Department of Labor website - Families First Coronavirus Response Act: Questions and Answers

The United States Department of Labor (DOL) has issued a detailed memo, in question and answer format, about the paid sick leave and the expanded family and medical leave contained in the recently enacted Families First Coronavirus Response Act (FFRCA), i.e., the second coronavirus (COVID-19) relief legislation. While the memo is mostly about the leave provisions themselves, it does contain some information about the employer tax credits that are based on the leave provisions.

Background.  On March 18, the President signed the FFRCA (PL 116-127) intended to ease the economic consequences stemming from the coronavirus disease outbreak by providing family and medical leave and sick leave to employees and providing tax credits to employers and self-employeds who provide the leave. The FFRCA also affects employer-sponsored health plans.

DOL memo provides tax credit information.  Here are some of the tax-credit-related information in the DOL memo.

Documentation requirements. An employer that intends to claim a tax credit under the FFCRA for its payment of the sick leave or expanded family and medical leave wages should retain appropriate documentation in its records. It should consult IRS applicable forms, instructions, and information for the procedures that must be followed to claim a tax credit, including any needed substantiation to be retained to support the credit. 

With respect to employees that take expanded family and medical leave to care for their child whose school or place of care is closed, or whose child care provider is unavailable, due to COVID-19, an employer may require the employees to provide it with any additional documentation in support of such leave, to the extent permitted under the certification rules for conventional Family Medical Leave Act (FMLA) leave requests. For example, this could include a notice that has been posted on a government, school, or day care website, or published in a newspaper, or an email from an employee or official of the school, place of care, or child care provider. 

Payments to employees that exceed paid leave provisions of FFRCA.  An employer may pay its employees in excess of FFCRA requirements. But it cannot claim, and will not receive tax credit for, those amounts in excess of the FFCRA's statutory limits. 

References: For the employer credit for paid family and medical leave, see FTC 2d/FIN ¶ L-17880 et seq.; United States Tax Reporter ¶ 45S4.01.

Document Title:Labor Department answers COVID-19 sick leave/family leave questions, Federal Tax Update (03/31/2020)
Checkpoint Source:2020 COVID-19 News

In an Information Release, the Treasury Department and IRS have announced that distribution of economic impact payments, made as part of the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136, 3/27/2020, the Act), will begin in the next three weeks and will be distributed automatically, with no action required for most people. However, people who did not file 2018 or 2019 federal income tax returns will need to submit "a simple tax return" to receive the stimulus payment.

The Information Release answers the following questions:

Who is eligible for the economic impact payment? Tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.

Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples. Parents also receive $500 for each qualifying child.

How will the IRS know where to send a payment? The vast majority of people do not need to take any action to provide IRS with a way to send them their payment. The IRS will calculate and automatically send the economic impact payment to those eligible.

How will the IRS calculate the amount of payment? For people who have already filed their 2019 tax returns, the IRS will use information from those returns to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. The economic impact payment will be deposited directly into the same banking account reflected on the return filed.

What should a recipient do if IRS doesn't have his direct deposit information? In the coming weeks, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail.

If a potential recipient is not required to file a 2018 or 2019 tax return, can that person still receive a payment? Yes. People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment. Persons who are otherwise not required to file a tax return will not owe tax.
 

How can a person in the groups listed in the above question file the tax return needed to receive an economic impact payment? IRS.gov/coronavirus will soon provide information instructing people in these groups on how to file a 2019 tax return with simple, but necessary, information including their filing status, number of dependents and direct deposit bank account information.

If a person required to file a 2018 or 2019 retun has not yet filed either return, can the person still receive an economic impact payment? Yes. The IRS urges anyone with a tax filing obligation who has not yet filed a tax return for 2018 or 2019 to file as soon as they can to receive an economic impact payment. Taxpayers should include direct deposit banking information on the return.

How long are the economic impact payments available? For those concerned about visiting a tax professional or local community organization in person to get help with a tax return, these economic impact payments will be available throughout the rest of 2020.

Where can one get more information? The IRS will post all key information on IRS.gov/coronavirus as soon as it becomes available.

The IRS has a reduced staff in many of its offices but says that it is committed to helping eligible individuals receive their payments expeditiously. It asks that taxpayers, etc. check for updated information on IRS.gov/coronavirus rather than call IRS assistors who are helping process 2019 returns.

Document Title:IRS releases details on receiving coronavirus economic impact payments, Federal Tax Update (04/01/2020)
Checkpoint Source:2020 COVID-19 News

Document Title:Individual tax provisions in Senate-passed third coronavirus relief package, Federal Tax Update (03/27/2020)
Checkpoint Source:2020 COVID-19 News

Employee retention credit for employers

New law. This provision provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. (Act Sec. 2301(a))

Eligible employers. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. (Act Sec. 2301(c)(2))

The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act. (Act Sec. 2301(j))

Wages paid to which employees? For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers' closure or reduced gross receipts are eligible for the credit. (Act Sec. 2301(c)(3)(A))

No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit (Code Sec. 21) with respect to the employee. (Act Sec. 2301(h)(1))

Wages. The term "wages" includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee. ((Act Sec. 2301(c)(3)(C); Act Sec. 2301(b)(1))

Wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus Act (part of P.L. 116-127) (Act Sec. 2301(c)(3)(A)), nor for wages taken into account for the Code Sec. 45S employer credit for paid family and medical leave. (Act Sec. 2301(h)(2))

Other. IRS is granted authority to advance payments to eligible employers (Act Sec. 2301(l)(1)) and to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit. (Act Sec. 2301(k))

Effective date. The credit applies to wages paid after March 12, 2020 and before Jan. 1, 2021. (Act Sec. 2301(m))

Delay of payment of employer payroll taxes

Background. Employers are required to withhold social security taxes (Code Sec. 3111(a)) and tax under the Railroad Retirement Tax Act (RRTA) from wages paid to employees. (Code Sec. 3211(a) and Code Sec. 3221(a)). Self-employed individuals are subject to self-employment (SECA) tax. (Code Sec. 1401(a))

New law. The CARES Act allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. Thus, notwithstanding any other provision of law, the payment for "applicable employment taxes" for the "payroll tax deferral period" won't be due before the "applicable date." (Act Sec. 2302(a)(1))

For purposes of the above rules, the term ''applicable employment taxes'' means: (A) the taxes imposed under Code Sec. 3111(a) (social security taxes), (B) so much of the taxes imposed under Code Sec. 3211(a) as are attributable to the rate in effect under Code Sec. 3111(a), and (C) so much of the taxes imposed under Code Sec. 3221(a) as are attributable to the rate in effect under Code Sec. 3111(a) (RRTA taxes). (Act Sec. 2302(d)(1))

The term ''payroll tax deferral period'' means the period beginning on the date of enactment of the Act and ending before Jan. 1, 2021. (Act Sec. 2302(d)(2))

The term ''applicable date'' means: (A) Dec. 31, 2021, with respect to 50% of the amounts to which Act Sec. 2302(a) (employment taxes) and Act Sec. 2302(b) (self-employment tax), as the case may be, apply, and (B) Dec. 31, 2022, with respect to the remaining 50% of those amounts. (Act Sec. 2302(d)(3))

Notwithstanding Code Sec. 6302 (which authorizes IRS to set deadlines for tax deposits), an employer will be treated as having timely made all deposits of applicable employment taxes required (without regard to Act Sec. 2302) to be made during the payroll tax deferral period if all such deposits are made not later than the applicable date. (Act Sec. 2302(a)(2))

The above rules won't apply to any taxpayer which has had indebtedness forgiven under Act Sec. 1106 with respect to a loan under Small Business Act Sec. 7(a)(36), as added by Act Sec. 1102, or indebtedness forgiven under Act Sec. 1109. (Act Sec. 2302(a)(3))

Notwithstanding any other provision of law, the payment for 50% of the taxes imposed under Code Sec. 1401(a) (self-employment taxes) for the payroll tax deferral period won't be due before the applicable date. (Act Sec. 2302(b)(1))

For purposes of applying Code Sec. 6654 (requiring individuals to make estimated tax payments) to any tax year which includes any part of the payroll tax deferral period, 50% of the self-employment taxes imposed under Code Sec. 1401(a) for the payroll tax deferral period won't be treated as taxes to which Code Sec. 6654 applies. (Act Sec. 2302(b)(2))

For purposes of Code Sec. 3504 (imposing third party liability for withholding tax), in the case of any person designated under that section (and any regulations or other guidance issued by IRS with respect to that section) to perform acts otherwise required to be performed by an employer, if an employer directs that person to defer payment of any applicable employment taxes during the payroll tax deferral period under Act Sec. 2302, the employer will be solely liable for the payment of the applicable employment taxes before the applicable date for any wages paid by that that person on behalf of that employer during that period. (Act Sec. 2302(c)(1))

For purposes of Code Sec. 3511 (which requires certified professional employer organizations (CPEOs) to be treated as employers for employment tax withholding purposes), in the case of a CPEO (as defined in Code Sec. 7705(a)) that has entered into a service contract described in Code Sec. 7705(e)(2) with a customer, if that customer directs that CPEO to defer payment of any applicable employment taxes during the payroll tax deferral period under this section, the customer will, notwithstanding Code Sec. 3511(a) and Code Sec. 3511(c), be solely liable for the payment of those applicable employment taxes before the applicable date for any wages paid by the CPEO to any worksite employee performing services for that customer during that period. (Act Sec. 2302(c)(2))

Effective date . The provisions of Act Sec. 2302 apply to the period beginning on the date of enactment of the Act. (Act Sec. 2302(d)(2))

Temporary repeal of taxable income limitation for net operating losses (NOLs)

Old law. Under Code Sec. 172(a) the amount of the NOL deduction is equal to the lesser of (1) the aggregate of the NOL carryovers to such year and NOL carrybacks to such year, or (2) 80% of taxable income computed without regard to the deduction allowable in this section. Thus, NOLs are currently subject to a taxable-income limitation and can't fully offset income.

New law. The CARES Act temporarily removes the taxable income limitation to allow an NOL to fully offset income. (Code Sec. 172(a), as amended by Act Sec. 2303(a)(1))

Effective date. The amendments made by Act Sec. 2303(a) apply to tax years beginning after Dec. 31, 2017, and to tax years beginning on or before Dec. 31, 2017, to which NOLs arising in tax years beginning after Dec. 31, 2017 are carried. (Act Sec. 2303(d)(1))

Modification of rules relating to net operating loss (NOL) carrybacks

Old law. Code Sec. 172(b)(1) provides that, except for farming losses and losses of property and casualty insurance companies, an NOL for any tax year is carried forward to each tax year following the tax year of the loss but isn't carried back to any tax year preceding the tax year of the loss.

New law. The CARES Act provides that NOLs arising in a tax year beginning after Dec. 31, 2018 and before Jan. 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss. (Code Sec. 172(b)(1) as amended by Act Sec. 2303(b)(1))

Effective date. The amendments made by Act Sec. 2303(b) apply to NOLs arising in tax years beginning after Dec. 31, 2017 and to tax years beginning before, on or after such date to which such NOLs are carried. (Act Sec. 2303(d)(2))

Modification of limitation on losses for noncorporate taxpayers

Old law. Code Sec. 461(l)(1) disallows the deduction of excess business losses by noncorporate taxpayers for tax years beginning after Dec. 31, 2017 and ending before Jan. 1, 2026. Generally, Code Sec. 461(l)(3)(A) provides that an "excess business loss" is the excess of the (1) taxpayer's aggregate trade or business deductions for the tax year over (2) the sum of the taxpayer's aggregate trade or business gross income or gain plus $250,000 (as adjusted for inflation).

New law. The CARES Act temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020. (Code Sec. 461(l)(1), as amended by Act Sec. 2304(a))

Effective date. The amendments made by Act Sec. 2304(a) apply to tax years beginning after Dec. 31, 2017. (Code Sec. 461(l)(1), as amended by Act Sec. 2304(a))

Corporate minimum tax credit (MTC) is accelerated

Background. Corporations (for which the alternative minimum tax was repealed for tax years after 2017) may claim outstanding MTCs (subject to limits) for tax years before 2021, at which time any remaining MTC may be claimed as fully refundable. Thus, under Code Sec. 53(e), the MTC is refundable for any tax year beginning in 2018, 2019, 2020, or 2021, in an amount equal to 50% (100% for tax years beginning in 2021) of the excess MTC for the tax year, over the amount of the credit allowable for the year against regular tax liability. (Code Sec. 53(e))

New law. The CARES Act changes ''2018, 2019, 2020, or 2021'' (above) to ''2018 or 2019," and changes "(100% for tax years beginning in 2021)" to "(100% for tax years beginning in 2019)" (Code Sec. 53(e)(1), as amended by Act Sec. 2305(a), and Code Sec. 53(e)(2), as amended by Act Sec. 2305(a))

The CARES Act also provides for an election to take the entire refundable credit amount in 2018. (Code Sec. 53(e)(5), as amended by Act Sec. 2305(b)(1))

Under the CARES Act, a claim for credit or refund where a corporation elects to take the entire refundable credit amount in 2018 must be treated as made under Code Sec. 6411, i.e., as a tentative carryback refund claim. (Act Sec. 2305(d)(1))

Taxpayers may file an application for a tentative refund of any amount for which a refund is due by reason of an election under Code Sec. 53(e)(5). The application, which must be filed before Dec. 31, 2020, must be in the manner and form IRS provides, must be verified in the same manner as an application for a tentative carryback adjustment, and must set forth: (a) the amount of the refundable credit claimed under Code Sec. 53(e) for the tax year, (b) the amount of the refundable credit claimed under Code Sec. 53(e) for any previously filed return for the tax year, and (c) the amount of the refund claimed. (Act Sec. 2305(d)(2)(A))

Within 90 days from the date the application is filed, IRS must: (i) review the application, (ii) determine the amount of the overpayment, and (iii) apply, credit, or refund the overpayment, in a manner similar to that provided in Code Sec. 6411(b) (allowance of tentative carryback adjustments). (Act Sec. 2305(d)(2)(B))

For an application made by a corporation filing a consolidated return, the rules of Code Sec. 6411(c) apply to an adjustment, to the extent IRS provides. (Act Sec. 2305(d)(2)(C))

Effective date. The amendments made by Act Sec. 2305 apply to tax years beginning after December 31, 2017. (Act Sec. 2305(c))

Deductibility of interest expense temporarily increased

Background. The Tax Cuts and Jobs Act of 2017 (P.L. 115-97, the “TCJA”) generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income. (Code Sec. 163(j)(10))

New law. The CARES Act temporarily and retroactively increases the limitation on the deductibility of interest expense under Code Sec. 163(j)(1) from 30% to 50% for tax years beginning in 2019 and 2020. (Code Sec. 163(j)(10)(A)(i) as amended by Act Sec. 2306(a))

Special rules for partnerships. Under a special rule for partnerships, the increase in the limitation will not apply to partners in partnerships for 2019 (it applies only in 2020). (Code Sec. 163(j)(10)(A)(ii)(I) as amended by Act Sec. 2306(a)) For partners that don't elect out, any excess business interest of the partnership for any tax year beginning in 2019 that is allocated to the partner will be treated as follows (Code Sec. 163(j)(10)(A)(ii)(II) as amended by Act Sec. 2306(a)):

…50% of the excess business interest will be treated as paid or accrued by the partner in the partner's first tax year beginning in 2020 and isn't subject to any limits in 2020. (Code Sec. 163(j)(10)(A)(ii)(II)(aa) as amended by Act Sec. 2306(a))

…50% of the excess business interest will be subject to the limitations of paragraph 163(j)(4)(B)(ii) (relating to the usual treatment of excess business interest allocated to partners) in the same manner as any other excess business interest that is so allocated. (Code Sec. 163(j)(10)(A)(ii)(II)(bb) as amended by Act Sec. 2306(a)) In other words, it will remain suspended until the partnership allocates excess taxable income or excess interest income to the partner (or the partnership is no longer subject to Code Sec. 163(j)).

Election out of the increased limitation. Taxpayers may elect out of the increase, for any tax year, in the time and manner IRS prescribes. Once made, the election can be revoked only with IRS consent. For partnerships, the election must be made by the partnership and can be made only for tax years beginning in 2020. (Code Sec. 163(j)(10)(A)(iii) as amended by Act Sec. 2306(a))

Election to calculate 2020 interest limitation using 2019 adjusted taxable income. In addition, taxpayers can elect to calculate the interest limitation for their tax year beginning in 2020 using the adjusted taxable income for their last tax year beginning in 2019 as the relevant base. For partnerships, this election must be made by the partnership. (Code Sec. 163(j)(10)(B)(i) as amended by Act Sec. 2306(a))

If an election is made to calculate the interest limitation using 2019 adjusted taxable income for a tax year that is a short tax year, the adjusted taxable income for the taxpayer's last tax year beginning in 2019 which is substituted under the election will be equal to the amount which bears the same ratio to such adjusted taxable income as the number of months in the short taxable year bears to 12. (Code Sec. 163(j)(10)(B)(ii) as amended by Act Sec. 2306(a))

Effective date. The amendments made by Act Sec. 2306 apply to tax years beginning after Dec. 31, 2018. (Act Sec. 2306(b))

Bonus depreciation technical correction for qualified improvement property

Background. The Tax Cuts and Jobs Act of 2017 (P.L. 115-97, the "TCJA") amended Code Sec. 168 to allow 100% additional first-year depreciation deductions ("100% Bonus Depreciation") for certain qualified property. The TCJA eliminated pre-existing definitions for (1) qualified leasehold improvement property, (2) qualified restaurant property, and (3) qualified retail improvement property. It replaced those definitions with one category called qualified improvement property ("QI Property"). A general 15-year recovery period was intended to have been provided for QI Property. However, that specific recovery period failed to be reflected in the statutory text of the TCJA. Thus, under the TCJA, QI Property falls into the 39-year recovery period for nonresidential rental property. That makes the QI Property category ineligible for 100% Bonus Depreciation.

New law. The CARES Act provides a technical correction to the TCJA, and specifically designates QI Property as 15-year property for depreciation purposes. (Code Sec. 168(e)(3)(E)(vii), as amended by Act Sec. 2307(a)(1)(A)) This makes QI Property a category eligible for 100% Bonus Depreciation. QI property also is specifically assigned a 20-year class life for the Alternative Depreciation System. (Code Sec. 168(g)(3)(B), as amended by Act Sec. 2307(a)(3)(B))

Effective date. The amendments made by Act Sec. 2307 are effective for property placed in service after Dec. 31, 2017. (Act Sec. 2307(b))

Checkpoint subscribers can find the latest tax and accounting news and analysis related to the ongoing COVID-19 (coronavirus) pandemic by searching or navigating to our new COVID-19 Guidance folder. This folder can be accessed from the top of the Table of Contents or included in searches (be sure to select it). The folder will be available beginning at 3:00 PM ET on Friday, March 27.

Document Title:Business tax provisions in Senate-passed third coronavirus relief package, Federal Tax Update (03/27/2020)
Checkpoint Source:2020 COVID-19 News

 

 

Tax Rates
• 10% - up to $19,050 (MFJ; $9,525 single individual)
• 12% - $19,050 to $77,400 (MFJ; $9,525 - $38,700 single individual)
• 22% - $77,400 to $165,000 (MFJ; $38,700 - $82,500 single individual)
• 24% - $165,000 to $315,000 (MFJ; $82,500 - $157,500 single individual)
• 32% - $315,000 to $400,000 (MFJ; $157,500 - $200,000 single individual)
• 35% - $400,000 to $600,000 (MFJ; $200,000 - $500,000 single individual)
• 37% - $600,000+ (MFJ; $500,000+ single individual)

 

Standard Deduction Increased
• $24,000 for married individuals filing a joint return,
• $18,000 for head-of-household filers, and
• $12,000 for all other taxpayers

 

Kiddie Tax Modified
• For tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child's ordinary income and his or her income taxed at preferential rates.
Capital Gains Provisions Conformed
• The adjusted net capital gain of a noncorporate taxpayer (e.g., an individual) is taxed at maximum rates of 0%, 15%, or 20%.
• For 2018, the 15% breakpoint is:
    o $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately),
    o $51,700 for heads of household,
    o $2,600 for trusts and estates, and $38,600 for other unmarried individuals.
• The 20% breakpoint is:
    o $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately),
    o $452,400 for heads of household,
    o $12,700 for estates and trusts, and
    o $425,800 for other unmarried individuals.

Gambling Loss Limitation Modified
• For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limitation on wagering losses is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.

Child Tax Credit Increased
• For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000
• Phase-out:
    o The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers).
• Non-child dependents:
    o In addition, a $500 nonrefundable credit is provided for certain non-child dependents.
• Refundability:
    o The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount.
 
State and Local Tax Deduction Limited
• A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing a separate return) for the aggregate of
    o State and local property taxes not paid or accrued in carrying on a trade or business or activity and
    o State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year.
    o Foreign real property taxes may not be deducted.
• Prepayment provision:
    o A taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, can't claim an itemized deduction in 2017 for that prepaid income tax.

Mortgage & Home Equity Indebtedness Interest Deduction Limited
• The deduction for interest on home equity indebtedness is eliminated.
• The deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing    separately).
    o Treatment of indebtedness incurred on or before Dec. 15, 2017. The new lower limit doesn't apply to any acquisition indebtedness incurred before Dec. 15, 2017.
    o “Binding contract” exception. A taxpayer who has entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who purchases such residence before Apr. 1, 2018, shall be considered to incur acquisition indebtedness prior to Dec. 15, 2017.
• Refinancing:
    o The $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before Dec. 15, 2017, so long as the indebtedness resulting from the refinancing doesn't exceed the amount of the refinanced indebtedness.

Medical Expense Deduction Threshold Temporarily Reduced
• For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, the threshhold on medical expense deductions is reduced to 7.5% for all taxpayers.
Charitable Contribution Deduction Limitation Increased
• For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation under for cash contributions to public charities and certain private foundations is increased to 60%.
• Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year's ceiling.
No Deduction For Amounts Paid For College Athletic Seating Rights
• For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event.
Alimony Deduction by Payor/Inclusion by Payee Suspended
• For any divorce or separation agreement executed after Dec. 31, 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. Rather, income used for alimony is taxed at the rates applicable to the payor spouse.
Miscellaneous Itemized Deductions Suspended
• The deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. This includes the deduction for tax preparation and investment advisory expenses.
Overall Limitation (“Pease” Limitation) on Itemized Deductions Suspended
• New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the “Pease limitation” (the itemized deduction phase-out for higher-income individuals) on itemized deductions is suspended.
 
Moving Expenses Deduction Suspended
• The deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.  This also precludes tax-free moving reimbursements provided by an employer.
Repeal of Obamacare Individual Mandate
• For months beginning after Dec. 31, 2018, the amount of the individual shared responsibility payment is reduced to zero.
    o The Act leaves intact the 3.8% net investment income tax and the 0.9% additional Medicare tax, both enacted by Obamacare.
Alternative Minimum Tax (AMT)
• For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act increases the AMT exemption amounts for individuals as follows:
    o For joint returns and surviving spouses, $109,400.
    o For single taxpayers, $70,300.
    o For marrieds filing separately, $54,700.
• Under the Act, the above exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the AMTI of the taxpayer exceeds the phase-out amounts, increased as follows:
    o For joint returns and surviving spouses, $1 million.
    o For all other taxpayers (other than estates and trusts), $500,000.
    o For trusts and estates, the pre-inflation adjustment exemption amount of $22,500 and phase-out amount of $75,000 remain unchanged.

Student Loan Interest
• Deduction retained

 

Teacher Expenses
• Deduction retained

ABLE Account Changes
ABLE Accounts under Code Sec. 529A provide individuals with disabilities and their families the ability to fund a tax preferred savings account to pay for “qualified” disability related expenses. Contributions may be made by the person with a disability (the “designated beneficiary”), parents, family members or others. Under pre-Act law, the annual limitation on contributions is the amount of the annual gift-tax exemption ($15,000 in 2018).
• Effective for tax years beginning after the enactment date and before Jan. 1, 2026, the contribution limitation to ABLE accounts with respect to contributions made by the designated beneficiary is increased, and other changes are in effect as described below. After the overall limitation on contributions is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account's designated beneficiary can contribute an additional amount, up to the lesser of (a) the Federal poverty line for a one-person household; or (b) the individual's compensation for the tax year.
• Saver's credit eligible. Additionally, the designated beneficiary of an ABLE account can claim the saver's credit under Code Sec. 25B for contributions made to his or her ABLE account.
• For distributions after the date of enactment, amounts from qualified tuition programs (QTPs, also known as 529 accounts; see below) are allowed to be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary's family. Such rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.
Expanded Use of 529 Account Funds
• New law. For distributions after Dec. 31, 2017, “qualified higher education expenses” include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.
 
Student Loan Discharged on Death Or Disability
• Certain student loans that are discharged (forgiven) on account of death or total and permanent disability of the student are also excluded from gross income.
New Deferral Election for Qualified Equity Grants
• Generally effective with respect to stock attributable to options exercised or restricted stock units (RSUs) settled after Dec. 31, 2017 (subject to a transition rule; see below), a qualified employee can elect to defer, for income tax purposes, recognition of the amount of income attributable to qualified stock transferred to the employee by the employer.
• The election applies only for income tax purposes; the application of FICA and FUTA is not affected.
• The election must be made no later than 30 days after the first time the employee's right to the stock is substantially vested or is transferable, whichever occurs earlier.
2016 “Net Disaster Loss” Relief Available to Non-Itemizers & Taxpayers Subject to AMT
• In general, no personal casualty loss can be claimed by a taxpayer who claims the standard deduction. Such losses can only be claimed as itemized deductions.
• Effective for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, if an individual has a net disaster loss (defined below) for any tax year beginning after Dec. 31, 2017, and before Jan. 1, 2026, the standard deduction is increased by the net disaster loss.
Relief from Early Withdrawal Tax for “Qualified 2016 Disaster Distributions”
• The Act provides an exception to the retirement plan 10% early withdrawal tax for up to $100,000 of “qualified 2016 disaster distributions.” These distributions are defined as distributions from an eligible retirement plan made (a) on or after Jan. 1, 2016, and before Jan. 1, 2018, to an individual whose principal place of abode at any time during calendar year 2016 was located in a 2016 disaster area and who has sustained an economic loss by reason of the events that gave rise to the Presidential disaster declaration. An “eligible retirement plan” means a qualified retirement plan, a section 403(b) plan or an IRA.
Certain Self-Created Property Not Treated as Capital Asset
• Under pre-Act law, property held by a taxpayer (whether or not connected with the taxpayer's trade or business) is generally considered a capital asset.
o However, certain assets are specifically excluded from the definition of a capital asset, including inventory property, depreciable property, and certain self-created intangibles (e.g., copyrights, musical compositions).
• Effective for dispositions after Dec. 31, 2017, the Act amends Code Sec. 1221(a)(3), resulting in the exclusion of patents, inventions, models or designs (whether or not patented), and secret formulas or processes, which are held either by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created), from the definition of a “capital asset.”
Estate and Gift Tax Retained, with Increased Exemption Amount
• Under pre-Act law, the first $5 million (as adjusted for inflation in years after 2011) of transferred property was exempt from estate and gift tax. For estates of decedents dying and gifts made in 2018, this “basic exclusion amount” was $5.6 million ($11.2 million for a married couple).
• New law:
    o For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the Act doubles the base estate and gift tax exemption amount from $5 million to $10 million.

 
HIGHLIGHTED BUSINESS TAX CHANGES IN THE “TAX CUTS AND JOBS ACT”

Corporate Tax Rates Reduced
• For tax years beginning after Dec. 31, 2017, the corporate tax rate is a flat 21% rate.
Dividends-Received Deduction Percentages Reduced
• The 80% dividends received deduction is reduced to 65%, and the 70% dividends received deduction is reduced to 50%.
Corporate Alternative Minimum Tax Repealed
• For tax years beginning after Dec. 31, 2017, the corporate AMT is repealed.
Increased Code 179 Expensing
• For property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount a taxpayer may expense under Code Sec. 179 is increased to $1 million (was $500k), and the phase-out threshold amount is increased to $2.5 million of total purchases.
Temporary 100% Cost Recovery of Qualifying Business Assets
• A 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 The additional first-year depreciation deduction is allowed for new and used property.
    o The Act refers to the new 100% depreciation deduction in the placed-in-service year as “100% expensing,” but the tax break should not be confused with expensing under Code Sec. 179, which is subject to entirely separate rules (see above).
• For certain plants bearing fruit or nuts planted or grafted after Sept. 27, 2017, and before Jan. 21, 2023, the 100% first-year deduction is also available.
Luxury Automobile Depreciation Limits Increased
• For passenger automobiles placed in service after Dec. 31, 2017, in tax years ending after that date, for which the additional first-year depreciation deduction under Code Sec. 168(k) is not claimed, the maximum amount of allowable depreciation is increased to:
    o $10,000 for the year in which the vehicle is placed in service,
    o $16,000 for the second year,
    o $9,600 for the third year, and
    o $5,760 for the fourth and later years in the recovery period.
• In addition, computer or peripheral equipment is removed from the definition of listed property, and so isn't subject to the heightened substantiation requirements that apply to listed property.
New Farming Equipment and Machinery Is 5-Year Property
• For property placed in service after Dec. 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which begins with the taxpayer.
Recovery Period for Real Property Shortened
• For property placed in service after Dec. 31, 2017, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated, a general 15-year recovery period and straight-line depreciation are provided for qualified improvement property.
• Thus, qualified improvement property placed in service after Dec. 31, 2017, is generally depreciable over 15 years using the straight-line method and half-year convention, without regard to whether the improvements are property subject to a lease, placed in service more than three years after the date the building was first placed in service, or made to a restaurant building.

 
Limits on Deduction of Business Interest
• For tax years beginning after Dec. 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business's adjusted taxable income.
• The amount of any business interest not allowed as a deduction for any taxable year is treated as business interest paid or accrued in the succeeding taxable year. Business interest may be carried forward indefinitely, subject to certain restrictions applicable to partnerships.
• Exemptions.
    o An exemption from these rules applies for taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year period ending with the prior tax year that do not exceed $25 million.
Modification of Net Operating Loss Deduction
• For NOLs arising in tax years ending after Dec. 31, 2017, the two-year carryback and the special carryback provisions are repealed, but a two-year carryback applies in the case of certain losses incurred in the trade or business of farming.
• For losses arising in tax years beginning after Dec. 31, 2017, the NOL deduction is limited to 80% of taxable income (determined without regard to the deduction).
Domestic Production Activities Deduction Repealed
• For tax years beginning after Dec. 31, 2017, the DPAD is repealed.
Like-Kind Exchange Treatment Limited
• Generally effective for transfers after Dec. 31, 2017, the rule allowing the deferral of gain on like-kind exchanges is modified to allow for like-kind exchanges only with respect to real property that is not held primarily for sale.
Five-Year Writeoff of Specified R&E Expenses
• For amounts paid or incurred in tax years beginning after Dec. 31, 2021, “specified R&E expenses” must be capitalized and amortized ratably over a 5-year period (15 years if conducted outside of the U.S.), beginning with the midpoint of the tax year in which the specified R&E expenses were paid or incurred.
Employer's Deduction for Fringe Benefit Expenses Limited
• For amounts incurred or paid after Dec. 31, 2017, deductions for entertainment expenses are disallowed, eliminating the subjective determination of whether such expenses are sufficiently business related.
• The current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer.
• Deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained.
    o In addition, no deduction is allowed for transportation expenses that are the equivalent of commuting for employees (e.g., between the employee's home and the workplace), except as provided for the safety of the employee.
No Deduction for Amounts Paid For Sexual Harassment Subject to Nondisclosure Agreement
• A taxpayer generally is allowed a deduction for ordinary and necessary expenses paid or incurred in carrying on any trade or business. However, among other exceptions, there's no deduction for: any illegal bribe, illegal kickback, or other illegal payment; certain lobbying and political expenses; any fine or similar penalty paid to a government for the violation of any law; and two-thirds of treble damage payments under the antitrust laws.
• New law:
    o Under the Act, effective for amounts paid or incurred after the enactment date, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.
 
Employee Achievement Awards
• Employee achievement awards are excludable to the extent the employer can deduct the cost of the award—generally limited to $400 for any one employee, or $1,600 for a “qualified plan award.”
    o An employee achievement award is an item of tangible personal property given to an employee in recognition of either length of service or safety achievement and presented as part of a meaningful presentation.
• New law:
    o For amounts paid or incurred after Dec. 31, 2017, a definition of “tangible personal property” is provided:
Tangible personal property does not include cash, cash equivalents, gifts cards, gift coupons, gift certificates (other than where from the employer pre-selected or pre-approved a limited selection) vacations, meals, lodging, tickets for theatre or sporting events, stock, bonds or similar items. and other non-tangible personal property. No inference is intended that this is a change from present law and guidance.

Deduction for Local Lobbying Expenses Eliminated
• For amounts paid or incurred on or after the date of enactment, the deduction for lobbying expenses with respect to legislation before local government bodies (including Indian tribal governments) is eliminated.
Rehabilitation Credit Limited
• For amounts paid or incurred after Dec. 31, 2017, the 10% credit for qualified rehabilitation expenditures with respect to a pre-'36 building is repealed and a 20% credit is provided for qualified rehabilitation expenditures with respect to a certified historic structure which can be claimed ratably over a 5-year period beginning in the tax year in which a qualified rehabilitated structure is placed in service.
New Credit for Employer-Paid Family and Medical Leave
• For wages paid in tax years beginning after Dec. 31, 2017, but not beginning after Dec. 31, 2019, the Act allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave (FMLA) if the rate of payment is 50% of the wages normally paid to an employee.
o All qualifying full-time employees have to be given at least two weeks of annual paid family and medical leave (all less-than-full-time qualifying employees have to be given a commensurate amount of leave on a pro rata basis).
Taxable Year of Inclusion
• In general, for a cash basis taxpayer, an amount is included in income when actually or constructively received.
• For an accrual basis taxpayer, an amount is included in income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy (i.e., when the “all events test” is met), unless an exception permits deferral or exclusion.
    o A number of exceptions that exist to permit deferral of income relate to advance payments. An advance payment is when a taxpayer receives payment before the taxpayer provides goods or services to its customer. The exceptions often allow tax deferral to mirror financial accounting deferral (e.g., income is recognized as the goods are provided or the services are performed).
• New law:
    o Generally for tax years beginning after Dec. 31, 2017, a taxpayer is required to recognize income no later than the tax year in which such income is taken into account as income on an applicable financial statement (AFS) or another financial statement under rules specified by IRS (subject to an exception for long-term contract income under Code Sec. 460).
    o The Act also codifies the current deferral method of accounting for advance payments for goods and services provided by Rev Proc 2004-34 to allow taxpayers to defer the inclusion of income associated with certain advance payments to the end of the tax year following the tax year of receipt if such income also is deferred for financial statement purposes.
 
Cash Method of Accounting
• For tax years beginning after Dec. 31, the cash method may be used by taxpayers (other than tax shelters) that satisfy a $25 million gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.
    o Under the gross receipts test, taxpayers with annual average gross receipts that do not exceed $25 million for the three prior tax years are allowed to use the cash method.
• Use of this provision results in a change in the taxpayer's accounting method for purposes of Code Sec. 481.
Accounting for Inventories
• Under pre-Act law, businesses that are required to use an inventory method must generally use the accrual accounting method.
    o However, the cash method could be used for certain small businesses that meet a gross receipt test with average gross receipts of not more than $1 million.
• New law:
    o For tax years beginning after Dec. 31, 2017, taxpayers that meet the $25 million gross receipts test are not required to account for inventories as mentioned above, but rather may use an accounting method for inventories that either (1) treats inventories as non-incidental materials and supplies, or (2) conforms to the taxpayer's financial accounting treatment of inventories.
• Use of this provisions results is a change in the taxpayer's accounting method for purposes of Code Sec. 481.
Capitalization and Inclusion of Certain Expenses in Inventory Costs
• The uniform capitalization (UNICAP) rules generally require certain direct and indirect costs associated with real or tangible personal property manufactured by a business to be included in either inventory or capitalized into the basis of such property.
o Under pre-Act law, a business with average annual gross receipts of $10 million or less in the preceding three years is not subject to the UNICAP rules for personal property acquired for resale.
• New law:
    o For tax years beginning after Dec. 31, 2017, any producer or re-seller that meets the $25 million gross receipts test is exempted from the application of Code Sec. 263A.
• Use of this provision results is a change in the taxpayer's accounting method for purposes of Code Sec. 481.
Accounting for Long-Term Contracts
• Under pre-Act law, an exception from the requirement to use the percentage-of-completion method (PCM) for long-term contracts was provided for construction companies with average annual gross receipts of $10 million or less in the preceding three years (i.e., small construction contracts) that met certain requirements.
    o They were allowed to instead deduct costs associated with construction when they were paid and recognize income when the building was completed.
• New law:
    o For contracts entered into after Dec. 31, 2017, in tax years ending after that date, the exception for small construction contracts from the requirement to use the PCM is expanded to apply to contracts for the construction or improvement of real property if the contract: (1) is expected (at the time such contract is entered into) to be completed within two years of commencement of the contract and (2) is performed by a taxpayer that (for the tax year in which the contract was entered into) meets the $25 million gross receipts test.
 

HIGHLIGHTED PASSTHROUGH TAX CHANGES IN THE “TAX CUTS AND JOBS ACT”

New Deduction for Pass-Through Income
• Under pre-Act law, the net income of these pass-through businesses— sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations—was not subject to an entity-level tax and was instead reported by the owners or shareholders on their individual income tax returns. Thus, the income was effectively subject to individual income tax rates.
• New law:
    o Generally, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the Act adds a new section, “Qualified Business Income,” under which a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship is allowed to deduct:
(1) the lesser of:
 (a) the “combined qualified business income amount” of the taxpayer, or
(b) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year; plus
(2)  the lesser of:
(i) 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year, or
(ii) taxable income (reduced by the net capital gain) of the taxpayer for the tax year.
• The “combined qualified business income amount” means, for any tax year, an amount equal to:
(i) the deductible amount for each qualified trade or business of the taxpayer (defined as 20% of the taxpayer's QBI subject to the W-2 wage limitation; see below); plus
(ii) 20% of the aggregate amount of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income of the taxpayer for the tax year.
• Limitations.
    o For pass-through entities, other than sole proprietorships, the deduction cannot exceed the greater of:
(1)  50% of the W-2 wages with respect to the qualified trade or business (“W-2 wage limit”), or
(2)  the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.”
• Qualified property is defined in Code Sec. 199A(b)(6) as meaning tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year.
    o The second limitation, which was newly added to the bill during Conference, apparently allows pass-through businesses to be eligible for the deduction on the basis of owning property that qualifies under the provision (e.g., real estate).
• For a partnership or S corporation, each partner or shareholder is treated as having W-2 wages for the tax year in an amount equal to his or her allocable share of the W-2 wages of the entity for the tax year.
• Thresholds and exclusions:
    o The deduction does not apply to specified service businesses (i.e., trades or businesses described in Code Sec. 1202(e)(3)(A), but excluding engineering and architecture; and trades or businesses that involve the performance of services that consist of investment-type activities).
    o The service business limitation begins phasing out in the case of a taxpayer whose taxable income exceeds $315,000 for married individuals filing jointly ($157,500 for other individuals), both indexed for inflation after 2018.
• The new deduction for pass-through income is also available to specified agricultural or horticultural cooperatives.