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Budget Bill Includes Tax Extenders, California Wildfire Disaster Relief, and a Grab Bag of Tax Reform Provisions
(Parker Tax Publishing February 2018)
On Friday, February 9, 2018, the House and the Senate passed, and the President signed, the Bipartisan Budget Act of 2018 (BBA). The two-year budget bill incorporated numerous tax provisions, including retroactive extensions of more than 30 expired tax breaks for 2017, tax relief for victims of California wildfires, and several minor tax reform measures and adjustments to provisions in last year's tax overhaul. Pub. L. 115-123 (2/9/2018).
I. Tax Extenders
Business Tax Breaks
Classification of Certain Race Horses as 3-Year Property. BBA extends the 3-year recovery period for race horses to property placed in service during 2017.
7-Year Recovery Period for Motorsports Entertainment Complexes. BBA extends the 7-year recovery period for motorsport entertainment complexes to property placed in service during 2017.
Special Expensing Rules for Certain Film and Television Productions. BBA extends through 2017 the special expensing provision for qualified film, television, and live theater productions. In general, only the first $15 million of costs may be expensed.
Accelerated Depreciation for Business Property on an Indian Reservation. BBA extends accelerated depreciation for qualified Indian reservation property to property placed in service during 2017. It also modifies the deduction to permit taxpayers to elect out of the accelerated depreciation rules.
Miscellaneous Business Tax Provisions Extended Through 2017. BBA also extends through 2017 the following business tax breaks:
(1) Indian employment tax credit.
(2) Railroad track maintenance credit.
(3) Mine rescue team training credit.
(4) Election to expense mine safety equipment.
(5) Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
(6) Empowerment zone tax incentives.
(7) Temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.
(8) American Samoa economic development credit.
(9) Extension of special rule relating to qualified timber gain.
Tax Breaks for Individuals
Exclusion from Gross Income of Discharge of Qualified Principal Residence Indebtedness. BBA extends through 2017 the exclusion from gross income of a discharge of qualified principal residence indebtedness. It also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged in 2018, if the discharge is pursuant to a written agreement entered into in 2017.
Mortgage Insurance Premiums Treated as Qualified Residence Interest. BBA extends through 2017 the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. This deduction phases out ratably for a taxpayer with AGI of $100,000 to $110,000.
Above-the-Line Deduction for Qualified Tuition and Related Expenses. The bill extends through 2017 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).
Energy Incentives
Residential Energy Efficient Property Credit. Code Sec. 25D provides a tax credit for five categories of qualified property: (1) solar electric property, (2) solar water heating property, (3) fuel cell property, (4) small wind energy property, and (5) geothermal heat pump property. Under pre-BBA law, the credit for qualifying property in the last three categories expired on December 31, 2016, whereas that credit for qualified solar electric property and qualified solar water heating property wasn't set to expire until December 31, 2021. Under BBA, the credit will be available for property in all five categories until December 31, 2021. The amount of the credit is determined by applying a specified percentage to expenditures for qualifying property based on the date it's placed in service as follows: 30 percent for property placed in service in 2017 through 2019; 26 percent for property placed in service in 2020; and 22 percent for property placed in service in 2021.
Extension and phaseout of energy credit. (Sec. 40411 - looks like 5-year extension + modifications). Code Sec. 48 provides an energy credit for various types of energy property, including property which uses solar energy, property used to produce energy derived from a geothermal deposits, qualified fuel cell or microturbine property, heat and power system property, wind energy property, and equipment which uses ground or ground water as a thermal energy source. Under pre-BBA law, such property qualified as property eligible for the energy credit only with respect to periods ending before January 1, 2017. Under BBA, such property continues to be eligible for the energy credit for periods ending before January 1, 2022. Under pre-BBA the term "qualified fuel cell property" was scheduled to exclude any property for any period after December 31, 2016. The BBA changed the termination date to property for which construction does not begin before 2022. The BBA also extended application of the credit to combined heat and power system property the construction of which begins before 2022, whereas pre-BBA had it scheduled to terminate for property placed in service before 2017. The BBA also provides special rules for the phaseout of the credit for fiber-optic solar, qualified fuel cell, and qualified small wind energy property.
BBA also extends the following energy tax incentives for alternative and renewable energy sources through December 31, 2017:
(1) Extension of credit for nonbusiness energy property.
(2) Extension of credit for new qualified fuel cell motor vehicles.
(3) Extension of credit for alternative fuel vehicle refueling property.
(4) Extension of credit for 2-wheeled plug-in electric vehicles.
(5) Extension of second generation biofuel producer credit.
(6) Extension of biodiesel and renewable diesel incentives.
(7) Extension of production credit for Indian coal facilities.
(8) Extension of credits with respect to facilities producing energy from certain renewable resources.
(9) Extension of credit for energy-efficient new homes.
(10) Extension of special allowance for second generation biofuel plant property.
(11) Extension of energy efficient commercial buildings deduction.
(12) Extension of special rule for sales or dispositions to implement FERC or state electric restructuring policy for qualified electric utilities.
(13) Extension of excise tax credits relating to alternative fuels.
(14) Enhancement of carbon dioxide sequestration credit.
(15) Modifications of credit for production from advanced nuclear power facilities.
II. California Wildfire Disaster Relief
BBA provides several forms of tax relief to victims of California wildfires: (1) enhancements to casualty loss deduction rules, (2) relaxation of retirement plan distribution rules, (3) modification of the earned income definition for purposes of the earned income credit and child tax credit, (4)
suspension of limitations on charitable contributions, and (5) the modification of the employee retention tax credit available to businesses.
BBA's disaster relief provisions revolve around two definitions used to determine whether a taxpayer qualifies for relief. BBA defines "California wildfire disaster area" as an area with respect to which, between January 1, 2017 through January 18, 2018, a major disaster has been declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act ("Stafford Act") by reason of wildfires in California. It defines "California wildfire disaster zone" to mean the portion of the California wildfire disaster area determined by the President to warrant assistance from the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of wildfires in California.
Enhancements to Casualty Loss Deduction Rules
Generally, the deduction for a casualty loss of personal-use property is subject to a $100 reduction rule (only losses above $100 are counted) and the loss is limited to the extent it exceeds 10 percent of the taxpayer's adjusted gross income. For victims of California wildfires, BBA removes the 10 percent of adjusted gross income limitation, but increases the $100 floor to $500. It also allows individuals to claim a casualty loss even if they do not itemize their deductions by adding the amount of the loss to their standard deduction.
To qualify, a loss must arise in the California wildfire disaster area on or after October 8, 2017, and be attributable to the wildfires to which the disaster for such area declaration relates. The deduction is limited to the "net disaster loss" which consists of the excess of personal casualty losses attributable to a federally declared disaster over personal casualty gains.
Retirement Plan Rules Relaxed
BBA contains the following relief provisions regarding retirement plans:
(1) The 10 percent early withdrawal penalty tax in Code Sec. 72(t) will not apply to any qualified wildfire distribution made from a taxpayer's qualified retirement plan.
(2) The aggregate amount of distributions from a qualified retirement plan received by an individual which may be treated as qualified wildfire distributions for any tax year cannot exceed the excess (if any) of (i) $100,000, over (ii) the aggregate amounts treated as qualified wildfire distributions received by such individual for all prior tax years.
(3) If a distribution to an individual would (without regard to (2), above) be a qualified wildfire distribution, a plan will not be treated as violating any requirement of the Code merely because the plan treats such distribution as a qualified wildfire distribution, unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $100,000.
(4) Any individual who receives a qualified wildfire distribution may, at any time during the three-year period beginning on the day after the date on which such distribution was received, make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under Code Secs. 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or Code Sec. 457(e)(16). If such contributions are made with respect to a qualified wildfire distribution from an eligible retirement plan other than an individual retirement plan, then the taxpayer will, to the extent of the amount of the contribution, be treated as having received the qualified wildfire distribution in an eligible rollover distribution and as having transferred the amount to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution. If such contributions are made with respect to a qualified wildfire distribution from an individual retirement plan, then, to the extent of the amount of the contribution, the qualified wildfire distribution will be treated as a distribution described in Code Sec. 408(d)(3) and as having been transferred to the eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution.
(5) In the case of any qualified wildfire distribution, any amount required to be included in gross income for such tax year will be includible ratably over the three-tax-year period beginning with such tax year, unless the taxpayer elects not to have this rule apply for any tax year. For purposes of this provision, rules similar to Code Sec. 408A(d)(3)(E), relating to an acceleration of the inclusion of such amounts in income, apply.
(6) Any individual who received a qualified distribution may, during the period beginning on October 8, 2017, and ending on June 30, 2018, make one or more contributions in an aggregate amount not to exceed the amount of such qualified distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under Code Secs. 402(c), 403(a)(4), 403(b)(8), or Code Sec. 408(d)(3), as the case may be.
(7) The limit on loans from a qualified employer plan to a qualified individual that are not treated as taxable distributions is increased from $50,000 to $100,000, and the repayment of such loan may be delayed from the regular repayment term by an additional year.
BBA defines the term "qualified wildfire distribution" as any distribution from an eligible retirement plan made on or after October 8, 2017, and before January 1, 2019, to an individual whose principal place of abode during any portion of the period from October 8, 2017, to December 31, 2017, is located in the California wildfire disaster area and who has sustained an economic loss by reason of the wildfires to which the disaster declaration for such area relates.
Modification of Earned Income for Purposes of the Earned Income Credit and Child Tax Credit
If a qualified individual is eligible for the earned income credit and the child tax credit for 2017, and the taxpayer's earned income for the 2017 tax year is less than the taxpayer's earned income for 2016, the earned income credit and child tax credit may, at the taxpayer's election, be determined by substituting 2016 earned income for 2017 earned income.
A qualified individual is an individual whose principal place of abode during any portion of the period from October 8, 2017, to December 31, 2017, was located (1) in the California wildfire disaster zone, or (2) in the California wildfire disaster area (but outside the California wildfire disaster zone) and such individual was displaced from such principal place of abode by reason of the wildfires to which the disaster declaration for such area relates.
Suspension of Limitations on Charitable Contributions
A temporary suspension of the limitations on charitable contributions applies with respect to qualified contributions, which are defined as those made between October 8, 2017, and December 31, 2018, to a charitable organization and made for relief efforts with respect to the wildfire disaster area. The taxpayer must make an election to apply these rules. In the case of a partnership or S corporation, the election is made separately by each partner or shareholder.
Employee Retention Tax Credit Available to Businesses
BBA provides eligible employers with an employee retention credit of 40 percent of qualified wages with respect to each eligible employee. The amount of qualified wages which may be taken into account cannot exceed $6,000 paid to an eligible individual (making the maximum credit $2,400 per eligible employee).
A taxpayer is considered an eligible employer if it conducted an active trade or business on October 8, 2017, in the California wildfire disaster zone, and the trade or business was inoperable on any day after October 8, 2017 and before January 1, 2018, as a result of damage sustained by reason of wildfires to which the disaster declaration for such area relates.
III. Additional Hurricane Disaster Relief
Modification of Hurricanes Harvey and Irma Disaster Areas
BBA modifies the definition in Section 501 of the Disaster Tax Relief and Airport and Airway Extension Act of 2017 relating to the date to which the Hurricane Harvey and Hurricane Irma disaster areas were declared a disaster by striking "September 21, 2017" and inserting "October 17, 2017." In addition, the BBA provides that the rules under Code Sec. 280C also apply to any employers affected by those hurricanes and who are taking the employee retention credit.
IV. Tax Reforms and Other Provisions
Extension of Waiver of Limitations with Respect to Excluding from Gross Income Amounts Received by Wrongfully Incarcerated Individuals
Pre-BBA, Code Sec. 139F provided a special onewindow during which an eligible wrongfullyincarcerated individual could file a refund claim based on any civil damages, restitution, or other monetary award received and reported in a prior tax year, even if the normal statute of limitations had already expired for that year. If the credit or refund of any overpayment of tax resulting from the application of Code Sec. 139F to a period before December 18, 2015 (i.e., the date of enactment of Code Sec. 139F) was prevented as of such date by the operation of any law or rule of law (including res judicata), such credit or refund was nevertheless allowed if the claim was filed before the close of the one-year period beginning on December 18, 2015. Under the BBA, the wrongfully incarcerated individual has until December 18, 2018, to file a claim.
Individuals Held Harmless on Improper Levy on Retirement Plans
The BBA enacted Code Sec. 6343(f), which provides that, if the Treasury Secretary determines that an individual's account or benefit under an eligible retirement plan has been levied upon in a case where the property has been returned to the taxpayer or the levy was premature or otherwise not in accordance with administrative procedures, the individual can contribute such property or an amount equal to the sum of (1) the amount of money so returned, and (2) interest paid on such amount into an eligible retirement plan if such contribution is permitted by the plan, or into an individual retirement plan (other than an endowment contract) to which a rollover contribution of a distribution from such eligible retirement plan is permitted, but only if such contribution is made not later than the due date (not including extensions) for filing the return of tax for the tax year in which such property or amount of money is returned. The IRS must, at the time such property or amount of money is returned, notify such individual that such a contribution may be made.
The distribution on account of the levy and any contribution with respect to the return of such distribution are treated as if such distribution and contribution were described in Code Secs. 402(c), 402A(c)(3), 403(a)(4), 403(b)(8), 408(d)(3), 408A(d)(3), or 457(e)(16), whichever is applicable, except that (1) the contribution will be treated as having been made for the tax year in which the distribution on account of the levy occurred, (2) the interest paid under this provision will be treated as earnings within the plan after the contribution and will not be included in gross income, and (3) such contribution shall not be taken into account under Code Sec. 408(d)(3)(B).
Form 1040SR for Seniors
Under the BBA, the IRS is required to make available a form, to be known as ''Form 1040SR'', for use by individuals to file their income tax return. Such form is to be as similar as practicable to Form 1040EZ, except that (1) the form will be available only to individuals who have attained age 65 as of the close of the taxable year, (2) the form may be used even if income for the taxable year includes (i) social security benefits, (ii) distributions from qualified retirement plans, annuities or other such deferred payment arrangements, (iii) interest and dividends, or (iv) capital gains and losses taken into account in determining adjusted net capital gain, and (3) the form must be available without regard to the amount of any item of taxable income or the total amount of taxable income for the tax year.
Modification of User Fee Requirements for Installment Agreements
Under the BBA, the amount of any fee imposed on an installment agreement for certain individuals is capped and, for certain low-income taxpayers, no fee is imposed for automated payments and, for those who can't make automated payments, the fees may be refundable.
Other Miscellaneous Provisions
Miscellaneous other provisions in the BBA include the following:
(1) Provision relating to the deduction of attorney's fees relating to awards to whistleblowers;
(2) Clarification to the term "proceeds" as it relates to whistleblower awards;
(3) Clarification regarding excise tax based on investment income of private colleges and universities;
(4) Exception from private foundation excess business holding tax for independently-operated philanthropic business holdings;
(5) Simplification of rules regarding records, statements, and returns;
(6) Modification of rules governing certain hardship distributions and hardship withdrawals;
(7) Opportunity Zones rule for Puerto Rico;
(8) Modification to the rule of tax homes of certain citizens or residents of the United States living abroad;
(9) Treatment of foreign persons for returns relating to payments made in settlement of payment card and third party network transactions; and
(10) Repeal of shift in time of payment of corporate estimated taxes.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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