As most readers know, the passage of the Tax Cuts and Jobs Act (“TCJA”) last December rolled out some of the most significant tax law changes seen since Ronald Reagan was in office. It also introduced numerous questions regarding how to apply the new rules. Answers to those questions are expected primarily in the form of Treasury Regulations, which are IRS-written clarifications authorized (and often requested) by Congress. Regulations and other IRS pronouncements supplement the Internal Revenue Code (“IRC”), which houses the primary law itself.
Readers interested in a summary of the new law are encouraged to check out our January article that generally explains many of its provisions. The purpose of this article is to bring you up to speed on timelines provided by the IRS for forthcoming information, and share what frustratingly little guidance has materialized thus far. In no particular order, here are some things we have learned since the law was passed:
Qualified Opportunity Zone benefits
As explained in a March 2018 BNN article, the TCJA provides various favorable gain deferrals, basis adjustments, or gain exclusions for taxpayers who invest in Qualified Opportunity Zones. This month, the IRS updated its Frequently Asked Questions page on its website addressing a number of questions related to these benefits. The Treasury Department, through the Community Development Financial Institutions Fund, maintains a resource page, which includes an updated online map and list showing the final locations of the qualifying zones, as well as a link to the IRS Frequently Asked Questions about Opportunity Zones page noted above. Additional guidance on how the Qualified Opportunity Zone rules will be applied is expected later this summer from the Treasury and IRS.
Sec. 199A – 20% deduction for flow-through entities – more guidance soon
This potentially potent new deduction is riddled with questions, not the least of which is “does this deduction apply to rental income?” This feature of the new law has been the subject of significant speculation, but we have received no definitive or formal guidance. The IRS plans to release more information in mid-July of this year.
Sec. 965 repatriation tax – penalty relief provided
A completely new tax was assessed on the deemed (not actual) distribution of certain accumulated foreign earnings held in foreign corporations. It represented one of the least popular features of the TCJA, partly because the first annual installment of the tax was due only 3.5 months after the law’s passage, and also because it began the practice of assessing tax before money was actually repatriated.
The first installment of this new tax was tracked separately from individual taxpayer’s “regular” Form 1040 tax, but was due at the same time as those regular tax return or extension payments on April 15. Many believed that overpayments of either tax may be applied forward to offset 2018 1040 liabilities, only to find later that 2017 overpayments of both the Sec. 965 and the regular income tax must be applied first to subsequent annual installments of the Sec. 965 tax (the amounts that otherwise would not be due until years 2-8) before being applied toward any other estimated income tax at all. This left some taxpayers shorthanded for the first quarter of 2018 with regards to regular income tax.
Some new guidance, in the form of penalty relief, was provided earlier this month. More details may be found on the IRS website, but generally the guidance accomplishes the following:
- Waives estimated tax penalties for expected 2017 overpayments to be applied to 2018, as long as any shortfall was corrected by Q2 of 2018.
- Allows taxpayers who missed the initial annual installment on April 15, 2018, can avoid late-payment penalties if that payment (and the regularly-scheduled second one) is made in full by April 15, 2019. This relief does not apply to liabilities of $1 million or more.
- Taxpayers who wanted to take advantage of the 8-year payment spread of this tax, but who overlooked the mechanics of the actual election to do so, can use the 8-year spread if they file amended returns (Form 1040X) by October 15, 2018.
Sec. 163(j) interest deduction cap
This new provision caps business interest expense at 30% of “business income” for entities whose gross receipts average more than $25 million. These rules are complex, but IRS tells us that more guidance is expected in late summer or early fall 2018.
Sec. 168(k) “bonus depreciation”
Under the TCJA, bonus depreciation was extended and enhanced, but some questions regarding its application remain. The IRS expects that guidance will be provided late this month, or early in July.
Arguably, most of the TCJA consisted of tweaks to the existing Code, intermingled with a number of new features. The international provisions, however, can appropriately be described as a true overhaul. They consist of the introduction of anti-base erosion rules, including the concepts of global intangible low-taxed income, and foreign derived intangible income; creation of additional foreign tax credit “baskets”; a change in corporate tax rates; the previously-described repatriation tax (which represents a change to something resembling a territorial system); and many other provisions. These rules are deep, broad, and complex; and subject to plenty of interpretation. Guidance in this area is expected (likely in many rounds) beginning in the late fall of this year.
States’ attempts to circumvent the new cap on itemized deductions of state tax
One of the most contentious areas of the new law was the capping of the state tax component of itemized deductions to $10,000, because it disproportionately affects taxpayers who reside in states with high tax rates.
Some states have responded with proposed structures that allow state taxpayers to make a contribution to a state agency, thereby converting what has characteristics of a state tax to something theoretically qualifying as a charitable contribution instead (contributions have much more liberal limitations as itemized deductions under the TCJA). Some states have had structures like this for some time (and at least one received a favorable ruling a few years ago from the IRS Chief Counsel’s office), but several more sprang into action when the TCJA was passed, in an attempt to circumvent the new state tax limitation.
In IRS Notice 2018-54, the Treasury Department put us all on notice that it will be issuing regulations addressing states’ contribution arrangements, and that in doing so, it will observe substance over form, and such arrangements may not necessarily fly.
Other state actions
One of the biggest wildcards any time a federal law change occurs is how/when/if the states will act to accommodate it. This month’s BNN Tax Snacks address some action taken by CT, which also highlights one particular issue other states may encounter (the credit for taxes paid to other states). Additionally, a much more comprehensive rundown of state issues related to the TCJA can be found in an article published by BNN’s Merrill Barter in the Tax Adviser, a national magazine provided by the American Institute of CPAs to keep tax practitioners up to date.
In a late June 2018 press conference, Treasury Secretary confirmed something that was touted when the TCJA was passed. He said that in a few days, a new 1040 would be unveiled, and that “it will be a postcard as we promised.” The New York Times this week obtained a draft copy, and while the draft only contains just over 20 lines, it still monopolizes an entire full-size page, and it apparently is supported by a number of computational schedules. While it seems a bit of a stretch to characterize this as a postcard, it undoubtedly will be easier to complete than the historical 1040, and may allow many more filers to complete their own returns.
Please contact Jim Usseglio at 1.800.244.7444 if you have questions about how you or your business may be affected by these tax law changes.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.