Presidential candidates including Jeb Bush and Donald Trump have been stumping for a simpler tax code in order to make filing taxes an easier ordeal. However, changes to the tax code could potentially hurt CPAs.

Kevin WIlson of Sterling Management comments on proposed changes to the tax code and the potential effects for CPAs.

Businesses will need someone to turn to for advice and help, and accountants will most likely still be used to get clarification and make sure taxes are filed correctly.

With the upcoming presidential election, many presidential candidates have brought up plans for tax reformation. Both Jeb Bush and Donald Trump have both stated that, should they be elected, they plan to get rid of the tax code in order to make filing taxes less complicated for all citizens. If the tax code were to change so drastically, Certified Public Accountants (CPAs) could be thrown into chaos.

“Sound business management can protect CPAs for any major changes in the industry,” says Kevin Wilson, CEO of practice management consulting company Sterling Management. “It is the foundation that will help CPAs handle whatever Washington throws their way.”

“I want to lower taxes and make the tax code simple, fair and clear,” Jeb Bush explained in an op-ed in the Washington Journal. “It should be easy to understand and make it easy for people to fill out their own tax forms.” Bush proposes creating three income tax-brackets set at 10, 25 and 28 percent. Per the Bush campaign, these changes would give 42 million Americans in the middle-class a 33% reduction in their tax liability. Bush also proposes lowering the corporate-tax and capital-gains tax rate. (1)

The “carried interest” loophole has been a bipartisan concern, and has been called an “area of common ground” by President Obama. The tax rule allows hedge funds, private equity firms and venture capitalists to avoid paying billions of dollars in taxes every year. Bush, Trump and President Obama have all tried to abolish the loophole in order to make it more difficult for investors to make so much money off of other people's investments (2)

While 2014 was not a great year from hedge funds, according to Institutional Investor, the top 25 hedge fund managers earned $11.62 billion combined which equals $467 each. However, data from the Internal Revenue Service (IRS) shows that the top 400 hedge fund managers payed the second-lowest average federal tax rate (16.7%) in 2012. This is mostly due to the fact that an average of 57% of their income is taxed at the lower capital gains rate. (3)

Hedge funds are structured as investment partnerships. Managers are considered the “general partner” while outside investors (e.g. wealthy individuals, pension funds) are considered “limited partners”. These limited partners will give hefty sums over to the partnerships to grow their wealth. Over time, those limited partners will get their money back in addition to the gains made by the investment minus manager's fees. (2)

Hedge funds utilize a “2-and-20” fee structure. The general partner will take a 2% cut of the investment as well as an additional 20% incentive fee of the additional gains that are realized over benchmarks. This 2% is taxed as if it is ordinary income, however the 20% is considered “carried interest.” The tax code allows incentive fees to be taxed at a rate some 20% less than those fees would be taxed as income. (2) As a byproduct of getting rid of this loophole, the complicated process of filing taxes and some of the strategic services CPAs provide for investors sand hedge-fund types will also be eliminated.

Wilson points out that as CPAs are well-respected strategic business advisers and decision-makers, they will still act as consultants on many issues, including taxes and accounting regardless of any changes made in the tax code. “If the tax code is changed and simplified, we will absolutely still need CPA's,” says Wilson. “Businesses will need someone to turn to for advice and help, and accountants will most likely still be used to get clarification and make sure taxes are filed correctly.”

CPAs provide other services for personal and business finances. If the proposed tax reforms are made, the services provided by CPAs may not be needed for that particular reason, however businesses will still need a CPA or a team of CPAs to keep their finances in check and organized.
CPAs will need to change their business strategies to reflect this possible change.

By providing strong business strategies, Sterling Management can help CPAs remain relevant in the event the current tax code is thrown out and the process is made easier for citizens to handle on their own without the help of a CPA. Sterling Management assists CPAs in business and management consulting for their clients, as well as update their business tactics and advertise their other services should a change in the tax code occur. The tax reform could cause a temporary struggle, however, with Sterling Management’s advice and strategies, CPAs will be able to keep their business alive.

About Sterling:

Founded in 1983, Sterling has been the dominant player in the practice management consulting field for over three decades. By survey, active Sterling clients see a 10 to 20 percent increase in production in the first four to six months and a 30 to 40 percent increase in the first year. Sterling CEO Kevin Wilson is not only a highly trained administrator and consultant; he has published the widely read human resources book, Personnel: Your Most Valuable Resource or Greatest Burden. All told, Sterling has delivered over 500,000 hours of business consulting and achieved more than 135,000 training completions among 175,000 business professionals from 1,700 cities in every state in the nation. The company has won more than 75 local, national and international awards including twice appearing on the Inc. 500 list of America’s fastest-growing, privately-held companies. For more information, visit http://www.Sterling.us.

(1)    Warren, Michael. “Jeb Calls for 'Radical Change' to Tax Code”; The Weekly Standard; September 9, 2015. weeklystandard.com/blogs/jeb-calls-radical-change-tax-code_1027844.html?page=1

(2)    Davis, Owen. “What is the Carried Interest Tax Loophole?”; International Business Times; September 16, 2015. ibtimes.com/what-carried-interest-tax-loophole-2100059

(3)    Stewart, James B. “Trump Lands a Blow Against Carried Interest Tax Loophole”; The New York Times; September 17, 2015. nytimes.com/2015/09/18/business/with-trump-as-foe-carried-interest-tax-loophole-is-vulnerable.html?_r=3

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