Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271

Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271

President Donald Trump has signed bipartisan legislation, which expands a religious exemption for the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate. The exemption is effective for taxable years beginning after December 31, 2018.

Religious Exemption

SUPPORT for Patients and Communities Act ( HR 6) amends Code Sec. 5000A(d)(2)(a) to expand the religious conscience exemption for the ACA individual mandate. Individual taxpayers who rely solely on a religious method of healing for whom the acceptance of medical health services would be inconsistent with their religious beliefs are exempt from the ACA mandate to maintain health insurance or pay a penalty.

Tax Reform

Additionally, last year’s tax reform legislation essentially repeals the ACA’s individual mandate. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) repeals the ACA’s shared responsibility payment for individuals failing to maintain minimum essential coverage effective January 1, 2019.

Congressional Republicans are looking to move forward with certain legislative tax efforts during Congress’s lame-duck session. The House’s top tax writer, who will hand the reins to Democrats next year, has reportedly outlined several tax measures that will be a priority when lawmakers return to Washington, D.C., during the week of November 12. However, President Donald Trump’s recently touted 10-percent middle-income tax cut does not appear to be one of them.

Congressional Republicans are looking to move forward with certain legislative tax efforts during Congress’s lame-duck session. The House’s top tax writer, who will hand the reins to Democrats next year, has reportedly outlined several tax measures that will be a priority when lawmakers return to Washington, D.C., during the week of November 12. However, President Donald Trump’s recently touted 10-percent middle-income tax cut does not appear to be one of them.

Democrats Take the House

Republicans will lose their one-party rule in Washington, D.C. in the 116th Congress beginning in January 2019. As a result of the November 6 midterm elections, Democrats will control the House during the next Congress, and Republicans will retain control of the Senate.

Currently, Rep. Kevin Brady, R-Tex., serves as chairman of the House’s tax-writing Ways and Means Committee. Republicans’ majority in both chambers of Congress enabled the GOP, in coordination with the Trump administration, to enact tax reform legislation last year. However, the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) reportedly did not turn out to be as popular as they had hoped. The TCJA’s unpopularity is at least in part why Republicans lost vital seats in the House, according to several reports.

Lame-Duck

Before the turnover of power, however, Brady is reportedly gearing up to introduce a tax extenders measure during the lame-duck session, which would extend certain temporary or expired tax breaks. Generally, Democrats have been supportive of year-end tax extender legislation. At this time, the details of the tax-extender proposal remain unclear.

Additionally, Brady reportedly said on November 7 that a TCJA technical corrections bill with "minor changes" will move in the lame-duck session. Further, the Senate is expected to take up a House-approved retirement savings measure that is part of House Republicans’ "Tax Reform 2.0" efforts.

Looking Forward

House Ways and Means Committee ranking member Richard Neal, D-Mass., is expected to chair the committee in the 116th Congress. Neal has a fairly moderate tax-legislative record, and is considered on Capitol Hill to be "business-friendly." To that end, Neal has recently sponsored several retirement savings measures, which would enhance employer workplace savings accounts. Additionally, infrastructure and tax-related health care initiatives are expected to be a priority among House Democrats.

GOP Retains Senate

Republicans will continue to lead the Senate in the 116th Congress. While the GOP Senate majority may not be enough to approve additional GOP tax legislation, it is likely to prevent Democrats from repealing parts of the TCJA. However, it is expected on Capitol Hill that hearings will be held in both chambers’ tax writing committees to examine various provisions of the new tax law. Although a divided Congress can result in fewer tax bills being approved, successful legislation will likely be bipartisan.

The Senate Finance Committee’s (SFC) top ranking Democrat has introduced a bill to restore a retirement savings program known as myRA that was terminated by Treasury last year. The myRA program was created by former President Obama through an Executive Order.

The Senate Finance Committee’s (SFC) top ranking Democrat has introduced a bill to restore a retirement savings program known as myRA that was terminated by Treasury last year. The myRA program was created by former President Obama through an Executive Order.

Retirement Savings

"Cost-of-living is soaring with working families having less and less to save for their futures," SFC ranking member Ron Wyden, D-Ore., said in a November 15 tweet. "Today, I’m introducing a bill to address this retirement crisis."

The Encouraging Americans to Save Bill is co-sponsored by Sens. Ben Cardin, D-Md., Bob Casey, D-Pa., Amy Klobuchar, D-Minn., and Michael Bennet, D-Colo. An earlier version of the bill, Sen. 2492, was introduced by Wyden in the 114th Congress that also aimed to expand the myRA program.

"The Encouraging Americans to Save [Bill] enhances retirement savings incentives by restructuring the existing, nonrefundable saver’s credit into a refundable, government matching contribution of up to $500 a year for middle-class workers who save through 401(k) type plans or IRAs, "Wyden’s November 15 press release noted. Additionally, the bill would restore the myRA program, which Treasury determined last year was too costly to continue.

myRA Program

The Obama-era myRA program was designed as a government-sponsored retirement savings program available to individuals without access to employer-sponsored retirement plans. Although the program was determined to have very little demand to warrant its high operating costs, Democrats attributed the low sign-up to the program still being in its infancy. However, Republicans criticized the program as an "executive overreach" that could not become successful based on its investments in little interest yielding Treasury bonds and posed certain risks to taxpayers and employees.

House

House Ways and Means Committee ranking member Richard Neal, D-Mass., along with Wyden, sent a letter last year to Treasury Secretary Steven Mnuchin urging Treasury to continue the myRA program. Neal is expected to become chairman of the House’s tax writing committee this coming January in the 116th Congress.

However, considering the Trump administration ended the program, it is seen as unlikely on Capitol Hill that Trump would support legislation to restore it. Moreover, Republicans will retain their majority-hold of the Senate in the next Congress, thus further limiting its chances of success.

A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November.

A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November.

Middle-Income Tax Cut

President Donald Trump announced on October 22 that a new 10 percent tax cut would soon be unveiled that will focus specifically on middle-income taxpayers. "President Trump is determined to provide further tax relief for middle-class families," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an October 23 statement. "We will continue to work with the White House and Treasury over the coming weeks to develop an additional 10 percent tax cut focused specifically on middle-class families and workers, to be advanced as Republicans retain the House and Senate," Brady added.

Comment. Notably, Brady is essentially highlighting in his statement that any such additional tax cut measure would require a Republican majority for congressional approval. As November midterm elections near, there is "talk" on Capitol Hill that Republicans may lose control of the House.

The additional 10 percent tax cut for middle-income taxpayers would aim to build upon the individual tax cuts enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). To that end, the House passed a "Tax Reform 2.0"package last month, which would make permanent the TCJA’s individual and small business tax credits. The TCJA’s individual tax cut provisions were enacted temporarily through 2025 in accordance with certain Senate budget rules. Although the TCJA did not receive one Democratic vote, the Tax Reform 2.0 package did clear the House with some bipartisan support.

New Congress, New Tax Cut

"We expect to advance this in the new session of Congress if Republicans maintain control of the House and Senate," Brady, said of the tax cut in an October 26 televised interview. However, President Trump said a couple of days before that a " resolution" would be introduced for the tax cut by the week of October 29.

Democratic lawmakers have been criticizing Trump’s announcement as nothing more than politically-driven rhetoric ahead of the November 6 midterm elections. Several top congressional Democrats have voiced intent to repeal, at least in part, the TCJA enacted last December. While Republicans, on the other hand, want to continue building upon the TCJA’s tax cuts.

"What President Trump is looking at is a 10 percent cut focused on middle-class workers and families…he still believes middle-class families are the ones always in the squeeze," Brady said on October 26. "We’ve been working with the White House and the Treasury on some ideas about how best to do it," he added.

Net Neutral

Trump has predicted that the tax cut will be net neutral. A chief complaint of last year’s tax reform among Democrats is the TCJA estimated $1.4 trillion price tag over a 10-year budget window.

"If you speak to Brady and a group of people, we're putting in a tax reduction of 10 percent, which I think will be a net neutral because we're doing other things, which I don't have to explain now," Trump said. A spokesperson for Brady has reportedly said that cost measures for the tax cut will be addressed once the proposal has been scored.

Looking Ahead

At this time, it is considered likely on Capitol Hill that Republicans will retain control of the Senate, but several predictions continue to float that the GOP will lose its House majority. Republicans would likely need to retain control of both chambers for any chance of approving further individual tax cuts or making permanent those enacted under the TCJA.

Although, the House approved its "Tax Reform 2.0" package last month, which includes measures to make permanent the TCJA’s individual tax cuts and enhance various savings accounts and business innovation, the Senate has showed little interest in taking up the package as a whole before the end of the year. However, consideration of the retirement and savings measure in the lame-duck session remains a possibility.

IRS Commissioner Charles Rettig gave his first speech since being confirmed as the 49th chief of the Service at the American Institute of CPAs (AICPA) November 13 National Tax Conference in Washington, D.C. "You’re going to see things [I do] and go, ‘I can’t believe he did that,’" Rettig said.

IRS Commissioner Charles Rettig gave his first speech since being confirmed as the 49th chief of the Service at the American Institute of CPAs (AICPA) November 13 National Tax Conference in Washington, D.C. "You’re going to see things [I do] and go, ‘I can’t believe he did that,’" Rettig said.

Rettig, nominated by President Donald Trump last February and sworn in as IRS Commissioner on October 1, was a practicing tax attorney for over 30 years. "I’m not going to lose my tax edge," he told CPAs and other tax professionals.

Modernizing the IRS

Rettig, since being confirmed, has maintained that a top priority of the IRS is updating the Service’s technology. "We must work on our IT modernization efforts," Rettig said in a previous statement.

Additionally, Rettig discussed the IRS’s antiquated information technology (IT) systems and software at the AICPA event. "I can call Google…or All State and a recording…says, 'you are 14th in line, we can call you back, you won't lose your place in line," Rettig said. "We don't have those tools, we need those tools."

However, Rettig emphasized that the IRS’s employees should have pride in their roles, and that many IRS challenges are a result of constrained financial resources. IRS employees are "people who care,"Rettig said. Further, Rettig said he wants the IRS to gain taxpayers’ respect.

Additionally, in line with the IRS’s increased efforts toward transparency, Rettig said that employee training materials for last year’s tax reform will soon be posted to the IRS’s website. The Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) was enacted last December. Rettig is tasked with overseeing the new tax law’s implementation.

Tax Reform

A copy of Rettig’s prepared remarks for the AICPA event was provided to Wolters Kluwer by the IRS on November 14. Notably, an IRS spokesperson told Wolters Kluwer that Rettig "did not stick to the script." In an informal outline of areas on which Rettig intends to focus, "the top of the list is continuing to implement the Tax Cuts and Jobs Act, which contains the most sweeping tax changes in 30 years,"Rettig stated in the prepared remarks. "The IRS has already made great progress in this area, but more remains to be done."

IRS Guidance

The IRS is committed to helping taxpayers and tax professionals understand the new tax law changes, as well as file returns next year timely and accurately, Rettig noted. To that end, the IRS will continue to issue guidance this year related to tax reform, according to Rettig. "You can expect additional guidance in the next several weeks in a number of areas," he added, which include TCJA provisions related to the following:

• Opportunity Zones;
• the limitation on the business interest expense deduction; and
• the Base Erosion and Anti-Abuse Tax (BEAT).

Additionally, the IRS will continue to update taxpayer forms and instructions related to new tax law provisions, Rettig noted. "We’re well on our way to having those completed in time for [the 2019] filing season."

The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules.

The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules.

Transition Tax

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, revived and amended Code Sec. 965. The new Code Sec. 965 generally requires U.S. shareholders pay a mandatory one-time repatriation "transition" tax on untaxed foreign earnings of certain foreign corporations.

"The Tax Cuts and Jobs Act treats these foreign earnings as repatriated and places a 15.5 percent tax on cash or cash equivalents, and an 8 percent tax on the remaining earnings. Generally, the transition tax can be paid in installments over an eight-year period when a taxpayer files a timely election under section 965(h),"Treasury Secretary Steven Mnuchin said in a statement.

The IRS held an October 22 public hearing on NPRM REG-104226-18, which provides rules for implementing the transition tax created under last year’s tax reform. IRS officials did not provide any feedback at the hearing.

AICPA Recommendations

In an October 31 comment letter to the IRS, the AICPA offered 15 recommendations to provide taxpayers further clarity and guidance on tax reform’s transition tax requirements. The AICPA’s recommendations include the following:

• Clarify that previously taxed earnings (PTI) under Code Sec. 965(b)(4)(A) are deemed included in Code Sec. 951 for purposes of applying Code Sec. 1248(d).
• Clarify that the portion of a Code Sec. 965 inclusion liability attributable to Code Sec. 956 is eligible for the appropriate reduced rate of tax as a consequence of the deduction provided for in Code Sec. 965(c).
• Provide taxpayers with additional flexibility when making the basis adjustment election under Proposed Reg. §1.965-2(f) by including the ability to make partial basis adjustments, elect adjustments on an entity-by-entity basis, and modify the proposed consistency provision on related persons.
• Provide guidance as to the ordering of distributions of PTI between Code Sec. 965(a) PTI and Code Sec. 965(b) PTI for purposes of applying Code Sec. 959(c) and Code Sec. 986(c).
• Provide relief to taxpayers that make or have made late elections under the proposed regulations and clarify the procedure for obtaining such relief.
• Provide that U.S. shareholders that are members of the same consolidated group are treated as a single U.S. shareholder for all purposes with respect to Code Sec. 965.
• Clarify that the PTI amount created under Code Sec. 965(b)(4)(A) is not taken into account under Code Sec. 864(e)(4)(D) for purposes of allocating and apportioning interest expense.
• Exercise the authority under Code Sec. 965(o) to provide relief from the income inclusion to certain affected taxpayers. Specifically, provide guidance excluding a foreign corporation that is considered a controlled foreign corporation (CFC) solely as a result of the "downward attribution" rules of Code Sec. 318(a)(3) from the definition of an specified foreign corporation (SFC) for any U.S. shareholder not considered a related party (within the meaning of Code Sec. 954(d)(3)) with respect to the domestic corporation to which ownership was attributed.
• Provide a carve-out for certain "triggering events" of an S corporation Code Sec. 965(i), such as where the S corporation and relevant shareholders maintain direct or indirect ownership of the transferred assets (e.g., tax-free transfers).
• Provide guidance on the interaction between a Code Sec. 962 election and a Code Sec. 965(i) election, including clarifying that an eligible taxpayer may make a Code Sec. 962 election for a Code Sec. 965 tax liability for which they intend to defer inclusion under Code Sec. 965(i).

ABA Recommendations

Likewise, the ABA made similar recommendations on the proposed regulations and related guidance in an October 29 letter sent to IRS Commissioner Charles Rettig. The ABA’s 80-page letter grouped its principal recommendations into the three categories:

• the application of Code Sec. 965 to passthrough entities (other than S corporations) and individuals;
• the application of the netting of accumulated post-1986 deferred foreign income with deficits in other related entities; and
• issues in applying the foreign tax credit.

Last year’s tax reform created a new Opportunity Zone program, which offers qualifying investors certain tax incentives aimed to spur investment in economically distressed areas. Treasury Secretary Steven Mnuchin has predicted that the Opportunity Zone program will create $100 billion in private capital that will be invested in designated opportunity zones.

Last year’s tax reform created a new Opportunity Zone program, which offers qualifying investors certain tax incentives aimed to spur investment in economically distressed areas. Treasury Secretary Steven Mnuchin has predicted that the Opportunity Zone program will create $100 billion in private capital that will be invested in designated opportunity zones.

The IRS released the much anticipated proposed regulations for the Opportunity Zone program in October ( REG-115420-18). The proposed rules provide "clarity and some good news for taxpayers," Micheal Bernier, partner at Ernst & Young’s National Tax practice, told Wolters Kluwer in an emailed statement.

Opportunity Zones

The Opportunity Zone program was created under the Tax Cuts and Jobs Act ( P.L. 115-97) enacted in December 2017. The TCJA added Code Secs. 1400Z-1 and 1400Z-2, which include procedural rules for designating opportunity zones and provisions allowing qualifying taxpayers to elect certain income tax benefits. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bipartisan bill sponsored by Sens. Tim Scott, R-S.C., and Cory Booker, D-N.J. The program "creates tax incentives to help stimulate the flow of capital into communities that need opportunity the most," Cory Booker said in an October 29 tweet.

Generally, the proposed rules have been considered on Capitol Hill as leaning favorably toward taxpayers. However, stakeholders and practitioners are reporting that many questions remain. To that end, the Office of Information and Regulatory Affairs (OIRA), housed under the Office of Management and Budget (OMB), has announced that a second package of regulations is expected to be completed by the end of this year.

Qualified Opportunity Funds

The TCJA’s Opportunity Zone program generally established the following investor tax benefits:

• a temporary tax deferral for capital gains realized on the sale of appreciated assets and reinvested within 180 days in a qualified opportunity fund (QOF);
• the elimination of up to 10 or 15 percent of the tax on the capital gain that is invested in the QOF and held between five and seven years; and
• the permanent exclusion of tax when exiting a qualified opportunity fund investment held for at least 10 years.

"Most importantly, taxpayers can use the fund as collateral. This was a surprise and is important," Bernier told Wolters Kluwer. "The type of investments made by Opportunity Funds do have some strings attached, which are designed to make sure the investments are creating economic activity in the Opportunity Zones, not just buying and holding existing assets," he added. "Under an Opportunity Zone structure, if you refinance the property and take cash out of the Opportunity Zone fund, that would be a disposition and would trigger the gain, thus reducing the amount of investment that is eligible for the 10-year deferral."

Real Estate Investors

Additionally, real estate investors stand to receive significant tax advantages through the Opportunity Zone program, according to Bernier. "As collateral, it is possible to borrow against the Opportunity Zone fund, a very important option for real estate investors," he said. "There are a few extra hurdles to using that strategy, but it’s valuable in the real estate world and would be the rough equivalent of a cash-out refinancing."

Additionally, Bernier noted the generous latitude that Treasury and the IRS used in defining certain statutory terms. For example, "‘substantially all’ of owned or leased assets was defined as 70 percent [in the proposed regulations]; this could have been as high as 90 percent or more," Bernier said. Further, "the time allowance for working capital is set at 30 months to deal with cash. This helps in getting the development done," he added.

Too Flexible?

The proposed regulations for the Opportunity Zone program may be too flexible, according to an October article released by the liberal-leaning Urban-Brookings Tax Policy Center (TPC). "Neither the statute nor the guidance ensure that the investments will benefit low- and moderate-income residents of these communities,"the TPC article noted. "The investment flexibility makes it very difficult to evaluate the success of Opportunity Zones."

Additionally, TPC researchers noted the need for proper reporting under the Opportunity Zone program. "The next round of IRS regulations and tax forms is expected to detail those reporting requirements,"the TPC article said. "It will be vital that this disclosure provide the public with the answers to a series of basic questions: Who is investing in Opportunity Zones? How much is being invested? How is the money being used?"

Likewise, the conservative-leaning Tax Foundation noted in an October 23 article that the proposed regulations do nothing to ensure the program’s success. "The benefits given to investors through opportunity funds are remarkably generous, and many of these regulations only increase and widen those benefits without regard to the results," the article said.

Further, stakeholders testifying before the Senate Small Business Committee in early October also emphasized the importance of establishing proper reporting metrics for the program.

Questions Remain

Although stakeholder feedback has been largely positive, stakeholders and practitioners have noted several areas where additional IRS guidance is needed. Particularly, uncertainties surrounding the application of the QOF penalty, tax treatment of the sale of a QOF asset, and clarity on the definition of qualified opportunity zone business property are reportedly among items circulating the tax community as needing further guidance.

After the IRS released the proposed regulations, Sen. Scott praised the guidance while also noting that it is incomplete. "The first set of rules released by the Treasury Department today reinforce that this will not be another bureaucratic process burdened by red tape, but rather a streamlined, efficient process that allows for investments to truly help communities in need," Scott said.

Additionally, Bernier told Wolters Kluwer that future regulations are needed to "fill in gaps." The next package of proposed regulations are "anticipated in November and December, "he added.

To that end, the House’s top tax writer has urged stakeholders in a recent statement to provide feedback on the proposed regulations. Moreover, those comments should include "identifying any areas where additional technical guidance would be valuable in providing certainty to potential investors and project managers," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said.

The IRS is expected to soon release proposed regulations for tax reform’s new business interest limitation. "They are so broad that nearly every domestic taxpayer will be impacted," Daniel G. Strickland, an associate at Eversheds Sutherland, told Wolters Kluwer.

The IRS is expected to soon release proposed regulations for tax reform’s new business interest limitation. "They are so broad that nearly every domestic taxpayer will be impacted," Daniel G. Strickland, an associate at Eversheds Sutherland, told Wolters Kluwer.

The first set of proposed regulations for the Code Sec. 163(j) business interest limitation is expected to focus primarily on corporations. A second package of proposed regulations, expected sometime in December, will reportedly address the business interest limitation’s treatment of partnerships and S corporations.

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, amended Code Sec. 163(j) to include a broader limitation on the business interest expense deduction. Before last year’s tax reform, the former Code Sec. 163(j) "earnings stripping" rules were applied much more narrowly to a specific type of debt-to-equity ratio held by corporations. Now, the amended Code Sec. 163(j)limitation encompasses all debt, regardless of entity or individual. The new business interest limitation was intended by Republicans, at least in part, to serve as a revenue raiser to help offset tax reform’s significant corporate tax rate reduction from 35 to 21 percent.

OMB Review

Currently, the proposed regulations for the Code Sec. 163(j) business interest limitation are under review at the Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA). OIRA received the proposed regulations from Treasury and the IRS on October 25, according to OIRA’s website.

It is expected on Capitol Hill that a 10-day expedited review process that is available for tax reform-related regulations was requested.

Business Interest Limitation

Under the amended Code Sec. 163(j), a taxpayer’s annual business interest expense for the tax year, effective for tax years after December 31, 2017, is limited to the following three factors:

• business interest income;
• 30 percent of adjustable taxable income (ATI); and
• floor plan financing interest.

Under the TCJA, business interest excludes "investment interest" as defined in Code Sec. 163(d). Additionally, the calculation requirements for "adjusted taxable income" are set to change in 2022.

Practitioner Insight

"In terms of statutory language, phrases like ‘properly allocable’ jump off the page,"Strickland told Wolters Kluwer. Under the TCJA, "business interest" is defined as any interest paid or accrued on indebtedness that is properly allocable to a trade or business. It remains to be seen how the IRS will identify what is "properly allocable,"according to Strickland.

"Since propriety differs between taxpayers and the government, it will be interesting to see how the regulations handle it," Strickland said. "Will we get a two-pronged objective and subjective test or will there be a bright line rule?" he posited.

Additionally, Strickland said that tax practitioners expect allocation rules will be included, but noted that it remains unclear what form the rules will take. Whether there will be separate rules for different types of entities and how the IRS will treat allocation between exempt and non-exempt entities and within consolidated groups are all interesting yet unsettled components, according to Strickland.

Further, Strickland predicted that the forthcoming regulations will clarify how Code Sec. 951A’s global intangible low-taxed income (GILTI) provision will interact with Code Sec. 163(j). "In the same vein, I expect that we will see how 163(j) plays with 168(k) and 267A, among other sections," he added. "As we get each new piece of the puzzle, the whole picture comes into focus."

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

New Deduction
The Tax Cuts and Jobs Act created Code Sec. 199A. The deduction is temporary and begins this year.

Generally, qualified taxpayers may deduct up to 20 percent of domestic QBI from a partnership, S corporation or sole proprietorship. Congress put in place a limitation based on wages paid, or on wages paid plus a capital element, among other requirements. Certain service trades or businesses generally may not take advantage of the deduction but there are exceptions.

Almost immediately after passage of the new tax law, the AICPA and other tax professional groups urged on the IRS to move quickly on guidance. Recently, the National Society of Accountants (NSA) reported that the IRS would issue guidance on Code Sec. 199A this summer.

Immediate Concern
The AICPA identified several areas of immediate concern. They are:

• Definition of Code Sec. 199A qualified business income.
• Aggregation method for calculation of QBI of pass-through businesses.
• Deductible amount of QBI for a pass-through entity with business in net loss.
• Qualification of wages paid by an employee leasing company.
• Application of Code Sec. 199A to an owner of a fiscal year pass-through entity ending in 2018.
• Availability of deduction for Electing Small Business Trusts (ESBTs).

Services
The AICPA asked the IRS to describe what activities are included in the definition of a services trade or business. "The guidance should clarify that the definition of the term ‘accounting services’ includes any services associated with the determination of tax liabilities including preparation, tax planning, cost segregation services, services rendered with respect to tax credits and deductions, and similar consultative services,"the AICPA told the Service.

The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively (with the 25- and 28-percent rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.

The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively (with the 25- and 28-percent rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.

Capital gains rates

The maximum rates on net capital gain and qualified dividends are generally retained after 2017 and are 0 percent, 15 percent, and 20 percent. The breakpoints between the zero- and 15-percent rates ("15-percent breakpoint") and the 15- and 20-percent rates ("20-percent breakpoint") are generally the same amounts as the breakpoints under prior law, except the breakpoints are indexed using the new C-CPI-U factor in tax years beginning after 2018. For 2018:

• the 15-percent breakpoint is $77,200 for joint returns and surviving spouses (one-half of this amount ($38,600) for married taxpayers filing separately), $51,700 for heads of household, $2,600 for estates and trusts, and $38,600 for other unmarried individuals; and
• The 20-percent breakpoint is $479,000 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.

“Zero” rate. In the case of an individual (including an estate or trust) with adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent breakpoint, such gain is not taxed.

Comment. The breakpoints are not aligned with the new general income tax rate brackets. For example, alignment for joint filers would have the 15-percent breakpoint at $77,400 rather than $77,200; and, more significantly, 20 percent at $600,000 rather than at $479,000. Instead, they continue the alignment themselves more closely to the prior-law rate brackets.

Comment. As under prior law, unrecaptured section 1250 gain generally is taxed at a maximum rate of 25 percent, and 28-percent rate gain is taxed at a maximum rate of 28 percent. In addition, an individual, estate, or trust also remains subject to the 3.8 percent tax on net investment income (NII tax).

Kiddie tax

Effective for tax years beginning after December 31, 2017, and before January 1, 2026, the "kiddie tax" is simplified by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child. A child’s "kiddie tax" is no longer affected by the tax situation of his or her parent or the unearned income of any siblings.

Taxable income attributable to net unearned income is taxed according to the brackets applicable to trusts and estates, with respect to both ordinary income and income taxed at preferential rates. For 2018, that means that the 15-percent capital gain rate starts at $2,600 and rising to 20 percent when $12,700 is reached.

Carried interest

Capital gain passed through to fund managers via a partnership profits interest (carried interest) in exchange for investment management services must meet an extended three-year holding period to qualify for long-term capital gain treatment. Under new Code 1061(a), if a taxpayer holds an applicable partnership interest at any time during the tax year, this rule treats carried interest as short-term capital gain—taxed at ordinary income rates— based on a three-year holding period instead of the usual one-year period.

SSBIC rollovers

For sales after 2017, the new law repeals the election to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sale proceeds to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC). Prior to 2018 under former Code Sec. 1044, C corporations and individuals could elect to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sales proceeds within 60 days to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC).

Like-kind exchanges

Like-kind exchanges have often been used to defer taxable gains. Going forward, like-kind exchanges are allowed only for real property after 2017 (Code Sec. 1031(a)(1)). Like-kind exchanges are no longer available for depreciable tangible personal property, and intangible and nondepreciable personal property after 2017. Gain on those assets will no longer be allowed to be deferred.

Code Sec. 199A deduction

The concept of capital gain is intertwined within the new passthrough deduction for partnerships, S corporations and sole proprietorships under Code Sec. 199A in several ways. A noncorporate taxpayer can claim a Code Sec. 199A deduction for a tax year for the sum of—

(1)

the lesser of —

(a) the taxpayer’s "combined qualified business income amount"; or

(b) 20 percent of the excess of the taxpayer’s taxable income over the sum of (i) the taxpayer’s net capital gain under Code Sec. 1(h) and (ii) the taxpayer’s aggregate qualified cooperative dividends; plus

(2)

the lesser of —

(a) 20 percent of the taxpayer’s aggregate qualified cooperative dividends; or

(b) the taxpayer’s taxable income minus the taxpayer’s net capital gain (Code Sec. 199A(a), as added by the 2017 Tax Cuts Act).

Comment. As a result, the Code Sec. 199A deduction cannot be more than the taxpayer’s taxable income reduced by net capital gain for the tax year, making monitoring of capital gains a “must” for some taxpayers.

The IRS has released the 2018 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, medical, moving and charitable purposes. Beginning on January 1, 2018, the standard mileage rates for the use of a car, van, pickup of panel truck will be:

• 54.5 cents per mile for business miles driven (up from 53.5 cents in 2017);
• 18 cents per mile for medical and moving expenses (up from 17 cents in 2017); and
• 14 cents per mile for miles driven for charitable purposes (permanently set by statute at 14 cents).

Comment. A taxpayer may not use the business standard mileage rate after using a depreciation method under Code Sec. 168 or after claiming the Code Sec. 179 deduction for that vehicle. A taxpayer may not use the business rate for more than four vehicles at a time. As a result, business owners have a choice for their vehicles: take the standard mileage rate, or “itemize” each part of the expense (gas, tolls, insurance, etc., and depreciation).

The IRS has released the 2018 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, medical, moving and charitable purposes. Beginning on January 1, 2018, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

• 54.5 cents per mile for business miles driven (up from 53.5 cents in 2017);
• 18 cents per mile for medical and moving expenses (up from 17 cents in 2017); and
• 14 cents per mile for miles driven for charitable purposes (permanently set by statute at 14 cents).

Comment. A taxpayer may not use the business standard mileage rate after using a depreciation method under Code Sec. 168 or after claiming the Code Sec. 179 deduction for that vehicle. A taxpayer may not use the business rate for more than four vehicles at a time. As a result, business owners have a choice for their vehicles: take the standard mileage rate, or “itemize” each part of the expense (gas, tolls, insurance, etc., and depreciation).

New depreciation limits under the Tax Cuts and Jobs Act

The new “Tax Cuts and Jobs Act” recently passed by Congress and signed into law by President Trump raises the cap placed on depreciation write-offs of business-use vehicles. The new caps will be:

• $10,000 for the first year a vehicle is placed in service (up from a current level of $3,160);
• $16,000 for the second year (up from $5,100); $9,600 for the third year (up from $3,050); and
• $5,760 for each subsequent year (up from $1,875) until costs are fully recovered.

For passengers autos eligible for bonus first-year depreciation, that maximum first-year bonus depreciation allowance remains at $8,000 (raising the first-year write-off to $18,000). The new, higher limits only apply to vehicles placed in service after December 31, 2017.

Comment. For vehicles placed in service in 2018, the preceding caps will apply to all types of vehicles. However, the IRS figures inflation adjustments differently for (1) trucks (including SUVs treated as trucks) and vans and (2) regular passenger cars. Thus, beginning in 2019 when these figures are first adjusted for inflation, separate inflation adjusted caps will be provided for (1) trucks (including SUVs) and vans and for (2) regular passenger cars.

Also, the $25,000 section 179 expensing limit on certain heavy SUVs is inflation-adjusted after 2018. The $25,000 limit applies to a sport utility vehicle, a truck with an interior cargo bed length less than six feet, or a van that seats fewer than 10 persons behind the driver’s seat if the vehicle is exempt form the Code Sec. 280F annual depreciation caps because it has a gross vehicle weight rating in excess of 6,000 pounds or is otherwise exempt.

For a discussion of what’s best for your business situation, please contact our offices. 

January 1, 2018 not only brings a new year, it brings a new federal Tax Code. The just-passed Tax Cuts and Jobs Act makes sweeping changes to the nation’s tax laws. Many of these changes take effect January 1. Everyone – especially individuals and business owners – needs to review their tax strategies for the new law. The changes are huge. However, many changes are temporary, especially for individuals.

January 1, 2018 not only brings a new year, it brings a new federal Tax Code. The just-passed Tax Cuts and Jobs Act makes sweeping changes to the nation’s tax laws. Many of these changes take effect January 1. Everyone – especially individuals and business owners – needs to review their tax strategies for the new law. The changes are huge. However, many changes are temporary, especially for individuals.

Individuals

Individuals who work for wages will see the impact of the new law on their paychecks. The Tax Cuts and Jobs Act sets forth seven individual tax rates: 10, 12, 22, 24, 32, 35, and 37 percent. Before 2018, these rates were 10, 15, 25, 28, 33, 35, and 39.6 percent. Because the tax rates have changed for 2018, federal income tax withholding also must change.

The IRS has promised to publish new withholding tables as soon as possible. Most likely, the IRS will post the new withholding tables this month. After the IRS posts the new withholding tables, employers will likely have a transition period. Based on past changes to the tax laws, workers can generally expect to see the impact of the new law on their pay checks in February. Our office will keep you posted of developments.

The IRS also is expected to revise Form W-4. The new law repeals the deduction for personal exemptions after 2017.

Business entities 

Perhaps nowhere else does the new law turn traditional tax planning on its head more than choice of business entity. Business owners need to immediately start thinking about how they want to structure their business in 2018 and beyond.

For corporations, the Tax Cuts and Jobs Act lowers the corporate tax rate to 21 percent effective January 1, 2018. This change is permanent.

The Tax Cuts and Jobs Act also changes the tax treatment of pass-through businesses. These are partnerships, S corporations and others, which have been extremely popular choice of business entity in recent years. Very broadly, and the rules here are complex, the new law allows deductions for qualified business income of pass-throughs up to a certain percentage. This change is temporary and is scheduled to expire after 2025.

Business owners need to reevaluate their choice of entity. The corporate form may be more attractive for some business owners. The pass-through form may be less attractive. Adding complexity to the mix is the new law’s rules for certain businesses, such as law firms, and other professions. Please contact our office and we can discuss in detail these important changes.

Deductions and credits

Individuals who itemized deductions in past years may find that may no longer be the case under the new law. The Tax Cuts and Jobs Act temporarily increases the standard deduction (up to $24,000 for married couples filing a joint return and $12,000 for single individuals). The new law also places limits on the deduction for state and local taxes. Individuals may deduct state and local income, sales, property taxes up to $10,000. Gone are the days of an unlimited deduction for state and local taxes. This change is effective for 2018 and is scheduled to expire after 2025. Other popular deductions also are changed, including the medical expense deduction and the moving expense deduction.

Although the new law repeals the deduction for personal exemptions, it does enhance the child tax credit. The child tax credit increases from $1,000 to $2,000. The refundable portion also increases. The Tax Cuts and Jobs Act also creates a $500 credit for non-child dependents. These enhancements are temporary, scheduled to expire after 2025.

Alternative Minimum Tax

The Tax Cuts and Jobs Act does not repeal the alternative minimum tax (AMT) for individuals. Early on, AMT repeal seemed almost certain. However, Congress needed to keep the AMT because it raises significant revenues. The new law does increase the AMT exemption amounts.

What’s not in the new law?

The Tax Cuts and Jobs Act does not change the tax rates for capital gains and dividends. Also left unchanged are the many reporting and disclosure requirements under the Foreign Account Tax Compliance Act (FATCA).

The new law also does not repeal the Affordable Care Act’s taxes. The net investment income (NII) tax and the additional Medicare tax are left unchanged. This is also true for the ACA’s medical device tax, health insurance provider fee and excise tax on high-dollar health insurance plans. The new law also does not repeal the ACA’s shared responsibility payment for employers (it does effectively repeal the individual shared responsibility requirement).

IRS Guidance

Keep in mind that the new law leaves a lot of the details to the Treasury Department and the IRS to flesh-out. Guidance from the IRS may take some time. As discussed, payroll guidance seems to be the first item on the agency’s agenda. Guidance for the new tax treatment of pass-throughs also is likely to be high on its agenda. Our office will keep you posted of developments.

The Tax Cuts and Jobs Act modifies Section 529 qualified tuition plans to allow the plans to distribute up to $10,000 in tuition expenses incurred during the tax year for designated beneficiaries enrolled at a public, private, or religious elementary or secondary school. Section 529 plans used to only be allowed for college tuition, up to full tuition amounts. That provision for college tuition remains the same.

The Tax Cuts and Jobs Act modifies Section 529 qualified tuition plans to allow the plans to distribute up to $10,000 in tuition expenses incurred during the tax year for designated beneficiaries enrolled at a public, private, or religious elementary or secondary school. Section 529 plans used to only be allowed for college tuition, up to full tuition amounts. That provision for college tuition remains the same.

Although contributions are not tax deductible for federal tax purposes, funds within a Section 529 plan can accumulate tax-free within the plan until they are distributed tax-free to the educational institution for the child-beneficiary. The new $10,000 limitation applies on a per-student, not per-account basis. As a result, if an individual is a designated beneficiary of multiple accounts, a maximum of $10,000 in distributions will be free of income tax, regardless of whether the funds are distributed from multiple accounts. Some state plans provide a limited deduction against state income taxes for contributions to Section 529 plans. They may also provide caps on contributions.

The expansion of Section 529 plans to cover elementary and secondary school education applies to distributions made after December 31, 2017. Since existing Section 529 set up for a child-beneficiary’s college education may now be redirected earlier to primary and secondary tuition, parents, grandparents and other contributors will need to decide how best to manage each child’s combined accounts: whether amounts needed to cover college tuition should accumulate tax-free until those years, or whether they should be used earlier. Generally, if contributions are limited either by a donor’s financial resources or by state caps, use for college tuition will allow a greater amount to accumulate tax-free. If projected accumulated contributions can cover more than college tuition, then using remaining Section 529 balances for secondary and even elementary school may make sense.

These expanded rules are still young, however, with expected IRS regulations and other guidance overlaid onto the basic law under the Tax Cuts and Jobs Act sure to come. But although the tax-free growth benefits of any Section 529 plans have a long-term perspective, giving some thought to how these expanded Section 529 plans might be used in your family situation might start soon. Please contact our offices for further details.