What's up everyone. Anton Anderson here, co-founder Elite Resource Team. If you're not familiar with our company, we are made up of financial advisors, insurance agents, tax and business attorneys and accountants. And in these weekly videos what I like to do is take questions from you, our community, usually about either working with more affluent clients or working with more strategic partnerships. So in today's video, I want to talk about why the Tax Cuts and Jobs Act is likely going to end the careers for tens of thousands, if not hundreds of thousands of CPAs. This question actually came up last week at our Mass Money event in San Diego. One of the attendees was saying, "What do you think is going to happen to the tax profession as a result of the standard deduction levels increasing?" I thought it was a great question. So we talked about it a little bit there and I realized in that dialogue that this would be a great topic to do for a blog video like this.

 

So take a look at this chart here. What this represents is the number of standard deductions. I'm sorry, this represents the number of itemized deductions in 2017 compared to the number of itemized deductions in 2018. What you see is it went from 46.5 million down to 18 million. So 46.5 million households in 2017 itemize their deductions in 2018 it dropped to 18 million. Why is this significant and what is it a result of? Well, again, I already told you it's a result of some of the changes coming from TCJA as I've heard some accountants refer to it as Tax Cuts and Jobs Act that Trump introduced. What it did is it increased the number of households that are using a standard deduction on their tax returns by 29 million. That is a huge jump. Why is that significant? Let me explain. So where it came from, first and foremost, you need to really remember there's two options you have in terms of the way you're going to deduct expenses.

 

You can either do your standard deduction or you can itemize your deductions. The more you itemize, the more complicated your return is. You have to file a schedule A, the more likelihood you have of being audited. And in essence, the more value in that scenario, a CPA can bring a client. The more people use a standard deduction, the less complicated the return, the quicker it is to file, the less in individual forms are required and therefore really the less value a CPA can actually bring.

 

So this is what happened in terms of the numbers. If we go back to 2017 an individual at the standard deduction was $6,500. 2019, $12,200 and if we look at a married couple filing together, you were at a level of 13,000 and now it's 24,400. So what does this mean? Let me give you an example. Let's say my wife and I, we live in San Diego and maybe we were planning or historically we would have itemized our returns because let's assume that in the past our level of standard deduction was 13,000. Well, maybe we have 16,000 worth of expenses that we can itemize or deduct and therefore it would be worth it for us to pay our CPA, to go ahead and do the itemized deduction.

 

But now in 2019 that same 15,000 or 16,000 is actually worthless. It's actually better for us, it's easier, faster, cheaper for us to just go ahead with the standard deduction of the 24,400. So again, what this means is in that scenario, I could actually, if I wanted, just go ahead and do a standard tax return. I don't have to itemize my deductions. My wife and I could save time and could certainly do it with something like in H and R block for a fraction of the price that most people are paying a CPA or worse do it online with a lot of free services.

 

Now, I don't know about you, but it's really hard to run a profitable accounting business when what you're competing with is free. How do you compete with free? From a price perspective, it's pretty tough. So here's a couple of the other things that people don't recognize. One is the other thing that TCJA did, we actually no longer get to deduct the preparation fees. So if I used to pay my CPA $450 or $500 you know, I'm deducting that. We can't do that anymore. The other thing is they came out with the compliance savings, meaning what they expected this change to do from a compliance perspective. How long it takes to prepare the forms, the cost involved in preparing those forms. And they estimate between 3.1 billion to 5.4 billion in savings. 3.1 billion to 5.4 billion in savings.

 

Well, guess where that savings is coming from? That's the savings that I'm not paying as the tax payer, and you know what else isn't getting paid? A lot of CPAs in that scenario. Now, did it happen drastically in 2018 when this was first introduced or 2019 when the levels even increased a little bit more? Or will it happen more in 2020? It's a slow shift. But I've already spoken to a number of CPAs that are seeing a good percent of their businesses, business clients, individual clients starting to say, "Hey, what am I paying you $600 for again, when you're no longer helping me save additional money on my taxes? If I'm just going for a standard deduction, what I paying you for?"

 

And they might be a little bit more polite than that, and maybe there's some history and some relationship there and that might help you keep some of your clients, but tell you what, it's not going to help you keep all of them. And what about the younger people that you know just are graduating, just starting out? Maybe they would have itemized in the past, but now all of a sudden they're being introduced to this world where, "Hey, you know what? Right out the gate. I can, my standard deductions, 12,200." Those aren't going to become new clients.

 

So we're losing some clients, we're missing an opportunity on some new clients. Our clients are no longer able to deduct the tax preparation fees. We're seeing this compliance savings of billions of dollars estimated each year. Oh, but don't worry, don't worry. If you're a CPA and you're getting a little bit nervous about the impact that this is going to have on your clients, don't worry, it does expire in 2025. Now there's obviously the asterick that the house of representatives has started to introduce some bills that would actually make this permanent, but there is a chance it will expire. You just have to hold your breath for six years. So as long as you can hold your breath for six years, deal with the bleeding revenue, you should be able to weather the storm.

 

Oh of course, apart from the other problems like technology and outsourcing returns and just the fact that it's becoming more expensive to run a business. So yes, tax cuts and jobs act, I would expect to either put tens of thousands of CPAs out of business, make it less profitable, reduce the amount of ROI that we're going to see. The value that a CPA is going to receive when they are actually looking at selling their company, or forcing CPAs to look at new ways to create value. Now that actually I think is a good thing on the industries. If you look historically at where disruption has come from, it could be the hotel industry with something like Airbnb. It could be the taxi industry, it could be software, it could be cars. Let me give you an example of each of these.

 

The hotel industry has completely been disrupted. Was it Marriott or Hilton that disrupted it? Of course not. It's Airbnb. It's something coming in from a completely different perspective. What was the other one I gave you the example of? Cars. Was it Ford that just recently disrupted the industry in the last five to 10 years? No, it's Tesla. Completely different description of what a car company is. Oh, taxis. Was it yellow cab? Of course not. It's Lyft. It's Uber. These companies that are changing the way that clients typically interact with and receive these types of services are the companies that are going to create the disruption. So the tax profession that we see today is going to look different in the next five to 10 years. There's no question about that. Now, will that disruption come from a top 10 firm? No, I don't think so.

 

I think we'll see moves that people will try to acquire smaller firms, more entrepreneurial firms or they'll try to redefine their value proposition, but that's not where the disruption will come from. It doesn't work like that. In the financial services industry, is the disruption going to come from a firm that's 100 years old, and established and has thousands of employees? No, it's not. It's going to come from a small group of individuals with a collective mindset that's seen an opportunity in an industry and capitalized on that opportunity. That is always where disruption comes from. So is the Tax Cuts and Jobs Act to blame for this disruption that we're going to see in the accounting space and as a result of that feel the ripple effect in the financial services space? It's not to blame for it, but I think it is adding fuel to the fire.

 

That fire was certainly there, but this, this is going to add fuel to that fire. So what are these CPAs going to do? Well, like I said, some are just going to hold their breath. They're going to stay and keep their head down, keep going at it just like they have for the last five years, 10 years, 20 years, 30 years, however long they've been in practice. What are others going to do? They're going to exit. They're going to say, "You know what, it's been a good run. I'm out. I sell my firm, I'm retiring off in the sunset or I'm shifting industries." Whatever that might look like. Some will do that. Some will redefine the interactions they have with clients. We've seen this a lot with firms like HD Vest, right? Go out, get insurance license, get securities license, start your own RIA, join a BD, start offering clients that previously you would have just offered tax returns or compliance services to. Start offering them things like retirement planning, manage their assets, take care of their life insurance needs.

 

Sure. Why not? Because that's so easy to do. It's really easy to be a professional football player and to be the quarterback running back wide receiver and blocker. You see that all the time, right? No, of course not. Maybe you see it in like Pop Warner, but what professionals really want to play Pop Warner? Like who's dreaming that that's the top we're going to get to? You know, I mean, yes, you could be licensed to prepare tax returns, to sell insurance, to do some type of asset under management or financial planning, but what level are you really playing at? I mean, we've got a full time 21 year tax attorney in house, we have two accountants, we have at least four securities advisers, four people who are licensed in insurance in house. And you know what each of them do? The one thing that they're good at.

 

Now, would you like to compare our team of 12 people to one person who says they're wearing all those hats? It's kind of like a Pop Warner team versus a professional NFL team. I mean, you think really you're going to compete? Maybe if your clients don't know any better. Or maybe if your servicing really, maybe some clients that just don't have any complexity. Both my parents were elementary school teachers, maybe there's nothing wrong with that. You don't want to work with anybody who wants to itemize anyways and that's your niches. Okay, that's fine. But I can't see growing a very profitable business like that. And I also don't see how much value you're bringing to those individuals. So I'm really speaking to the people that are watching that don't want to play Pop Warner, they want to to be in the pros. They don't want to service a client just to make some money, they want to service a client that they can bring extreme value to. So that's who I'm speaking to.

 

Okay, so the CPA can get out of business, they can sell, they can get licensed and try to do everything or they can try to refer these clients to other professionals and somehow like referring them out is bringing them more value, but not really, I mean, let's be honest with it. Who wants to be referred out to three or four or five different professionals? And by the way, how is that really justifying my fee of $500 that I'm paying you to prepare my tax return when all I'm doing is falling under the standard deduction. It's not. It's really not, right? So what else can we do?

 

Why don't we come a professional team? Why don't we have the ability to work together as professionals offering tax, offering financial planning, offering insurance, offering legal planning, and any of these together as a team? Now that's a little different, right? That looks more like a professional team where we have different professionals all working together on the same team to accomplish the same goal. Do we need to legally start the same company and like all become partners? Not necessarily. I mean we've helped people do that, but that's not the only way to go about it. So I do believe that CPAs will be forced to come up and re-define their value proposition. I also believe that many of these CPAs will get licensed.

 

I think this again is just fuel on the fire for what is the biggest opportunity for both of these industries to create tremendous disruption by coming in with a completely different value proposition, more of a team based model where you're working together much like a family office, serves the extremely high net worth. You know, if you have a friend that's got 100 million, 200 million, maybe you have $200 million net worth and you're working with a family office, great value proposition. I call one person to get my questions answered, saves me a lot of time and energy, but can we take advantage of this opportunity for disruption? Can we also simultaneously take advantage of technology and just a shift in social landscape to take the same benefits of a family office and apply that more to the average type of clientele?

 

The average small business owner, the successful small business owner but that doesn't have $100 million. The individuals that do still need some type of help, some type of a relationship, they need to go somewhere for advice but they don't want to just pay $500 for standard tax return. Yes, there is a huge marketplace there, there's a huge need for that and I do believe we will see in the next five to 10 years a massive shift towards serving that population. The one to 100 million dollar net worth client that needs a team of professionals to work together on their behalf. They are sick of getting three to five names and phone numbers of people when they have a problem and them being told to pick up the phone and do the work, do the due diligence, then you decide who to work with. Well, guess what? I'm getting three to five conflicting suggestions. Can't just one person help me. Can't one person with a team of professionals help me? The answer should absolutely be yes. Even if your net worth isn't $100 million.

 

So I hope you found this video helpful. I think it is really interesting what's going on in our industries. It's exciting for us. We're seeing a tremendous, I think a tremendous disruption and opportunity as a result of these conversations. If you have future questions that you would like us to tackle, whether it's about future disruption in the industry, it's about working with more affluent clients, it's about working as more of a multidisciplinary family office or it's about strategic partnerships between financial advisors, CPAs, and attorneys, let us know. Feel free if you're watching this in YouTube to post a question on the comments there or if you're watching it on our blog page, you can either email info@elitert.com or just go over to YouTube, you'll see an ability to leave a post there. Thanks so much. Hope it's helpful. Look forward to connecting with you next week.