Skip to Main Content

New Tax Client – What Do You Do?

New Tax Client – What Do You Do?

What do you do if you have a new tax client walk through your doors? What questions do you ask? What information do you need? What things do you consider? And how do you help them plan for the future? Tom covers it all in today’s blog post!

by Tom O’Saben, EA

Video Link:

Tax School Facebook Group

Hello again, everybody. Tom O’Saben coming to you from my office here at the Tax School at the University of Illinois on the campus at Urbana Champaign, Illinois, with my weekly blog for you to get through tax season. Today, we’re going to concentrate on that new client who comes in. And I’m going to talk about it from two directions. One being: what we should be looking for as we get our information together to file that 2019 return. And then finally, some 2020 items we can do to still impact the 2019 return.The first thing I want to talk about is when we’ve got that new client who had a business in 2018. Now getting last year’s return is really imperative. And if they had a business, it would be suggested that you try to get perhaps the last three years’ returns. And I want to talk about this from the area of the QBID deduction, you know, the qualified business income deduction, which rewards making money. We know that’s a 20% deduction, and I’m not as concerned as those circumstances as when our client, perhaps in 2018, had a loss in their activity that was eligible for QBID. That creates what’s called a QBL, qualified business loss. And here’s the rub. In 2018, we didn’t have a form to put these numbers onto, we merely had worksheets. So if we don’t have that whole tax return from the client, we’re going to have to try to back into what that qualified business loss actually was. Because again, lacking a form. Now, I know we all have the ability to kind of back into that, but what if we’ve got several activities going on? How do we calculate what we had? Well, again, get that return from last year and look for those losses. Now, here’s the thing. So let’s say you look at that client’s 2018 tax return, and it was Joe’s Carpet Cleaning. And Joe’s Carpet Cleaning had a loss for 2018. Okay, you say well, let’s talk about Joe’s Carpet Cleaning. You’re here with me now, when we prepare the 2019 return. And they said, “Well, I’m not doing that anymore, so don’t worry about it. I’m now trying a new business where I’m doing some online travel agency work. So we should be starting all new.” Well, that’s true from the standpoint of the normal business operation. But what about that QBL from 2018 from Joe’s Carpet Cleaning? Guess what – It doesn’t just go away. It’s going to impact the profit on that online travel agency work in 2019. So I want you to understand that a QBL isn’t segregated and kept just with that one activity. It’ll impact any activities that are eligible for QBID going forward. So you see why I think it’s imperative to get that last year’s return.

When somebody has a small business, I even suggest that we try to get the last three years’ returns because I want to talk about that in light of QBID. What you could have is, let’s say you have rental properties, for example, that rose to level of trade or business. You’ve made that determination, or perhaps you went with Safe Harbor. And we had losses that were suspended on that rental property for whatever reason. I just worked with this this weekend. And I really liked that our new software, that it was asking me to enter losses that were suspended prior to 2017. And those that were suspended in 2018. And I’ll tell you why. There’s a wrinkle in the QBID rules, which say that if we have suspended losses from prior to 2018, prior to TCJA, those might be released now against taxable income, let’s say in that rental property. But guess what? They don’t impact QBID. So let me explain to you what I mean. Let’s say we had $5,000 of suspended losses prior to 2018. Now you’re in 2019.

The taxpayer has $7,000 of income. For tax purposes, we’re going to release that $5,000 suspended loss. And the taxpayer is going to have taxable income of $2,000. You know what they have for QBID. They have $7,000 eligible for QBID, Because we don’t have to consider those losses or other items that were suspended or disallowed prior to the enactment of TCJA. So as I’m explaining to you, my software, I was working on it this weekend, where it had: enter the 2017 and prior suspended losses, enter the 2018 suspended losses. Now let’s use that same example and say that we didn’t have any losses suspended prior to 2017. But in 2018, we had a $5,000 suspended loss and now in 2019 that rental property has $7,000 of income. Suspended loss for 2018 is going to be released, go against the $7,000 of income, we have $2,000 of taxable income and we also have $2,000 eligible for QBID. See the difference? It depends on when the loss occurred, or whatever item, it could have been a section 179 that wasn’t allowed, or some other kind of carry over or loss suspended. But prior to TCJA, prior to 18, those losses can be released to reduce income tax, but for QBID, they’re not impacted. So you may want to actually disclose that outcome, given that you’re only putting $2,000 on the front of the 1040. But on the QBID calculation, we’re doing the full $7,000, disclose that on a Form 8275 as to the circumstances that created it. In the same light, let’s again talk in the area of business and QBID.

Qualified business income is defined as items of income, deduction, gain or loss effectively connected with a trade or business. So I think you’re all aware that we have that five year look back when a taxpayer has taken ordinary losses when they dispose the business property. And that five year look back says okay, you got to take that ordinary loss back then in whatever year. Now, to the extent now that you have capital gain from the sale of business property, that same amount in the previous five years that was allowed as ordinary income will cause that capital gain to be taxed as ordinary income. So we have to do that anyway, I think we’re aware of it. But get this: qualified business income are items of income, deduction, gain or loss, effectively connected with a trade or business. I might also add that typically, items eligible for QBID are those that are taxed at ordinary income tax rates. They don’t have a preferential tax treatment.

So think about this. We’ve got a capital gain from the sale of a business asset. Is that effectively connected with a trade or business? Sure is. And moreover, because we had ordinary losses in the previous five years (got to get those returns to look at…remember, we’re talking about a new client)- So we’re going to have ordinary income treatment on income that’s effectively connected with a trade or business. I would make the argument you’ve got QBID.

So enough about the QBID discussion, I think you can see the importance of both the QBID and QBL coming from years prior to when that client came to see you. If you’ve got a client who came in, for example, and they’re over age 70 1/2, and they’ve got a distribution from an IRA, a 1099R, the question will be did you do a qualified charitable distribution? In other words, a transfer directly from the IRA to qualified charity. Well, that being said, that isn’t going to be on the 1099R anywhere. You’re going to have to ask the taxpayer: did you do this type of thing? They may have brought paperwork in and may have been encouraged by either the charity or Fidelity or whoever’s handling their IRA, to get that information together. But it isn’t just going to be apparent to you right there on the 1099R. That would be a real question to ask also.

I’m also looking at, are there opportunities to amend 2018 returns? You know, the blog I did last week, I said I thought 2020 was going to be the year of the amended return, because of the fact that we had those tax extenders made retroactive, back to 2018 (like the tuition and fees deduction, qualified principal residence, indebtedness, exclusion, the energy credits). I’ve done a couple of those just this past week. Those clients reminded me, “Hey, I put that furnace in last year. You told me we were looking for an extension on that rule, those will have to be done on an amended return. Could we amend for those factors?”

We also want to be looking for capital loss carry forwards. You know, I’ve told people for a long time that that giveaway, that indicator, that a client probably has one of these is when you look at last year’s return, and as far as capital losses go, you see a round $3,000. I’m willing to bet there’s a capital loss carry over that you need to get information out of that return to determine. We could have had minimum tax credit carry forwards because of AMT. You want to look for that too, on that Form 8801. We may now have those items that were caused by timing and preference for alternative minimum tax now being released because the tax person’s situation may have changed. How about if the client has an NOL coming forward on 2018? Hmm where’d that NOL come from? Is it an old NOL, prior to TCJA, it’s been used up and old years and now it’s coming forward? Or is it a 2018 NOL? Hmm, different rules. 2018 NOLs can only carry forward and in the carry forward year can only offset 80% of taxable income. An old NOL that’s coming forward because we already went 2 back or maybe the client made the decision to forgo carry back. First of all you want to use those first; use the oldest NOLs first, those aren’t limited to 80% of taxable income in the carry forward year. So if you just happened to see that NOL 2018 return, where’d it come from? And by the way, let me say this from a compliance standpoint, you’re taking on that client. You’re also taking on responsibility for that NOL. It is not going to work in audit or in an answer to the IRS to say, “I don’t know, I’m not the one who created it. I wasn’t the tax preparer until 2019.” You take on that client, you take ownership of the numbers that are on their return. I just want to say. I don’t mean to be preachy, I’m actually trying to be protective of you and and your practice.

So those are a couple of things there too in looking for Section 179, that perhaps was elected. But it wasn’t allowed for a variety of reasons. Could that now be released? A lot of these are in the business area but certainly things like the RMDs that were done in a qualified charitable distribution, or capital loss carry forwards would impact other tax clients as well as those who have a business or have rental property.

So the last thing I want to talk about is some planning ideas. What can we do in 2020 to still impact the 2019 tax return? Well, the first one is the tried and true conversation about doing a contribution to a traditional IRA (if the client qualifies). But share that with the client. Well, I’ll tell you what, what else could we do for you (rather than say, here’s the number sign here, sign here, see ya).

What would be the impact if they were to fund an IRA – doesn’t take very long in software. And I realize there are circumstances where the IRA would not be deductible, but nonetheless ask the question. You’re doing planning for your client. You know, let me give you a little tidbit too that’ll help you as a memory jogger. Let’s say for your example, you get the clients W2 and you see in box 12 code W. That’s it. That’s an indicator that they funded an HSA last year. Okay, you could ask them, “Hey, did you still have that HSA qualified high deductible health plan in December of 2019? Do you have it today yet?” If the answer is yes: did we max fund that HSA? We need to find out whether it’s single coverage or family coverage. And get this, your taxpayer has until April 15 to fund that HSA for last year, to max it out. I mean, they’re going to have to do it through their plans, that’s something you’re going to set up. But that also could provide more 2019 deduction. Let’s talk about that self-employed person. They’ve got bottom line profit; what else can we do to reduce the taxable income? How about establishing and funding a SEP? That’ll work. We’re going to talk about a traditional pension plan. Unfortunately, that had to be set up by the end of last year. But a SEP can be set up and funded by the due date of the tax return plus extension. It doesn’t have those IRA or HSA funding deadlines of April 15, to be treated for the previous year. So that would be an opportunity. You see the planning opportunities here? You’re going beyond just the crunching of the numbers, and you’re working with the client to try to minimize their tax and also perhaps help them plan for their future.

So again, I wanted to give you just a couple of quick shots, something you can listen to real quickly, and maybe they’ll act as memory joggers and help you get through this marathon of tax season. So I don’t want to keep you any longer. We’ll be back with more of these tidbits. Go to our Facebook page if you’ve got questions or maybe you’ve run into an interesting situation that you’d like to share with the rest of the group. There’s a lot of activity going on, even now during the height of tax season. So again, this is Tom O’Saben coming to you for the University of Illinois Tax School in Urbana Champaign, saying  goodbye for just a while.

Disclaimer: The information referenced in Tax School’s blog is accurate at the date of publication. You may contact if you have more up-to-date, supported information and we will create an addendum.

University of Illinois Tax School is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. This blog and the information contained herein does not constitute tax client advice.