TCJA glitches: Lessons learned this tax season and more uncertainty to come

Many taxpayers (and accountants) are astonished by the errors in the Tax Cuts and Jobs Act (TCJA) and find themselves wondering when legislative fixes will be put in place.

Adding to the frustration is Congress’ failure to pass the traditional “extenders” legislation that retroactively extend certain tax relief provisions that expired at the end of an earlier year–in this case, 2017.

Problems with the TCJA

Passed rather quickly, the TCJA signed into law in late 2017, contains some unintentional problems that range from a lack of clarity to significant drafting errors. In some cases the problems may produce unintended and costly consequences. Here are examples of two faults with the TCJA that still need to be addressed and one that has been addressed recently:

The “retail” glitch. Retailers, restaurants and other businesses weren’t able to enjoy the 100% bonus depreciation on certain assets. Before the TCJA’s enactment, qualified retail improvement property, qualified restaurant property and qualified leasehold improvement property were depreciated over 15 years under the modified accelerated cost recovery system (MACRS) and over 39 years under the alternative depreciation system (ADS).

The TCJA classifies all of these property types as qualified improvement property (QIP) which is defined as any improvement to the interior of a nonresidential real property that’s placed in service after the building was placed in service.

Congress intended QIP that is placed in service after 2017 to have a 15-year MACRS recovery period and a 20-year recovery under the ADS. Because 15-year property is eligible for bonus depreciation, Congress also intended QIP to be eligible for that break.

Yet, the 15-year recovery period for QIP doesn’t appear in the statutory language of the TCJA, even though it’s found in the Joint Explanatory Statement of Congressional Intent. Until technical corrections are made, therefore, QIP has a 39-year MACRS recovery period, making it ineligible for bonus depreciation.

In late March 2019, a bipartisan bill that would fix the error was introduced in the U.S. House of Representatives. The Restoring Investment in Improvements Act mirrors bipartisan legislation introduced in the Senate in mid-March. But many Democrats in Congress haven’t supported this and other TCJA fixes, due to their complaints about how the law was enacted. Some lawmakers advocate tying such fixes to other tax code changes that might otherwise come up short on the votes necessary for passage.

In the meantime, taxpayers who have invested in QIP might consider cost segregation studies which allows owners to maximize depreciation deductions.

(You’ll find a list of tax-related limits for Section 179, QBI and others on our website)

Effective date glitch for the NOL deduction. The TCJA implemented several changes to deductions for net operating losses (NOLs) including taking deductions to 80% of taxable income which eliminates most NOL carrybacks and allows unlimited carryforwards (vs. 20 years under prior law).

The statutory text states that changes to carrybacks and carryforwards apply to NOLs arising in taxable years ending after December 31, 2017 — but the Conference Report says they apply to NOLs arising in taxable years beginning after December 31, 2017. The statute and the report agree that the 80% limitation applies to losses arising in taxable years beginning after December 31, 2017. Because statutory language controls, a mismatch now exists between the effective dates for the 80% limitation and the changes to NOL carrybacks and carryforwards.

Congress’s Joint Committee on Taxation has confirmed that all of the changes should apply to NOLs in tax years beginning after 2017 but states that technical corrections may be necessary (currently no correcting legislation has been introduced in Congress).

The “grain” glitch. Problem solved.  An error in the Section 199A deduction for pass-through entities incentivized farmers to sell their crops to cooperatives, rather than to private businesses. The deduction typically is referred to as the qualified business income (QBI) deduction, but Sec. 199A actually had two parts — one for QBI and one for qualified cooperative dividends (QCD).

The QBI deduction was based on the net amount of business income, but the QCD was based on the gross amount of sales. In addition, the QCD deduction wasn’t subject to the same limitations as the QBI deduction (for example, the wage limit and income-related phaseouts).

In other words, the deduction for sales to co-ops was more generous than the deduction for income from sales to businesses. In some circumstances, farmers could have avoided income taxes altogether.

But the appropriations bill President Trump signed on March 23, 2019, includes a section addressing this problem including:

• Eliminating the QCD concept, leaving farmers with the same QBI deduction as other pass-through businesses have, subject to the same limitations.
• Reviving the former Sec. 199 domestic production activities deduction for cooperatives, allowing a deduction of 9% of the qualified production activities (limited to 50% of the W-2 wages of the cooperative), which generally is passed through from the cooperative to its members.

Potential tax extenders

Congress enacts many temporary income tax provisions which results needing to routinely temporarily reauthorize some provisions before or after they expire.

The Tax Extender and Disaster Relief Act of 2019 resulted in:

• New Energy-Efficient Home Credit ($1,000 or $2,000 per home for eligible manufacturers of qualified energy-efficient residential homes),

• Exclusion from gross income of discharge of qualified principal residence debt (up to $2 million for married couples filing jointly and $1 million for other taxpayers),
• Mortgage insurance premiums deduction (phasing out for taxpayers with adjusted gross income over $100,000 or, if married filing separately, $50,000),
• Deduction for qualified tuition and related expenses (up to $4,000 per year subject to income limitations), and
• Empowerment zone tax incentives, including tax-exempt bond financing, a wage credit, accelerated depreciation on qualifying equipment and capital gains tax deferral in designated geographic areas.

You’ll find a list of tax-related limits for Section 179, QBI and others on our website.

From uncertainty to lack of Congressional action, learn how the TCJA created mixed results for taxpayers. Watch for updates about tax law changes on our website or learn more about our tax services.