On December 22, the President signed into law the “Tax Cuts and Jobs Act” (P.L. 115-97; the Act). As this article explains, the President’s signature sets the effective date for a number of Act provisions with an effective date geared to the Dec. 22, 2017, date of enactment, including these more widely applicable provisions:
ABLE account liberalizations. Effective for tax years beginning after Dec. 22, 2017, and before Jan. 1, 2026, after the overall limitation on contributions to ABLE accounts 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. (Code Sec. 529A(b), as amended by Act Sec. 11024(a)) 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. (Code Sec. 25B(d)(1), as amended by Act Sec. 11024(b))
For distributions after Dec. 22, 2017, amounts from qualified tuition programs (QTPs, also known as 529 accounts) may 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. (Code Sec. 529(c)(3), as amended by Act Sec. 11025) 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.
Congressional living expenses deduction eliminated. For tax years beginning after Dec. 22, 2017, members of Congress cannot deduct living expenses when they are away from home. (Code Sec. 162(a), as amended by Act Sec. 13311)
Extension of time to contest IRS levy. For levies made after Dec. 22, 2017; and for levies made on or before Dec. 22, 2017, if the prior-law 9-month period for the return of wrongfully levied property has not expired as of Dec. 22, 2017, the 9-month period during which IRS may return the monetary proceeds from the sale of property that has been wrongfully levied upon is extended to two years. The period for bringing a civil action for wrongful levy is similarly extended from nine months to two years. (Code Sec. 6343(b), as amended by Act Sec. 11071)
More taxpayers eligible to deduct costs of replanting citrus plants lost due to casualty. Under a special rule, the uniform capitalization rules of Code Sec. 263A don’t apply and certain agricultural producers and co-owners can deduct costs incurred in replanting edible crops for human consumption following loss or damage due to freezing temperatures, disease, drought, pests, or casualty. For replanting costs paid or incurred after Dec. 22, 2017, but not after Dec. 22, 2027, i.e., the date that is 10 years after Dec. 22, 2017, for citrus plants lost or damaged due to casualty, the Act expands the definition of taxpayers eligible to deduct such costs to include a person other than the taxpayer if (1) the taxpayer has an equity interest of not less than 50% in the replanted citrus plants at all times during the tax year in which the replanting costs are paid or incurred and such other person holds any part of the remaining equity interest, or (2) such other person acquires all of the taxpayer’s equity interest in the land on which the lost or damaged citrus plants were located at the time of such loss or damage, and the replanting is on such land. (Code Sec. 263A(d), as amended by Act Sec. 13207)
Broadened denial of deduction for fines, penalties, etc. For amounts generally paid or incurred on or after Dec. 22, 2017, no deduction is allowed for any otherwise deductible amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or specified nongovernmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. Certain exceptions apply.
Government agencies (or entities treated as such) must report to IRS and to the taxpayer the amount of each settlement agreement or order entered into where the aggregate amount required to be paid or incurred to or at the direction of the government is at least $600 (or such other amount as may be specified by IRS). The report must separately identify any amounts that are for restitution or remediation of property, or correction of noncompliance. (Code Sec. 6050X, as added by Act Sec. 13306)
The above provisions don’t apply to amounts paid or incurred under any binding order or agreement entered into before Dec. 22, 2017. But this exception does not apply to an order or agreement requiring court approval unless the approval was obtained before Dec. 22, 2017.
No deduction for amount paid for sexual harassment subject to nondisclosure agreement. Effective for amounts paid or incurred after Dec. 22, 2017, 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. (Code Sec. 162, as amended by Act Sec. 13307)
Broadened incentives for Qualified Opportunity Zone investment. Effective on Dec. 22, 2017, the Act provides temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund. (Code Sec. 1400Z-2, as added by Act Sec. 13823)
Exclusions from contributions to capital. Effective for contributions made after Dec. 22, 2017 (except as otherwise provided below), the Act provides that the term “contributions to capital” for purposes of Code Sec. 118 does not include: any contribution in aid of construction or any other contribution as a customer or potential customer, and any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such). (Code Sec. 118, as amended by Act Sec. 13312)
The new rule does not apply to any contribution made after Dec. 22, 2017, by a governmental entity pursuant to a master development plan that had been approved before Dec. 22, 2017, by a governmental entity.
Deduction for local lobbying expenses repealed. For amounts paid or incurred on or after Dec. 22, 2017, the Code Sec. 162(e) deduction for lobbying expenses with respect to legislation before local government bodies (including Indian tribal governments) is eliminated. (Code Sec. 162(e), as amended by Act Sec. 13308)
S corp conversion to C corp. Effective on Dec. 22, 2017, any Code Sec. 481(a) adjustment of an eligible terminated S corporation attributable to the revocation of its S corporation election (i.e., a change from the cash method to an accrual method) is taken into account ratably during 6-tax year period beginning with the year of change. An eligible terminated S corporation is any C corporation which (1) is an S corporation the day before Dec. 22, 2017; (2) during the 2-year period beginning on Dec. 22, 2017, revokes its S corporation election; and (3) all of the owners of which on the date the S corporation election is revoked are the same owners (and in identical proportions) as the owners on Dec. 22, 2017.
In the case of a distribution of money by an eligible terminated S corporation, the accumulated adjustments account shall be allocated to such distribution, and the distribution shall be chargeable to accumulated earnings and profits, in the same ratio as the amount of the accumulated adjustments account bears to the amount the accumulated earnings and profits. (Code Sec. 1371(f) and Code Sec. 481(d), as amended by Act Sec. 13543)
Surrogate foreign corporation dividends aren’t qualified. For dividends paid in tax years that begin after Dec. 31, 2017, any dividend received by an individual shareholder from a corporation which is a surrogate foreign corporation as defined in Code Sec. 7874(a)(2)(B) (other than a foreign corporation which is treated as a domestic corporation under Code Sec. 7874(b)), and which first became a foreign surrogate corporation after Dec. 22, 2017, is not entitled to the lower rates on qualified dividends provided for in Code Sec. 1(h). (Code Sec. 1(h), as amended by Act Sec. 14223)
Stock compensation of insiders in expatriated corporations. An excise tax is imposed on the value of the specified stock compensation held by disqualified individuals if a corporation expatriates and gain on any stock in the expatriated corporation is recognized by any shareholder in the expatriation transaction. For corporations first becoming expatriated corporations after Dec. 22, 2017, the excise tax on stock compensation in an inversion is increased from 15% to 20%. (Code Sec. 4985(a)(1), as amended by Act Sec. 13604)