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What does IRS publication 6149 say about future tax returns?

7 minute read

The IRS recently released Publication 6149: Calendar Year Return Projections by State for 2021–2028. While the predictions made within this publication are certainly not set in stone, tax preparers and advisors should be aware of some of the major projections the IRS has made for the next seven years.

Federal Trends and Projections

The IRS predicts that all types of returns will see an increase over the next seven years. Partnership returns are expected to see the largest growth, while C corporation returns are projected to have the lowest increase. Overall, the number of business returns is expected to increase by 13,117,600, compared with individual returns, which are predicted to increase by 12,679,380. 

Increases in Total Income Tax Returns

The IRS is projecting that by 2028, individual income tax returns (including all iterations of form 1040) will increase to 173,563,800. This is an increase from the total of 160,884,420 for 2020. There is also a significant bump for 2021 predicted, caused by multiple factors, including filers claiming the child tax credit, claiming a stimulus payment or filing a return that was granted an extension. While the overall number is fairly high, the predicted increase of just under 8% in individual returns is still lower than in previous years, where projected increases tended to be around 10%. 

Significant Increases in Small Business Returns

Total S corporation returns (1120-S) are expected to increase to 5,791,600 by 2028. This is a nearly 15% increase from the current number of 4,987,160. While the report does not break out 1040 Schedule C returns individually, the overall number of 1040-NR, NR-EZ and Schedule C is expected to increase from 692,490 to 1,001,400. Presumably, a significant number of the increased returns will be sole proprietors filing Schedule C, but it is not known what that predicted increase will be. Partnership returns (1065/1065-B) are expected to increase the most, by over 1.6 million returns from 2020 to 2028. The expected number of partnership returns for 2028 is 5,791,600, up from 4,114,980 in 2020, an increase of over 40.7%.

Slight Increases in C Corporation Returns

Conversely, C corporation (1120) returns are not expected to see significant increases. The total number of C corporation returns for 2020 is 1,559,980. This is expected to increase to 1,610,100 by 2028, about a 3.2% increase. This growth, however, continues the reversal of the previous trend of significant decreases in the number of C corporation returns predicted in previous projections. It is still a significant decrease from 10 years ago, when 1,961,773 C corporation returns were filed.

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State Trends and Projections

Some Increases in More Rural States Expected

States that have previously seen declines or steady numbers of returns are expected to see increases over the next seven years. Of note is Texas, where S corporation and C corporation returns are expected to grow by nearly 18% and 22.5%, respectively. In fact, Texas is one of the few states expected to have a significant increase in C corporation returns over the next seven years. The state is expected to see growth in all return types and is predicted to see an increase of 50.84% in partnership returns. 

Utah is also predicted to see significant increases in business returns, though the population growth is not expected to be as high as in previous estimates. While in 2011 and 2015, the projected growth was 11.61% and 16.32%, respectively, for 2021 the projected increase of individual returns is only 9.6%. However, C corporation returns are expected to increase by 10% over the next seven years, and partnership returns (1065) are expected to increase by 51.67% — the largest increase of the states analyzed.

Georgia is also an interesting case. While its individual returns are only predicted to grow 3.93% over the next seven years, the state is expected to see major increases in pass-through entity returns. 1120 forms are expected to drop only 4.39% (from previous predictions of significantly more), while S corporation returns are expected to increase by 14.84%. Partnerships again are expected to see substantial growth, with a projected increase of 41.74% over the next few years.

Projected Growth in More Populous States Expected to Contract Slightly

In comparison, California in past years has been expected to see increases of 10%–12% for C corporation filings and increases of 16%–17% for S corporations. This year’s projections, however, include only a 4% increase in C corporation filings and a 13% increase in S corporation filings over the next few years. Additionally, where California has typically seen projections of individual returns growing 10%–12%, the prediction for 2028 shows only a 7.96% increase. 

Florida is also not expected to see the same increases as predicted in previous years. Unlike most states, the number of partnership returns is expected to remain at the same steady growth as in previous years (18.1%), and S corporations are expected to see an increase of 18.03% versus 11.99% in 2016. Individual return increases are also expected to not reach previous levels, with an increase of only 3.67% for individual returns. Previous years have predicted increases in the 12%–15% range.

Conclusions

Many of these projections reflect the current state of the world; given the continued effect of the COVID-19 pandemic, the projections and the conclusions to be drawn from them are likely more subject to change than in years past. However, some trends seem to be consistent with previous years, such as the slight increase in C corporations since the tax cuts created in the Tax Cuts and Jobs Act of 2017 and the increase in small businesses. From these projections, it appears that despite those corporation taxation cuts, most businesses are still electing to form as an S corporation or partnership. 

The impact of states passing and implementing new pass-through entity-level taxes has yet to be seen, but it may account for the predictions of increased S corporation and partnership returns in the next seven years being so high. Additionally, the ability to work remotely may have an impact on the individual filing requirements for many workers, which could increase individual returns in some states. 

Takeaways for Tax Advisors

Tax advisors should be sure they are well versed on small business tax laws and changes, given the demand for these structures. They should also be prepared to analyze whether the structure chosen for the business is the most beneficial structure from a tax perspective. Given the large number of projected partnerships created, tax advisors should pay special attention to the differences between partnership structures and S corporations and the advantages and disadvantages of both. Particularly, practitioners should be very familiar with the new elective pass-through entity laws that are in effect. In addition, many advisors could find Corvee software helpful in seeing the full impact of an entity switch. 

Finally, nexus and state considerations will continue to be a hot topic for tax advisors and preparers. With the workforce becoming increasingly remote and the indications that this trend has no end in sight, advisors should take special care to consider nexus in employment issues for their business clients. Multistate tax returns for businesses and individuals will continue to grow, and tax advisors and preparers should be confident in the recommendations they make for their clients regarding filing requirements. State and local taxes (SALT) will continue to drive new tax filings for an increasingly remote workforce.

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