Thomson Reuters Checkpoint Special Study: Non-extender tax provisions in the Bipartisan Budget Act of 2018
Thomson Reuters Checkpoint Special Study: Non-extender tax provisions in the Bipartisan Budget Act of 2018
On February 9, Congress passed, and the President signed into law, H.R. 1892, the “Bipartisan Budget Act of 2018” (the Budget Act, P.L. 115-123). In addition to providing a continuing resolution to fund the federal government through March 23, this 2-year budget contains a host of tax law changes. The Budget Act retroactively extends through 2017 over 30 so-called “extender” provisions, provides tax relief to victims of natural disasters, and includes a number of miscellaneous tax-related provisions, as described below.
For other extender provisions included in the “Bipartisan Budget Act of 2018,” see ¶ 24.
For disaster relief provisions included in the “Bipartisan Budget Act of 2018,” see ¶ 25.
Advanced Nuclear Power Facility Production Credit
The advanced nuclear power facility production credit, a general business credit, provides a 1.8¢ credit for each kilowatt hour of electricity produced by a taxpayer at an advanced nuclear power facility during the 8-year period beginning on the date the facility was originally placed in service, and sold by the taxpayer to an “unrelated person” during the tax year. The credit may be limited by an annual limitation, a national limitation, and phaseout rules. The credit applies to production from a facility that is placed in service after Aug. 8, 2005 and before Jan. 1, 2021.
New law. The Budget Act adds a new subsection, Code Sec. 45J(b)(5), that provides for the allocation of any “unitized national megawatt capacity limitation” to be allocated by IRS under Code Sec. 45J(b)(3) as “rapidly as is practicable” after Dec. 31, 2010, first to facilities placed in service on or before such date to the extent that such facilities didn’t receive an allocation equal to their full nameplate capacity, and then to facilities placed in service after such date in the order in which such facilities are placed in service. “Unutilized national megawatt capacity limitation” is defined as the excess, if any, of (i) 6,000 megawatts, over (ii) the aggregate amount of national megawatt capacity limitation allocated by the Secretary before Jan. 1, 2021, reduced by any amount of such limitation which was allocated to a facility which was not placed in service before that date. These provisions are effective on the date of enactment—Feb. 9, 2018. (Budget Act Sec. 40501(a))
The Budget Act also provides a new Code Sec. 45J(e) and (redesignates former Code Sec. 45J(e) as Code Sec. 45J(f)), which provides rules governing the transfer of the credit by certain public entities. These rules apply to tax years beginning after Feb. 9, 2018. (Budget Act Sec. 40501(b))
Enhancement of Carbon Dioxide Sequestration Credit
Former Code Sec. 45Q allows a carbon dioxide sequestration credit for carbon dioxide captured and disposed of by the taxpayer in secure geological storage or used by the taxpayer as a tertiary injectant in a qualified enhanced oil or natural gas recovery project. (Former Code Sec. 45Q(d)(7)). Qualified carbon dioxide is carbon dioxide captured from an industrial source that would otherwise be released into the atmosphere as industrial emission of greenhouse gas, and is measured at the source of capture and verified at the point of disposal or injection.
New law. The Budget Act replaces former Code Sec. 45Q, “Credit for carbon dioxide sequestration,” with a new Code Sec. 45Q titled “Credit for Carbon OxideSequestration” (emphasis added). The new Code Sec. 45Q increases the amount of the credit, the window for carbon capture projects, and the number of years to claim the credits. (Budget Act Sec. 41119)
Excise Tax Based on Private Investment Income of Colleges and Universities
Under Code Sec. 4968, as recently added by the TCJA, for tax years beginning after Dec. 31, 2017, an excise tax equal to 1.4% is imposed on net investment income of certain private colleges and universities. The tax applies only to private colleges and universities with at least 500 students, more than 50% of the students of which are located in the U.S., and with assets (other than those used directly in carrying out the institution’s exempt purpose) of at least $500,000 per student. The number of students is based on the daily average number of full-time equivalent students (full-time students and part-time students on an equivalent basis). Net investment income is gross investment income minus expenses to produce the investment (but disallowing the use of accelerated depreciation methods or percentage depletion).
New law. The Budget Act provides that the 500 and 50% of students referred to above both refer to tuition-paying students, effective for tax years beginning after Dec. 31, 2017. (Budget Act Sec. 41109)
Exception from Excess Business Holding Tax for Independently-Operated Philanthropic Business Holdings
Under current lawCode Sec. 4943, a private foundation that has any excess business holdings generally is subject to an initial tax equal to 10% of those excess holdings.
New law. The Budget Act adds a new subsection, Code Sec. 4943(g), providing an exception from this tax for certain holdings of a private foundation in any business enterprise which meets the following requirements for the tax year: (1) the foundation owns all of the business enterprise’s voting stock at all times during the tax year, (2) the foundation acquired all of its interests in the for-profit business other than by purchasing it, (3) the business enterprise distributes all of its net operating income for any given tax year to the private foundation within 120 days of the close of that tax year, and (4) the directors, executives, etc. of the business enterprise are not substantial contributors to the private foundation, and at least a majority of the board of directors of the private foundation are persons who are not directors or officers of the business enterprise or family members of a substantial contributor to the private foundation. Certain “deemed” private foundations are excluded. This exception goes into effect for tax years beginning after Dec. 31, 2017. (Budget Act Sec. 41110)
Rules Governing Hardship Distributions
401(k) plans may provide that an employee can receive a distribution of elective contributions from the plan on account of hardship. In general, a retirement plan can make a hardship distribution only: if the plan permits such distributions; because of an immediate and heavy financial need of the employee; and in an amount necessary to meet the financial need. (Reg. § 1.401(k)-1(d)(3)) Under Reg. § 1.401(k)-1(d)(3)(iv)(E), an employee who receives a hardship distribution cannot make elective contributions or employee contribution to the plan and all other plans maintained by the employer for at least six months after receipt of the hardship distribution.
New law. The Budget Act directs IRS to modify Reg. § 1.401(k)-1(d)(3)(iv)(E), within one year from Feb. 9, 2018, to delete the 6-month prohibition on contributions and to make “any other modifications necessary to carry out the purposes of” Code Sec. 401(k)(2)(B)(i)(IV). (Budget Act Sec. 41113) The revised regs are to apply to plan years beginning after Dec. 31, 2018.
The Budget Act also adds Code Sec. 401(k)(14), providing special rules relating to hardship withdrawals. Under the provision, for purposes of Code Sec. 401(k)(2)(B)(i)(IV), the following amounts may be distributed upon hardship of the employee: (i) contributions to a profit-sharing or stock bonus plan to which Code Sec. 402(e)(3) applies; (ii) qualified nonelective contributions (as defined in Code Sec. 401(m)(4)(C)); (iii) qualified matching contributions described in paragraph Code Sec. 401(k)(3)(D)(ii)(I); and (iv) earnings on any contributions described in (i), (ii), or (iii). Further, under Code Sec. 401(k)(14)(B), a distribution won’t be treated as failing to be made upon the hardship of an employee solely because the employee doesn’t take any available loan under the plan. These amendments apply to plan years beginning after Dec. 31, 2018. (Budget Act Sec. 41114)
Qualified Opportunity Zones—Puerto Rico
Code Sec. 1400Z-1, as recently added by the TCJA, allows for the designation of certain low-income community population census tracts as qualified opportunity zones eligible for a number of favorable tax rules aimed at encouraging economic growth and investment to businesses within the zone. In general, a population census tract that is a low-income community is designated as a qualified opportunity zone if the chief executive officer of the State in which the tract is located timely nominates the tract for designation as such and notifies the Secretary in writing of the nomination, and the Secretary certifies the nomination and designates the track as a qualified opportunity zone beyond the end of the “consideration period.” (Code Sec. 1400Z-1(b))
New law. The Budget Act adds a new subsection, Code Sec. 1400Z-1(b)(3), which provides a special rule for Puerto Rico under which every population census tract in Puerto Rico that is a low-income community is deemed to be certified and designated as a qualified opportunity zone, effective as of Dec. 22, 2017 (i.e., the date that the TCJA was enacted). (Budget Act Sec. 4115(a))
“Tax Home” for Certain U.S. Citizens or Residents in Combat Zones
Under Code Sec. 911(d), the term “tax home” means, in the case of an individual, “such individual’s home for purposes of Code Sec. 162(a)(2),” which in turn generally considers a person’s home to be the location of his or her regular or principal place of business. However, Code Sec. 911(d)(3) also provides that an individual will not be treated as having a tax home in a foreign country for any period for which his or her abode is within the U.S.
New law. The Budget Act amends Code Sec. 911(d)(3) by providing that an individual will not be treated as having a tax home in a foreign country for any period for which his or her abode is within the U.S., unless such individual is serving in an area designed by the President by Executive Order as a combat zone, effective for tax years beginning after Dec. 31, 2017. (Budget Act Sec. 41116)
Damages for wrongful incarceration. The Budget Act extends the waiver on the statute of limitations (effectively extending the deadline to Dec. 18, 2019) for filing a refund claim for an overpayment of tax resulting from the exclusion under Code Sec. 139F for damages received on account of wrongful incarceration. (Budget Act Sec. 41103)
Improper levy on retirement plans. The Budget Act adds a new subsection, Code Sec. 6343(f), that provides new rules that hold an individual harmless in the event that there is an improper levy (defined as one that was wrongful or determined to be premature or otherwise not in accordance with administrative procedures) on an individual’s account or benefit under an eligible retirement plan (under Code Sec. 402(c)(8)(B)), and the amount is later returned by the individual from IRS. Under the Budget Act, the individual is allowed, within a specified timeframe, to contribute the amount returned and any interest thereon into the eligible retirement plan, if permissible under the terms of the plan (or to a different plan to which a rollover contribution of a distribution from such eligible retirement plan is permitted), and such contribution will be treated as a rollover made for the tax year in which the distribution on account of the levy occurred. (Code Sec. 6343(f)(1)) The contribution is allowed without regard to the normally applicable limits on IRA contributions and rollovers. The Budget Act also provides for a refund of any income tax imposed on the distribution as a result of the wrongful levy. (Code Sec. 6343(f)(3)) These provisions are effective for amounts paid under Code Sec. 6343(b), Code Sec. 6343(c), and Code Sec. 6343(d)(2)(A) in tax years beginning after Dec. 31, 2017. (Budget Act Sec. 41104)
Installment agreements—user fees. The Budget Act adds a new subsection, Code Sec. 6159(f) (and redesignates former Code Sec. 6159(f) and Code Sec. 6159(g)), which prohibits increases in the amount of user fees charged by IRS for installment agreements from the amount in effect as of Feb. 9, 2018. For low-income taxpayers (defined as those whose income falls below 250% of the Federal poverty guidelines), no user fee is to be imposed where the low-income taxpayer enters into an installment agreement under which the taxpayer agrees to make automated installment payments through a debit account. For low-income taxpayers who are unable to agree to make payments electronically, the user fee applies, but will be reimbursed upon completion of the installment agreement. (Code Sec. 6159(f)(2)) These provisions apply to agreements entered into on or after the date that is 60 days after Feb. 9, 2018. (Budget Act Sec. 41105)
Simplified filing for older individuals. The Budget Act requires IRS to publish a simplified income tax return designated as Form 1040SR for use by persons who are age 65 or older by the close of the tax year. The form is to be as similar as possible to the Form 1040EZ, and its use would not to be restricted based on the amount of taxable income shown on the return or the fact that the income to be reported for the tax year includes social security benefits, distributions from qualified retirement plans, annuities or other such deferred payment arrangements, interest and dividends, or capital gains and losses taken into account in determining adjusted net capital gain. The form is to be made available for tax years beginning after Feb. 9, 2018. (Budget Act Sec. 41106)
Whistleblower awards. The Budget Act amends Code Sec. 62(a)(21) to provide an above-the-line deduction for attorney fees and court costs paid by, or on behalf of, a taxpayer in connection with any award under: (i) Code Sec. 7623(b) (i.e., whistleblowers), or (ii) in the case of tax years beginning after Dec. 31, 2017, section 21F of the Securities Exchange Act of 1934, a State law relating to false or fraudulent claims that meets the requirements described in section 1909(b) of the Social Security Act, or section 23 of the Commodity Exchange Act. The amount of the deduction cannot exceed the amount includible in the taxpayer’s gross income for the tax year on account of the award. (Budget Act Sec. 41107)
In addition, the Budget Act modifies Code Sec. 7623 to broaden the definition of “collected proceeds” eligible for awards to include: (1) penalties, interest, additions to tax, and additional amounts provided under the internal revenue laws; and (2) any proceeds arising from laws for which IRS is authorized to administer, enforce, or investigate, including criminal fines and civil forfeitures, and violations of reporting requirements. (Budget Act Sec. 41108) These changes apply to information provided before, on, or after Feb. 9, 2018 with respect to which a final determination for an award has not yet been made as of that date.
Credit card sale reporting requirements. Under Code Sec. 6050W, any payment settlement entity making payment to a “participating payee” in settlement of reportable payment transactions (any payment card transaction and any third party network transaction) must file a return for each calendar year with IRS, and furnish a statement to the participating payee, setting out the gross amount of the reportable payment transactions, as well as providing certain information about the participating payee. A participating payee generally includes, in the case of a payment card transaction, any person who accepts a payment card as payment; and in the case of a third party network transaction, any person who accepts payment from a third party settlement organization in settlement of such transaction. The Budget Act amends Code Sec. 6050W(d)(1)(B), which provides that the term “participating payee” does not include any person with a foreign address (except as provided in regs), to further add that “a person with only a foreign address shall not be treated as a participating payee with respect to any payment settlement entity solely because such person receives payments from such payment settlement entity in dollars,” effective for calendar years beginning after Dec. 31, 2017. (Budget Act Sec. 41117)
Repeal of accelerated 2020 estimated tax payment for large corporations. The Budget Act repeals the rule accelerating the payment of certain estimated corporate taxes in 2020. (Trade Preferences Extension Act Sec. 803, as repealed by Budget Act Sec. 41118)