YOUR TAXES : PART FIVE: PAYING YOUR TAXES : Accounting headaches bound to accrue : Provision could mean extra work for many firms and their clients
WASHINGTON — Accountants, who eagerly anticipated a business bonanza from the labyrinthine Tax Reform Act of 1986, now are afraid they’re getting too much of a good thing.
A provision in the tax code makes a major change in the way millions of small, private partnerships and corporations calculate their taxes. Among those affected: many clients of accounting firms--and many accounting firms themselves.
The projected increase in workload from the change could overwhelm many of the nation’s accountants next year, representatives of the profession said. The provision, intended to end a tax abuse that let many professionals defer income from one year to another for tax purposes, also is coming under fire on Capitol Hill.
Legislation to repeal that portion of the law has been proposed, and staff aides to House and Senate tax-writing committees are looking at ways to modify the provision without losing the $1.7 billion in federal revenue it is projected to bring in during the next five years.
“There is a lot of action on this one,†said Assistant Treasury Secretary J. Roger Mentz. “It is extremely heavily lobbied, and I think there is a point there. (But) I don’t think we can work out a solution that loses a bunch of revenue. Revenue is a huge consideration.â€
The provision, the subject of little debate when the House and Senate passed the tax revision law last year, would require that three kinds of private firms--partnerships, personal service corporations and companies that pay taxes under the personal sections of the tax code--calculate their taxes on a calendar-year basis rather than using a fiscal year.
Many such enterprises keep their books on a fiscal-year basis, such as from October through September or July through June. That allowed a partner in an accounting firm with a fiscal year ended June 30, 1985, for example, to declare only the fiscal-year income on his personal, calendar-year tax return for 1985.
The income the partner earned from July through December, 1985, did not have to be reported to the Internal Revenue Service until the taxpayer filed his 1986 tax return.
The new law requires that a partnership adhere to the same tax year as either a majority of its partners or its principal partners. In most cases, that will require the firms to start filing tax returns for calendar years.
Tax returns reflecting the transition from the old system to the new will have to be filed beginning next year. The affected firms will file a tax return at the end of their normal fiscal years, then file another for the remaining period from the end of the fiscal year through Dec. 31, 1987.
A four-year phase-in will ease the financial effects of the provision, so the partners will not have to report, say, 18 months of income on their 1987 tax return.
But taxes for many clients still will have to be done twice in 12 months, a multiple whammy for accountants who also must cope with the law’s many changes in how their clients are taxed.
“We really don’t need any more business†during what is already a peak period, said Herbert Lerner of the accounting firm Ernst & Whinney. “We didn’t seek this. It’s being forced on us, and it’s going to make it more difficult to provide effective service to people.â€
Preliminary results of a survey by the American Institute of Certified Public Accountants indicate that the accounting firms that responded, which now do just under 50% of their work between Jan. 1 and April 15, will see their workload rise during that period to more than 60% of the year’s total. As many as half of the respondents to the survey, including nearly all of the “Big Eight†accounting firms, will have to change the way they calculate their own taxes.
The AICPA, realizing that repeal of the provision is unlikely because of the revenue loss, is trying to find other ways of raising the money without shifting tax years.
Lerner said possibilities include increasing the amount of estimated taxes that partners pay and increasing estimated tax payments by the business entity itself. Both approaches would lessen the advantages of the tax deferral.
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