Senate approves bill to avoid shutdown

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On Thursday, February 14, the Senate approved a budget measure (H.J. Res 31) that would avoid a government shutdown. The House was expected to take up and pass the measure in the evening of February 14, and President Trump has indicated he will sign the bill.

The bill includes $11.3 billion in funding for the IRS in fiscal 2019. The final vote was 83-16. The measure stipulates that $77 million must be used to implement tax reform. The bill also contains language that prohibits the Treasury Department from finalizing any regulation related to the standards used to determine the tax-exempt status of a 501(c)(4) organization.

In addition, the appropriations bill provides the IRS with $4.86 billion for enforcement, $3.7 billion for operations support, $2.5 billion for taxpayer services, and $110 million for business systems modernization.

Temporary Tax Provisions not yet Extended

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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).

Family and Medical Leave Credit

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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.

 

IRS Provides Section 199A Safe Harbor for Rental Real Estate

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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.