7th Anniversary of Tax Cuts and Jobs Act Enactment

P.L. 115-97, An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, commonly known as the Tax Cuts and Jobs Act (TCJA), was signed into law on December 22, 2017. It had many changes including significant ones such as a permanent change from a progressive corporate rate structure of 15% to 35% to a flat 21% on a permanent basis. Most of the 160 million individual filers got a tax reduction but on a temporary basis for 2018 through 2025 due to a drop in where tax rates begin, almost doubling of the standard deduction and a $2,000 rather than $1,000 child tax credit.

Most of the individual tax cuts and tax increases were only put into the TCJA for 2018 through 2025. That is, the TCJA had expiration dates for many tax cuts and tax increases (such as the $10,000 SALT cap and disallowance of a deduction for home equity interest). It also had built-in tax increases with significant ones affecting businesses already in effect such and capitalizing R&D rather than expensing it and phasedown of 100% bonus depreciation.

I have a list of the temporary provisions as well as the tax increases that have already started and ones to start after 2025 at the end of this post.  I also have track changes for some of the TCJA changes from this January 2018 blog post.

While we are hearing a lot about extending the individual and estate tax cuts, there are non-TCJA provisions that expire at the end of 2025 including the Work Opportunity Tax Credit, New Markets Tax Credit and enhanced Premium Tax Credit (PTC). For a list of all expiring provisions, see this JCT report issued every January - JCX-1-24 (1/11/24).

Will the expiring provisions all just be renewed including those that expired a few years ago (R&D, §163(j) formula, bonus depreciation at 100%)? Is this the best mix of tax changes for an effective tax law?  For example, the disallowance of miscellaneous itemized deduction subject to the 2%-of-AGI floor is contrary to the operation of an income tax as these include expenditures to produce taxable income such as hobby expenses (up to hobby income), investment expenses and unreimbursed employee business expenses. There are easily over 50 tax expenditures that don't belong in the tax law that could be modified or eliminated to enable for permanent lower rates and an even higher child tax credit for low-to-middle income taxpayers. These include the mortgage interest deduction, exclusion for employer-provided health insurance and other fringe benefits (these could be reduced based on income level and subject to a cap), the higher standard deduction for the elderly or tie it to income, and more.

Will we see a discussion of what changes are best for economic growth? Items other than the expiring or expired provisions?  We'll see.

What do you think?

List of expiring or expired provisions: (tax increases built into TCJA as enacted 12/22/17):

•        International Provisions:

•        tyba 12/31/25, deduction for GILTI reduced from 50% (10.5% US tax rate) to 37.5% (13.125% US tax rate)

•        tyba 12/31/25, FDII deduction reduced to 21.875% (16.406% effective tax rate on FDII) compared to 37.5% deduction (13.125% effective tax rate on FDII) for 2018 through 2025.

•        tyba 12/31/25, BEAT rate increases from 10% to 12.5%

•        BEAT = Base Erosion and Anti-Abuse Tax (§59A and Form 8991)

•        Business Provisions:

•        §174 expensing converted to capitalization and amortization for tyba 12/31/21.

•        100% bonus depreciation started to phasedown starting in 2023 (80%), continuing to no bonus in 2027.

•        §163(j) business interest expense became less taxpayer favorable starting for tyba 12/31/21. Prior to that time, add back depreciation, amortization and depreciation to adjusted taxable income (ATI) which is the limitation.  Today, don’t add it back making ATI smaller.

•        §199A Qualified Business Income Deduction ends after 2025.

•        §274(o) – no deduction for meals provided at convenience of employer including for operating facility for the meals starting for amounts paid or incurred after 12/31/25.

•        Individual Provisions:

•        It is a long list including of tax cuts and tax increases. Temporary tax cuts included the higher standard deduction, $2,000 rather than $1,000 child tax credit, lowered brackets and a few others. Temporary tax increases included disallowance of interest on home equity debt, no deduction for miscellaneous itemized deduction subject to the 2% of AGI threshold, the $10,000 SALT cap and others. See complete list from the JCT here.

A more temporary tax system

For at least the past decade, our federal tax system has had several temporary provisions. That is, rules added to the law with an expiration date. Many of these items are credits that often are not included as permanent items because they tie to economic stimulus or temporary energy needs (such as promoting alternative fuels by lowering their cost). Another reason for temporary provisions that result in less federal revenues is that they don't "cost" as much in a 10-year budget window if in existence for one or two years rather than for all ten years.

The Tax Cuts and Jobs Act (P.L. 115-97 (12/22/17) has increased the number of temporary provisions in the law. Most notably, most of the individual tax cuts, such as lower rates, a higher standard deduction and child credit, as well as lost deductions such as interest on home equity debt and casualty/theft losses, are only in the law for eight years (2018 through 2025).

Each January, the Joint Committee on Taxation (JCT) publishes a list of all temporary provisions and when they expire. Below I have a summary of the number of expiring provisions identified in their January 2017 report and the one issued in January 2018.

Year	2017 JCT Report	2018 JCT Report
2016	36	34*
2017	2	1**
2018	1	3
2019	10	9
2020	1	1
2021	4	3
2022	2	2
2023	1	1
2024	0	0
2025	1	23
2026	0	2
2027	0	1
TOTAL	58	80

As you can see, we go from 58 temporary provisions last year to 80 temporary ones today. Also, the number is really higher each year because the JCT combines some similar items, such as various empowerment zone tax incentives.

Missing Item: I think the number for the 2018 report is missing at least one new temporary item.  P.L. 115-97 provides that for tax years beginning after 12/31/22, taxpayers may no longer follow Code section 174(a) on expensing of R&D expenditures. Instead, such costs must be capitalized and then amortized over 5 years (15 years for foreign research). Thus, I think we really have 4 temporary items expiring in 2021 because section 174(a) should have been included.  Also, I expect that Congress will find a way for this capitalization provision to never go into effect. Favorable treatment of R&D expenditures should be in our tax law for a few reasons: simplification, incentivizing R&D, and international competitiveness.  So, why did Congress add a provision that harms economic growth?  Likely to help generate revenue to help reach the $1.5 trillion cost of tax reform without going over that amount.

What do you think?

*Includes section 199(d)(8) for certain Puerto Rico benefits. P.L. 115-97 repeals section 199 effective for tax years beginning after 12/31/17, so this temporary item is only relevant for possibly seeing Congress renew it for 2017. An item removed from the 2016 for the 2018 report is the 7.5% threshold for deducting medical expenses for individuals age 65 or over. It got moved to the 2018 list because for 2017 and 2018, all individuals use a 7.5% threshold for both regular tax and AMT.

**Airport excise taxes were renewed one year by 2017 legislation (so got moved to the 2018 list for the 2018 JCT report.

PATH and Many Tax Changes - PL 114-113

Big drama as 2015 ended was for Congress to fund the government for the 2016 fiscal year, extend the 50+ tax provisions that expired at 12/31/14, and make numerous other tax changes. The extenders part of P.L. 114-113 (12/18/15) includes 126 changes with several being multi-part changes (for example, making Section 179 permanent with additional changes to it). The extenders part of the legislation is called PATH - Protecting Americans from Tax Hikes.

I have a document here that you may find helpful. It includes:

• Links to P.L. 114-113 and PATH documents
• Section 179, Election to expense certain depreciable business assets - showing the changes via track changes
• Section 25D, Residential energy efficient property - showing the changes via track changes

I include the track changes format because it often really helps in seeing the specific changes. For example, some brief updates may note that the Section 25D credit was extended and phases out in later years. This credit was already in existence through 2016 before PATH.  PATH extends 2 of the 5 credits of Section 25R past 2016 and phases them out through 2021.  See my pdf document for the details.

I'll have more on the relevance of all of these changes to tax reform soon.

What do you think about all of the changes?

Over 50 provisions retroactively extended on 12/19/14

On December 31, 2013, 57 provisions in the federal tax law expired. Many had expired before and been renewed.  While there was discussion in the congressional tax committees since at least April 2014, as well as votes, no consensus was reached until early December. The House passed the bill - H.R. 5771, the Tax Increase Prevention Act, on December 3 by 378-46. On December 16, the Senate passed it by a vote of 76-16. On December 19, President Obama signed the bill. The Joint Committee on Taxation estimates the cost of H.R. 5771 for one year as about $81 billion, but only $42 billion for ten years (because some of the items, such as bonus depreciation involved timing of deductions).

The extension means, for example, that if a business purchased new equipment in the first 50 weeks of 2014 not expecting to be able to claim 50% bonus depreciation on it (because that rule expired 12/31/13), they get the gift of extra depreciation for 2014.  This is contrary to the primary purpose of bonus depreciation which is to encourage businesses to buy new equipment.

The late extension, for just one year, also means that at 1/1/15, they are all gone again.

This is an odd way to design a tax system. When something is added temporarily, such as to help get out of an economic recession, it should be allowed to expire when the need no longer exists.  If another provision is deemed appropriate for a tax system, such as allowing individuals who itemize to deduct either their sales tax or their income tax (assuming there is even a reason to deduct either), make it a permanent part of the system.

Will the needed analysis of these extenders occur in 2015? Or will we reach the end of 2015 with a repeat of what happened this year?

What do you think?


[Photo is from the White House website (without the "extenders").]

The fate of expiring provisions for individuals

Senate Finance Committee hearing of 4/3/14 on extenders

Over 50 federal tax rules expired at the end of 2013 and a few more will expire in the next few years. This is not news - it is a recurring event.  Often the provisions are renewed a year or more later after expiration. That makes planning impossible and it removes the incentive effect that some of these provisions are intended to have.

I've got a short article in the 4/10/14 AICPA Tax Insider that lists all of the expired and expiring provisions relevant to individuals. An accompanying table shows:

• When the provision was originally enacted.
• How many times the rule has already been renewed.
• How it would be addressed by proposals from Senator Wyden (although prior to some amendment by the Senate Finance Committee last week), Congressman Camp's reform proposals (of February 2014) and President Obama's FY2015 revenue proposals.

The table also includes my commentary on the particular items.

I hope you'll take a look and post a comment here on what you think of letting them all expire, renewing some, or something else and why. Thank you.

Expiring provisions by the numbers

Data from the White House

We hear a lot about expiring tax cuts. That would be cuts enacted in 2001 and 2003 that were to expire at the end of 2010, but were extended for 2011 and 2012 on 12/17/10. In addition to over 30 provisions that expire at the end of 2012, there were about 60 provisions that expired at the end of 2011 and have not been renewed.  It is likely that most will be renewed as that has happened in the past and often retroactively. These include the research tax credit and the above-the-line deduction for K-12 teacher expenses.

I have a short article in the AICPA Tax Adviser today that presents many of the numbers associated with these expired and expiring provisions. These numbers include how many provisions expired or will expire and when, how long we have had these rates relative past sets of tax rates, the number of taxpayers affected by various expired or expiring provisions and the estimated costs to extend various of these provisions.

I hope you'll take a look - Expiring provisions by the numbers (9/13/12).  This is part of the "fiscal cliff" we also hear about - that in January 2013, most individuals will have higher taxes than in 2012 and required spending cuts (sequestration) takes effect. The CBO predicts it may lead to a recession.

"Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013. This month, OMB is required to report on how the required spending cuts will be accomplished (Sequestration Transparency Act of 2012, PL 112-155; 8/7/12).

So, what do you think will happen?  Will any of these 100+ expired or expiring provisions be extended before the November 6 election? will it happen in the lame-duck session?  will it wait until the 113th Congress?