Federal Spending Bill Likely to Bring Much-Needed Tax Benefits

December 2019 | Article

Legislation is expected to be enacted this week to fund the federal government through September of 2020, and it carries with it some good holiday tax cheer for taxpayers.

What's Changing

In the legislation are tax changes including the extension of most of the expired and expiring tax provisions (usually referred to as the “extenders”), the SECURE Act, the repeal of several taxes associated with the Affordable Care Act, and other tax provisions, particularly related to tax exempt organizations. However, much to the disappointment of many tax professionals, the technical corrections to the 2017 tax reform law known as the Tax Cuts and Jobs Act, including the unintended exclusion of improvements from bonus depreciation, are not included in the legislation.

The House of Representatives and the Senate have passed the legislation, to be called the Taxpayer Certainty and Disaster Relief Act of 2019, and, the White House has informally indicated that the President will sign the legislation today.

Details to Consider

Extenders
Virtually all the extender provisions that expired at the end of 2017, 2018 and 2019 will be extended. Provisions that had previously expired will be restored retroactively, meaning no gap in the use of the provision. That will be an important point to remember, and why, will be discussed a little later.

Although potential changes and restrictions on some of the provisions were discussed, none of those items ended up being included in the legislation.

The extender provisions are generally extended through 2020, with a few (Biodiesel, short line railroad track maintenance, for example) extended through 2022. Among the provisions extended are:

Individual provisions

  • The exclusion from income of the discharge of indebtedness on a principal residence
  • The ability to treat mortgage insurance premiums as qualified residence interest
  • The 7.5% of AGI limitation on the itemized deduction for medical expenses
  • The above-the-line deduction for qualified tuition and related expenses
  • Credit for health insurance costs of certain low-income individuals

Social incentives

  • Empowerment zone designations extended through 2020
  • Additional $5 billion of New Markets Tax Credit designations provided for 2020
  • Employer credit for paid family and medical leave

Energy incentives

  • Biodiesel and renewable diesel credits and excise tax relief
  • Credit for nonbusiness energy property
  • Energy efficient commercial building deduction
  • Credit for constructing new energy efficient homes
  • Credits for fuel cell motor vehicles and two-wheel plug-in electric vehicles
  • Credit for alternative fuel vehicle refueling property
  • Delay in phase out of energy credits for alternative fuels other than solar

Cost recovery

  • Accelerated depreciation for property:
    • On an Indian Reservation
    • Second generation biofuel plant property
    • Motorsports entertainment complexes and horses older than two years
  • Expensing for certain film, television and live theatrical productions
  • Short line railroad tax maintenance credit

Foreign taxes

  • Look through rule for controlled foreign corporations

SECURE Act
The legislation includes the SECURE Act that was passed by the House of Representatives in May. Included in this legislation are provisions that would:

  • Facilitate the creation of multi-employer 401(k) plans
  • Allow up to $5,000 in penalty free withdrawals for the birth or adoption of a child
  • Allow contributions to an IRA without regard to age
  • Delay required minimum distributions from most plans until age 72
  • Require certain inherited IRAs to be distributed over not more than 10 years
  • Modify the “kiddie tax” so that unearned income of children is not taxed at trust tax rates

Click here for a more complete discussion of the SECURE Act.

Repeal of the Affordable Care Act Provisions
The legislation will permanently repeal three provisions that were associated with the Affordable Care Act:

  • The 40 % “Cadillac” excise tax on certain high-cost health
  • The annual health insurance fee
  • The medical device excise tax

The legislation does NOT repeal the net investment income tax.

Additional Provisions

  • Disaster relief provisions
  • Tax Exempt Organizations
    • Retroactive repeal of the requirement that certain fringe benefit expenses (employee parking) be considered UBTI
    • Replace the two-tiered excise tax on net investment income of private foundations with a 1.39% rate to be effective for tax years beginning after the legislation is signed into law
    • Modify what is income for tax-exempt cooperatives

Some Holiday Cheer

With all these changes and items of extension, it is very likely that every taxpayer got a little holiday gift because, when enacted, the retroactive restoration (the no gap item from above) of many of the expired provisions will provide refund opportunities for many taxpayers.

So, be alert. Once the legislation is signed into law, the process of recognizing and determining how to monetize the benefits from the extenders and other items in the overall legislation will begin. Of course, federal tax changes can have varying effects on state income taxes. Many states automatically conform to federal law, but others do not. These states, if they want to adopt some of the federal extenders and other changes, may need to take legislative action early next year. Talk with your tax professional to start your search.

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