President Trump on February 9 signed the Bipartisan Budget Act into law after a brief government shutdown occurred overnight. The legislation contains tax provisions in addition to a continuing resolution to fund the government and federal agencies through March 23. The House approved this new law in the early morning hours of February 9, by a 240-to-186 vote. The Senate approved the bipartisan measure a few hours earlier, by a 71-to-28 vote.

Take away. The Bipartisan Budget Act contains a significant number of tax provisions, including disaster tax relief and the extension of over 30 expired tax breaks. The majority of the tax relief included in the legislation applies for the 2017 tax year only. The full impact of these retroactive changes on the current filing season remains to be fully assessed. The IRS issued a statement on February 9, saying that it was beginning to determine the next steps. “The IRS will provide additional information as quickly as possible for affected taxpayers and the tax community,“ the Service indicated.

Comment

While many economists and lawmakers argue retroactive tax extenders are unfavorable tax policy, others contend that these tax breaks were included in the Bipartisan Budget Act because they had been relied upon and expected for the 2017 tax year but were squeezed out of year-end consideration by the Tax Cut and Jobs Act. A House Ways and Means Committee spokesperson told Wolters Kluwer that “job creators and families expected these extenders. In a pre-tax reform world, these extenders would be taken care of in a similar fashion as Congress has done for years.” Moving forward, however, the committee is planning hearings to determine how and if tax extenders fit in post-tax reform years, the spokesperson added.

Highlight of some of the tax extender provisions with more widespread impact than others are as follows (and are extended through 2017 only unless noted):

• Exclusion from gross income of discharge of qualified principal residence indebtedness;
• Mortgage insurance premiums treated as qualified residence interest;
• Above the line deduction for qualified tuition and related expenses;
• Election to expense mine safety equipment;
• Special expensing rules for certain productions;
• Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico;
• Special rule relating to qualified timber gain;
• Empowerment zone tax incentives;
• Credit for nonbusiness energy property;
• Credit for nonresidential energy property (extended through 2021 and modified);
• Credit for new qualified fuel cell motor vehicles;
• Credit for alternative fuel vehicle refueling property;
• Credit for 2-wheeled plug-in electric vehicles;
• Second generation biofuel producer credit;
• Biodiesel and renewable diesel incentives;
• Credits with respect to facilities producing energy from certain renewable resources;
• Credit for energy-efficient new homes;
• Energy credit (extended through 2021 and modified);
• Special allowance for second generation biofuel plant property;
• Energy efficient commercial buildings deduction; and
• Carbon dioxide sequestration credit (enhanced, modified and generally extended through 2023).

Disaster relief

The Bipartisan Budget Act also established disaster tax relief for individuals and businesses impacted by California wildfires. Such relief includes but is not limited to allowing certain access to retirement funds, temporarily suspending the limit on charitable contribution deductions, allowing deductions for personal casualty disaster losses and a tax credit for employee retention. The Act also includes changes to the Opportunity Zones rules for Puerto Rico, originally included in the “Tax Cuts and Jobs Act.” Additionally, tax relief is extended for areas affected by hurricanes Harvey, Irma and Maria.

Additional tax provisions

A number of new tax provisions were included in the legislation, as well as modifications to existing tax provisions. These include modifications of the rules relating to whistleblower awards, user fees on installment agreements, and hardship distributions and withdrawals from deferred accounts. The Act also mandates the creation of a new version of Form 1040, similar to a Form 1040EZ, for seniors, for tax years beginning after February 9, 2018 (the 2019 tax year for calendar year taxpayers). An additional provision of note is the requirement that for the excise tax on investment income of private colleges and universities to apply, the 500 students must be “tuition-paying.” This requirement was included in the original version of the Tax Cuts and Jobs Act, but was removed at the last minute to comply with budget reconciliation rules.

Comment

The Joint Committee on Taxation has estimated that extending the expired tax breaks will cost the federal government over $15 billion. The disaster relief will add $456 million to the deficit in addition to relief that has already been provided.

The Trump administration on February 12 released its much-anticipated fiscal year (FY) 2019 budget request, “Efficient, Effective, Accountable An American Budget.” The administration’s proposal calls for IRS funding that focuses additional resources on enforcement and cybersecurity. Coming off passage of the Tax Cuts and Jobs Act, this year’s budget recommendations contain only a handful of additional tax proposals when compared to some prior-year budget requests.

Take away. Presidential budget requests are not binding; rather, the requests offer a legislative proposal for congressional lawmakers to consider. A Treasury Department “Green Book” that traditional outlines an administration’s revenue proposals for the coming year is not expected this year in light of the Tax Cuts and Jobs Act’s recent passage. Some practitioners have expressed concern that not enough resources in the proposed budget would be allocated toward providing guidance to fully implement the new law.

IRS

The administration’s budget proposal breaks its IRS funding request into four parts. The administration proposes allocating $11.1 billion in base funding, $2.3 billion for key tax filing and compliance initiatives, and $110 million for IT modernization efforts. Additionally, funding has been requested to expand and strengthen tax enforcement.

Comment

“These additional investments over the next 10 years are estimated to generate approximately $44 billion in additional revenue at a cost of $15 billion, yielding a net savings of $29 billion over 10 years,” the proposal states.

Tax provisions

In addition to IRS funding, the administration’s 2019 budget requests certain tax changes. These changes, among others, would include provisions to provide more oversight of paid tax preparers, require valid Social Security numbers when claiming the earned income and child tax credits, allow the IRS more flexibility in correcting errors on tax returns that seek refunds, allow Medicare recipients with high-deductible plans to make tax-deductible contributions to health savings accounts, and, as part of the administration’s infrastructure plan, expand by $6 billion the use of tax-exempt private activity bonds.

The Treasury and IRS have released their second quarter update to the 2017-2018 Priority Guidance Plan. The updated 2017-2018 Priority Guidance Plan now reflects 29 additional projects, including 18 projects that have become near term priorities as a result of the Tax Cut and Jobs Act of 2017.

Take away. As in the past but made more urgent by the Tax Cuts and Jobs Act, the IRS intends to update its cumulative 2017-2018 Priority Guidance Plan to consider comments received from taxpayers and tax practitioners relating to additional projects and to respond to developments arising during the plan year.

Response to new law

Part 1 of the updated Priority Guidance Plan, “Initial implementation fo Tax Cuts and Jobs Act (TCJA),” contains plans for guidance on 18 targeted areas, including the following:

• Code Sec. 45S business credits with respect to wages paid to qualifying employees during family and medical leave;
• Application of the effective date provisions under Code Sec. 162(m) to the elimination of the exceptions for commissions and performance-based compensation from the definition of compensation subject to the deduction limit;
• Fines and penalties under Code Sec. 162(f) and new Code Sec. 6050X;
• Computational, definitional, and other matters under new Code Sec. 163(j) on the deduction of business interest;
• Bonus depreciation under new Code Sec. 168(k);
• Computational, definitional, and anti-avoidance matters under the new Code Sec. 199A passthrough deduction;
• Adopting new small business accounting method changes under Code Sec. 263A, 448, 460 and 471;
• Implementing changes to Code Sec. 529 college savings plans;
• Implementing changes to Code Sec. 1361 regarding electing small business trusts;
• Computation of estate and gift taxes to reflect changes in the basic exclusion amount; and
• Withholding under Code Secs. 3402 and 3401 and optional flat rate withholding.

IRS resources

Although IRS officials have said that its updated list is not exclusive, they have emphasized that the items on the list will be its first order of business, which it hopes to get through by July. Treasury Secretary Steven Mnuchin predicted in mid-January 12 that the IRS will hire more employees to implement the Tax Cuts and Jobs Act: “Our number one issue is implementing the new tax law,” Mnuchin said.