How Will the New Tax Law Affect the Preparer Industry?

I’m late to the blog party for posting about the tax reform bill passed by Congress in December, so I won’t even get into what’s in the new law and how it will affect taxpayers, because that topic has been covered already in other places.

Instead, I want to focus on what it means for the preparer industry.

I think it will be a mixed bag … those of us who deal with average folks will likely be hurt, while the firms that deal mainly with businesses will likely benefit.

Itemized Deductions

The standard deduction is nearly doubled, across the board. As I looked through my client list, of clients who currently itemize deductions, only 15% will continue to do so.

I would imagine this percentage holds true for all the small-time operators such as me.

Does this mean I’m going to lose 85% of my clients? No, of course not. Many of that 85% still have other things going on, such as Schedule C, Schedule E for rental property, investments, etc.

What I Think Will Happen

I think a trend is going to accelerate: the low-end, simple returns are going to leave in favor of DIY options. This has been happening for years now. I’ve noticed it since around 2015 in my practice (I know it was happening before then, but it became noticeable to me in 2015).

So now there will be millions more people who will suddenly not need to file Schedule A for itemized deductions, and so they’ll go off to DIY software, rather than paying someone like me.

I see the next few years playing out like this:

1. Most of us will see growth this year because there will be plenty of people who erroneously believe that the changes affect their 2017 return.
2. I think next tax season (2019, for 2018 returns) will be another growth year, because people will be hesitant to go with DIY for the first year of filing under the new laws.
3. Starting in 2020, I predict that the bottom will fall out of the low-end of the tax prep market, as people realize they no longer itemize. You’d be surprised how many new clients I get because they say “I bought a house and so now I’ve got mortgage interest” and they don’t want to deal with filing Schedule A. A basic Schedule A is simple to a tax pro, but can be intimidating for the average person. Starting in 2018 the average person doesn’t need to worry about Schedule A. Now that taxpayer can just file a 1040 (maybe even a 1040EZ). They’ll catch on quickly that they can just “TurboTax it” or “Get their taxes won with MORE ZERO!!!!!!!” with the H&R Block DIY software, and cut out the tax preparer.

How I’m Responding

I’m trying to get out in front of this by:

1. Making sure that I’m providing good customer service this year. Faster turnaround time, better communication. As a small firm, I can be more of a “boutique” provider and focus on relationships, and that’s what I’m focusing on this year.
2. I’m studying how my pricing should look next year, when 85% of my clients will no longer itemize. I haven’t figured it out yet, but I’m thinking of offering a “quick-lube/oil change” option where pricing for all these new “simple” returns will be set close to what TurboTax is charging.
3. For the last half of 2017, I had made a strategic decision to scale back my business services and not do corporate or partnership returns anymore. But there’s a rush now of people forming S-corps to take advantage of the “pass-through deduction” in the new law. (Even though sole proprietors also qualify for that deduction — there’s a lot of confusion and of course people go ahead and form the S-corp without talking to me first. But I digress….) So I’m having to buckle up and get over my “yips” and wade back into the world of business taxes.

I hate the idea of #2, but on the other hand I also hate the idea of my bread-and-butter suddenly dropping off the face of the earth.