TCJA Reference to 1944 Law Regarding SALT Cap is Now Online

Santa Clara County Law Library - great place and free - has the 1944 Cumulative Bulletin!

In describing the new $10,000 deduction limit for personal state and local taxes that was added by the Tax Cuts and Jobs Act (P.L. 115-97; 12/22/17), the committee report at footnote 168 refers to a page from the 1944 Cumulative Bulletin (CB) regarding a 1944 law change. To help understand what they were getting at, I recently tracked down that 1944 page.

This is a reminder of a few things. First, not everything is on the Internet.  While there might be a copy of the 1944 legislation available on an online database somewhere, likely not for free access (I could not find it). But the CB is really needed because footnote 168 refers to a specific page for its support of a statement about the present law (pre-TCJA law). I pulled the CB from where the Santa County Law Library (free to public) stores its old government publications (in the attic!) (Note: the photo above shows first and second floors, there really is an attic above that.)

But - now that page from the CB is on the Internet - click on Section 164 from this 1/2/18 post where I have links to a few track changes versions of Code sections changed by the TCJA. The Section 164 link will also take you to the committee report.

Second, the 1944 law is a reminder that when Congress created the concept of Adjusted Gross Income (AGI) in 1944, they described where state and local taxes are deducted (for or from AGI). For property taxes paid by your sole proprietor business for example, they are deducted for AGI because they are paid and imposed directly on the business. In contrast, state income taxes imposed on that business are deducted from AGI as they are remotely connected to the business income. Basically, I think the concept is that when an individual calculates their state income taxes that calculation involves all of their income, various deductions, exclusions and credits. How much of that state income tax is attributable to the business income?

This is why for decades, state income taxes go on Schedule A rather than splitting it among other schedules, such as C, E, and F. In contrast, property taxes paid by a business, partnership or farm are deducted above the line (as part of one of these schedules).

This was also an issue after the Tax Reform Act of 1986 when tax prep fees became subject to the 2%-of-AGI threshold. People asked - what about the tax prep fee attributable to my Schedule C sole proprietor business? Despite the treatment of state and local income taxes, the IRS determined that the tax prep fee could be allocated (see Rev. Rul. 92-29).

Also, old IRS rulings determined that in calculating a net operating loss (NOL), the state and local income taxes attributable to business income can be part of that NOL (Rev. Rul. 70-40). Thus, there are ways to measure that (there are ways to measure most things).

The $10,000 state and local income cap (also referred to as the SALT cap), is in the law from 2018 through 2025. The House Ways and Means Committee voted to make it permanent, along with other temporary individual provisions including the reduced tax rates), on 9/13/18 (HR 6760). It is unlikely the Senate will vote on this as it would take 60 votes there to pass.

Final point while I'm talking about the $10,000 SALT cap, why not change the law to allow individuals to deduct their state and local income taxes attributable to their business income above the line?  Certainly with the $10,000 cap, this seems like the right thing to do. After all, corporations don't have a cap on their state and local income tax deduction, why should individuals operating a business outside of the corporate form have a limitation. And even without the cap, deducting for AGI makes sense because not all business owners itemized.  The AICPA recommended this change while the TCJA was being discussed in Congress (which was the first time the SALT cap came up) (see item 4 in this 11/2/17 letter to Congress and this 11/13/17 letter and 11/10/17 letter).

What do you think?

Smart 401(k) Plan to Help Employees with Student Loans

In PLR 201833012 (8/17/18), employer (T) sought a ruling from the IRS on whether it was permissible to amend its defined contribution 401(k) plan to allow T to make a nonelective contribution for an employee if that employee makes a student loan repayment (SLR). The option would be voluntary. The plan already included T matching contributions equal to 5% of the employee’s eligible compensation for the pay period.

Participating employees could still make elective contributions but could not receive regular matches on such contributions. T sought a private ruling from the IRS to be sure the planned amendment did not violate the “contingent benefit” prohibition at §401(k)(4)(A) and Reg. 1.401(k)-1(e)6). The IRS found no problem with the plan.

The IRS found that the plan did not violate any of the 401(k) rules.

While private letter rulings (PLRs) do not state the taxpayer's name, a taxpayer can volunteer such information. That is the case here and Abbott says it is their plan and ruling (6/26/18 press release). They call it the Abbott Freedom 2 Save Plan. 

Per Abbott, if an eligible part-time or full-time employee contributes 2% of their eligible compensation towards paying down their student loans, they receive Abbott’s 5% match into their 401(k) plan and do not need to make a contribution on their own. Abbott’s press release gives an example of an employee accumulating $54,000 in their 401(k) plan after ten years assuming a salary of $70,000 with 3% increases annually. (Also see Abbott’s infographic.)

Abbott started the plan because it found employees not contributing to plans because of their need to make payments on their student loans. Abbott employees appear to potentially have significant student debt as the company notes that most of its employees have colleges degrees and about one-third of the 1,000+ people under age 35 hired in 2017 had a doctorate degree and about the same had a master’s degree.

In 2016, the ERISA Industry Committee (ERIC) issued a press release (10/18/16) that it had asked Congress to “adopt legislation to support employers as they develop programs that assist their employees in both repaying student loans and saving for retirement.”

President Trump's Executive Order 13847 (8/31/18) on Strengthening Retirement Security in America calls for efforts to “expand access to workplace retirement plans for American workers.” Per the BLS, 23% of private-sector, full-time employees and 34% of part-time ones do not have access to a retirement plan from their employer. Complexity of plans for small employers is noted as an obstacle, as well as costs and risks of not properly following numerous rules. A key solution proposed to be explored by the Department of Labor is expanding access to multiple employer plans (MEPs).

The EO also calls for updating life expectancy and distribution period tables for required minimum distributions (RMDs) and determining how often they should be updated.

Queries:

• The PLR only applies to the taxpayer who requested it (Abbott). Will the IRS issue binding guidance applicable to all taxpayers with the same holding to provide assurance to other employers who make similar changes? The cost to obtain a letter ruling is $28,300!

• Will EO 13847 lead to other modernizations to retirement plans to let them reflect the ways we live and do business in the 21st century? For example, why not have retirement plans that tie to the worker rather than the employer? With a growing gig economy and workers changing jobs frequently, why not let them have a single plan of their own to contribute to and have employers contribute to within specified rules? With technology, this would not be difficult.

What do you think? What are new solutions to improve retirement savings and to help people pay down their student loans (or not to have such large debts in the first place)?

199A Fiscal Year Clarification In the Prop Regs

On August 8, the IRS released the long-awaited proposed regulations on Section 199A, the 20% qualified business income deduction added by the Tax Cuts and Jobs Act last December. The double-spaced version including preamble is 184 pages long! It's only 47 pages in the Federal Register's smaller print.

The proposed regulations answer many questions, but leave several lingering. For example, is QBI reduced by the taxpayer's deduction for half of self-employment tax (I think it is) and retirement plan contributions (not sure). But these are significant questions that affect the vast majority of individuals who will claim this new deduction.

One area clarified, but a bit buried in the regs, is how the new deduction applies to eligible owners of a fiscal  year partnership, such as one with a year ending June 30, 2018. Section 199A is effective for tax years beginning after 12/31/17. So, does the partner consider all of the income for the complete year ended 6/30/18 for the §199A deduction or only six months.  The statute and committee report seem to indicate the entire year (see my 3/15/18 article explaining this).

Well, the proposed regulation confirms that approach. Prop. Reg. §1.199A-6(e)(2)(ii) (pages 180-181 of the proposed regs) and page 81 are the sources. But, this is a proposed regulation which generally is not effective until issued as a final regulation. The preamble states though that "taxpayers may rely on the rules set forth in proposed §§1.199A-1 through 1.199A-6, in their entirety, until the date a Treasury decision adopting these regulations as final regulations is published in the Federal Register" (page 80).

So, some fiscal year partnerships (and any S corps not on a calendar year), likely need to do some additional computations for their year ending in 2018 to get the appropriate information to owners so they can do their §199A computation.

What do you think? What have you found interesting about the §199A regs?

Disaster tax relief for California wildfires - links

On 8/6/18, the IRS announced tax relief for victims of the  northern California wildfires (and here). IRS also has information on dealing with due dates and qualifying for tax relief at its disaster relief website.

The IRS posts a lot of information on dealing with disasters, when alternative due dates apply and what they are, and more.

Also see links from my post on 2017 disasters which also includes links on AICPA materials and those from Gerard Schreiber, CPA, an expert on tax rules on disasters.

Form 4684, Csualties and Thefts, and instructions.

Information from the California Franchise Tax Board (FTB).

Charitable donations above the line?

H.R. 5771 proposes to make the charitable contribution deduction one for AGI rather than an itemized deduction. This is not a new idea, but one that affects more individuals because the Tax Cuts and Jobs Act changes mean that rather than 30% of individuals itemizing, only about 13% will itemize. Of course, among those itemizers are many big donors.

The Tax Policy Center estimates that the change will reduce donations for 2018 by about 5%. The Joint Committee on Taxation estimates that the "cost" of the charitable contribution deduction for 2018, claimed by about 16.4 million individuals is $41 billion (JCX-34-18, page 49). For 2017, the estimate was 35.8 million individuals claiming it at a cost of $58 billion (JCX-3-17, page 45). Part of the drop in "cost" is due to rate reductions, but most is due to more people claiming the standard deduction. This JCT data is not a good indicator of change in donations because many newly claiming the standard deduction may very likely continue to give as much as they did before.

The "cost" of an above-the-line deduction would be significant as many people donate to charity including those who always itemize. Should the deduction be available to everyone? Would a credit be better? A credit would be worth the same to all taxpayers. A deduction is worth a lot more to those in higher tax brackets. For example, someone donating $1,000 who is in the 37% bracket is only out of pocket $630 after taxes. In contrast someone in the 12% bracket is out of pocket $880.  Or put another way, all taxpayers are providing a greater subsidy to higher bracket donors.

A challenge with the charitable contribution is that the benefit not only goes to the donor, but to the charities they chose to support. Do people at all income levels support the same charities? Probably not (a good area for some study - let me know if you've seen such a study).

What about modifying H.R. 5771 to only allow a deduction to the extent it exceeds 3% (or some other percentage) of your modified AGI where that term is defined as AGI before the donation and with tax-exempt interest and various exclusions such as for foreign-earned income added back?  This won't cost as much (meaning we might not have to have a rate increase to pay for the change) and recognizes that giving some percentage of your before-tax income is expected, but if you give above that amount, you'll get a tax break.

Not perfect because not everyone can estimate their income well enough to know if they should be keeping records of donations because they might exceed the threshold, but certainly not as complex as many other tax rules that exist.

What do you think?