One Year Since Tax Reform - What the Impact on Franchising Has Been

It’s been a year since the Tax Cuts and Jobs Act of 2017 was passed, and the franchising industry has definitely seen some changes.

Franchise tax experts spoke with 1851 Franchise about their thoughts on tax reform and its impact on the franchising industry.  

Scott Thompson, Chief Development Officer of Level 5 Capital Partners, believes that tax reform has been “100 percent, 1,000 percent” good for the franchising industry.  “The biggest thing I’ve seen with us at L-5 is we have more capital to keep investing and hiring,” Thompson said.

Of tax reform, he said “It’s really helped accelerate growth in the economy the way it’s structured. And then employees have more cash in their pockets because they’re not paying as much payroll taxes.”

Knox Wimberly is the tax director for Happy Tax. Happy Tax franchisees do not have brick and mortar locations.

“The Happy Tax model is a bit different,” Wimberly said. “Our franchisees are essentially marketers, so they focus on growing their business. They source the returns and then we actually prepare all of the returns at corporate in the tax department.”

Happy Tax franchisees do not have to be tax experts, although many of them are actually CPAs or attorneys that know tax well, Wimberly said.

“We will meet you at a Starbucks, we will meet you at your place of employment, we will meet you in your house,” Wimberly said. “We sort of come to you as a concierge service.”

In terms of the impact tax reform has had, Wimberly said competitors have closed offices. Fewer people will need to itemize under the new tax laws, meaning the industry will have less need for brick and mortar locations.

“We’ve seen with our competitors that almost across the board they’re closing offices and so that has been somewhat of a large impact,” Wimberly said.

There’s also the matter of cryptocurrency and how people who own cryptocurrency will need to report that information to the IRS. Happy Tax, Wimberley said, is prepared to deal with this.

“For us, we actually see an uptick,” Wimberly said. “Part of that is we’re very forward-thinking, and our largest, fastest-growing division right now is actually our cryptocurrency division. We do more cryptocurrency tax returns than anybody in the country.”

Happy Tax opened their cryptocurrency division at the beginning of 2018.

“It’s very fast-growing,” Wimberly said of the cryptocurrency division. “We expect that to continue to increase astronomically as it’s helped our franchisees tremendously because they are now known as the source for cryptocurrency returns and we are very much the experts in that field.”

Happy Tax has also capitalized on their knowledge.

“We own CryptoTaxPrep.com which is a very high-performing, consumer-facing site for cryptocurrency,” Wimberly said. “We also own CryptoTaxAcademy.com. We are known as the premier educators across the industry, not just the franchise world.”

This is preparing the company for the new year.

“The IRS has actually said that the enforcement of cryptocurrency reporting is one of their key priorities for the upcoming year,” he said, adding that “and the bottom line is, if you’re not including your cryptocurrency transactions on your tax returns you’re going to be a whole lot better off fixing that before the IRS discovers it. So people are starting to figure that out.”

This knowledge will help Happy Tax in the new year.

“The average tax place has no clue what to do with it, to be perfectly honest,” Wimberly said, adding that “it’s really positioned us well.”

Wimberly noted that Section 199A, a deduction for qualified business income, is a huge part of a tax person’s job, will likely cause a swell in need of tax return assistance.

“Any of these kinds of activities are going to see incredibly complex returns compared to what they were before,” Wimberly said.

He believes this will present significant challenges to much of the franchise industry, as competitors may not have invested relatively much in terms of training.

“So we have invested in a four-month training period as opposed to what many of our competitors are doing and we think that’s going to position us pretty well for that,” he said. “The proof will be in the pudding, though, because we haven’t seen the upcoming season yet.”

A benefit of tax reform, Wimberly said, is that customers are seeing information about tax reform on the news and they are asking questions about it.

“That’s going to make some tax planning opportunities and that’s a positive thing from our perspective,” Wimberly said.

One drawback of tax reform, Wimberly said, is that many people might start to think that filing taxes is now going to be an easier, more simplified process.

“There will be some people, we think, an increased number of people, who will try to do it themselves first and we think that will probably lead to even more of a big rush right before the deadline for people that sort of figure out ‘What have I gotten myself into?’” he said. “We’re sort of preparing for that as well.