Recent Tax Law Change Cautions

 

There were numerous public laws enacted in 2015 changing our federal tax system. The largest in terms of number of change (over 130) is Public Law 114-113 (12/18/15). See basics and links in my 1/10/16 post. That's a lot of changes.  There are a variety of effective dates including many that are retroactively effecting back to 1/1/15. Did we need all of these changes? I don't think so.  Or at least not all at once. 

I want to note a few cautions based on what I've learned from reading this and thinking about it for the past several weeks.  I've been covering many of these updates in update presentations I've been making for the past few weeks.

This is not all of the cautions.  Please comment to this post if you have more to offer.

• Look at the legislative language (go to Division P and Q) and Joint Committee on Taxation explanation to get the real understanding of the change. As noted in my 1/10/16 post, some quick summaries implied that the Section 25D residential energy credit was extended to 2021. That is an overstatement as only two items from the five items at this section were extended. The other three continue to expire at the end of 2016 as was the case before PL 114-113. See the 1/10/16 post for a track change version of Section 25D.
• At least one change required quick action.  If you have a 529 qualified tuition plan and in 2015 you paid for a qualified expense, such as tuition, but got all or part of it refunded, you have 60 days after 12/18/15 (that should be 2/16/16) to return it to your 529 plan to avoid taxability of it. Going forward you'll have a 60 day period to rollover the refund. Click here to see a track changes version of the changes to Section 529 qualified tuition programs.
• There are significant changes to bonus depreciation and Section 179 expensing. Take a careful look to determine if property (personal or real) might fall under both and what only falls under one. Still, bonus is only for new assets (original use with the taxpayer) and Section 179 applied to qualified used or new property. But there are also differences between 2015 and beyond 2015 as well as for leased property. And don't forget about the de minimis safe harbor election at Reg. 1.263(a)-1(f).
• The temporary provision allowing an individual age 70 1/2 or older to transfer up to $100,000 from her IRA directly to a qualified charity and omit the income and the donation from her tax return was made permanent (Section 408(d)(8) - qualified charitable distribution). Be cautious in doing this.  Notice 2007-7 and Pub 590-B (see page 13) and the legislative history to the Pension Protection Act of 2006 (which was the originating legislation) stress that the rules for charitable contribution deductions must be followed. Here an excerpt from the 2006 legislation (PL 109-280; 8/17/06):  “exclusion applies only if a charitable contribution deduction for the entire distribution otherwise would be allowable (under present law), determined without regard to the generally applicable percentage limitations. Thus, for example, if the deductible amount is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion is not available with respect to any part of the IRA distribution.”
  I believe that means you can have a very bad result if you don't do the charitable contribution part correct. Let's say an eligible person transfers $100,000 but does not get the required "contemporaneous written acknowledgement" from the charity prior to filing the return. The result is that the individual must report the $100,000 of income and doesn't get a charitable contribution deduction!  It would be good to see a draft of the letter before making the contribution and be sure you get it before filing the return and be sure it meets the requirements of Section 170(f)(8) and Reg. 1.170A-13(f).
• Watch the effective dates. There are several, such as the ability for small businesses to use the research credit against payroll tax or AMT, that are effective for tax years beginning after 12/31/15. However, when you read the Code section, that does is not in the text of the law. Thus, you might think it applies on your 2015 return. Similar issues occur to some of the bonus depreciation changes.  Again, check the legislative language or the Joint Committee on Taxation summary. 

Our tax law became more complicated with PL 114-113, but that's true of every law we've seen in the past 20+ years (post a comment if you know of a law that simplified the federal tax law in the past twenty years). While we tend to like special deductions and credits and exemptions, they make the law more complex.

What do you think?  Any other cautions you have to offer?

Is tax reform on or off? Odd activities in the House last week

Last week, the House Ways and Means passed H.R. 4718 to make 50% bonus depreciation permanent (it expired after 12/31/13). This is in stark contrast to Congressman Camp's tax reform proposal of February 2014 that calls for straight-line depreciation (rather than accelerated) and longer lives, as a way to pay for a 25% corporate tax rate. The Joint Committee on Taxation estimates the cost over 10 years is $263 billion (JCX-63-14). H.R. 4718 does not include any revenue offset.

It is unlikely that this bill will be passed by the Senate given the cost and that it is not revenue neutral. Even if revenue were found, I think more politicians would rather use the revenue from converting slowing down depreciation to lower the corporate and individual tax rates.*  The lower rates would also benefit all businesses while more favorable depreciation favors capital intensive business over labor intensive ones.

 

Other bills were also acted upon at the May 29 markup hearing.

 

What do you think?

 

* Depreciation is a timing item.  Slowing down depreciation is only a revenue raiser because it is measured over 10 years rather than infinity.

Continued bonus depreciation or tax reform?

One of the 57 federal tax provisions that expired at the end of 2013 was 50% bonus depreciation. That has been a temporary provision for several years, primarily aimed at helping economic recovery. It's also been a generous provision (it was even 100% for a few years). With 50% bonus depreciation, a business claims depreciation on new equipment in the year it is placed in service equal to 50% of the cost + normal depreciation on the balance. If the company was also eligible for Section 179 expensing, it would first claim $500,000 and then take 50% of the balance and then normal depreciation on the balance.

Temporary tax provisions are often renewed well after they expire. These temporary provisions all "cost" money because they result in reduced tax collections. To be extended in a revenue neutral bill, Congress has to find "offsets" - other tax increases or spending cuts.

Some of these temporary provisions, such as bonus depreciation, are for economic stimulus.  Isn't the economic downturn over?  Some of the provisions are to serve a specific purpose, such as encouraging hiring of certain workers or buying certain energy efficient equipment.  Do we have data on whether these provisions met their goals?

How does possible extension tie with calls for comprehensive tax reform where tax rates are lowered and the base broadened?  One easy way to help broaden the base would be to let the temporary provisions that expire remain expired!  After all, it is difficult enough to remove or cut back permanent tax preferences; it's easy to let the expired ones stay that way.

So far as bonus depreciation, I think any effort to extend it calls into question just how serious elected officials are to lower the corporate tax rate or engage in comprehensive tax reform.  One significant way to pay for a lower corporate tax rate would be to slow down depreciation.  And that has been proposed - including in the past few weeks by Senator Baucus, Chair of the Senate Finance Committee. His tax reform discussion draft on cost recovery calls for moving from MACRS to asset pools for depreciation, extending the life of buildings from 39 to 43 years and extending the life of intangibles from 15 to 20 years (among other changes). In 2011, the Joint Committee on Taxation suggested that about 70% of the cost to lower the corporate rate from 35% to 28% would come from converting from MACRS to the slower Alternative Depreciation System (ADS)  That's because other changes, such as repeal of LIFO, don't generate enough dollars to fund any significant drop in the corporate rate.

So, let's see what happens with any discussion of extending any of the provisions that expired in December 2013, particularly the 50% bonus deprecation and shorter life for certain assets such as race horses and leasehold improvements.  If they get extended, should we just drop the thought that we'll see revenue neutral comprehensive tax reform with lowered rates in the near future?

What do you think?