In a letter to Ranking Member of the Senate Finance Committee Ron Wyden (D-OR), dated February 25, 2019, J. Brady Howell, Senior Advisor, Treasury’s Office of Legislative Affairs responded to the statement that tens of millions of taxpayers will be underwithheld for 2018 and the suggestions that this was due to the Tax Cut & Jobs Act (TCJA). Howell said that the TCJA and IRS’s implementation of the law through the withholding tables and Form W-4 instructions would not cause tens of millions of taxpayers to be underwithheld. Rather, he said, tens of millions of taxpayers are underwithheld every year, due to taxpayers’ choices or the difficulties some taxpayers face in adjusting withholding to account for changes in their circumstances each year. And, recognizing that because the TCJA was new and some taxpayers would not have understood that they should check their withholding (despite the extensive IRS outreach efforts), Howell noted that IRS had provided taxpayer relief. Specifically, he noted that IRS recently announced that taxpayers would not be subject to the usual underpayment penalties as long as they timely paid at least 85% of the tax they owe. This would provide substantial relief to many taxpayers without creating large windfalls for taxpayers who would have been underwithheld in any event.
The recently enacted Tax Cuts and Jobs Act (TCJA) introduces two elections, one to defer gain from the sale of property that is reinvested in an investment in a Qualified Opportunity (QO) Fund and another to permanently exclude gain from the sale or exchange of the investment in the QO Fund. These elections can provide substantial tax benefits for taxpayers who can satisfy the detailed and quite complex set of rules.
Designation of a QO Zone. Under the TCJA, a state’s chief executive officer (CEO) (generally, a governor or the mayor of the District of Columbia) can designate certain census tracts that are low-income communities as Qualified Opportunity Zones (QO Zones). The state’s CEO has 90 days (plus, another 30 days under an extension) after the date of enactment to nominate a tract by notifying IRS in writing of the nomination. IRS then has to certify the nomination and designate the tract as a QO Zone within 30 days (plus, another 30 days under an extension) after receiving the notice. Thus, a designation has to occur before June 21, 2018 and will remain in effect for ten calendar years. Census tracts in Puerto Rico that are low-income communities are considered to be certified and designated as QO Zones effective on Dec. 22, 2017.
QO Funds. A QO Fund is an investment vehicle organized as a corporation or a partnership for the purpose of investing in a QO Zone. The QO Fund can’t invest in another QO Fund and has to hold at least 90% of its assets in QO Zone property (i.e., any QO Zone stock, any QO Zone partnership interest, and any QO Zone business property). A QO Zone property has to meet many requirements, including that substantially all of the entity’s business property is used in a QO Zone. A penalty can apply to the QO Fund if it fails to meet the 90% requirement.
Temporary gain deferral election. If a taxpayer invests gains from the sale or exchange of property with an unrelated person in a QO Fund within the 180-day period beginning on the date of the sale or exchange, the taxpayer can elect to defer the gain from the sale or exchange.
Recognition of deferred gain. The taxpayer defers the gain until the later of the date on which the investment is sold or exchanged, or Dec. 31, 2026. At that time, the taxpayer includes the excess of (1) the gain over the lesser of the amount of deferred gain or the fair market value of the investment as determined on that date over (2) the taxpayer’s basis in the investment.
Basis in the investment. A taxpayer’s basis in the investment is zero unless any of the following increases apply: (a) 10% of the deferred gain if the investment is held for five years, (b) 5% of the deferred gain if the investment is held for seven years; and (c) any deferred gain recognized at the end of the deferral period.
Permanent gain exclusion election. At the taxpayer’s election, a taxpayer can exclude any post-acquisition capital gains on an investment in a QO Fund if the investment in the QO Fund has been held for ten years.
When elections can’t be made. A taxpayer can’t make either election if there’s already an election in effect with respect to the same sale or exchange. Also, a taxpayer can’t make a temporary deferral election with respect to any sale or exchange after Dec. 31, 2026.
On February 28, Senate Finance Committee leaders introduced legislation to retroactively extend tax provisions that expired at the end of 2017 and 2018 and provide disaster tax relief benefits to individuals and businesses affected by major disasters occurring in 2018.
The measure, introduced by Senate Finance Committee Chairman Charles E. Grassley (R-IA), and Ranking Member Ron Wyden (D-OR), would extend some 29 expired tax provisions through the end of 2019 at their current levels. These temporary tax provisions are generally referred to as “extenders” because they are routinely extended by Congress on a one- or two-year basis. Twenty-six of these provisions expired at the end of 2017, and three others expired at the end of 2018.
While in the past many lawmakers have indicated that they would like to get rid of some of the extenders and make others permanent, their indecision has allowed a timely renewal to fall by the wayside. Co-sponsor of the bill Grassley commented, “Congress needs to get out of this bad habit of regular retroactive extensions of these tax provisions….The whole point of these federal tax incentives is to encourage certain behaviors, especially investments in alternative energies, energy efficiency and transportation.” Co-sponsor Wyden commented, “It’s past time to kick the addiction to short-term tax policies, but until Congress is able to break this cycle for good, taxpayers deserve certainty about what they’ll owe,” Wyden said.
However, some House members have shown less interest in quickly advancing a renewal of the tax provisions. House Ways and Means Chairman Richard E. Neal, D-Mass said he wants to take time to examine each provision and plans to hold hearings on tax extenders sometime in March.
The following provisions that expired at the end of 2017 would be extended through 2019:
…the nonbusiness energy property credit;
…the qualified fuel cell motor vehicle credit;
…the alternative fuel refueling property credit;
…the 2-wheeled plug-in electric vehicle credit;
…the second generation biofuel producer credit;
…the biodiesel and renewable diesel incentives;
…the credit for electricity produced from certain renewable resources;
…the production credit for Indian coal facilities;
…the railroad track maintenance credit;
…the energy efficient homes credit;
…the classification of certain race horses as 3-year property;
…the special allowance for second generation biofuel plant property;
…the energy efficient commercial buildings deduction;
…the election to expense advanced mine safety equipment;
…the extension of the special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities;
…the extension and clarification of excise tax credits relating to alternative fuels;
…the 7-year recovery period for motorsports entertainment complexes;
…the accelerated depreciation for business property on Indian reservation;
…the expensing rules for certain productions;
…the Indian employment credit;
…the mine rescue team training credit;
…the exclusion from gross income of discharge of qualified principal residence indebtedness;
…the treatment of mortgage insurance premiums as qualified residence interest;
…the deduction of qualified tuition and related expenses;
…the extension of empowerment zone tax incentives; and
…the American Samoa economic development credit.
The following provisions that expired at the end of 2018 would be extended through 2019:
…the temporary reduction in medical expense deduction floor;
…the extension of oil spill liability trust fund rate; and
…the black lung liability trust fund excise tax.
The disaster tax relief provisions in the bill include special rules allowing access to retirement funds, an employee retention credit, suspension of limits on deductions for certain charitable contributions, liberal rules for deductions for disaster-related personal casualty losses, and special rules for measurement of earned income for purposes of qualifying for tax credits.
Legislation to extend “extenders,” i.e. tax provisions with termination dates that are typically extended, has not been enacted. As we enter tax season, here is a listing of those extenders, that, as noted in a recent report by the Joint Committee on Taxation (JCT), have not been extended to tax year 2018.
Background. The Code contains dozens of temporary tax provisions—i.e., provisions with a fixed termination date. Often, these expiring provisions are temporarily extended for a short period of time (e.g., one or two years).
Many of these extender provisions would have been extended through the end of 2018 by a the Retirement, Savings, and Other Tax Relief Act of 2018 and the Taxpayer First Act of 2018 (H.R. 88). However, on Dec. 10, 2018, that bill was revised so as to not include those extensions.
On January 15, 2019, Charles Grassley (R-IA), Chairman of the Senate Finance Committee stated that his goal is to guide extenders legislation to final enactment. However, he acknowledged that he does not have a specific plan and that no hearings on the subject have been scheduled.
List of extenders that haven’t been extended to 2018. On January 19, the JCT released its annual report on the temporary individual, business, and energy tax extender provisions. This report contains a section that serves as a reminder of the extender provisions that expired at the end of 2017.
The provisions can be fit into three categories—those primarily affecting individuals, those primarily affecting businesses, and being energy-related provisions.
The expired individual provisions are:
… the above-the-line deduction for certain higher-education expenses, including qualified tuition and related expenses, under Code Sec. 222;
… the treatment of mortgage insurance premiums as qualified residence interest under Code Sec. 163(h)(3)(E); and
… the exclusion from income of qualified canceled mortgage debt income associated with a primary residence under Code Sec. 108(a)(1)(E).
The expired business provisions are:
… the Indian employment tax credit under Code Sec. 45A(f);
… accelerated depreciation for business property on Indian reservations under Code Sec. 168(j)(9);
… the American Samoa economic development credit (P.L. 109-432, Sec. 119);
… the railroad track maintenance credit under Code Sec. 45G(f);
… 7-year recovery for motorsport racing facilities under Code Sec. 168(i)(15);
… the mine rescue team training credit under Code Sec. 45N(e);
… the election to expense advanced mine safety equipment under Code Sec. 179E(g);
… special expensing rules for film, television, and live theatrical production under Code Sec. 181;
… empowerment zone tax incentives under Code Sec. 1391(d)(1)(A);
… 3-year depreciation for race horses two years or younger under Code Sec. 168(e)(3)(A)(i); and
The expired energy provisions are:
… the beginning-of-construction date for nonwind facilities to claim the production tax credit (PTC) or the investment tax credit (ITC) in lieu of the PTC under Code Sec. 45(d) and Code Sec. 48(a)(5);
… the special rule to implement electric transmission restructuring under Code Sec. 451(k);
… the credit for construction of energy efficient new homes under Code Sec. 45L;
… the energy efficient commercial building deduction under Code Sec. 179D;
… the nonbusiness energy property credit under Code Sec. 25C;
… the alternative fuel vehicle refueling property credit under Code Sec. 30C(g);
… incentives for alternative fuel and alternative fuel mixtures under Code Sec. 6426(d)(5) and Code Sec. 6427(e)(6)(C);
… incentives for biodiesel and renewable diesel under Code Sec. 40A(a), Code Sec. 6426(c)(6), Code Sec. 6426(e)(3) and Code Sec. 6427(e)(6)(B);
… second generation (cellulosic) biofuel producer credit under Code Sec. 40(b)(6)(J);
… credit for production of Indian coal under Code Sec. 45(e)(10)(A);
… special depreciation allowance for second generation (cellulosic) biofuel plant property under Code Sec. 168(l);
… the credit for qualified fuel cell vehicles under Code Sec. 30B; and
… the credit for 2-wheeled plug-in electric vehicles under Code Sec. 30D(g)(3)(E)(ii).
The Tax Cuts and Jobs Act introduces a new component credit for paid family and medical leave, i.e. the paid family and medical leave credit, which is available to eligible employers for wages paid to qualifying employees on family and medical leave. The credit is available as long as the amount paid to employees on leave is at least 50% of their normal wages and the leave payments are made in employer tax years beginning in 2018 and 2019. That is, under the Act, the new credit is temporary and won’t be available for employer tax years beginning in 2020 or later unless Congress extends it further.
For leave payments of 50% of normal wage payments, the credit amount is 12.5% of wages paid on leave. If the leave payment is more than 50% of normal wages, then the credit is raised by .25% for each 1% by which the rate is more than 50% of normal wages. So, if the leave payment rate is 100% of the normal rate, i.e. is equal to the normal rate, then the credit is raised to 25% of the on leave payment rate. The maximum leave allowed for any employee for any tax year is 12 weeks.
Eligible employers are those with a written policy in place allowing (1) qualifying full-time employees at least two weeks of paid family and medical leave a year, and (2) less than full-time employees a pro-rated amount of leave. On that note, qualifying employees are those who have (1) been employed by the employer for one year or more, and (2) who, in the preceding year, had compensation not above 60% of the compensation threshold for highly compensated employees. Paid leave provided as vacation leave, personal leave, or other medical or sick leave is not considered family and medical leave.
In a Notice that includes a proposed Revenue Procedure, the IRS has provided a safe harbor under which a rental real estate enterprise will be treated as a trade or business for purposes of the Qualified Business Income (QBI) deduction.
To qualify for the safe harbor:
(1) separate books and records must be maintained for each enterprise;
(2) 250 or more hours of rental services must be performed; and
(3) contemporaneous records must be maintained.
The safe harbor does not apply to real estate used by the taxpayer as a residence under IRC Sec. 280A or real estate rented under a triple net lease. An enterprise that fails safe harbor requirements may still qualify as a trade or business under the regulations. Taxpayers may rely on the safe harbor, which generally applies to tax years ending after 12/31/17, until the proposed Revenue Procedure is published in final form.
The IRS has announced that despite the government shutdown, the 2019 tax filing season will begin on Monday, 1/28/19. The agency maintains the position that it has the authority to pay refunds despite a lapse in annual appropriations, and the Office of Management and Budget (OMB) agrees. For most taxpayers, the deadline to file 2018 tax returns is Monday, 4/15/19. However, taxpayers living in Maine or Massachusetts have until 4/17/19 due to the Emancipation Day holiday.