The Tax Cuts and Jobs Act (TCJA) has ushered in approximately 500 changes to the Internal Revenue Code, including many brand new and highly complex provisions.
By Michael A. Sonnenblick
There has been no shortage of confusion as American taxpayers have started filing their returns for the first time under the 2017 tax overhaul. Though it was pitched initially as a simplification, the Tax Cuts and Jobs Act (TCJA) ultimately ushered in approximately 500 changes to the Internal Revenue Code, including many brand new and highly complex provisions.
While some of these changes were small, others have caught taxpayers off guard. Accordingly, the headlines have been littered with examples of families that neglected to change their paycheck withholdings during the year, only to be surprised when their tax return disappeared, and homeowners lamenting lost tax deductions.
While those anecdotal, individual tax dramas are unfolding on an hourly basis these days, there is a list of even bigger issues that are keeping even trained tax professionals and accountants up at night. To find out which provisions of the TCJA are sparking the most uncertainty and confusion among the experts, we queried our Thomson Reuters Checkpoint database to find out where the greatest number of searches and information requests were concentrated.
Here are some of the TCJA-related areas that have generated the highest level of concern among our customers:
- The IRC § 199A qualified business income deduction. This is a brand-new deduction that many, if not all, pass-through entities are looking at. The provision allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI), plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction. Like Qualified Opportunity Funds (discussed below), the Treasury Regulations accompanying this provision are complex and confusing. Tax planners see the regulations as both positive tax planning opportunities but also potential traps for the unwary.
- 100% depreciation of qualified property under IRC § 168(k). Many taxpayers are familiar with 50% bonus depreciation—an immediate deduction of 50% of the cost of eligible business or other income producing property, followed by depreciation deductions for the remaining 50% of the cost over the regular depreciation period. By accelerating the tax savings from depreciation deductions for machinery, equipment, most software and certain real property, 50% bonus depreciation deduction was available to lower the true economic cost of these assets. But the TCJA replaced the 50% bonus depreciation with 100% bonus depreciation, an even more powerful cost cutting tool.
- Qualified Opportunity Funds under IRC § 1400Z-2. This is the triple play of tax benefits. Investors can defer recognizing capital gains if they rollover the capital gain to a qualified opportunity fund (QOF). Then, if they keep the QOF investment for a period of time, a portion of the capital gain is reduced. And if they keep the QOF investment for a longer period of time, there is no tax on the appreciation within the QOF itself.
- The new like-kind exchange rules under IRC § 1031. Like-kind exchanges, which previously afforded favorable tax treatment to a broader range of property types, are now limited to real property.
- Nondeducibility of entertainment expenses under IRC § 274. This one is simple – no deduction is allowed for any item with respect to an activity of a type that is generally considered to be entertainment, amusement, or recreation (but there is still allowed a 50% deduction allowed for meals, including food and beverage).
The interest in these topics is high. And for new concepts such as the qualified business income deduction and Qualified Opportunity Funds, the IRS has issued hundreds of pages of regulations to help explain what can and cannot be done.
For many tax pros, though, that’s still not enough. They not only need the original source material, but also the analysis and interpretation around each provision, which helps to organize the information and provide insight into what’s really going on with the new laws. Based on the volume of inquiries into these five provisions, expect to see these areas crop up on the IRS’s radar for closer review. Thomson Reuters Checkpoint is updated daily to keep our subscribers in the know.