Guest Blog Post: Individual Tax Extenders Included in the Bipartisan Budget Act of 2018

By:
Mark H. Levin, CPA, M.S. (Taxation)
Published Date:
Mar 9, 2018

STORY No. 1

On Feb. 9, 2018, President Trump signed the Bipartisan Budget Act of 2018 as P.L. 115-123 (the Budget Act). Division D, Title 1, of the Budget Act enacts many of the long-awaited extenders of provisions that expired at the end of 2016. Some of these provisions are extended only for the tax year 2017, while others are extended for multiple years.

Due to the extremely late enactment of these extenders, the Internal Revenue Service (IRS) will have to designate some way to input these items on the various tax forms.  While the IRS has included some “reserved” lines on these forms, some items may have to be entered in more creative ways.

Special care must be taken when preparing taxpayers’ 2017 tax returns, as provisions for many of these extenders are not clearly labeled or provided for on the 2017 tax forms.

Taxpayers who have already filed their 2017 tax returns, for whom these extenders apply, may have to file amended returns in order to avail themselves of any tax benefits provided by these extenders.

This article discusses those extenders that, in the author’s opinion, will have the greatest impact for CPAs.

Tax Relief for Families and Individuals (Subtitle A)

The ability to exclude a discharge of residential mortgage indebtedness from gross income

The Budget Act extends the exclusion from gross income of a discharge of qualified principal residence indebtedness through 2017. § 40201(a), amending Internal Revenue Code (IRC) § 108(a)(1)(E). The act also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged pursuant to a binding written agreement entered into in 2017. § 40201(b).

The deduction for mortgage insurance premiums

The Budget Act extends the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2017.  § 40202(a), amending IRC § 163(h)(3)(E)(iv)(I). This deduction phases out ratably for taxpayers with adjusted gross income of $100,000 to $110,000.

The above-the-line deduction of up to $4,000 for higher education expenses

The Budget Act extends the above-the-line deduction for qualified tuition and related expenses for higher education through 2017. § 40202(a), amending IRC § 222(e). The deduction is capped at $4,000 for an individual whose adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).

Incentives for Growth, Jobs, Investment, and Innovation (Subtitle B)

Extension of classification of certain race horses as 3-year property

The Budget Act extends the 3-year recovery period for race horses to property placed in service during 2017. § 40304(a), amending IRC § 168(e)(3)(A)(i).

Extension of 7-year recovery period for motorsports entertainment complexes

The Budget Act extends the 7-year recovery period for motorsport entertainment complexes to property placed in service during 2017. § 40305(a), amending IRC § 168(i)(15)(D).

Extension of special expensing rules for certain film, television, and theatrical productions

The Budget Act extends the special expensing provision for qualified film, television, and theatrical productions through 2017. § 40305(a), amending IRC § 181(g). In general, only the first $15 million of costs may be expensed

Extension of empowerment zone tax incentives

The Budget Act extends the tax benefits for businesses and employers operating in empowerment zones through 2017. Empowerment zones are economically distressed areas, and the tax benefits available include tax-exempt bonds, employment credits, increased expensing and gain exclusion from the sale of certain small-business stock.  § 40311(a), amending IRC § 1391(d)(1)(A)(i).

Incentives for Energy Production and Conservation

The $500 energy-efficient home improvements tax credit

The Budget Act extends the credit for purchases of nonbusiness energy property through 2017. § 40401(a), amending IRC §25C(g)(2). The provision allows a credit of 10 percent of the amount paid or incurred by the taxpayer for qualified energy improvements, up to $500.

Extension and modification of credit for residential energy property

The Budget Act extends the credit for residential energy-efficient property for all qualified property placed in service prior to 2022, subject to a reduced rate of 26 percent for property placed in service during 2020, and 22 percent for property placed in service during 2021. § 40402(a), amending IRC § 25D(h). This provision is effective for property placed in service after 2016.

Extension of credit for new qualified fuel cell motor vehicles

The Budget Act extends the credit for purchases of new qualified fuel cell motor vehicles through 2017. § 40403(a), amending IRC § 30B(k)(1). The provision allows a credit of between $4,000 and $40,000, depending on the weight of the vehicle, for the purchase of such vehicles.

Extension of credit for alternative fuel vehicle refueling property

The Budget Act extends the credit for the installation of nonhydrogen alternative fuel vehicle refueling property through 2017. § 40404(a), amending IRC § 30C(g). (Under current law, hydrogen-related property already is eligible for the credit.) Taxpayers are allowed a credit of up to 30 percent of the cost of the installation of the qualified alternative fuel vehicle refueling property.

The 2-wheel plug-in electric vehicle credit

The Budget Act extends through 2017 the 10 percent credit for two-wheeled plug-in electric vehicles through 2017. § 40405(a), amending IRC § 30D(g)(3)(E)(ii). The credit is capped at $2,500.

Extension of second-generation biofuel producer credit

The Budget Act extends the credit for production of cellulosic biofuels through 2017. § 40406(a), amending IRC § 40(b)(6)(J)(i).

Extension of biodiesel and renewable diesel incentives

The Budget Act extends the existing $1.00 per gallon tax credit for biodiesel and biodiesel mixtures, and the small agro-biodiesel producer credit of 10 cents per gallon, through 2017. The act also extends the $1.00 per gallon production tax credit for diesel fuel created from biomass through 2017. § 40407(a), amending IRC § 40A(g). In addition, it extends through 2017 the fuel excise tax credit for biodiesel mixtures. §40408(a), amending IRC §§ 6426(c)(6) and 6427(e)(6)(B).

Extension of credits with respect to facilities producing energy from certain renewable resources

The Budget Act extends the production tax credit (PTC) for certain renewable sources of electricity to facilities for which construction had commenced by the end of 2017. § 40409(a), amending IRC § 45(d).

Extension of credit for energy-efficient new homes

The Budget Act extends the tax credit for manufacturers of energy-efficient residential homes through 2017. § 40410(a), amending IRC § 45L(g). An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria

Extension and phase-out of the geothermal and small-wind residential energy credits

The Budget Act generally coordinates the expiration dates and phase-out schedules for different types of energy properties through 2022. § 40411(a), amending IRC §§ 48(a)(3)(A)(1) and 48(a)(3)(A)(2). The 30 percent investment tax credit (ITC) for solar energy, fiber-optic solar energy, qualified fuel cell and qualified small-wind energy property is available for property the construction of which begins before 2020 and is then phased out for property the construction of which begins before 2022. § 40411(b), adding new IRC § 48(a)(7), and § 40411(c), amending IRC § 48(c)(1)(D). Additionally, the 10 percent ITC for qualified microturbine, combined heat and power system, and thermal energy property is made available for property the construction of which begins before 2022. § 40411(d), amending IRC § 48(c)(2)(D); § 40411(e), amending IRC § 48(c)(3)(A)(iv); and § 40411(f), amending IRC § 48(c)(4)(C).

Extension of special allowance for second-generation biofuel plant property

The Budget Act extends through 2017 the 50 percent bonus depreciation for cellulosic biofuel facilities. § 40412), amending IRC §168(l)(2)(D).

Extension of energy-efficient commercial buildings deduction

The Budget Act extends the deduction for energy efficiency improvements to lighting, heating, cooling, ventilation and hot water systems of commercial buildings through 2017. § 40413 amending IRC §179D(h).

Miscellaneous Provisions

Form 1040SR for seniors

The Budget Act requires that the IRS publish a simplified income tax return form designated as Form 1040SR, for use by persons who are age 65 or older by the close of the taxable year. The Form 1040SR is to be as similar as possible to Form 1040EZ.  The use of Form 1040SR is not to be restricted based on the amount of taxable income to be shown on the return, or the fact that the income to be reported for the taxable 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. § 41106(a). This provision is effective for taxable years beginning after Feb. 9, 2017. § 41106(b).

Attorney fees and court costs relating to awards to whistleblowers

The Budget Act allows an above-the-line deduction for attorney fees and courts costs paid by, or on behalf of, a taxpayer in connection with any action involving a claim under state false claims acts, the Securities and Exchange Commission whistleblower program, and the Commodity Futures Trading Commission whistleblower program. § 41107(a), amending IRC § 62(a). The provision would be applicable in to taxable years beginning after Dec. 31, 2017.  § 41107(b).

Modification of rules governing hardship distribution

The Budget Act directed the Secretary of the Treasury to modify the applicable regulations by Feb. 8, 2018 (§ 41113(a)) to:

(1) Delete the requirement prohibiting an employee from making elective deferrals and employee contributions for six months after the receipt of a hardship distribution in order for the distribution to be deemed necessary to satisfy an immediate and heavy financial need (§ 41113(a)(1), amending IRC §1.401(k)–1(d)(3)(iv)(E)); and

(2) Make any other modifications necessary to carry out the purposes of the rule allowing elective deferrals to be distributed in the case of hardship. § 41113(a)(2).

Thus, under the modified regulations, an employee, after receiving a hardship distribution, would not be prevented for any period after receiving such hardship distribution from continuing to make elective deferrals and employee contributions. The regulations as revised by the provision shall apply to plan years beginning after Dec. 31, 2018. § 41113(b).

Modification of rules relating to hardship withdrawals from cash or deferred arrangements

Under current law, defined contribution plans are generally not permitted to allow in-service distributions attributable to elective deferrals if the employee is less than 59½ years old. One exception is for hardship distributions, which plans have the option of offering to participants. Hardship distributions previously allowed only for amounts actually contributed by the employee and did not include account earnings or amounts contributed by the employer. The Budget Act permits employees to choose to allow hardship distributions to also include account earnings and employer contributions. § 41114(a), adding new IRC § 401(k)(14) and amending IRC § 401(k)(2)(B)(i)(IV). The provision would be effective for plan years beginning after 2018.

Tax home of certain citizens or residents of the United States living abroad

At the election of the individual, IRC § 911 excludes from gross income certain foreign earned income of the individual. In order to receive such exclusion, the individual must have a “tax home” outside the United States. Under the Budget Act, if an individual is serving in an area designated by the president as a combat zone, then such individual has a tax home outside the United States. § 41116(a) amending IRC § 911(d). This provision is effective for taxable years beginning after Dec. 31, 2017. § 41116(b).

Mark H. Levin, CPA, M.S. (Taxation) is adjunct assistant professor of accounting & taxation at the School of Business & Information Systems, Department of Accounting & Finance, York College, CUNY.

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