President Trump signed into law H.R. 1892, the Bipartisan Budget Act of 2018, just hours after the Senate passed the bill by a vote of 71-28 and the House by a margin of 240-186 this month.
The BBA resolved numerous non-tax law-related issues for the federal government on a bipartisan basis, including, but not limited to, raising the debt ceiling, domestic and military spending, community health care and disaster relief. In addition, the BBA includes tax relief for certain disasters, a retroactive one-year tax extenders package for statutory tax incentives that previously expired on Dec. 31, 2016, including several prevalent energy tax incentive programs, along with a diverse array of other statutory tax provisions.
The BBA provides disaster relief tax benefits for individuals and business entities affected by the California wildfires, including access to their retirement funds, the temporary suspension of limits on deductions for charitable contributions, and the allowance of deductions for personal casualty disaster losses. The BBA further extends tax relief previously provided for hurricanes Harvey, Irma and Maria to include disaster areas that were declared between the periods of Sept. 21, 2017 through Oct. 17, 2017.
The BBA affords an extension for many previously expired statutory tax provisions for individuals and business entities, and the extension and phasedown of many energy tax incentive programs.
Some of the main provisions for individuals originally expired on Dec. 31, 2016 and were retroactively reinstated, but only through Dec. 31, 2017, including:
• Section 108(a)(1)(E) of the Tax Code, which excludes from gross income the discharge of qualified principal residence indebtedness income;
• Section 163(h)(3) treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer's principal residence; and
• Section 222, which provides an above-the-line deduction for qualified tuition and related expenses.
Other provisions affected business entities and previously expired on Dec. 31, 2016 but were retroactively reinstated through Dec. 31, 2017, including:
• Section 45G railroad track maintenance credit, equal to 50 percent of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer;
• Section 168(e)(3)(A), which allows certain racehorses to be depreciated as three-year property instead of seven-year property;
• Section 168(i)(15), which allows a seven-year recovery period for motorsports entertainment complexes;
• Section 181 special expensing rules for certain film and television productions, which allows taxpayers to treat the costs of any qualified film or television production as a deductible expense. This provision also applies to live theatrical productions such as Broadway Shows;
• Section 199(d)(8), which permits a deduction for income attributable to domestic production activities in Puerto Rico; and
• Section 1391 empowerment zone tax incentives.
Another set of tax provisions pertained to popular energy tax incentive programs that previously expired on Dec. 31, 2016 but were retroactively reinstated through Dec. 31, 2017, unless otherwise noted, including, but not limited to:
• Section 25C, which provides a 10 percent credit for qualified nonbusiness energy property;
• Section 25D credit for residential energy property for qualified fuel cell property, small wind energy property, geothermal heat pump property, qualified solar electric property, and solar water heating property. It should be duly noted that this incentive was extended through 2021;
• Section 30B, which provides a credit for qualified fuel cell motor vehicles;
• Section 30C, which provides a 30 percent credit for the cost of alternative (non-hydrogen) fuel vehicle refueling property;
• Section 40(b)(6), which provides a credit for each gallon of qualified second-generation biofuel produced;
• Section 40A credit for biodiesel and renewable diesel, which includes the biodiesel mixture credit, the biodiesel credit and the small agri-biodiesel producer credit;
• Section 45 credits for facilities producing energy from certain renewable resources;
• Section 45L, which provides a credit for each qualified new energy-efficient home constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year;
• Section 48 credits for fiber-optic solar lighting system, geothermal heat pump, small wind energy, and combined heat and power properties and the credit for qualified fuel cell and micro-turbine plant property (it should be noted these credits were extended through 2021, subject to phase-out requirements);
• Section 168(l), which provides a depreciation allowance equal to 50 percent of the adjusted basis of qualified second-generation biofuel plant property; and
• Section 179D energy tax deduction for building envelope efficiency in connection to energy efficient lighting systems, energy efficient HVAC systems; and/or an energy efficient building envelope (such as windows, doors, roofs, insulation, etc.).
The BBA also includes many tax provisions that were not previously addressed within the historic and far-reaching Tax Cuts and Jobs Act of 2017, which President Trump signed into law in December. These tax provisions include but are not limited to:
• An exception from the excess business holdings rule for independently operating philanthropic business holdings was provided for private foundations meeting the requirements. The excess business holdings rule prevents private foundations from owning more than a 20 percent stake in a for-profit company after the founder’s death. The new exception was championed by the foundation that owns the Newman’s Own company and will now open new opportunities for charitable planning with family-controlled businesses where the excess business holdings rule has been a major impediment;
• An exemption from the 1.4 percent excise tax on sizable college endowments for colleges that don’t charge tuition to students was included. Colleges with sizable endowments are now only subject to the tax if there are at least 500 tuition-paying students and more than 50 percent of the tuition-paying students are in the U.S.; and
• Several other tax law changes were included, such as relief from an improper levy by the Internal Revenue Service on individual retirement accounts; the clarification of whistleblower awards and related attorney’s fees; and the repeal of the corporate estimated tax shift for corporations with assets in excess of $1 billion.
The funding for the federal government has been successfully extended, the debt ceiling raised, and a bipartisan agreement has been successfully reached with respect to many essential and highly diverse budgetary issues. Many of the temporary tax extenders that had previously expired on Dec. 31, 2016 have now been extended through Dec. 31, 2017, while a number of additional tax provisions have been introduced into the Code.
The U.S. tax regime has undergone a significant paradigm shift over the past few months between both the newly enacted TCJA and the BBA. I fully expect a series of administrative authorities to be issued in the coming months in connection with Treasury Regulations (either in the form of Proposed Treasury Regulations, Temporary Treasury Regulations, and/or Final Treasury Regulations), Revenue Procedures and Revenue Rulings to provide a proper framework around the scope and application of these far-reaching tax law changes affecting both individual taxpayers and business-entity taxpayers alike.
H.R. 1 – Tax Cuts and Jobs Act of 2017 can be viewed in its entirety at https://www.congress.gov/bill/115th-congress/house-bill/1
H.R. 1892 – Bipartisan Budget Act of 2018 can be viewed in its entirety at https://www.congress.gov/bill/115th-congress/house-bill/1892/text#toc-H514FC9B8F1BC41E3B61ED883360ECDA1