Congress has passed a bipartisan $426 billion bill that was rapidly signed by the President. The bill wraps several major tax initiatives into massive government funding legislation, H.R. 1865. Among the many changes are the return of some popular tax extenders and the repeal of three Obamacare taxes that were unpopular with both political parties.
With many changes being retroactively applied to 2018, tax payers should work with tax advisors to understand the potential for amendments to 2018 returns.
Obamacare Taxes Gone For Good
Three taxes designed to fund the Affordable Care Act have been eliminated. The medical device tax, the annual fee on health insurance providers, and the excise tax on high-cost employer health plans—the so-called “Cadillac tax” were all officially repealed. All three taxes were postponed or suspended by bipartisan agreement and never took effect, but now tax payers can be secure they will not be implemented.
Many Expired Tax Deductions And Credits Revived
The 30+ popular tax provisions which used to sunset every year and then get reenacted at the last minute expired for good on January 1, 2018. Or so we thought. Congress brought back many “extenders” in the 2020 government funding bill, will little fanfare. Included are special tax breaks for mortgage insurance premiums, forgiveness of mortgage debt, tuition expenses, motorsports complexes and many renewable energy incentives.
One surprise is that Congress extended for two years the lower 7.5% of AGI threshold for the medical expense deduction that was supposed to expire in 2019. Most provisions were extended for 2019 and 2020, but some items were retroactively extended from 2018 through 2020, as noted.
- Medical expense deduction allowed for expenses that exceed 7.5% of adjusted gross income instead of 10%.
- Deduction for mortgage insurance premiums extended retroactively for 2018-2020.
- Exclusion for discharged home mortgage debt extended retroactively for 2018-2020.
- Higher education tuition deduction retroactively extended for 2018-2020.
- Refundable credit for health insurance costs.
- Employer tax credit for paid family and medical leave.
- Election to expense film, TV, and live theater production costs, retroactively extended 2018-2020.
- Seven-year depreciation for motor-sports entertainment complexes, retroactively extended from 2018-2020.
- Three-year depreciation of race horses for horses in service before 2021.
- Accelerated depreciation for business property on Native American reservations, retroactively extended from 2018-2020.
- Employment credit for employing workers on Native American reservations, retroactively extended from 2018-2020.
- Empowerment zone tax incentives, retroactively extended through 2020, with special rules for re-nominating zones that terminated at the end of 2017.
- American Samoa economic development credit.
- Railroad track maintenance credit, extended through 2022.
- Mine rescue team training credit.
- Credit for new energy-efficient home construction.
- Deduction for energy efficient commercial building envelope components, such as windows, doors, roofs, and insulation, and for energy efficient lighting systems, and HVAC systems.
- 10% credit for non-business energy property.
- Credit for electricity produced from renewable resources.
- Plug-in electric vehicle credit, for two-wheeled vehicles.
- Credit for fuel cell motor vehicles.
- 30% credit for the cost of alternative fuel vehicle refueling property.
- Excise tax credits for alternative fuels extended and clarified.
- Production credit for Native American coal facilities, retroactively extended from 2018-2020.
- Credit for each gallon of second-generation bio fuel produced and credits for bio diesel and renewable diesel producers.
- Bonus depreciation equal to 50 percent of the adjusted basis of qualified second-generation bio fuel plant property.
- Deferred gain on sales or dispositions of property or stock relating to electric transmission services, extended retroactively from 2018 through 2020.
Other Extended Provisions
- New markets tax credit allocation of $5 billion for 2020. The law also extends the carryover period for the credit through 2025.
- Work opportunity credit.
- Look-through treatment for payments of dividends, interest, rent, and royalties between related controlled foreign corporations.
- Reduced excise taxes on beer, wine, and distilled spirits.
- Excise tax on coal to fund black lung liability trust fund extended.
- Excise tax to fund oil spill liability trust fund extended.
‘Qualified Improvement Property’ A Noticeable Omission
What the massive tax bill did not include is a correction to the so-called “retailers, restaurant glitch” from the Tax Cuts and Jobs Act. The TCJA treats depreciation for qualified improvement property very unfavorably, greatly reducing the tax write-offs. The government funding bill, with all of its various tax provisions, does not correct this error in the drafting of TCJA.
Taxpayer Service Improvements
Congress included several items in H.R. 1865 to ensure that the mandate for taxpayer rights is properly carried out. First, the law requires the IRS to develop an employee training program that emphasizes taxpayer rights, dealing courteously with taxpayers, cross-cultural relations, ethics and the impartial application of tax law. The IRS also must institute policies and procedures to safeguard the confidentiality of taxpayer information and to protect taxpayers against identity theft.
Congress also wants the IRS to improve its toll-free customer service help line and to allocate resources to reduce wait times and response times. Finally, the law prohibits the IRS from targeting U.S. citizens for exercising their First Amendment rights and prohibits the IRS from making regulatory decisions based on the ideology of any group.
Evaluate the opportunity to amend your past returns
With any major tax bill comes opportunities and possible pitfalls. The good news is that most of the tax provisions wrapped into Public Law 116-94 are beneficial for taxpayers. The retroactively extended provisions provide an opportunity for many taxpayers to file an amended return to seek a refund if they act with certain time limits. Consult your Frazier & Deeter tax advisor on how you can benefit from the year-end tax package.