Don’t Count on Those Deductions: Popular Tax Extenders Expiring Again
The 25+ popular tax provisions which sunset every year expired again–last January 1. That means these tax provisions are not in effect for 2018. Now at the end of 2018, Congress is working to extend them, retroactively, that is. This situation is a yearly drama that plays out each December/January, and it is looking more and more like Congress will not act before the end of the 2018 lame duck session. Included are special tax breaks for mortgage insurance premiums, tuition deduction, timber gains, motorsports complexes and many renewable energy incentives. Whether the provisions lapse or not, it is important for taxpayers to know exactly which tax breaks are subject to this yearly fluctuation.
One version of the current extenders bill before Congress, the Retirement, Savings, and Other Tax Relief Act of 2018, also includes two important technical corrections to the Tax Cuts and Jobs Act (TCJA) and elements of what is being called Tax Reform 2.0, including retirement plan changes and increased deductions for start-up companies.
Here’s a list of the major expired provisions currently up for renewal. Note the extender bill would only renew for one year – through 2018:
- Deduction for mortgage insurance premiums.
- Exclusion for discharged home mortgage debt.
- Higher education tuition deduction.
- Business Provisions.
- Election to expense film, TV, and live theater production costs.
- Lower tax rate for a corporation’s timber gains.
- Seven-year depreciation for motorsports entertainment complexes.
- Three-year depreciation of race horses.
- Empowerment zone tax incentives.
- Domestic production deduction for activities in Puerto Rico.
- Plug-in electric vehicle credit.
- Credit for new energy-efficient home construction.
- Deduction for energy efficient building envelope components, such as windows, doors, roofs, and insulation, and for energy efficient lighting systems, and HVAC systems.
- 10 percent credit for nonbusiness energy property.
- Credit for residential energy property for fuel cell property, small wind energy property, geothermal heat pump property, solar electric property, and solar water heating property (extended through 2021).
- Credit for fuel cell motor vehicles.
- 30 percent credit for the cost of alternative (non-hydrogen) fuel vehicle refueling property.
- Credit for each gallon of second-generation biofuel produced and credits for biodiesel and renewable diesel producers.
- Credits for facilities producing energy from certain renewable resources.
- Credits for fiber-optic solar lighting systems, geothermal heat pumps, small wind energy, and combined heat and power properties and the credit for fuel cell and micro-turbine plant property (extended through 2021).
- Depreciation allowance equal to 50 percent of the adjusted basis of qualified second-generation biofuel plant property.
Two Important Technical Corrections
One iteration of the last-minute tax bill contains two important technical corrections to the TCJA. The so-called “retailers, restaurant glitch” was caused by a drafting error for “qualified improvement property.” Expenses for these improvements were left out of the definition of qualified property and, as a result, they have been put in the 39-year recovery class instead of 15-year class, greatly reducing the tax write-offs. The bill would correct this error.
The second technical correction relates to the timing of the new net operating loss (NOL) rules in the TCJA. The language of the Act states that the new limits apply to NOLs arising in taxable years ending after Dec. 31, 2017. Congressional intent was that the change would apply to NOLs arising in taxable years beginning after Dec. 31, 2017. If a business’s taxable year began in mid-2017 and ended mid-2018, the change would limit NOLs within that year instead of the tax year beginning after the change. The legislation pending before Congress would adopt the later effective date.
Tax Reform 2.0
The more comprehensive extender bill also includes “improvements” in retirement savings, including provisions to facilitate the creation of multiple employer plans and pooled employer plans, and repealing the prohibition on contributions to a traditional IRA after age 70 ½. The bill also would exempt from the required minimum distribution rules IRAs below $50,000 and allow the withdrawal of up to $7,500 penalty free upon the birth or adoption of a child. Finally, the bill would expand the types of expenses eligible for funding with 529 plans.
A second reform provision would help start-up companies by increasing the deduction for start-up costs from $5,000 to $20,000.
Nonprofits Get Relief, IRS Reforms
The bill would eliminate the increase in unrelated business taxable income related to transportation fringe benefits provided to employees of nonprofit organizations. The bill also contains a long list of IRS “reforms” that are unlikely to survive at this point, including a reorganization of the agency and new customer service mandates.
Dropped from the Tax Reform 2.0 bill are the permanent extensions of many individual TCJA provisions and making permanent the Sec. 199A passthrough deduction.
The expiring provisions are dead for now unless and until Congress resurrects them, which has happened many times before. That means taxpayers may not use these tax breaks on their 2018 tax year returns unless Congress retroactively revives them. Chances are they will, but well after the time for taxpayers to do any planning. The House seems intent on passing something before they adjourn, but it would take 60 votes to get any tax legislation through the Senate. It is more likely that the Democrats will take up a pared-down version of the extender legislation when they take over the House in early 2019. The unfortunate lesson here is that taxpayers cannot count on these incentives now or in the future although they may be retroactively available each year.
Lucia Nasuti Smeal is an attorney and a tax professor with the School of Accountancy at Georgia State University’s J. Mack Robinson College of Business, and the former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker on current tax developments.