Workload compression: a top agenda item.

• Author: Padwe, Gerald W.

The workload compression problem has been recognized as the primary tax-driven issue faced by AICPA members. The provisions of the Tax Reform Act of 1986 requiring fiscal-year partnerships, S corporations and personal service corporations (PSCs) to adopt calendar years (to avoid the deferral of tax paid by their owners through fiscal-year mechanisms) have caused much of a CPA's accounting and tax work, which had been spread over the course of a 12-month business cycle, to be performed within the first 3 1/2 months of the calendar year. In short, while the problem is caused by a change in the tax law, the result has been a practice issue of major proportions.

In 1987, through the efforts of the AICPA, Congress improved this situation a bit, permitting electing entities to have a fiscal year ending in September, October or November, but at the price of paying a deposit (an interest-free loan, if you will) that has approximated the amount of tax to be deferred through election of the fiscal year. (Analogous rules, involving compensation deductions, were put in place for PSCs, but the balance of this discussion will be in the context of partnerships and S corporations.) The deposit calculation essentially required the amount of deferred entity income to be multiplied by the top statutory tax rate applicable to individuals, plus one percentage point. In 1988, therefore, when the top individual rate was 28%, the deposit would have been calculated at 29%.

It has been recognized that the fiscal year/deposit approach of Sec. 444 was of limited value, but it was not possible to obtain further relief because of the revenue neutrality requirements of the budget acts in existence at that time, which continue today. As a result, the great majority of partnerships and S corporations on fiscal years in 1986 (and those coming into existence thereafter, which would have elected fiscal years) are now operating on calendar years. Financial audits, reviews, reports to shareholders and creditors, and tax compliance are all squeezed into the first few months of the succeeding calendar year.

The problem has become even more exacerbated with the enactment of the 1993 increases in individual tax rates. By the Administration's own projections, approximately 1.2% of individual taxpayers are expected to be in the 36% bracket, and only 0.3% in the 39.6% bracket. Yet, because of the mechanics of Sec. 444, the deposit presently payable on deferred income is at a 40.6% rate, even though most owners of electing entities will likely be in the 31% or 36% bracket. Thus, simple financial self-interest dictates that, for most affected entities, the proper course of action is to terminate the fiscal-year election, making the workload compression problem even more intense.

Recognizing the problems that would face electing passthrough entities due to the 1993...