Congress Reaches Deal to Renew Expired Tax Incentives and Provide New Tax Relief Measures
The House and the Senate are expected to pass legislation that renews expired tax incentives and provides other new tax incentives, which President Trump will likely sign into law by December 20. The legislation includes only some of the so-called tax extenders, and does not include a fix for a high-profile drafting error in the tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA). Still, the legislation would bring favorable changes to businesses and individuals alike, including certain brand new tax incentives, along with significant relief to nonprofit organizations that provide parking benefits to employees.
Highlights of Legislation
As of the date of this writing, the Further Consolidated Appropriations Act, 2020 (FCAA) is headed for a floor vote in the House and Senate, where it is expected to pass and be signed into law by President Trump. The FCAA primarily authorizes increased spending to avert a government shutdown on December 20. As is commonplace, certain tax provisions were shoehorned into the legislation as part of negotiations among lawmakers.
Key among these tax provisions includes the SECURE Act, which encompasses a suite of retirement savings plan incentives. Among these are an increased credit – from $500 to $5,000 – for employers that establish new retirement plans. Also included is a new rule that permits small employers to offer retirement plans by a pooled retirement plan provider. For individuals, the retirement plan incentives include a delay to the age at which required minimum distributions must commence – from 70 ½ to 72 – and removes the prohibition against IRA contributions for persons attaining age 70 ½. Individuals also will be able to withdraw up to $5,000 penalty-free from retirement accounts in the year following the birth or adoption of a child.
Unfortunately, the FCAA does not contain a technical correction to the “retail glitch” included in the TCJA. This scrivener’s error effectively requires businesses to depreciate certain types of leasehold improvements, retail improvements, and restaurant property over 39 years instead of 15 years, which also means such property is ineligible for bonus depreciation. According to Senator Sherrod Brown (D-OH), lawmakers were unable to reach an agreement to fix the retail glitch because they were unwilling to expand the earned income tax credit.
Another significant provision of the FCAA is the repeal of a new tax on not-for-profit organizations attributable to parking benefits and transportation benefits provided to employees. The TCJA established this tax as a counterpart to a provision that makes equivalent expenses nondeductible for commercial businesses. The tax hits not-for-profit organizations especially hard, as many do not otherwise face a tax liability and must perform complex calculations and file additional forms to comply. The FCAA repeals the tax for not-for-profit organizations retroactively to the date of its original enactment, but leaves intact the nondeductible expense rules for commercial businesses. The FCAA also lowers the excise tax rate from 2% to 1.39% that private foundations incur on net investment income, and eliminates eligibility for a reduced 1% rate on such net investment income.
Other Significant Tax Provisions
The FCAA repeals permanently the “Cadillac” tax that certain employers face when they sponsor health plans that cost more than $10,200 for individuals and $27,500 for families. Also repealed permanently is the 2.3% medical device excise tax and the annual fee imposed on health insurance providers.
Certain individual tax incentives were extended retroactively to 2018 and through 2020, including the exclusion from taxable income for mortgage debt cancellation, the inclusion of mortgage insurance premiums as mortgage interest for itemized deduction purposes, and a deduction for adjusted gross income of up to $4,000 for qualified tuition and related expenses. For 2019 and 2020, the floor used to determine the deductible amount of medical expenses for itemized deduction purposes is reduced from 10% to 7.5%.
Many expiring energy tax incentives are included, but not all of them. Among those that are extended retroactively to 2018 and through 2020 are credits for producers of biodiesel fuels, wind energy producers, producers of energy from other renewable sources, and residential energy-efficient property improvements. Also extended retroactively to 2018 and through 2020 is the energy-efficient commercial buildings deduction under Section 179D. The 30% investment tax credit, commonly used for investments in solar energy property, was not extended, and is scheduled to phase out beginning in 2020.
Business tax incentives for empowerment zones were extended retroactively to 2018 and through 2020. Other business tax incentives were scheduled to expire after 2019 and are extended through 2020, including the New Markets Tax Credit, the credit for employers that provide paid family medical leave, the Work Opportunity Tax Credit, and other incentives including a “look-through” rule that applies to certain transactions between related controlled foreign corporations.
Some less common tax extenders are included for businesses, such as credits for railroad track maintenance, credits for mine rescue team training costs, faster depreciation for racehorses and motor sports complexes, and immediate deduction opportunities for film, television, and theater development costs.
Certain disaster tax relief provisions for businesses and individuals are also included.
The inclusion of the new retirement plan benefits in the FCAA will make it easier for employers to offer retirement plans to employees, and offers other incentives to individuals grappling with required minimum distributions for the first time. Not-for-profit organizations will be elated to find that the unrelated business income tax on employee parking benefits is repealed retroactively. The other business and individual tax incentives should also be well received. However, administrative guidance is not yet available about the variety of provisions that apply retroactively to 2018. Because 2018 tax returns have already been filed, we should expect to see guidance in the coming months about the procedures that should be used to incorporate these law changes into prior year returns.
For more information about the FCAA, please contact your local CBIZ MHM tax professional.