[JPRT 115-2-19]
[From the U.S. Government Publishing Office]
[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
CERTAIN TAX LEGISLATION
ENACTED IN THE 115TH CONGRESS
----------
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
OCTOBER 2019
* JCS-2-19
[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
CERTAIN TAX LEGISLATION
ENACTED IN THE 115TH CONGRESS
__________
Prepared by the Staff
of the
JOINT COMMITTEE ON TAXATION
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
OCTOBER 2019
__________
U.S. GOVERNMENT PUBLISHING OFFICE
*36-999 WASHINGTON : 2019 JCS-2-19
JOINT COMMITTEE ON TAXATION
116th Congress, 1st Session
__________
SENATE HOUSE
CHUCK GRASSLEY, Iowa RICHARD NEAL, Massachusetts
Vice Chairman Chairman
MIKE CRAPO, Idaho JOHN LEWIS, Georgia
MICHAEL ENZI, Wyoming LLOYD DOGGETT, Texas
RON WYDEN, Oregon KEVIN BRADY, Texas
DEBBIE STABENOW, Michigan DEVIN NUNES, California
Thomas A. Barthold, Chief of Staff
Robert P. Harvey, Deputy Chief of Staff
C O N T E N T S
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Page
INTRODUCTION..................................................... 1
PART ONE: DISASTER TAX RELIEF AND AIRPORT AND AIRWAY EXTENSION
ACT OF 2017 (PUBLIC LAW 115-63)................................ 3
A. Aviation Revenue Provisions......................... 3
1. Extension of expenditure authority and taxes
funding Airport and Airway Trust Fund (secs.
201 and 202 of the Act and secs. 4081, 4083,
4261, 4271, and 9502 of the Code).............. 3
B. Tax Relief for Hurricanes Harvey, Irma, and Maria... 4
1. Special disaster-related rules for use of
retirement funds (sec. 502 of the Act and sec.
72 of the Code)................................ 5
2. Disaster-related employment relief (sec. 503 of
the Act and sec. 38 of the Code)............... 9
3. Temporary suspension of limitations on
charitable contributions (sec. 504(a) of the
Act and sec. 170 of the Code).................. 10
4. Special rules for qualified disaster-related
personal casualty losses (sec. 504(b) of the
Act and sec. 165 of the Code).................. 12
5. Special rule for determining earned income
(sec. 504(c) of the Act and secs. 24 and 32 of
the Code)...................................... 13
6. Application of disaster-related tax relief to
possessions of the United States (sec. 504(d)
of the Act).................................... 15
PART TWO: FOURTH CONTINUING APPROPRIATIONS FOR FISCAL YEAR 2018,
FEDERAL REGISTER PRINTING SAVINGS, HEALTHY KIDS, HEALTH-RELATED
TAXES, AND BUDGETARY EFFECTS (PUBLIC LAW 115-120).............. 17
1. Extension of moratorium on medical device
excise tax (sec. 4001 of the Act and sec. 4191
of the Code)................................... 17
2. Delay in implementation of excise tax on high
cost employer-sponsored health coverage (sec.
4002 of the Act and sec. 4980I of the Code).... 18
3. Suspension of annual fee on health insurance
providers (sec. 4003 of the Act and sec. 9010
of the Patient Protection and Affordable Care
Act)........................................... 21
PART THREE: BIPARTISAN BUDGET ACT OF 2018 (PUBLIC LAW 115-123)... 22
A. Tax Relief and Medicaid Changes Related to Certain
Disasters: California Fires........................ 22
1. Special disaster-related rules for use of
retirement funds (sec. 20102 of the Act and
sec. 72 of the Code)........................... 22
2. Employee retention credit for employers
affected by California wildfires (sec. 20103 of
the Act and sec. 38 of the Code)............... 26
3. Temporary suspension of limitations on
charitable contributions (sec. 20104(a) of the
Act and sec. 170 of the Code).................. 27
4. Special rules for qualified disaster-related
personal casualty losses (sec. 20104(b) of the
Act and sec. 165 of the Code).................. 30
5. Special rule for determining earned income
(sec. 20104(c) of the Act and secs. 24 and 32
of the Code)................................... 30
B. Tax Relief for Hurricanes Harvey, Irma, And Maria... 32
1. Tax relief for Hurricanes Harvey, Irma, and
Maria (sec. 20201 of the Act and sec. 501(a)(2)
and (b)(2) of the Disaster Tax Relief and
Airport and Airway Extension Act of 2017, Pub.
L. No. 115-63)................................. 32
C. Tax Relief for Families and Individuals............. 32
1. Extension of exclusion from gross income of
discharge of qualified principal residence
indebtedness (sec. 40201 of the Act and sec.
108 of the Code)............................... 32
2. Extension of mortgage insurance premiums
treated as qualified residence interest (sec.
40202 of the Act and sec. 163 of the Code)..... 34
3. Extension of above-the-line deduction for
qualified tuition and related expenses (sec.
40203 of the Act and sec. 222 of the Code)..... 35
D. Incentives for Growth, Jobs, Investment, and
Innovation......................................... 37
1. Extension of Indian employment tax credit (sec.
40301 of the Act and sec. 45A of the Code)..... 37
2. Extension of railroad track maintenance credit
(sec. 40302 of the Act and sec. 45G of the
Code).......................................... 38
3. Extension of mine rescue team training credit
(sec. 40303 of the Act and sec. 45N of the
Code).......................................... 41
4. Extension of classification of certain race
horses as three-year property (sec. 40304 of
the Act and sec. 168 of the Code).............. 42
5. Extension of seven-year recovery period for
motorsports entertainment complexes (sec. 40305
of the Act and sec. 168 of the Code)........... 43
6. Extension of accelerated depreciation for
business property on an Indian reservation
(sec. 40306 of the Act and sec. 168(j) of the
Code).......................................... 46
7. Extension of election to expense mine safety
equipment (sec. 40307 of the Act and sec. 179E
of the Code)................................... 47
8. Extension of special expensing rules for
certain productions (sec. 40308 of the Act and
sec. 181 of the Code).......................... 48
9. Extension of deduction allowable with respect
to income attributable to domestic production
activities in Puerto Rico (sec. 40309 of the
Act and former sec. 199 of the Code)........... 50
10. Extension of special rule relating to
qualified timber gain (sec. 40310 of the Act
and former sec. 1201 of the Code).............. 52
11. Extension of empowerment zone tax incentives
(sec. 40311 of the Act and secs. 1391 and 1394
of the Code)................................... 53
12. Extension of American Samoa economic
development credit (sec. 40312 of the Act and
sec. 119 of Division A of Pub. L. No. 109-432). 59
E. Incentives for Energy Production and Conservation... 61
1. Extension of credit for nonbusiness energy
property (sec. 40401 of the Act and sec. 25C of
the Code)...................................... 61
2. Extension and modification of credit for
residential energy property (sec. 40402 of the
Act and sec. 25D of the Code).................. 62
3. Extension of credit for new qualified fuel cell
motor vehicles (sec. 40403 of the Act and sec.
30B of the Code)............................... 64
4. Extension of credit for alternative fuel
vehicle refueling property (sec. 40404 of the
Act and sec. 30C of the Code).................. 64
5. Extension of credit for two-wheeled plug-in
electric vehicles (sec. 40405 of the Act and
sec. 30D of the Code).......................... 65
6. Extension of second generation biofuel producer
credit (sec. 40406 of the Act and sec. 40(b)(6)
of the Code)................................... 66
7. Extension of biodiesel and renewable diesel
incentives (sec. 40407 of the Act and secs.
40A, 6426(c) and 6427(e) of the Code).......... 67
8. Extension of production credit for Indian coal
facilities (sec. 40408 of the Act and sec. 45
of the Code)................................... 70
9. Extension of credits with respect to facilities
producing energy from certain renewable
resources (sec. 40409 of the Act and secs. 45
and 48 of the Code)............................ 70
10. Extension of credit for energy-efficient new
homes (sec. 40410 of the Act and sec. 45L of
the Code)...................................... 71
11. Extension and phaseout of energy credit (sec.
40411 of the Act and sec. 48 of the Code)...... 72
12. Extension of special allowance for second
generation biofuel plant property (sec. 40412
of the Act and sec. 168(l) of the Code)........ 76
13. Extension of energy efficient commercial
buildings deduction (sec. 40413 of the Act and
sec. 179D of the Code)......................... 78
14. Extension of special rule for sales or
dispositions to implement FERC or State
electric restructuring policy for qualified
electric utilities (sec. 40414 of the Act and
sec. 451(k) of the Code)....................... 80
15. Extension of excise tax credits relating to
alternative fuel (sec. 40415 of the Act and
secs. 6426 and 6427 of the Code)............... 82
16. Extension of Oil Spill Liability Trust Fund
financing rate (sec. 40416 of the Act and sec.
4611 of the Code).............................. 83
F. Modifications of Energy Incentives.................. 84
1. Modifications of credit for production from
advanced nuclear power facilities (sec. 40501
of the Act and sec. 45J of the Code)........... 84
G. Miscellaneous Provisions............................ 86
1. Modifications to rum cover-over (sec. 41102 of
the Act and sec. 7652 of the Code)............. 86
2. Extension of waiver of limitations with respect
to excluding from gross income amounts received
by wrongly incarcerated individuals (sec. 41103
of the Act and sec. 139F of the Code).......... 88
3. Individuals held harmless on improper levy on
retirement plans (sec. 41104 of the Act and
sec. 6343 of the Code)......................... 89
4. Modifications of user fees requirements for
installment agreements (sec. 41105 of the Act
and new sec. 6159(f) of the Code).............. 91
5. Form 1040SR for seniors (sec. 41106 of the Act) 92
6. Attorneys' fees relating to awards to
whistleblowers (sec. 41107 of the Act and sec.
62(a)(21) of the Code)......................... 93
7. Clarification of whistleblower awards (sec.
41108 of the Act and new sec. 7623(c) of the
Code).......................................... 94
8. Clarification regarding excise tax based on
investment income of private colleges and
universities (sec. 41109 of the Act and sec.
4968 of the Code).............................. 98
9. Exception from private foundation excess
business holding tax for independently-operated
philanthropic business holdings (sec. 41110 of
the Act and sec. 4943 of the Code)............. 100
10. Rule of construction for craft beverage
modernization and tax reform (sec. 41111 of the
Act)........................................... 103
11. Simplification of rules regarding records,
statements, and returns (sec. 41112 of the Act
and sec. 5555 of the Code)..................... 103
12. Modifications of rules governing hardship
distributions (sec. 41113 of the Act, and secs.
401(k) and 403(b) of the Code)................. 104
13. Modification of rules relating to hardship
withdrawals from cash or deferred arrangements
(sec. 41114 of the Act and sec. 401(k) of the
Code).......................................... 105
14. Opportunity zones rule for Puerto Rico (sec.
41115 of the Act and sec. 1400Z-1 of the Code). 106
15. Tax home of certain citizens or residents of
the United States living abroad (sec. 41116 of
the Act and sec. 911 of the Code).............. 110
16. Treatment of foreign persons for returns
relating to payments made in settlement of
payment card and third party network
transactions (sec. 41117 of the Act and sec.
6050W of the Code)............................. 111
17. Repeal of shift in time of payment of corporate
estimated taxes (sec. 41118 of the Act and sec.
6655 of the Code).............................. 114
18. Credit for carbon oxide sequestration (sec.
41119 of the Act and sec. 45Q of the Code)..... 115
PART FOUR: CONSOLIDATED APPROPRIATIONS ACT, 2018 (PUBLIC LAW 115-
141)........................................................... 118
A. Aviation Revenue Provisions......................... 118
1. Extension of expenditure authority and taxes
funding Airport and Airway Trust Fund (secs.
201 and 202 of Division M of the Act (the
``Airport and Airway Extension Act of 2018'')
and secs. 4081, 4083, 4261, 4271, and 9502 of
the Code)...................................... 118
B. Revenue Provisions.................................. 120
1. Modification of deduction for qualified
business income of a cooperative and its
patrons (sec. 101 of Division T of Pub. L. No.
115-141 and sec. 199A of the Code)............. 120
2. State housing credit ceiling and average income
test for low-income housing credit (secs. 102
and 103 of Division T of the Act and sec. 42 of
the Code)...................................... 139
Tax Technical Corrections Act of 2018............................ 142
A. Tax Technical Corrections........................... 142
1. Amendments relating to Protecting Americans
from Tax Hikes (``PATH'') Act of 2015 (Division
Q of the Consolidated Appropriations Act, 2016)
(sec. 101 of Division U of the Act)............ 142
2. Amendment relating to Consolidated
Appropriations Act, 2016 (sec. 102 of Division
U of the Act).................................. 146
3. Amendments relating to Fixing America's Surface
Transportation Act (2015) (sec. 103 of Division
U of the Act).................................. 146
4. Amendments relating to Surface Transportation
and Veterans Health Care Choice Improvement Act
of 2015 (sec. 104 of Division U of the Act).... 147
5. Amendments relating to Stephen Beck, Jr., ABLE
Act of 2014 (sec. 105 of Division U of the Act) 147
6. Amendment relating to American Taxpayer Relief
Act of 2012 (sec. 106 of Division U of the Act) 148
7. Amendment relating to United States--Korea Free
Trade Agreement Implementation Act (2011) (sec.
107 of Division U of the Act).................. 148
8. Amendment relating to SAFETEA-LU (sec. 108 of
Division U of the Act)......................... 148
9. Amendments relating to the American Jobs
Creation Act of 2004 (``AJCA'') (sec. 109 of
Division U of the Act)......................... 148
B. Technical Corrections Related to Partnership Audit
Rules.............................................. 149
1. Scope of adjustments subject to partnership
audit rules (sec. 201 of Division U of the Act
and secs. 6241(2) and (9), 6501(c), 6221, 6225,
6226, 6227, 6231, 6234, and 7485 of the Code).. 149
2. Netting in the determination of imputed
underpayments (sec. 202 of Division U of the
Act and sec. 6225(a) and (b) of the Code)...... 151
3. Alternative procedure to filing amended returns
for purposes of modifications to imputed
underpayments (secs. 202(b) and (c)(2), 203,
and 206(b) of Division U of the Act and secs.
6225(c) and 6201(a)(1) of the Code)............ 152
4. Push-out treatment of passthrough partners in
tiered structures (sec. 204 of Division U of
the Act and sec. 6226 of the Code)............. 157
5. Treatment of failure of partnership or S
corporation to pay imputed underpayment and
assessment and collection authority with
respect to imputed underpayments (sec. 205 of
Division U of the Act and secs. 6232 and
6501(c)(4)(a) of the Code)..................... 158
6. Amendment of statements (Schedules K-1) to
partners (sec. 206(a) of Division U of the Act
and sec. 6031(b) of the Code).................. 159
7. Partnership adjustment tracking report and
administrative adjustment request not treated
as amended return (sec. 206(b) of Division U of
the Act and sec. 6225(c)(2) of the Code)....... 160
8. Authority to require e-filing of materials
(sec. 206(c) of Division U of the Act and sec.
6241(10) of the Code).......................... 160
9. Clarification of assessment authority in a
push-out (sec. 206(d) of Division U of the Act
and sec. 6226 of the Code)..................... 160
10. Treatment of partnership adjustments that
result in decrease in tax in push-out (sec.
206(e) of Division U of the Act and sec.
6226(b) of the Code)........................... 160
11. Coordination with adjustments related to
foreign tax credits (sec. 206(f) of Division U
of the Act and sec. 6227(d) of the Code)....... 161
12. Clarification of assessment of imputed
underpayments (sec. 206(g) of Division U of the
Act and secs. 6232(a) and (b) of the Code)..... 161
13. Time limit for notice of proposed partnership
adjustment (sec. 206(h) of Division U of the
Act and secs. 6231(a) and (b) of the Code)..... 162
14. Deposit to suspend interest on imputed
underpayment (sec. 206(i) of Division U of the
Act and sec. 6233 of the Code)................. 162
15. Deposit to meet jurisdictional requirement
(sec. 206(j) of Division U of the Act and sec.
6234(b) of the Code)........................... 162
16. Period of limitations on making adjustments
(sec. 206(k) of Division U of the Act and sec.
6235 of the Code).............................. 162
17. Treatment of special enforcement matters (sec.
206(l) of Division U of the Act and sec.
6241(10) of the Code).......................... 163
18. United States shareholders and certain other
persons treated as partners (sec. 206(m) of
Division U of the Act and sec. 6241(12) of the
Code).......................................... 163
19. Penalties relating to administrative adjustment
requests and partnership adjustment tracking
reports (sec. 206(n) of Division U of the Act
and secs. 6651, 6696, 6698, and 6702 of the
Code).......................................... 164
20. Statements to partners (adjusted Schedules K-1)
treated as payee statements (sec. 206(o) of
Division U of the Act and sec. 6724 of the
Code).......................................... 164
21. Clerical corrections relating to partnership
audit rules (sec. 206(p) of Division U of the
Act)........................................... 165
C. Other Corrections................................... 165
1. Amendment relating to the Bipartisan Budget Act
of 2015 (sec. 301 of Division U of the Act).... 165
2. Amendment relating to the Energy Policy Act of
2005 (sec. 302 of Division U of the Act)....... 165
D. Clerical Corrections and Deadwood................... 166
1. Clerical corrections and deadwood-related
provisions (sec. 401 of Division U of the Act). 166
PART FIVE: AIRPORT AND AIRWAY EXTENSION ACT OF 2018, PART II
(PUBLIC LAW 115-250)........................................... 167
1. Expenditure authority from the Airport and
Airway Trust Fund and extension of taxes
funding the Airport and Airway Trust Fund
(secs. 4 and 5 of the Act and secs. 4081, 4083,
4261, 4271, and 9502 of the Code).............. 167
PART SIX: FAA REAUTHORIZATION ACT OF 2018 (PUBLIC LAW 115-254)... 169
1. Expenditure authority from the Airport and
Airway Trust Fund and extension of taxes
funding the Airport and Airway Trust Fund
(secs. 801 and 802 of the Act and secs. 4081,
4083, 4261, 4271, and 9502 of the Code)........ 169
PART SEVEN: PROTECTING ACCESS TO THE COURTS FOR TAXPAYERS ACT
(PUBLIC LAW 115-332)........................................... 171
1. Transfer of certain cases (sec. 2 of the Act).. 171
APPENDIX: ESTIMATED BUDGET EFFECTS OF CERTAIN TAX LEGISLATION IN
THE 115TH CONGRESS............................................. 173
INTRODUCTION
This document,\1\ prepared by the staff of the Joint
Committee on Taxation in consultation with the staffs of the
House Committee on Ways and Means and the Senate Committee on
Finance, provides an explanation of certain tax legislation
enacted in the 115th Congress. This document does not include a
description and explanation of Public Law 115-97; a separate
document describes the provisions of that Act.\2\
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\1\ This document may be cited as follows: Joint Committee on
Taxation, General Explanation of Certain Tax Legislation Enacted in the
115th Congress (JCS-2-19), October 2019.
\2\ See Joint Committee on Taxation, General Explanation of Public
Law 115-97 (JCS-1-18), December 2018.
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For each provision, this document includes a description of
present law, explanation of the provision, and effective date.
Present law describes the law in effect immediately before
enactment of the provision and does not reflect changes to the
law made by the enacting legislation or by subsequent
legislation. In a case where a Committee report accompanies a
bill, this document is based on the language of the report. For
a bill with no Committee report but with a contemporaneous
technical explanation prepared and published by the staff of
the Joint Committee on Taxation, this document is based on the
language of the explanation. This document follows the
chronological order of the tax legislation as signed into law.
Section references are to the Internal Revenue Code of
1986, as amended, unless otherwise indicated.
Part One is an explanation of Titles II and V of the
Disaster Tax Relief and Airport and Airway Extension Act of
2017 (Pub. L. No. 115-63).
Part Two is an explanation of Division D of the Fourth
Continuing Appropriations for Fiscal Year 2018, Federal
Register Printing Savings, Healthy Kids, Health-Related Taxes,
and Budgetary Effects (Pub. L. No. 115-120).
Part Three is an explanation of the revenue provisions of
the Bipartisan Budget Act of 2018 (Pub. L. No. 115-123).
Part Four is an explanation of the revenue provisions of
the Consolidated Appropriations Act, 2018 (Pub. L. No. 115-
141).
Part Five is an explanation of the revenue provisions of
the Airport and Airway Extension Act of 2018, Part II (Pub. L.
No. 115-250).
Part Six is an explanation of the revenue provisions of the
FAA Reauthorization Act of 2018 (Pub. L. No. 115-254).
Part Seven is an explanation of the Protecting Access to
the Courts for Taxpayers Act (Pub. L. No. 115-332).
The Appendix provides the estimated budget effects of tax
legislation described in this document.
The first footnote in each Part gives the legislative
history of the Act explained in that Part.
PART ONE: DISASTER TAX RELIEF AND AIRPORT AND AIRWAY EXTENSION ACT OF
2017 (PUBLIC LAW 115-63) \3\
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\3\ H.R. 3823. The bill was introduced in the House of
Representatives on September 25, 2017, and was passed by the House on
September 28, 2017. The bill passed the Senate with an amendment on
September 28, 2017, to which the House agreed on September 28, 2017.
The President signed the bill on September 29, 2017.
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A. Aviation Revenue Provisions
1. Extension of expenditure authority and taxes funding Airport and
Airway Trust Fund (secs. 201 and 202 of the Act and secs. 4081,
4083, 4261, 4271, and 9502 of the Code)
Present Law
Taxes dedicated to the Airport and Airway Trust Fund
Excise taxes are imposed on amounts paid for commercial air
passenger and freight transportation and on fuels used in
commercial and noncommercial (i.e., transportation that is not
``for hire'') aviation to fund the Airport and Airway Trust
Fund.\4\ The present aviation excise taxes and rates are as
follows:
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\4\ Air transportation through U.S. airspace that neither lands in
nor takes off from a point in the United States (or the ``225-mile
zone'') is exempt from the aviation excise taxes, but the
transportation provider is subject to certain ``overflight fees''
imposed by the Federal Aviation Administration pursuant to section
45301 of Title 49 of the United States Code. The ``225-mile zone'' is
defined as ``that portion of Canada or Mexico which is not more than
225 miles from the nearest point in the continental United States.''
Sec. 4262(c)(2).
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Tax (and Code section) Tax Rates
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Domestic air passengers (sec. 4261)....... 7.5 percent of fare, plus
$4.10 (2017) per domestic
flight segment generally
\5\
International air passengers (sec. 4261).. $18.00 (2017) per arrival or
departure \6\
Amounts paid for right to award free or 7.5 percent of amount paid
reduced rate passenger air transportation
(sec. 4261).
Air cargo (freight) transportation (sec. 6.25 percent of amount
4271). charged for domestic
transportation; no tax on
international cargo
transportation
Aviation fuels (sec. 4081): \7\
Commercial aviation................... 4.3 cents per gallon
Noncommercial (general) aviation:
Aviation gasoline................. 19.3 cents per gallon
Jet fuel.......................... 21.8 cents per gallon
Fractional aircraft fuel surtax 14.1 cents per gallon
(sec. 4043).
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The Airport and Airway Trust Fund excise taxes (except for
4.3 cents per gallon of the taxes on aviation fuels and the
14.1 cents per gallon fractional aircraft fuel surtax) are
scheduled to expire after September 30, 2017. The 4.3-cents-
per-gallon fuels tax rate is permanent.
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\5\ The domestic flight segment portion of the tax is adjusted
annually (effective each January 1) for inflation (adjustments based on
the changes in the consumer price index (the ``CPI'')). Special rules
apply to air transportation between the continental United States and
Alaska or Hawaii and between Alaska and Hawaii. The portion of such
transportation that is not within the United States (e.g., the portion
over the Pacific Ocean) is not subject to the 7.5-percent domestic air
passenger excise tax. In addition to this prorated ad valorem tax, a
$9.00 (2017) international tax rate for the excluded portion of the
travel is imposed. The domestic flight segment component of tax applies
under the same rules as for flights within the continental United
States. Further, transportation within Alaska or Hawaii is taxed in the
same manner as domestic transportation within the continental United
States.
\6\ The international arrival and departure tax rate is adjusted
annually for inflation (measured by changes in the CPI).
\7\ Like most other taxable motor fuels, aviation fuels are subject
to an additional 0.1-cent-per-gallon excise tax to fund the Leaking
Underground Storage Tank (``LUST'') Trust Fund.
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With respect to fractional aircraft, the exemption from the
excise tax on commercial transportation for fractional aircraft
is scheduled to expire after September 30, 2017.\8\ The
fractional aircraft fuel surtax expires after September 30,
2021.
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\8\ Sec. 4261(j).
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Airport and Airway Trust Fund expenditure provisions
The Airport and Airway Trust Fund was established in 1970
to finance a major portion of national aviation programs
(previously funded entirely with General Fund revenues).
Operation of the Trust Fund is governed by parallel provisions
of the Code and authorizing statutes.\9\ The Code provisions
govern deposit of revenues into the Trust Fund and approve
expenditure purposes in authorizing statutes as in effect on
the date of enactment of the latest authorizing Act. The
authorizing Acts provide for specific Trust Fund expenditure
programs.
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\9\ Sec. 9502 and 49 U.S.C. sec. 48101, et seq.
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No expenditures are permitted to be made from the Airport
and Airway Trust Fund after September 30, 2017. The purposes
for which Airport and Airway Trust Fund monies are permitted to
be expended are fixed as of the date of enactment of the FAA
Extension, Safety, and Security Act of 2016; therefore, the
Code must be amended in order to authorize new Airport and
Airway Trust Fund expenditure purposes.\10\ The Code contains a
specific enforcement provision to prevent expenditure of Trust
Fund monies for purposes not authorized under section 9502.\11\
This provision provides that, should such unapproved
expenditures occur, no further aviation excise tax receipts
will be transferred to the Trust Fund. Rather, the aviation
taxes will continue to be imposed, but the receipts will be
retained in the General Fund.
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\10\ Sec. 9502(d).
\11\ Sec. 9502(e)(1).
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Explanation of Provision
The provisions extend the taxes, expenditure authority, and
exemption for fractional aircraft transportation from the taxes
on commercial aviation transportation through March 31, 2018.
Effective Date
The provision is effective on the date of enactment
(September 29, 2017).
B. Tax Relief for Hurricanes Harvey, Irma, and Maria
The provisions below were enacted to provide temporary tax
relief to those areas affected by Hurricanes Harvey, Irma, and
Maria. The provisions use the terms ``disaster area'' and
``disaster zone'' for each specified hurricane.\12\ As used in
the Act, a ``disaster area'' refers to an area with respect to
which a major disaster has been declared by the President
before October 17, 2017, in the case of Hurricanes Harvey and
Irma,\13\ or before September 21, 2017, in the case of
Hurricane Maria, under section 401 of the Robert T. Stafford
Disaster Relief and Emergency Assistance Act by reason of the
specified hurricane. A ``disaster zone'' refers to that portion
of the ``disaster area'' described above that has been
determined by the President to warrant individual or individual
and public assistance from the Federal government under the
Robert T. Stafford Disaster Relief and Emergency Assistance Act
by reason of the specified hurricane.
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\12\ See sec. 501 of the Act.
\13\ With respect to Hurricanes Harvey and Irma, section 20201(a)
of the Bipartisan Budget Act of 2018, Pub. L. No. 115-123, modified the
definition of ``disaster area'' in section 501 of the Act by delaying
the date by which the disaster must be declared from September 21,
2017, to October 17, 2017.
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1. Special disaster-related rules for use of retirement funds (sec. 502
of the Act and sec. 72 of the Code)
Present Law
Distributions from tax-favored retirement plans
A distribution from a qualified retirement plan, a tax-
sheltered annuity plan (a ``section 403(b) plan''), an eligible
deferred compensation plan of a State or local government
employer (a ``governmental section 457(b) plan''), or an
individual retirement arrangement (an ``IRA'') generally is
included in income for the year distributed.\14\ These plans
are referred to collectively as ``eligible retirement plans.''
In addition, unless an exception applies, a distribution from a
qualified retirement plan, a section 403(b) plan, or an IRA
received before age 59\1/2\ is subject to a 10-percent
additional tax (referred to as the ``early withdrawal tax'') on
the amount includible in income.\15\
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\14\ Secs. 401(a), 403(a), 403(b), 457(b), and 408. Under section
3405, distributions from these plans are generally subject to income
tax withholding unless the recipient elects otherwise. In addition,
certain distributions from a qualified retirement plan, a section
403(b) plan, or a governmental section 457(b) plan are subject to
mandatory income tax withholding at a 20-percent rate unless the
distribution is rolled over.
\15\ Sec. 72(t). The 10-percent early withdrawal tax does not apply
to distributions from a governmental section 457(b) plan.
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In general, a distribution from an eligible retirement plan
may be rolled over to another eligible retirement plan within
60 days, in which case the amount rolled over generally is not
includible in income. The Internal Revenue Service has the
authority to waive the 60-day requirement if failure to waive
the requirement would be against equity or good conscience,
including for cases of casualty, disaster, or other events
beyond the reasonable control of the individual.
The terms of a qualified retirement plan, section 403(b)
plan, or governmental section 457(b) plan generally determine
when distributions are permitted. However, in some cases,
restrictions may apply to distributions before an employee's
termination of employment, referred to as ``in-service''
distributions. Despite such restrictions, an in-service
distribution may be permitted in the case of financial hardship
or an unforeseeable emergency.
Loans from tax-favored retirement plans
Employer-sponsored retirement plans may provide loans to
participants. Unless the loan satisfies certain requirements in
both form and operation, the amount of a retirement plan loan
is a deemed distribution from the retirement plan. Among the
requirements that the loan must satisfy are that the loan
amount must not exceed the lesser of 50 percent of the
participant's vested account balance (or other accrued
benefit), or $50,000 (generally taking into account outstanding
balances of previous loans), and the loan's terms must provide
for a repayment period of not more than five years (except for
a loan specifically to purchase a home) and for level
amortization of loan payments to be made not less frequently
than quarterly.\16\ Thus, if an employee stops making payments
on a loan before the loan is repaid, a deemed distribution of
the outstanding loan balance generally occurs. A deemed
distribution of an unpaid loan balance generally is taxed as
though an actual distribution occurred, including being subject
to the 10-percent early withdrawal tax, if applicable. A deemed
distribution is not eligible for rollover to another eligible
retirement plan. Subject to the limit on the amount of loans,
which treats the amount of any loan that would exceed the limit
as a deemed distribution, the rules relating to loans do not
limit the number of loans an employee may obtain from a plan.
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\16\ Sec. 72(p).
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Tax-favored retirement plan compliance
Tax-favored retirement plans generally are required to be
operated in accordance with the terms of the plan document, and
amendments to reflect changes to the plan generally must be
adopted within a limited period.
Explanation of Provision
Distributions and recontributions
In the case of a ``qualified hurricane distribution'' from
a qualified retirement plan, a section 403(b) plan, or an IRA,
the provision provides an exception to the 10-percent early
withdrawal tax. In addition, income attributable to a qualified
hurricane distribution may be included in income ratably over
three years, and the amount of a qualified hurricane
distribution may be recontributed to an eligible retirement
plan within three years.
A qualified hurricane distribution is a permissible
distribution with respect to the relevant hurricane (described
below) from a qualified retirement plan, section 403(b) plan,
or governmental section 457(b) plan, regardless of whether a
distribution otherwise would be permissible.\17\ A plan is not
treated as violating any Code requirement merely because it
treats a distribution as a qualified hurricane distribution,
provided that the aggregate amount of such distributions from
plans maintained by the employer and members of the employer's
controlled group or affiliated service group does not exceed
$100,000. Thus, a plan is not treated as violating any Code
requirement merely because an individual might receive total
distributions in excess of $100,000 when taking into account
distributions from plans of other employers or IRAs.
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\17\ A qualified hurricane distribution is subject to income tax
withholding unless the recipient elects otherwise. Mandatory 20-percent
withholding does not apply.
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With respect to each of the relevant hurricanes, a
qualified hurricane distribution is any distribution from an
eligible retirement plan made on or after the date specific to
the hurricane and before January 1, 2019, to an individual
whose principal place of abode on the date specific to that
hurricane was located in that hurricane's disaster area and who
has sustained an economic loss by reason of that hurricane. The
dates specific to each hurricane are August 23, 2017, for
Hurricane Harvey; September 4, 2017, for Hurricane Irma; and
September 16, 2017, for Hurricane Maria. The total amount of
distributions to an individual from all eligible retirement
plans that may be treated as qualified hurricane distributions
is $100,000. Thus, any distributions in excess of $100,000 are
not qualified hurricane distributions.
Any amount required to be included in income as a result of
a qualified hurricane is included in income ratably over the
three-year period beginning with the year of distribution
unless the individual elects not to have ratable inclusion
apply.
Any portion of a qualified hurricane distribution may, at
any time during the three-year period beginning the day after
the date on which the distribution was received, be
recontributed to an eligible retirement plan to which a
rollover can be made. Any amount recontributed within the
three-year period is treated as a rollover and thus is not
includible in income. For example, if an individual receives a
qualified hurricane distribution in 2017, that amount is
included in income, generally ratably over the year of the
distribution and the following two years, but is not subject to
the 10-percent early withdrawal tax. If, in 2019, the amount of
the qualified hurricane distribution is recontributed to an
eligible retirement plan, the individual may file an amended
return to claim a refund of the tax attributable to the amount
previously included in income. In addition, if, under the
ratable inclusion provision, a portion of the distribution has
not yet been included in income at the time of the
contribution, the remaining amount is not includible in income.
Recontributions of withdrawals for purchase of a home
Any individual who received a qualified distribution \18\
after February 28, 2017, and before September 21, 2017, which
was to be used to purchase or construct a principal residence
in the Hurricane Harvey, Hurricane Irma, or Hurricane Maria
disaster area, but which was not so purchased or constructed on
account of Hurricane Harvey, Hurricane Irma, or Hurricane Maria
may, during the period beginning on August 23, 2017, and ending
on February 28, 2018, make one or more contributions in an
aggregate amount not to exceed the amount of such qualified
distribution to an eligible retirement plan of which such
individual is a beneficiary and to which a rollover
contribution of such distribution could be made.\19\ A plan is
not treated as violating any Code requirement merely because an
individual repays such distributions as provided above,
provided that the aggregate amount of such repayments from
plans maintained by the employer and members of the employer's
controlled group or affiliated service group does not exceed
$100,000.
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\18\ As described in sections 401(k)(2)(B)(i)(IV), 403(b)(7)(A)(ii)
(but only to the extent such distribution relates to financial
hardship), 403(b)(11)(B), or 72(t)(2)(F).
\19\ Under section 402(c), 403(a)(4), 403(b)(8), or 408(d)(3), as
the case may be.
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Loans
In the case of a ``qualified individual'' with respect to
Hurricane Harvey, Hurricane Irma, or Hurricane Maria who
obtained a loan from a qualified employer plan \20\ during the
period beginning on September 29, 2017, and ending on December
31, 2018, the permitted maximum loan amount is the lesser of
the present value of the nonforfeitable accrued benefit of the
employee under the plan (rather than one-half of the present
value of the nonforfeitable accrued benefit of the employee
under the plan) or $100,000 (rather than $50,000). A loan
meeting this limit is not treated as a distribution.\21\ For
this purpose, a qualified individual with respect to the
relevant hurricane is an individual whose principal place of
abode on the date specific to that hurricane was located in
that hurricane's disaster area and who sustained an economic
loss by reason of that hurricane. The dates specific to each
hurricane are August 23, 2017, for Hurricane Harvey, September
4, 2017, for Hurricane Irma, and September 16, 2017, for
Hurricane Maria.
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\20\ As defined under section 72(p)(4).
\21\ See sec. 72(p)(2)(A).
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In the case of such a qualified individual with an
outstanding loan on or after the relevant ``qualified beginning
date'' (August 23, 2017, for Hurricane Harvey, September 4,
2017, for Hurricane Irma, and September 16, 2017, for Hurricane
Maria) from a qualified employer plan, if the due date for any
repayment with respect to such a loan occurs during the period
beginning on the qualified beginning date and ending on
December 31, 2018, the due date is delayed for one year and any
subsequent repayments are appropriately adjusted to reflect the
delay in any repayment date noted above, but the repayment
delay is disregarded in determining the five-year period and
the term of the loan.\22\
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\22\ See sec. 72(p)(2)(B) or (C).
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Plan amendments
A plan amendment made pursuant to the provision (or a
regulation issued thereunder) may be retroactively effective
if, in addition to the requirements described below, the
amendment is made on or before the last day of the first plan
year beginning after January 1, 2019 (or in the case of a
governmental plan, January 1, 2021), or a later date prescribed
by the Secretary. In addition, the plan is treated as operated
in accordance with plan terms during the period beginning with
the date the provision or regulation takes effect (or the date
specified by the plan if the amendment is not required by the
provision or regulation) and ending on the last permissible
date for the amendment (or, if earlier, the date the amendment
is adopted). For an amendment to be retroactively effective, it
must apply retroactively for that period, and the plan must be
operated in accordance with the amendment during that period.
Effective Date
The provision is effective on the date of enactment
(September 29, 2017).
2. Disaster-related employment relief (sec. 503 of the Act and sec. 38
of the Code)
Present Law
There is no generally applicable employer tax credit for
wages paid in connection with employment in disaster areas.\23\
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\23\ But see former sec. 1400R, which provided an employer credit
for employers affected by Hurricane Katrina, Hurricane Rita, and
Hurricane Wilma. The provision was repealed as deadwood by the
Consolidated Appropriations Act, Pub L. No. 115-141, sec. 401(d)(6)(A).
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Explanation of Provision
The provision provides a credit of 40 percent of the
qualified wages (up to a maximum of $6,000 in qualified wages
per employee) paid by an eligible employer to an eligible
employee.
An eligible employer is any employer (1) that conducted an
active trade or business on August 23, 2017 (in the case of
Hurricane Harvey), September 4, 2017 (in the case of Hurricane
Irma), or September 16, 2017 (in the case of Hurricane Maria)
in such hurricane's disaster zone and (2) with respect to which
the trade or business described in (1) is inoperable on any day
after the specified date and before January 1, 2018, as a
result of damage sustained by reason of the hurricane.
An eligible employee is, with respect to an eligible
employer, an employee whose principal place of employment on
the date specific to the relevant hurricane with such eligible
employer was in the disaster zone of the relevant hurricane.
The dates specific to each hurricane are August 23, 2017, for
Hurricane Harvey, September 4, 2017, for Hurricane Irma, and
September 16, 2017, for Hurricane Maria. An employee may not be
treated as an eligible employee for any period with respect to
an employer if such employer is allowed a credit under section
51, the work opportunity credit, with respect to the employee
for the period.
Qualified wages are wages (as defined in section 51(c)(1)
of the Code, but without regard to section 3306(b)(2)(B)) paid
or incurred by an eligible employer with respect to an eligible
employee on any day after August 23, 2017, September 4, 2017,
or September 16, 2017, with respect to the relevant hurricane,
and before January 1, 2018, during the period (1) beginning on
the date on which the trade or business first became inoperable
at the principal place of employment of the employee
immediately before the hurricane and (2) ending on the date on
which such trade or business has resumed significant operations
at such principal place of employment. Qualified wages include
wages paid without regard to whether the employee performs no
services, performs services at a different place of employment
than such principal place of employment, or performs services
at such principal place of employment before significant
operations have resumed.
The credit is treated as a current year business credit
under section 38(b) and therefore is subject to the tax
liability limitations of section 38(c). Rules similar to
sections 51(i)(1), 52, and 280C(a) \24\ apply to the credit.
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\24\ Section 20201(b) of the Bipartisan Budget Act of 2018, Pub. L.
No. 115-123, amended section 503(a)(3), (b)(3), and (c)(3) of the Act
to provide that rules similar to section 280C(a) apply to the credit.
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Effective Date
The provision is effective on the date of enactment
(September 29, 2017).
3. Temporary suspension of limitations on charitable contributions
(sec. 504(a) of the Act and sec. 170 of the Code)
Present Law
In general
In general, an income tax deduction is permitted for
charitable contributions, subject to certain limitations that
depend on the type of taxpayer, the property contributed, and
the donee organization.\25\
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\25\ Sec. 170.
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Charitable contributions of cash are deductible in the
amount contributed. In general, contributions of capital gain
property to a qualified charity are deductible at fair market
value with certain exceptions. Capital gain property means any
capital asset or property used in the taxpayer's trade or
business the sale of which at its fair market value, at the
time of contribution, would have resulted in gain that would
have been long-term capital gain. Contributions of other
appreciated property generally are deductible at the donor's
basis in the property. Contributions of depreciated property
generally are deductible at the fair market value of the
property.
Percentage limitations
Contributions by individuals
For individuals, in any taxable year, the amount deductible
as a charitable contribution is limited to a percentage of the
taxpayer's contribution base. The applicable percentage of the
contribution base varies depending on the type of donee
organization and property contributed. The contribution base is
defined as the taxpayer's adjusted gross income computed
without regard to any net operating loss carryback.
Contributions by an individual taxpayer of property (other
than appreciated capital gain property) to a charitable
organization described in section 170(b)(1)(A) (e.g., public
charities, private foundations other than private non-operating
foundations, and certain governmental units) may not exceed 50
percent of the taxpayer's contribution base. Contributions of
this type of property to nonoperating private foundations and
certain other organizations generally may be deducted up to 30
percent of the taxpayer's contribution base.
Contributions of appreciated capital gain property to
charitable organizations described in section 170(b)(1)(A)
generally are deductible up to 30 percent of the taxpayer's
contribution base. An individual may elect, however, to bring
all these contributions of appreciated capital gain property
for a taxable year within the 50-percent limitation category by
reducing the amount of the contribution deduction by the amount
of the appreciation in the capital gain property. Contributions
of appreciated capital gain property to charitable
organizations described in section 170(b)(1)(B) (e.g., private
nonoperating foundations) are deductible up to 20 percent of
the taxpayer's contribution base.
Contributions by corporations
For corporations, in any taxable year, charitable
contributions are not deductible to the extent the aggregate
contributions exceed 10 percent of the corporation's taxable
income computed without regard to net operating loss or capital
loss carrybacks.
For purposes of determining whether a corporation's
aggregate charitable contributions in a taxable year exceed the
applicable percentage limitation, contributions of capital gain
property are taken into account after other charitable
contributions.
Carryforward of excess contributions
Charitable contributions that exceed the applicable
percentage limitation may be carried forward for up to five
years.\26\ The amount that may be carried forward from a
taxable year (``contribution year'') to a succeeding taxable
year may not exceed the applicable percentage of the
contribution base for the succeeding taxable year less the sum
of contributions made in the succeeding taxable year plus
contributions made in taxable years prior to the contribution
year and treated as paid in the succeeding taxable year under
this provision.
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\26\ Sec. 170(d).
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Overall limitation on itemized deductions (``Pease'' limitation)
For taxable years beginning before January 1, 2018, the
total amount of otherwise allowable itemized deductions (other
than medical expenses, investment interest, and casualty,
theft, or wagering losses) is reduced by three percent of the
amount of the taxpayer's adjusted gross income in excess of a
certain threshold. The otherwise allowable itemized deductions
may not be reduced by more than 80 percent. For 2017, the
adjusted gross income threshold is $261,500 for an individual
taxpayer ($313,800 for a married taxpayers filing a joint
return). These dollar amounts are adjusted for inflation.
Explanation of Provision
Suspension of percentage limitations
Under the provision, in the case of an individual, the
deduction for qualified contributions is allowed up to the
amount by which the taxpayer's contribution base exceeds the
deduction for other charitable contributions. Contributions in
excess of this amount are carried over to succeeding taxable
years as contributions described in 170(b)(1)(A), subject to
the limitations of section 170(d)(1)(A)(i) and (ii).
In the case of a corporation, the deduction for qualified
contributions is allowed up to the amount by which the
corporation's taxable income (as computed under section
170(b)(2)) exceeds the deduction for other charitable
contributions. Contributions in excess of this amount are
carried over to succeeding taxable years, subject to the
limitations of section 170(d)(2).
In applying subsections (b) and (d) of section 170 to
determine the deduction for other contributions, qualified
contributions are not taken into account (except to the extent
qualified contributions are carried over to succeeding taxable
years under the rules described above).
Qualified contributions are cash contributions paid during
the period beginning on August 23, 2017, and ending on December
31, 2017, to a charitable organization described in section
170(b)(1)(A), other than contributions to (i) a supporting
organization described in section 509(a)(3) or (ii) for the
establishment of a new, or maintenance of an existing, donor
advised fund (as defined in section 4966(d)(2)). Contributions
of noncash property, such as securities, are not qualified
contributions. Under the provision, qualified contributions
must be to an organization described in section 170(b)(1)(A);
thus, contributions to, for example, a charitable remainder
trust generally are not qualified contributions, unless the
charitable remainder interest is paid in cash to an eligible
charity during the applicable time period. Qualified
contributions must be made for relief efforts in the Hurricane
Harvey disaster area, the Hurricane Irma disaster area, or the
Hurricane Maria disaster area. Taxpayers must substantiate that
the contribution is made for this purpose. A taxpayer must
elect to have the contributions treated as qualified
contributions.
Limitation on overall itemized deductions
Under the provision, the charitable contribution deduction
up to the amount of qualified contributions (as defined above)
paid during the year is not treated as an itemized deduction
for purposes of the overall limitation on itemized deductions.
Effective Date
The provision is effective on the date of enactment
(September 29, 2017).
4. Special rules for qualified disaster-related personal casualty
losses (sec. 504(b) of the Act and sec. 165 of the Code)
Present Law
For tax years beginning before December 31, 2017, a
taxpayer may generally claim an itemized deduction for any loss
sustained during the taxable year and not compensated by
insurance or otherwise.\27\ For individual taxpayers,
deductible losses must be incurred in a trade or business or
other profit-seeking activity or consist of property losses
arising from fire, storm, shipwreck, or other casualty, or from
theft. Personal casualty or theft losses are deductible only if
they exceed $100 per casualty or theft. In addition, aggregate
net casualty and theft losses are deductible only to the extent
they exceed 10 percent of an individual taxpayer's adjusted
gross income.
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\27\ Sec. 165. For tax years beginning after December 31, 2017, and
before January 1, 2026, an individual may claim an itemized deduction
for a personal casualty loss only if such loss was attributable to a
disaster declared by the President under section 401 of the Robert T.
Stafford Disaster Relief and Emergency Assistance Act. An exception
applies to the extent a personal casualty loss of an individual does
not exceed the individual's personal casualty gains.
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Explanation of Provision
Under the provision, personal casualty losses that arose in
the disaster area of Hurricane Harvey, Hurricane Irma, or
Hurricane Maria on or after August 23, 2017 (in the case of
Hurricane Harvey), September 4, 2017 (in the case of Hurricane
Irma), or September 16, 2017 (in the case of Hurricane Maria),
and that were attributable to such hurricane, are deductible
without regard to whether aggregate net losses exceed 10
percent of a taxpayer's adjusted gross income. In order to be
deductible, however, such losses must exceed $500 per casualty.
Finally, such losses may be claimed in addition to the standard
deduction and may be claimed by taxpayers subject to the
alternative minimum tax.
Effective Date
The provision is effective on the date of enactment
(September 29, 2017).
5. Special rule for determining earned income (sec. 504(c) of the Act
and secs. 24 and 32 of the Code)
Present Law
Eligible taxpayers are allowed an earned income credit and
a child credit. In general, the earned income credit is a
refundable credit for low-income workers.\28\ The amount of the
credit depends on the earned income of the taxpayer and whether
the taxpayer has one, more than one, or no qualifying children.
Earned income generally includes wages, salaries, tips, and
other employee compensation, plus net earnings from self-
employment.
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\28\ Sec. 32.
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For taxable years beginning before December 31, 2017,
taxpayers with incomes below certain threshold amounts are
eligible for a $1,000 credit for each qualifying child.\29\ In
some circumstances, all or a portion of the otherwise allowable
credit is treated as a refundable credit (the ``additional
child tax credit''). The amount of the additional child tax
credit equals 15 percent of the taxpayer's earned income in
excess of $3,000.\30\ A taxpayer with three or more qualifying
children may take the additional child tax credit in the amount
by which the taxpayer's Social Security taxes exceed the
taxpayer's earned income credit, if that amount is greater than
the additional child tax credit based on the taxpayer's earned
income.
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\29\ Sec. 24.
\30\ For taxable years beginning after December 31, 2017, and
before January 1, 2026, the amount of the child credit is $2,000, the
refundable portion of the child credit is capped at $1,400 (indexed for
inflation), and the earned income threshold is $2,500.
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Bona fide residents of Puerto Rico with only Puerto Rico
source income do not have U.S. earned income and are ineligible
to claim the earned income credit. Such residents are allowed
an additional child tax credit only if they have three or more
children, and the amount of the credit is limited to Social
Security taxes paid.
Explanation of Provision
The provision permits qualified individuals to elect to
calculate their earned income credit and additional child tax
credit for the taxable year that includes the applicable date
using their earned income from the prior taxable year.
Qualified individuals are permitted to make the election only
if their earned income for the taxable year that includes the
applicable date is less than their earned income for the
preceding taxable year. The applicable date is August 23, 2017
(in the case of Hurricane Harvey), September 4, 2017 (in the
case of Hurricane Irma), and September 16, 2017 (in the case of
Hurricane Maria).
Qualified individuals who are residents of Puerto Rico may
elect to determine the additional child tax credit for the
taxable year that includes the applicable date by using their
Social Security taxes from the prior year, if Social Security
taxes for the taxable year that includes the applicable date
are less than Social Security taxes for the preceding taxable
year.
Qualified individuals are (1) individuals who on the
relevant applicable date, had their principal place of abode in
the disaster zone or (2) individuals who on such date were not
in the disaster zone but whose principal place of abode was in
the disaster area and were displaced from such principal place
of abode by reason of the relevant hurricane.
For purposes of the provision, in the case of a joint
return for a taxable year that includes the applicable date,
the provision applies if either spouse is a qualified
individual. In such cases, the earned income that is
attributable to the taxpayer for the preceding taxable year is
the sum of the earned income that is attributable to each
spouse for such preceding taxable year.
Any election to use the prior year's earned income under
the provision applies with respect to both the earned income
credit and additional child tax credit. For administrative
purposes, the incorrect use on a return of earned income
pursuant to an election under this provision is treated as a
mathematical or clerical error. An election under the provision
is disregarded for purposes of calculating gross income in the
election year.
Effective Date
The provision is effective on the date of enactment
(September 29, 2017).
6. Application of disaster-related tax relief to possessions of the
United States (sec. 504(d) of the Act)
Present Law
Citizens of the United States are generally subject to
Federal income tax on their worldwide income, including those
citizens in the U.S. territories. Residents of the U.S. Virgin
Islands and Puerto Rico are generally subject to the Federal
income tax system based on their status as U.S. citizens or
residents in the territories, with certain special rules for
determining residence and sources of income specific to the
territory. Broadly, a bona fide individual resident of a
territory is exempt from U.S. tax on income derived from
sources within that territory but is subject to U.S. tax on
U.S.-source and non-territory-source income.\31\ A corporation
that is organized in a territory is generally treated as a
foreign corporation for U.S. tax purposes.
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\31\ See secs. 932, 933, and 937.
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Because the U.S. Virgin Islands lacks authority to enact
its own internal tax laws, its local tax system is a mirrored
version of the Internal Revenue Code of 1986, as amended, in
which the U.S. Virgin Islands is substituted for the United
States wherever the Code refers to the United States. A
resident of the U.S. Virgin Islands generally files a single
tax return with the U.S. Virgin Islands and not with the United
States. Puerto Rico, by contrast, has its own internal tax
laws, and a resident of Puerto Rico may be required to file
income tax returns with both Puerto Rico and the United States.
Explanation of Provision
The U.S. Treasury will make a payment to the U.S. Virgin
Islands in an amount equal to the loss in revenue by reason of
the temporary tax relief allowable by reason of Title V of the
Act to residents of the U.S. Virgin Islands against its income
tax. This amount will be determined by the Treasury Secretary
based on information provided by the government of the U.S.
Virgin Islands.
The U.S. Treasury will make a payment to Puerto Rico in an
amount estimated by the Treasury Secretary as being equal to
loss in revenue by reason of the temporary tax relief allowable
by reason of Title V of the Act that would have been allowed to
residents of Puerto Rico if a mirror code tax system had been
in effect in Puerto Rico. Accordingly, the amount of each
payment to Puerto Rico will be an estimate of the aggregate
amount of the temporary tax relief that would be allowed to
residents of Puerto Rico if the relief provided by Title V of
the Act to U.S. residents were provided by Puerto Rico to its
residents. This payment will not be made to Puerto Rico unless
Puerto Rico has a plan that has been approved by the Secretary
under which Puerto Rico will promptly distribute the payment to
its residents.
No temporary tax relief provided by Title V of the Act is
permitted under the provision for any person to whom relief is
allowed against possession income taxes as a result of Title V
of the Act (e.g., under the U.S. Virgin Islands' mirror income
tax). Similarly, no tax relief against U.S. income taxes is
permitted for any person who is eligible for a payment under
Puerto Rico's plan for distributing to its residents the
payment described above from the U.S. Treasury.
Effective Date
The provision is effective on the date of enactment
(September 29, 2017).
PART TWO: FOURTH CONTINUING APPROPRIATIONS FOR FISCAL YEAR 2018,
FEDERAL REGISTER PRINTING SAVINGS, HEALTHY KIDS, HEALTH-RELATED TAXES,
AND BUDGETARY EFFECTS (PUBLIC LAW 115-120) \32\
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\32\ H.R. 195. The bill was introduced in the House of
Representatives on January 3, 2017, and was passed by the House on May
17, 2017. The bill passed the Senate with an amendment on December 21,
2017, to which the House agreed on January 22, 2018. The President
signed the bill on that same day.
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1. Extension of moratorium on medical device excise tax (sec. 4001 of
the Act and sec. 4191 of the Code)
Present Law
Effective for sales after December 31, 2012, excluding
sales during the period beginning on January 1, 2016 and ending
on December 31, 2017, a tax equal to 2.3 percent of the sale
price is imposed on the sale of any taxable medical device by
the manufacturer, producer, or importer of such device.\33\ A
taxable medical device is any device, as defined in section
201(h) of the Federal Food, Drug, and Cosmetic Act,\34\
intended for humans. Regulations further define a medical
device as one that is listed by the Food and Drug
Administration (``FDA'') under section 510(j) of the Federal
Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807, pursuant
to FDA requirements.\35\
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\33\ Sec. 4191.
\34\ 21 U.S.C. sec. 321. Section 201(h) defines device as ``an
instrument, apparatus, implement, machine, contrivance, implant, in
vitro reagent, or other similar or related article, including any
component, part, or accessory, which is (1) recognized in the official
National Formulary, or the United States Pharmacopeia, or any
supplement to them, (2) intended for use in the diagnosis of disease or
other conditions, or in the cure, mitigation, treatment, or prevention
of disease, in man or other animals, or (3) intended to affect the
structure or any function of the body of man or other animals, and
which does not achieve its primary intended purposes through chemical
action within or on the body of man or other animals and which is not
dependent upon being metabolized for the achievement of its primary
intended purposes.''
\35\ Treas. Reg. sec. 48.4191-2(a). The regulations also include as
devices items that should have been listed as a device with the FDA as
of the date the FDA notifies the manufacturer or importer that
corrective action with respect to listing is required.
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The excise tax does not apply to eyeglasses, contact
lenses, hearing aids, or any other medical device determined by
the Secretary to be of a type that is generally purchased by
the general public at retail for individual use (``retail
exemption''). Regulations provide guidance on the types of
devices that are exempt under the retail exemption. A device is
exempt under these provisions if: (1) it is regularly available
for purchase and use by individual consumers who are not
medical professionals; and (2) the design of the device
demonstrates that it is not primarily intended for use in a
medical institution or office or by a medical professional.\36\
Additionally, the regulations provide certain safe harbors for
devices eligible for the retail exemption.\37\
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\36\ Treas. Reg. sec. 48.4191-2(b)(2).
\37\ Treas. Reg. sec. 48.4191-2(b)(2)(iii). The safe harbors
include devices that are described as over-the-counter devices in
relevant FDA classification headings as well as certain FDA device
classifications listed in the regulations.
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The medical device excise tax is generally subject to the
rules applicable to other manufacturers excise taxes. These
rules include certain general manufacturers excise tax
exemptions including the exemption for sales for use by the
purchaser for further manufacture (or for resale to a second
purchaser in further manufacture) or for export (or for resale
to a second purchaser for export).\38\ If a medical device is
sold free of tax for resale to a second purchaser for further
manufacture or for export, the exemption does not apply unless,
within the six-month period beginning on the date of sale by
the manufacturer, the manufacturer receives proof that the
medical device has been exported or resold for use in further
manufacturing.\39\ In general, the exemption does not apply
unless the manufacturer, the first purchaser, and the second
purchaser are registered with the Secretary of the Treasury.
Foreign purchasers of articles sold or resold for export are
exempt from the registration requirement.
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\38\ Sec. 4221(a). Other general manufacturers excise tax
exemptions (i.e., the exemption for sales to purchasers for use as
supplies for vessels or aircraft, to a State or local government, to a
nonprofit educational organization, or to a qualified blood collector
organization) do not apply to the medical device excise tax.
\39\ Sec. 4221(b).
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The lease of a medical device is generally considered to be
a sale of such device.\40\ Special rules apply for the
imposition of tax to each lease payment. The use of a medical
device subject to tax by manufacturers, producers, or importers
of such device, is treated as a sale for the purpose of
imposition of excise taxes.\41\
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\40\ Sec. 4217(a).
\41\ Sec. 4218.
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There are also rules for determining the price of a medical
device on which the excise tax is imposed.\42\ These rules
provide for (1) the inclusion of containers, packaging, and
certain transportation charges in the price, (2) determining a
constructive sales price if a medical device is sold for less
than the fair market price, and (3) determining the tax due in
the case of partial payments or installment sales.
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\42\ Sec. 4216.
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Explanation of Provision
The provision extends the moratorium on the medical device
excise tax to include sales after December 31, 2017, and before
January 1, 2020.\43\
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\43\ Section 4191(c) provides a moratorium under which the medical
device excise tax does not apply to sales during the period beginning
on January 1, 2016, and ending on December 31, 2017. The provision
repeals the medical device excise tax for sales after December 31,
2017, and before January 1, 2020.
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Effective Date
The provision applies to medical device sales after
December 31, 2017.
2. Delay in implementation of excise tax on high cost employer-
sponsored health coverage (sec. 4002 of the Act and sec. 4980I
of the Code)
Present Law
In general
Effective for taxable years beginning after December 31,
2019, an excise tax is imposed on the provider of applicable
employer-sponsored health coverage (the ``coverage provider'')
if the aggregate cost of the coverage for an employee
(including a former employee, surviving spouse, or any other
primary insured individual) exceeds a threshold amount
(referred to as ``high cost health coverage''). The tax is 40
percent of the amount by which the aggregate cost exceeds the
threshold amount (the ``excess benefit'').
The annual threshold amount for 2018 is $10,200 for self-
only coverage and $27,500 for other coverage (such as family
coverage), multiplied by a one-time health cost adjustment
percentage.\44\ This threshold is then adjusted annually by an
age and gender adjusted excess premium amount. The age and
gender adjusted excess premium amount is the excess, if any, of
(1) the premium cost of standard Federal Employees Health
Benefit Program (``FEHBP'') coverage for the type of coverage
provided to an individual if priced for the age and gender
characteristics of all employees of the employer, over (2) the
premium cost of standard FEHBP coverage if priced for the age
and gender characteristics of the national workforce. For this
purpose, standard FEHBP coverage means the per employee cost of
Blue Cross/Blue Shield standard benefit coverage under FEHBP.
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\44\ The health cost adjustment percentage is 100 percent plus the
excess, if any, of (1) the percentage by which the cost of standard
FEHBP coverage for 2018 (determined according to specified criteria)
exceeds the cost of standard FEHBP coverage for 2010, over (2) 55
percent.
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The excise tax is determined on a monthly basis, by
reference to the monthly aggregate cost of applicable employer-
sponsored coverage for the month and \1/12\ of the annual
threshold amount.
Applicable employer-sponsored coverage and determination of cost
Subject to certain exceptions, applicable employer-
sponsored coverage is coverage under any group health plan
offered to an employee by an employer that is excludible from
the employee's gross income or that would be excludible if it
were employer-sponsored coverage.\45\ Thus, applicable
employer-sponsored coverage includes coverage for which an
employee pays on an after-tax basis. Applicable employer-
sponsored coverage includes coverage under any group health
plan established and maintained primarily for its civilian
employees by the Federal government or any Federal agency or
instrumentality, or the government of any State or political
subdivision thereof or any agency or instrumentality of a State
or political subdivision.
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\45\ Section 106 provides an exclusion for employer-provided
coverage.
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Applicable employer-sponsored coverage includes both
insured and self-insured health coverage, including, in
general, coverage under a health flexible spending arrangement
(``health FSA''), a health reimbursement arrangement, a health
savings account (``HSA''), or Archer medical savings account
(``Archer MSA'').\46\ In the case of a self-employed
individual, coverage is treated as applicable employer-
sponsored coverage if the self-employed individual is allowed a
deduction for all or any portion of the cost of coverage.\47\
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\46\ Some types of coverage are not included in applicable
employer-sponsored coverage, such as long-term care coverage, separate
insurance coverage substantially all the benefits of which are for
treatment of the mouth (including any organ or structure within the
mouth) or of the eye, and certain excepted benefits. Excepted benefits
for this purpose include (whether through insurance or otherwise)
coverage only for accident, or disability income insurance, or any
combination thereof; coverage issued as a supplement to liability
insurance; liability insurance, including general liability insurance
and automobile liability insurance; workers' compensation or similar
insurance; automobile medical payment insurance; credit-only insurance;
and other similar insurance coverage (as specified in regulations),
under which benefits for medical care are secondary or incidental to
other insurance benefits. Applicable employer-sponsored coverage does
not include coverage only for a specified disease or illness or
hospital indemnity or other fixed indemnity insurance if the cost of
the coverage is not excludible from an employee's income or deductible
by a self-employed individual.
\47\ Section 162(l) allows a deduction to a self-employed
individual for the cost of health insurance.
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For purposes of the excise tax, the cost of applicable
employer-sponsored coverage is generally determined under rules
similar to the rules for determining the applicable premium for
purposes of COBRA continuation coverage,\48\ except that any
portion of the cost of coverage attributable to the excise tax
is not taken into account. Cost is determined separately for
self-only coverage and other coverage. Special valuation rules
apply to retiree coverage, certain health FSAs, contributions
to HSAs and Archer MSAs, and qualified small employer health
reimbursement arrangements (``QSEHRAs'').
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\48\ Sec. 4980B(f)(4).
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Calculation of excess benefit and imposition of excise tax
In determining the excess benefit with respect to an
employee (i.e., the amount by which the cost of applicable
employer-sponsored coverage for the employee exceeds the
threshold amount), the aggregate cost of all applicable
employer-sponsored coverage of the employee is taken into
account. The threshold amount for other than self-only coverage
applies to an employee. The threshold amount for other coverage
applies to an employee only if the employee and at least one
other beneficiary are enrolled in coverage other than self-only
coverage under a group health plan that provides minimum
essential coverage and under which the benefits provided do not
vary based on whether the covered individual is the employee or
the other beneficiary. For purposes of the threshold amount,
any coverage provided under a multiemployer plan is treated as
coverage other than self-only coverage.\49\
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\49\ As defined in section 414(f), a multiemployer plan is
generally a plan to which more than one employer is required to
contribute and that is maintained pursuant to one or more collective
bargaining agreements between one or more employee organizations and
more than one employer.
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The excise tax is imposed on the coverage provider.\50\ In
the case of insured coverage (i.e., coverage under a policy,
certificate, or contract issued by an insurance company), the
health insurance issuer is liable for the excise tax. In the
case of self-insured coverage, the person that administers the
plan benefits (``plan administrator'') is generally liable for
the excise tax. However, in the case of employer contributions
to an HSA or an Archer MSA, the employer is liable for the
excise tax.
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\50\ The excise tax is allocated pro rata among the coverage
providers, with each responsible for the excise tax on an amount equal
to the total excess benefit multiplied by a fraction, the numerator of
which is the cost of the applicable employer-sponsored coverage of that
coverage provider and the denominator of which is the aggregate cost of
all applicable employer-sponsored coverage of the employee.
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The employer is generally responsible for calculating the
amount of excess benefit allocable to each coverage provider
and notifying each coverage provider (and the Internal Revenue
Service) of the coverage provider's allocable share. In the
case of applicable employer-sponsored coverage under a
multiemployer plan, the plan sponsor is responsible for the
calculation and notification.\51\
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\51\ The employer or multiemployer plan sponsor may be liable for a
penalty if the total excise tax due exceeds the tax on the excess
benefit calculated and allocated among coverage providers by the
employer or plan sponsor.
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Explanation of Provision
Under the provision, implementation of the excise tax on
high cost employer-sponsored health coverage is delayed until
taxable years beginning after December 31, 2021.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2021.
3. Suspension of annual fee on health insurance providers (sec. 4003 of
the Act and sec. 9010 of the Patient Protection and Affordable
Care Act)
Present Law
Annual fee on health insurance providers
An annual fee applies to any covered entity engaged in the
business of providing health insurance with respect to United
States health risks (``U.S. health risks'').\52\ The aggregate
annual fee for all covered entities is the applicable amount.
The applicable amount is $8 billion for calendar year 2014,
$11.3 billion for calendar years 2015 and 2016, $13.9 billion
for calendar year 2017, and $14.3 billion for calendar year
2018. However, a one-year moratorium applies to the annual fee
on health insurance providers for calendar year 2017. For
calendar years after 2018, the applicable amount is indexed to
the rate of premium growth.
---------------------------------------------------------------------------
\52\ Sec. 9010 of the Patient Protection and Affordable Care Act.
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The aggregate annual fee is apportioned among the providers
based on a ratio designed to reflect relative market share of
U.S. health insurance business. For each covered entity, the
fee for a calendar year is an amount that bears the same ratio
to the applicable amount as (1) the covered entity's net
premiums written during the preceding calendar year with
respect to health insurance for any U.S. health risk, bears to
(2) the aggregate net written premiums of all covered entities
during such preceding calendar year with respect to such health
insurance.
Explanation of Provision
The provision suspends the annual fee on health insurance
providers for calendar year 2019.
Effective Date
The provision is effective for calendar years beginning
after December 31, 2018.
PART THREE: BIPARTISAN BUDGET ACT OF 2018 (PUBLIC LAW 115-123)
53
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\53\ H.R. 1892. The House passed H.R. 1892 on May 18, 2017. The
Senate passed the bill with an amendment on November 28, 2017. The
House agreed to the Senate amendment with an amendment on February 6,
2018. The Senate agreed to the House amendment with an amendment on
February 9, 2018. The House agreed to the Senate amendment on February
9, 2018. The President signed the bill on February 9, 2018.
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A. Tax Relief and Medicaid Changes Related to Certain Disasters:
California Fires
The provisions below were enacted to provide temporary tax
relief to those areas affected by California wildfires. The
provisions use the terms ``California wildfire disaster area''
and ``California wildfire disaster zone.'' \54\ As used in the
Act, ``California wildfire disaster area'' refers to an area
with respect to which a major disaster has been declared by the
President between January 1, 2017, through January 18, 2018,
under section 401 of the Robert T. Stafford Disaster Relief and
Emergency Assistance Act by reason of wildfires in California.
A ``California wildfire disaster zone'' refers to that portion
of the ``California wildfire disaster area'' described above
that has been determined by the President to warrant individual
or individual and public assistance from the Federal government
under the Robert T. Stafford Disaster Relief and Emergency
Assistance Act by reason of the relevant wildfires.
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\54\ See sec. 20101 of the Act.
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1. Special disaster-related rules for use of retirement funds (sec.
20102 of the Act and sec. 72 of the Code)
Present Law
Distributions from tax-favored retirement plans
A distribution from a qualified retirement plan, a tax-
sheltered annuity plan (a ``section 403(b) plan''), an eligible
deferred compensation plan of a State or local government
employer (a ``governmental section 457(b) plan''), or an
individual retirement arrangement (an ``IRA'') generally is
included in income for the year distributed.\55\ These plans
are referred to collectively as ``eligible retirement plans.''
In addition, unless an exception applies, a distribution from a
qualified retirement plan, a section 403(b) plan, or an IRA
received before age 59\1/2\ is subject to the 10-percent
additional tax (referred to as the ``early withdrawal tax'') on
the amount includible in income.\56\
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\55\ Secs. 401(a), 403(a), 403(b), 457(b), and 408. Under section
3405, distributions from these plans are generally subject to income
tax withholding unless the recipient elects otherwise. In addition,
certain distributions from a qualified retirement plan, a section
403(b) plan, or a governmental section 457(b) plan are subject to
mandatory income tax withholding at a 20-percent rate unless the
distribution is rolled over.
\56\ Sec. 72(t). The 10-percent early withdrawal tax does not apply
to distributions from a governmental section 457(b) plan.
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In general, a distribution from an eligible retirement plan
may be rolled over to another eligible retirement plan within
60 days, in which case the amount rolled over generally is not
includible in income. The Internal Revenue Service has the
authority to waive the 60-day requirement if failure to waive
the requirement would be against equity or good conscience,
including cases of casualty, disaster, or other events beyond
the reasonable control of the individual.
The terms of a qualified retirement plan, section 403(b)
plan, or governmental section 457(b) plan generally determine
when distributions are permitted. However, in some cases,
restrictions may apply to distribution before an employee's
termination of employment, referred to as ``in-service''
distributions. Despite such restrictions, an in-service
distribution may be permitted in the case of financial hardship
or an unforeseeable emergency.
Loans from tax-favored retirement plans
Employer-sponsored retirement plans may provide loans to
participants. Unless the loan satisfies certain requirements in
both form and operation, the amount of a retirement plan loan
is a deemed distribution from the retirement plan. Among the
requirements that the loan must satisfy are that the loan
amount must not exceed the lesser of 50 percent of the
participant's vested account balance (or other accrued benefit)
or $50,000 (generally taking into account outstanding balances
of previous loans), and the loan's terms must provide for a
repayment period of not more than five years (except for a loan
specifically to purchase a home) and for level amortization of
loan payments to be made not less frequently than
quarterly.\57\ Thus, if an employee stops making payments on a
loan before the loan is repaid, a deemed distribution of the
outstanding loan balance generally occurs. A deemed
distribution of an unpaid loan balance is generally taxed as
though an actual distribution occurred, including being subject
to the 10-percent early withdrawal tax, if applicable. A deemed
distribution is not eligible for rollover to another eligible
retirement plan. Subject to the limit on the amount of loans,
which treats the amount of any loan that would exceed the limit
as a deemed distribution, the rules relating to loans do not
limit the number of loans an employee may obtain from a plan.
---------------------------------------------------------------------------
\57\ Sec. 72(p).
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Tax-favored retirement plan compliance
Tax-favored retirement plans are generally required to be
operated in accordance with the terms of the plan document, and
amendments to reflect changes to the plan generally must be
adopted within a limited period.
Explanation of Provision
Distributions and recontributions
Under the provision, an exception to the 10-percent early
withdrawal tax applies in the case of a ``qualified wildfire
distribution'' from a qualified retirement plan, a section
403(b) plan, or an IRA. In addition, as discussed further,
income attributable to a qualified wildfire distribution may be
included in income ratably over three years, and the amount of
a qualified wildfire distribution may be recontributed to an
eligible retirement plan within three years.
A qualified wildfire distribution is a permissible
distribution with respect to the relevant wildfires from a
qualified retirement plan, section 403(b) plan, or governmental
section 457(b) plan, regardless of whether a distribution
otherwise would be permissible.\58\ A plan is not treated as
violating any Code requirement merely because it treats a
distribution as a qualified wildfire distribution, provided
that the aggregate amount of such distributions from plans
maintained by the employer and members of the employer's
controlled group or affiliated service group does not exceed
$100,000. Thus, a plan is not treated as violating any Code
requirement merely because an individual might receive total
distributions in excess of $100,000, taking into account
distributions from plans of other employers or IRAs.
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\58\ A qualified wildfire distribution is subject to income tax
withholding unless the recipient elects otherwise. Mandatory 20-percent
withholding does not apply.
---------------------------------------------------------------------------
With respect to the wildfires, a qualified wildfire
distribution is any distribution from an eligible retirement
plan made on or after October 8, 2017, and before January 1,
2019, to an individual whose principal place of abode during
any portion of the period from October 8, 2017, to December 31,
2017 was located in the California wildfire disaster area and
who has sustained an economic loss by reason of the wildfires
giving rise to the Presidential disaster declaration. The total
amount of distributions to an individual from all eligible
retirement plans that may be treated as qualified wildfire
distributions is $100,000. Thus, any distributions in excess of
$100,000 are not qualified wildfire distributions.
Any amount required to be included in income as a result of
a qualified wildfire distribution is included in income ratably
over the three-year period beginning with the year of
distribution unless the individual elects not to have ratable
inclusion apply.
Any portion of a qualified wildfire distribution may, at
any time during the three-year period beginning the day after
the date on which the distribution was received, be
recontributed to an eligible retirement plan to which a
rollover can be made. Any amount recontributed within the
three-year period is treated as a rollover and thus is not
includible in income. For example, if an individual receives a
qualified wildfire distribution in 2017, that amount is
included in income, generally ratably over the year of the
distribution and the following two years, but is not subject to
the 10-percent early withdrawal tax. If, in 2019, the amount of
the qualified wildfire distribution is recontributed to an
eligible retirement plan, the individual may file an amended
return to claim a refund of the tax attributable to the amount
previously included in income. In addition, if, under the
ratable inclusion provision, a portion of the distribution has
not yet been included in income at the time of the
contribution, the remaining amount is not includible in income.
Recontributions of withdrawals for purchase of a home
Any individual who received a qualified distribution \59\
after March 31, 2017, and before January 15, 2018, which was to
be used to purchase or construct a principal residence in the
California disaster area, but which was not so purchased or
constructed on account of the California wildfires, may, during
the period beginning on October 8, 2017, and ending on June 30,
2018, make one or more contributions in an aggregate amount not
to exceed the amount of such qualified distribution to an
eligible retirement plan of which such individual is a
beneficiary and to which a rollover contribution of such
distribution could be made.\60\ A plan is not treated as
violating any Code requirement merely because it repays such
distributions as provided above, provided that the aggregate
amount of such repayments from plans maintained by the employer
and members of the employer's controlled group or affiliated
service group does not exceed $100,000.
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\59\ As described in sections 401(k)(2)(B)(i)(IV), 403(b)(7)(A)(ii)
(but only to the extent such distribution relates to financial
hardship), 403(b)(11)(B), or 72(t)(2)(F).
\60\ Under section 402(c), 403(a)(4), 403(b)(8), or 408(d)(3), as
the case may be.
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Loans
In the case of a ``qualified individual'' who obtained a
loan from a qualified employer plan \61\ during the period
beginning on February 9, 2018, and ending on December 31, 2018,
the permitted maximum loan amount is the lesser of ``the
present value of the nonforfeitable accrued benefit of the
employee under the plan'' (rather than ``one-half of the
present value of the nonforfeitable accrued benefit of the
employee under the plan'') or $100,000 (rather than $50,000),
and a loan meeting this limit is not treated as a
distribution.\62\ For this purpose, a qualified individual is
an individual whose principal place of abode during any portion
of the period from October 8, 2017, to December 31, 2017, was
located in the California wildfire disaster area and who
sustained an economic loss by reason of the California
wildfires.
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\61\ As defined under section 72(p)(4).
\62\ See section 72(p)(2)(A).
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In the case of such a qualified individual with an
outstanding loan on or after October 8, 2017, from a qualified
employer plan, if the due date for any repayment with respect
to such a loan \63\ occurs during the period beginning on
October 8, 2017, and ending on December 31, 2018, the due date
is delayed for one year and any subsequent repayments will be
appropriately adjusted to reflect the delay in any repayment
date noted above, but the repayment delay is disregarded in
determining the five-year period and the term of the loan.\64\
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\63\ See section 72(p)(2).
\64\ Under section 72(p)(2)(B) or (C).
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Plan amendments
A plan amendment made pursuant to the provision (or a
regulation issued thereunder) may be retroactively effective
if, in addition to the requirements described below, the
amendment is made on or before the last day of the first plan
year beginning after January 1, 2019 (or in the case of a
governmental plan, January 1, 2021), or a later date prescribed
by the Secretary. In addition, the plan is treated as operated
in accordance with plan terms during the period beginning with
the date the provision or regulation takes effect (or the date
specified by the plan if the amendment is not required by the
provision or regulation) and ending on the last permissible
date for the amendment (or, if earlier, the date the amendment
is adopted). For an amendment to be retroactively effective, it
must apply retroactively for that period, and the plan must be
operated in accordance with the amendment during that period.
Effective Date
The provision is effective on the date of enactment
(February 9, 2018).
2. Employee retention credit for employers affected by California
wildfires (sec. 20103 of the Act and sec. 38 of the Code)
Present Law
There is no generally applicable employer tax credit for
wages paid in connection with employment in disaster areas.
There is a credit, however, for employers affected by Hurricane
Harvey, Hurricane Irma, and Hurricane Maria.\65\
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\65\ Sec. 503 of the Disaster Tax Relief and Airport and Airway
Extension Act of 2017, Pub. L. No. 115-63. See also former sec. 1400R,
which provided an employer credit for employers affected by Hurricane
Katrina, Hurricane Rita, and Hurricane Wilma. The provision was
repealed as deadwood by the Consolidated Appropriations Act, Pub L. No.
115-141, sec. 401(d)(6)(A).
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Explanation of Provision
The provision provides a credit of 40 percent of the
qualified wages (up to a maximum of $6,000 in qualified wages
per employee) paid by an eligible employer to an eligible
employee.
An eligible employer is any employer that (1) conducted an
active trade or business on October 8, 2017, in the California
wildfire disaster zone and (2) with respect to which the trade
or business described in (1) is inoperable on any day after
October 1, 2017, and before January 1, 2018, as a result of
damage sustained by reason of the wildfires.
An eligible employee is, with respect to an eligible
employer, an employee whose principal place of employment on
October 8, 2017, with such eligible employer was in the
California wildfire disaster zone. An employee may not be
treated as an eligible employee for any period with respect to
an employer if such employer is allowed a credit under section
51, the work opportunity credit, with respect to the employee
for the period.
Qualified wages are wages (as defined in section 51(c)(1)
of the Code, but without regard to section 3306(b)(2)(B) of the
Code) paid or incurred by an eligible employer with respect to
an eligible employee on any day after October 8, 2017, and
before January 1, 2018, during the period (1) beginning on the
date on which the trade or business first became inoperable at
the principal place of employment of the employee immediately
before the wildfires and (2) ending on the date on which such
trade or business has resumed significant operations at such
principal place of employment. Qualified wages include wages
paid without regard to whether the employee performs no
services, performs services at a different place of employment
than such principal place of employment, or performs services
at such principal place of employment before significant
operations have resumed.
The credit is treated as a current year business credit
under section 38(b) and therefore is subject to the tax
liability limitations of section 38(c). Rules similar to
sections 51(i)(1), 52, and 280C(a) apply to the credit.
Effective Date
The provision is effective on the date of enactment
(February 9, 2018).
3. Temporary suspension of limitations on charitable contributions
(sec. 20104(a) of the Act and sec. 170 of the Code)
Present Law
In general
In general, an income tax deduction is permitted for
charitable contributions, subject to certain limitations that
depend on the type of taxpayer, the property contributed, and
the donee organization.\66\
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\66\ Sec. 170.
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Charitable contributions of cash are deductible in the
amount contributed. In general, contributions of capital gain
property to a qualified charity are deductible at fair market
value with certain exceptions. Capital gain property means any
capital asset or property used in the taxpayer's trade or
business the sale of which at its fair market value, at the
time of contribution, would have resulted in gain that would
have been long-term capital gain. Contributions of other
appreciated property generally are deductible at the donor's
basis in the property. Contributions of depreciated property
generally are deductible at the fair market value of the
property.
Percentage limitations
Contributions by individuals
For individuals, in any taxable year, the amount deductible
as a charitable contribution is limited to a percentage of the
taxpayer's contribution base. The applicable percentage of the
contribution base varies depending on the type of donee
organization and property contributed. The contribution base is
defined as the taxpayer's adjusted gross income computed
without regard to any net operating loss carryback.
Contributions by an individual taxpayer of property (other
than appreciated capital gain property) to a charitable
organization described in section 170(b)(1)(A) (e.g., public
charities, private foundations other than private non-operating
foundations, and certain governmental units) may not exceed 50
percent of the taxpayer's contribution base. Contributions of
this type of property to nonoperating private foundations and
certain other organizations generally may be deducted up to 30
percent of the taxpayer's contribution base.
For contributions taken into account for taxable years
beginning after December 31, 2017, and before January 1, 2026,
new section 170(b)(1)(G) increases the percentage limit for
contributions by an individual taxpayer of cash to an
organization described in section 170(b)(1)(A) to 60 percent.
The 60-percent limit does not apply to noncash contributions.
The 60-percent limit is intended to be applied after, and
reduced by, the amount of noncash contributions to
organizations described in section 170(b)(1)(A).
Contributions of appreciated capital gain property to
charitable organizations described in section 170(b)(1)(A)
generally are deductible up to 30 percent of the taxpayer's
contribution base. An individual may elect, however, to bring
all these contributions of appreciated capital gain property
for a taxable year within the 50-percent limitation category by
reducing the amount of the contribution deduction by the amount
of the appreciation in the capital gain property. Contributions
of appreciated capital gain property to charitable
organizations described in section 170(b)(1)(B) (e.g., private
nonoperating foundations) are deductible up to 20 percent of
the taxpayer's contribution base.
Contributions by corporations
For corporations, in any taxable year, charitable
contributions are not deductible to the extent the aggregate
contributions exceed 10 percent of the corporation's taxable
income computed without regard to net operating loss or capital
loss carrybacks.
For purposes of determining whether a corporation's
aggregate charitable contributions in a taxable year exceed the
applicable percentage limitation, contributions of capital gain
property are taken into account after other charitable
contributions.
Carryforward of excess contributions
Charitable contributions that exceed the applicable
percentage limitation may be carried forward for up to five
years.\67\ The amount that may be carried forward from a
taxable year (``contribution year'') to a succeeding taxable
year may not exceed the applicable percentage of the
contribution base for the succeeding taxable year less the sum
of contributions made in the succeeding taxable year plus
contributions made in taxable years prior to the contribution
year and treated as paid in the succeeding taxable year under
this provision.
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\67\ Sec. 170(d).
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Overall limitation on itemized deductions (``Pease'' limitation)
For taxable years beginning before January 1, 2018, the
total amount of otherwise allowable itemized deductions (other
than medical expenses, investment interest, and casualty,
theft, or wagering losses) is reduced by three percent of the
amount of the taxpayer's adjusted gross income in excess of a
certain threshold. The otherwise allowable itemized deductions
may not be reduced by more than 80 percent. For 2017, the
adjusted gross income threshold is $261,500 for an individual
taxpayer ($313,800 for a married taxpayers filing a joint
return). These dollar amounts are adjusted for inflation. The
Pease limitation does not apply to any taxable year beginning
after December 31, 2017, and before January 1, 2026.
Explanation of Provision
Suspension of percentage limitations
Under the provision, in the case of an individual, the
deduction for qualified contributions is allowed up to the
amount by which the taxpayer's contribution base exceeds the
deduction for other charitable contributions. Contributions in
excess of this amount are carried over to succeeding taxable
years as contributions described in 170(b)(1)(A), subject to
the limitations of section 170(d)(1)(A)(i) and (ii).
In the case of a corporation, the deduction for qualified
contributions is allowed up to the amount by which the
corporation's taxable income (as computed under section
170(b)(2)) exceeds the deduction for other charitable
contributions. Contributions in excess of this amount are
carried over to succeeding taxable years, subject to the
limitations of section 170(d)(2).
In applying subsections (b) and (d) of section 170 to
determine the deduction for other contributions, qualified
contributions are not taken into account (except to the extent
qualified contributions are carried over to succeeding taxable
years under the rules described above).
Qualified contributions are cash contributions paid during
the period beginning on October 8, 2017, and ending on December
31, 2018, to a charitable organization described in section
170(b)(1)(A), other than contributions to (i) a supporting
organization described in section 509(a)(3) or (ii) for the
establishment of a new, or maintenance of an existing, donor
advised fund (as defined in section 4966(d)(2)). Contributions
of noncash property, such as securities, are not qualified
contributions. Under the provision, qualified contributions
must be to an organization described in section 170(b)(1)(A);
thus, contributions to, for example, a charitable remainder
trust generally are not qualified contributions, unless the
charitable remainder interest is paid in cash to an eligible
charity during the applicable time period. Qualified
contributions must be made for relief efforts in the California
wildfire disaster area. Taxpayers must substantiate that the
contribution is made for this purpose. A taxpayer must elect to
have the contributions treated as qualified contributions.
Limitation on overall itemized deductions
Under the provision, the charitable contribution deduction
up to the amount of qualified contributions (as defined above)
paid during the year is not treated as an itemized deduction
for purposes of the overall limitation on itemized deductions
(the ``Pease'' limitation). As noted above, the Pease
limitation does not apply to any taxable year beginning after
December 31, 2017, and before January 1, 2026.
Effective Date
The provision is effective on the date of enactment
(February 9, 2018).
4. Special rules for qualified disaster-related personal casualty
losses (sec. 20104(b) of the Act and sec. 165 of the Code)
Present Law
For tax years beginning before December 31, 2017, a
taxpayer may generally claim an itemized deduction for any loss
sustained during the taxable year and not compensated by
insurance or otherwise.\68\ For individual taxpayers,
deductible losses must be incurred in a trade or business or
other profit-seeking activity or consist of property losses
arising from fire, storm, shipwreck, or other casualty, or from
theft. Personal casualty or theft losses are deductible only if
they exceed $100 per casualty or theft. In addition, aggregate
net casualty and theft losses are deductible only to the extent
they exceed 10 percent of an individual taxpayer's adjusted
gross income.
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\68\ Sec. 165.
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For tax years beginning after December 31, 2017, and before
January 1, 2026, an individual may claim an itemized deduction
for a personal casualty loss only if such loss was attributable
to a disaster declared by the President under section 401 of
the Robert T. Stafford Disaster Relief and Emergency Assistance
Act.\69\ An exception applies to the extent a personal casualty
loss of an individual does not exceed the individual's personal
casualty gains.
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\69\ Sec. 165(h)(5).
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Explanation of Provision
Under the provision, personal casualty losses that arose in
the California wildfire disaster area on or after October 8,
2017, and that were attributable to such wildfire, are
deductible without regard to whether aggregate net losses
exceed 10 percent of a taxpayer's adjusted gross income. In
order to be deductible, however, such losses must exceed $500
per casualty. Finally, such losses may be claimed in addition
to the standard deduction and may be claimed by taxpayers
subject to the alternative minimum tax.
Effective Date
The provision is effective on the date of enactment
(February 9, 2018).
5. Special rule for determining earned income (sec. 20104(c) of the Act
and secs. 24 and 32 of the Code)
Present Law
Eligible taxpayers are allowed an earned income credit and
a child credit. In general, the earned income credit is a
refundable credit for low-income workers.\70\ The amount of the
credit depends on the earned income of the taxpayer and whether
the taxpayer has one, more than one, or no qualifying children.
Earned income generally includes wages, salaries, tips, and
other employee compensation, plus net earnings from self-
employment.
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\70\ Sec. 32.
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For taxable years beginning before December 31, 2017,
taxpayers with incomes below certain threshold amounts are
eligible for a $1,000 credit for each qualifying child.\71\ In
some circumstances, all or a portion of the otherwise allowable
credit is treated as a refundable credit (the ``additional
child tax credit''). The amount of the additional child tax
credit equals 15 percent of the taxpayer's earned income in
excess of $3,000.
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\71\ Sec. 24.
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For taxable years beginning after December 31, 2017, and
before January 1, 2026, the amount of the credit is $2,000, the
refundable portion of the child credit is capped at $1,400
(indexed for inflation), and the earned income threshold is
$2,500.\72\
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\72\ Sec. 24(h).
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Explanation of Provision
The provision permits qualified individuals to elect to
calculate their earned income credit and additional child tax
credit for a taxable year that includes any portion of the
period from October 8, 2017, to December 31, 2017, using their
earned income from the prior taxable year. Qualified
individuals are permitted to make the election with respect to
a taxable year only if their earned income for such taxable
year is less than their earned income for the preceding taxable
year.
Qualified individuals are (1) individuals who, during any
portion of the period from October 8, 2017, to December 31,
2017, had their principal place of abode in the California
wildfire disaster zone or (2) individuals who, during any
portion of such period, were not in the California wildfire
disaster zone but whose principal place of abode was in the
California wildfire disaster area, and were displaced from such
principal place of abode by reason of the wildfires.
For purposes of the provision, in the case of a joint
return for a taxable year that includes any portion of the
period from October 8, 2017, to December 31, 2017, the
provision applies if either spouse is a qualified individual.
In such cases, the earned income which is attributable to the
taxpayer for the preceding taxable year is the sum of the
earned income which is attributable to each spouse for such
preceding taxable year.
Any election to use the prior year's earned income under
the provision applies with respect to both the earned income
credit and additional child tax credit. For administrative
purposes, the incorrect use on a return of earned income
pursuant to an election under this provision is treated as a
mathematical or clerical error. An election under the provision
is disregarded for purposes of calculating gross income in the
election year.
Effective Date
The provision is effective on the date of enactment
(February 9, 2018).
B. Tax Relief for Hurricanes Harvey, Irma, and Maria
1. Tax Relief for Hurricanes Harvey, Irma, and Maria (sec. 20201 of the
Act and sec. 501(a)(2) and (b)(2) of the Disaster Tax Relief
and Airport and Airway Extension Act of 2017, Pub. L. No. 115-
63)
Present Law
Section 501 of the Disaster Tax Relief and Airport and
Airway Extension Act of 2017 \73\ defines the Hurricanes Harvey
and Irma ``disaster area'' as an area with respect to which a
major disaster has been declared by the President before
September 21, 2017.
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\73\ Pub. L. No. 115-63.
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Explanation of Provision
The provision modifies the definition of ``disaster area''
with respect to Hurricanes Harvey and Irma by delaying the date
by which the disaster must be declared from September 21, 2017,
to October 17, 2017.
Effective Date
The amendment is effective as if included in the provisions
of the Disaster Tax Relief and Airport and Airway Extension Act
of 2017.
C. Tax Relief for Families and Individuals
1. Extension of exclusion from gross income of discharge of qualified
principal residence indebtedness (sec. 40201 of the Act and
sec. 108 of the Code)
Present Law
In general
Gross income includes income that is realized by a debtor
from the discharge of indebtedness,\74\ subject to certain
exceptions for debtors in Title 11 bankruptcy cases, insolvent
debtors, certain student loans, certain farm indebtedness, and
certain real property business indebtedness.\75\ In cases
involving discharges of indebtedness that are excluded from
gross income under the exceptions to the general rule,
taxpayers generally reduce certain tax attributes, including
basis in property, by the amount of the discharge of
indebtedness.
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\74\ A debt cancellation which constitutes a gift or bequest is not
treated as income to the donee debtor. Sec. 102.
\75\ Secs. 61(a)(11) and 108.
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The amount of discharge of indebtedness excluded from
income by an insolvent debtor not in a Title 11 bankruptcy case
cannot exceed the amount by which the debtor is insolvent. In
the case of a discharge in bankruptcy or where the debtor is
insolvent, any reduction in basis may not exceed the excess of
the aggregate bases of properties held by the taxpayer
immediately after the discharge over the aggregate of the
liabilities of the taxpayer immediately after the
discharge.\76\
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\76\ Sec. 1017.
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For all taxpayers, the amount of discharge of indebtedness
generally is equal to the difference between the adjusted issue
price of the debt being cancelled and the amount used to
satisfy the debt. These rules generally apply to the exchange
of an old obligation for a new obligation, including a
modification of indebtedness that is treated as an exchange (a
debt-for-debt exchange).
Qualified principal residence indebtedness
An exclusion from gross income is provided for any
discharge of indebtedness income by reason of a discharge (in
whole or in part) of qualified principal residence
indebtedness. Qualified principal residence indebtedness means
acquisition indebtedness (within the meaning of section
163(h)(3)(B), except that the dollar limitation is $2 million)
with respect to the taxpayer's principal residence.\77\
Acquisition indebtedness with respect to a principal residence
generally means indebtedness which is incurred in the
acquisition, construction, or substantial improvement of the
principal residence of the individual and is secured by the
residence. It also includes refinancing of such indebtedness to
the extent the amount of the indebtedness resulting from such
refinancing does not exceed the amount of the refinanced
indebtedness. For these purposes, the term ``principal
residence'' has the same meaning as under section 121 of the
Code.
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\77\ Sec. 108(h)(2).
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If, immediately before the discharge, only a portion of a
discharged indebtedness is qualified principal residence
indebtedness, the exclusion applies only to so much of the
amount discharged as exceeds the portion of the debt which is
not qualified principal residence indebtedness. Thus, assume
that a principal residence is secured by an indebtedness of $1
million, of which $700,000 is qualified principal residence
indebtedness. If the residence is sold for $600,000 and
$400,000 debt is discharged, then only $100,000 of the amount
discharged may be excluded from gross income under the
qualified principal residence indebtedness exclusion.
The basis of the individual's principal residence is
reduced by the amount excluded from income under the provision.
The qualified principal residence indebtedness exclusion
does not apply to a taxpayer in a Title 11 case; instead the
general exclusion rules apply. In the case of an insolvent
taxpayer not in a Title 11 case, the qualified principal
residence indebtedness exclusion applies unless the taxpayer
elects to have the general exclusion rules apply instead.
The exclusion does not apply to the discharge of a loan if
the discharge is on account of services performed for the
lender or any other factor not directly related to a decline in
the value of the residence or to the financial condition of the
taxpayer.
The exclusion for qualified principal residence
indebtedness is effective for discharges of indebtedness before
January 1, 2017.
Explanation of Provision
The provision extends for one additional year (through
December 31, 2017) the exclusion from gross income for
discharges of qualified principal residence indebtedness. The
provision also provides for an exclusion from gross income in
the case of those taxpayers whose qualified principal residence
indebtedness was discharged on or after January 1, 2018, if the
discharge was subject to a written arrangement entered into
before January 1, 2018.
Effective Date
The provision generally applies to discharges of
indebtedness after December 31, 2016.
2. Extension of mortgage insurance premiums treated as qualified
residence interest (sec. 40202 of the Act and sec. 163 of the
Code)
Present Law
In general
Qualified residence interest is deductible notwithstanding
the general rule that personal interest is nondeductible.\78\
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\78\ Sec. 163(h).
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Acquisition indebtedness and home equity indebtedness
For tax years beginning before December 31, 2017, qualified
residence interest is interest on acquisition indebtedness and
home equity indebtedness with respect to a principal and a
second residence of the taxpayer. The maximum amount of
acquisition indebtedness is $1,000,000 ($500,000 in the case of
married taxpayers filing separately) and the maximum amount of
home equity indebtedness is $100,000 ($50,000 in the case of
married taxpayers filing separately). Acquisition indebtedness
means debt that is incurred in acquiring, constructing, or
substantially improving a qualified residence of the taxpayer,
and that is secured by the residence. Home equity indebtedness
is debt (other than acquisition indebtedness) that is secured
by the taxpayer's qualified residence, to the extent the
aggregate amount of such debt does not exceed the difference
between the total acquisition indebtedness with respect to the
residence, and the fair market value of the residence.
For tax years beginning after December 31, 2017, and before
January 1, 2026, qualified residence interest does not include
home equity indebtedness. The maximum amount of acquisition
indebtedness is $750,000 ($375,000 in the case of married
taxpayers filing separately). This reduced limitation on
acquisition indebtedness does not apply to indebtedness
incurred on or before December 15, 2017.
Qualified mortgage insurance
Certain premiums paid or accrued for qualified mortgage
insurance by a taxpayer during the taxable year in connection
with acquisition indebtedness on a qualified residence of the
taxpayer are treated as interest that is qualified residence
interest and thus deductible. The amount allowable as a
deduction is phased out ratably by 10 percent for each $1,000
(or fraction thereof) by which the taxpayer's adjusted gross
income exceeds $100,000 ($500 and $50,000, respectively, in the
case of a married individual filing a separate return). Thus,
the deduction is not allowed if the taxpayer's adjusted gross
income exceeds $109,000 ($54,000 in the case of married
individual filing a separate return).
For this purpose, qualified mortgage insurance means
mortgage insurance provided by the Department of Veterans
Affairs, the Federal Housing Administration, or the Rural
Housing Service, and private mortgage insurance (defined in
section two of the Homeowners Protection Act of 1998 as in
effect on the date of enactment of the provision).
Amounts paid for qualified mortgage insurance that are
properly allocable to periods after the close of the taxable
year are treated as paid in the period to which they are
allocated. No deduction is allowed for the unamortized balance
if the mortgage is paid before the end of its term (except in
the case of qualified mortgage insurance provided by the
Department of Veterans Affairs or Rural Housing Service).
The deduction does not apply with respect to any mortgage
insurance contract issued before January 1, 2007. The deduction
is disallowed for any amount paid or accrued after December 31,
2016, or properly allocable to any period after that date.
Information reporting rules apply to mortgage insurance
premiums for premiums paid or accrued during periods to which
the deductibility provision applies.\79\
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\79\ Sec. 6050H(h) and Treas. Reg. sec. 1.6050H-3.
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Explanation of Provision
The provision extends the deduction for private mortgage
insurance premiums for one year (with respect to contracts
entered into after December 31, 2006). Thus, the provision
applies to amounts paid or accrued in 2017 (and not properly
allocable to any period after 2017).
Effective Date
The provision applies to amounts paid or accrued after
December 31, 2016.
3. Extension of above-the-line deduction for qualified tuition and
related expenses (sec. 40203 of the Act and sec. 222 of the
Code)
Present Law
An individual is allowed a deduction for qualified tuition
and related expenses for higher education paid by the
individual during the taxable year.\80\ The deduction is
allowed in computing adjusted gross income. The term qualified
tuition and related expenses is defined in the same manner as
for the American Opportunity and Lifetime Learning credits,\81\
and includes tuition and fees required for the enrollment or
attendance of the taxpayer, the taxpayer's spouse, or any
dependent of the taxpayer with respect to whom the taxpayer is
allowed a deduction for a personal exemption,\82\ at an
eligible institution of higher education for courses of
instruction of such individual at such institution.\83\ The
expenses must be in connection with enrollment at an
institution of higher education during the taxable year, or
with an academic period beginning during the taxable year or
during the first three months of the next taxable year. The
deduction is not available for tuition and related expenses
paid for elementary or secondary education.
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\80\ Sec. 222.
\81\ See sec. 25A(f). The American Opportunity tax credit allows
course materials to be taken into account in addition to tuition and
fees, but such materials are not taken into account for purposes of the
deduction for qualified tuition and related expenses.
\82\ Notwithstanding that the exemption amount is zero for taxable
years beginning after December 31, 2017, and before January 1, 2026,
the reduction of the exemption amount to zero is not taken into account
in determining whether a deduction for a personal exemption is still
allowed or allowable. Sec. 151(d)(5)(B).
\83\ The deduction generally is not available for expenses with
respect to a course or education involving sports, games, or hobbies,
and is not available for student activity fees, athletic fees,
insurance expenses, or other expenses unrelated to an individual's
academic course of instruction. Secs. 222(d)(1) and 25A(f).
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The maximum deduction is $4,000 for an individual whose
adjusted gross income for the taxable year does not exceed
$65,000 ($130,000 in the case of a joint return), or $2,000 for
an individual whose adjusted gross income does not exceed
$80,000 ($160,000 in the case of a joint return). No deduction
is allowed for an individual whose adjusted gross income
exceeds the relevant adjusted gross income limitations, for a
married individual who does not file a joint return, or for an
individual with respect to whom a personal exemption deduction
is allowable to another taxpayer for the taxable year. The
deduction is not available for taxable years beginning after
December 31, 2016.
The amount of qualified tuition and related expenses must
be reduced by certain scholarships, educational assistance
allowances, and other amounts paid for the benefit of such
individual,\84\ and by the amount of such expenses taken into
account for purposes of determining any exclusion from gross
income of: (1) income from certain U.S. savings bonds used to
pay higher education tuition and fees; and (2) income from a
Coverdell education savings account.\85\ Additionally, such
expenses must be reduced by the earnings portion (but not the
return of principal) of distributions from a qualified tuition
program if an exclusion under section 529 is claimed with
respect to expenses eligible for the qualified tuition
deduction. No deduction is allowed for any expense for which a
deduction is otherwise allowed or with respect to an individual
for whom an American Opportunity or Lifetime Learning credit is
elected for such taxable year.
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\84\ Secs. 222(d)(1) and 25A(g)(2).
\85\ Sec. 222(c). These reductions are the same as those that apply
to the American Opportunity and Lifetime Learning credits.
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Explanation of Provision
The provision extends the qualified tuition deduction for
one year, through 2017.
Effective Date
The provision applies to taxable years beginning after
December 31, 2016.
D. Incentives for Growth, Jobs, Investment, and Innovation
1. Extension of Indian employment tax credit (sec. 40301 of the Act and
sec. 45A of the Code)
Present Law
In general, a credit against income tax liability is
allowed to employers for the first $20,000 of qualified wages
and qualified employee health insurance costs paid or incurred
by the employer with respect to certain employees.\86\ The
credit is equal to 20 percent of the excess of eligible
employee qualified wages and health insurance costs during the
current year over the amount of such wages and costs incurred
by the employer during 1993. The credit is an incremental
credit, such that an employer's current-year qualified wages
and qualified employee health insurance costs (up to $20,000
per employee) are eligible for the credit only to the extent
that the sum of such costs exceeds the sum of comparable costs
paid during 1993. No deduction is allowed for the portion of
the wages equal to the amount of the credit.
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\86\ Sec. 45A.
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Qualified wages means wages paid or incurred by an employer
for services performed by a qualified employee. A qualified
employee means any employee who is an enrolled member of an
Indian tribe or the spouse of an enrolled member of an Indian
tribe, who performs substantially all of the services within an
Indian reservation, and whose principal place of abode while
performing such services is on or near the reservation in which
the services are performed. An ``Indian reservation'' is a
reservation as defined in section 3(d) of the Indian Financing
Act of 1974 \87\ or section 4(10) of the Indian Child Welfare
Act of 1978.\88\ For purposes of the preceding sentence,
section 3(d) is applied by treating ``former Indian
reservations in Oklahoma'' as including only lands that are (1)
within the jurisdictional area of an Oklahoma Indian tribe as
determined by the Secretary of the Interior, and (2) recognized
by such Secretary as an area eligible for trust land status
under 25 C.F.R. Part 151 (as in effect on August 5, 1997).
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\87\ Pub. L. No. 93-262.
\88\ Pub. L. No. 95-608.
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An employee is not treated as a qualified employee for any
taxable year of the employer if the total amount of wages paid
or incurred by the employer with respect to such employee
during the taxable year exceeds an amount determined at an
annual rate of $30,000 (which after adjustment for inflation is
$45,000 for 2016).\89\ In addition, an employee will not be
treated as a qualified employee under certain specific
circumstances, such as where the employee is related to the
employer (in the case of an individual employer) or to one of
the employer's specified shareholders, owners, partners,
grantors, beneficiaries, or fiduciaries, or is a dependent
thereof.\90\ Similarly, an employee will not be treated as a
qualified employee where the employee has more than a five
percent ownership interest in the employer. Finally, an
employee will not be considered a qualified employee to the
extent the employee's services relate to gaming activities or
are performed in a building housing such activities.
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\89\ See Instructions for Form 8845, Indian Employment Credit
(2016).
\90\ Sec. 51(i)(1).
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The wage credit is available for wages paid or incurred in
taxable years beginning on or before December 31, 2016.
Explanation of Provision
The provision extends the Indian employment tax credit for
one year (through taxable years beginning on or before December
31, 2017).
Effective Date
The provision applies to taxable years beginning after
December 31, 2016.
2. Extension of railroad track maintenance credit (sec. 40302 of the
Act and sec. 45G of the Code)
Present Law
In general
A business tax credit is allowed for 50 percent of
qualified railroad track maintenance expenditures paid or
incurred by an eligible taxpayer during taxable years beginning
before January 1, 2017 (the ``railroad track maintenance
credit'' or ``credit'').\91\ For purposes of calculating the
credit, all members of a controlled group of corporations or a
group of businesses under common control are treated as a
single taxpayer, and each member's credit is determined on a
proportionate basis to each member's share of the aggregate
qualified railroad track maintenance expenditures taken into
account by the group for the credit.\92\ The credit may reduce
a taxpayer's tax liability below its tentative minimum tax.\93\
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\91\ Sec. 45G(a) and (f). An eligible taxpayer generally claims the
railroad track maintenance credit by filing Form 8900, Qualified
Railroad Track Maintenance Credit. If a taxpayer's only source of the
credit is a partnership or S corporation, the taxpayer may report the
credit directly on Form 3800, General Business Credit (see Part III,
line 4g).
\92\ Sec. 45G(e)(2) and Treas. Reg. sec. 1.45G-1(f). See also
Notice 2013-20, 2013-15 I.R.B. 902, April 8, 2013; and Field Attorney
Advice 20151601F, December 19, 2014.
\93\ Sec. 38(c)(4).
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Limitation
The railroad track maintenance credit is limited to the
product of $3,500 times the number of miles of railroad track
\94\ (1) owned or leased by an eligible taxpayer as of the
close of its taxable year,\95\ and (2) assigned to the eligible
taxpayer by a Class II or Class III railroad that owns or
leases such track at the close of the taxable year.\96\ Amounts
that exceed the limitation are not carried over to another
taxable year.\97\
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\94\ Double track is treated as multiple lines of railroad track,
rather than as a single line of railroad track (i.e., one mile of
single track is one mile, but one mile of double track is two miles).
Treas. Reg. sec. 1.45G-1(b)(9).
\95\ A Class II or Class III owns railroad track if the railroad
track is subject to the allowance for depreciation under section 167 by
such Class II or Class III railroad. Treas. Reg. sec. 1.45G-1(b)(2).
Railroad track generally has a seven-year MACRS recovery period. Sec.
168(e)(3)(C)(i) and asset class 40.4 of Rev. Proc. 87-56, 1987-2 C.B.
674. Alternatively, railroad structures and similar improvements (e.g.,
bridges, elevated structures, fences, etc.) generally have a 20-year
MACRS recovery period (see asset class 40.2 of Rev. Proc. 87-56), while
railroad grading and tunnel bores have a 50-year recovery period (see
sec. 168(c)). The term ``railroad grading or tunnel bore'' means all
improvements resulting from excavations (including tunneling),
construction of embankments, clearings, diversions of roads and
streams, sodding of slopes, and from similar work necessary to provide,
construct, reconstruct, alter, protect, improve, replace, or restore a
roadbed or right-of-way for railroad track. Sec. 168(e)(4).
\96\ Sec. 45G(b)(1).
\97\ Treas. Reg. sec. 1.45G-1(c)(2)(iii).
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Assignments
Each mile of railroad track may be taken into account only
once, either by the owner of such mile or by the owner's
assignee, in computing the per-mile limitation.\98\ Any
assignment of a mile of railroad track may be made only once
per taxable year of the Class II or Class III railroad, and is
treated as made of the close of such taxable year.\99\ Such
assignment is taken into account for the taxable year of the
assignee that includes the date that such assignment is treated
as effective.
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\98\ Sec. 45G(b)(2). See also Treas. Reg. sec. 1.45G-1(d).
\99\ An assignor must file Form 8900 with its timely filed
(including extensions) Federal income tax return for the taxable year
for which it assigns any mile of eligible railroad track, even if it is
not itself claiming the railroad track maintenance credit for that
taxable year. Treas. Reg. sec. 1.45G-1(d)(4). Both the assignor and the
assignee must attach a statement to Form 8900 detailing the information
required by Treas. Reg. sec. 1.45G-1(d)(4).
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Eligible taxpayer
An eligible taxpayer means any Class II or Class III
railroad, and any person (including a Class I railroad \100\)
who transports property using the rail facilities \101\ of a
Class II or Class III railroad or who furnishes railroad-
related property \102\ or services \103\ to a Class II or Class
III railroad, but only with respect to miles of railroad track
assigned to such person by such railroad under the
provision.\104\
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\100\ The Surface Transportation Board currently classifies a Class
I railroad as a carrier with annual operating revenue of $447,621,226
or more. The seven Class I railroads are BNSF Railway Company, Kansas
City Southern Railway Company, Union Pacific Railway Company, Soo Line
Railroad Company (Canadian Pacific's U.S. operations), CSX
Transportation Inc., Norfolk Southern Railway Company, and Grand Trunk
Corporation (Canadian National's U.S. operations). See the Surface
Transportation Board FAQs--Economic and Industry Information, available
at https://www.stb.gov/stb/faqs.html.
\101\ Rail facilities of a Class II or Class III railroad are
railroad yards, tracks, bridges, tunnels, wharves, docks, stations, and
other related assets that are used in the transport of freight by a
railroad and owned or leased by that railroad. Treas. Reg. sec. 1.45G-
1(b)(6).
\102\ Railroad-related property is property that is unique to
railroads and provided directly to a Class II or Class III railroad.
See Treas. Reg. sec. 1.45G-1(b)(7) for a detailed description.
\103\ Railroad-related services are services that are provided
directly to, and are unique to, a railroad and that relate to railroad
shipping, loading and unloading of railroad freight, or repairs of rail
facilities or railroad-related property. See Treas. Reg. sec. 1.45G-
1(b)(8) for a detailed description.
\104\ Sec. 45G(c).
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The terms Class II or Class III railroad have the meanings
given by the Surface Transportation Board without regard to the
controlled group rules under section 45G(e)(2).\105\
---------------------------------------------------------------------------
\105\ Sec. 45G(e)(1) and Treas. Reg. sec. 1.45G-1(b)(1). The
Surface Transportation Board currently classifies a Class II railroad
as a carrier with annual operating revenue of less than $447,621,226
but in excess of $35,809,698, and a Class III railroad as a carrier
with annual operating revenue of $35,809,698 or less. See the Surface
Transportation Board FAQs--Economic and Industry Information, available
at https://www.stb.gov/stb/faqs.html.
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Qualified railroad track maintenance expenditures
Qualified railroad track maintenance expenditures are
defined as gross expenditures (whether or not otherwise
chargeable to capital account \106\) for maintaining railroad
track (including roadbed, bridges, and related track
structures) owned or leased as of January 1, 2015, by a Class
II or Class III railroad, determined without regard to any
consideration for such expenditure given by the Class II or
Class III railroad that made the assignment of such track.\107\
However, consideration received directly or indirectly from
persons other than the Class II or Class III railroad does
reduce the amount of qualified railroad track maintenance
expenditures.\108\ Any amount that an assignee pays an assignor
in exchange for an assignment of one or more miles of eligible
railroad is treated as qualified railroad track maintenance
expenditures paid or incurred by the assignee at the time and
to the extent the assignor pays or incurs qualified railroad
track maintenance expenditures.\109\
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\106\ All or some of the qualified railroad track maintenance
expenditures may be required to be capitalized under section 263(a) as
a tangible or intangible asset. See, e.g., Treas. Reg. sec. 1.263(a)-
4(d)(8), which requires the capitalization of amounts paid or incurred
by a taxpayer to produce or improve real property owned by another
(except to the extent the taxpayer is selling services at fair market
value to produce or improve the real property) if the real property can
reasonably be expected to produce significant economic benefits for the
taxpayer. The basis of the tangible or intangible asset includes the
capitalized amount of the qualified railroad track maintenance
expenditures. Treas. Reg. sec. 1.45G-1(e)(1). Note that for purposes of
Treas. Reg. sec. 1.263(a)-4(d)(8), real property includes property that
is affixed to real property and that will ordinarily remain affixed for
an indefinite period of time. Treas. Reg. sec. 1.263(a)-4(d)(8)(iii).
Intangible assets described in Treas. Reg. sec. 1.263(a)-4(d)(8) are
generally depreciable ratably over 25 years. See Treas. Reg. sec.
1.167(a)-3.
\107\ Sec. 45G(d); Treas. Reg. sec. 1.45G-1(b)(5).
\108\ Treas. Reg. sec. 1.45G-1(c)(3)(ii).
\109\ Treas. Reg. sec. 1.45G-1(c)(3).
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Basis adjustment
Basis of the railroad track must be reduced (but not below
zero) by an amount equal to 100 percent of the taxpayer's
qualified railroad track maintenance tax credit determined for
the taxable year.\110\ The basis reduction is taken into
account before the depreciation deduction with respect to such
railroad track is determined for the taxable year for which the
railroad track maintenance credit is allowable.\111\ If all or
some of the qualified railroad track maintenance expenditures
paid or incurred by an eligible taxpayer during the taxable
year is capitalized under section 263(a) to more than one
asset, whether tangible or intangible, the reduction to the
basis of these assets is allocated among each of the assets
subject to the reduction in proportion to the unadjusted basis
of each asset at the time the qualified railroad track
maintenance expenditures are paid or incurred during that
taxable year.\112\
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\110\ Sec. 45G(e)(3). See also sec. 1016(a)(29) and Treas. Reg.
sec. 1.45G-1(e).
\111\ Treas. Reg. sec. 1.45G-1(e)(2).
\112\ Ibid.
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Explanation of Provision
The provision extends the credit for one year, for
qualified railroad track maintenance expenditures paid or
incurred in taxable years beginning before January 1, 2018.
Effective Date
The provision generally applies to expenditures paid or
incurred in taxable years beginning after December 31, 2016.
The provision also provides a safe harbor that treats
assignments, including related expenditures paid or incurred,
for taxable years ending after January 1, 2017, and before
January 1, 2018, as effective as of the close of such taxable
year if made pursuant to a written agreement entered into no
later than 90 days following the date of enactment (i.e., no
later than May 10, 2018).
3. Extension of mine rescue team training credit (sec. 40303 of the Act
and sec. 45N of the Code)
Present Law
An eligible employer may claim a general business credit
against income tax with respect to each qualified mine rescue
team employee equal to the lesser of: (1) 20 percent of the
amount paid or incurred by the taxpayer during the taxable year
with respect to the training program costs of the qualified
mine rescue team employee (including the wages of the employee
while attending the program); or (2) $10,000.\113\
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\113\ Sec. 45N(a).
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A qualified mine rescue team employee is any full-time
employee of the taxpayer who is a miner eligible for more than
six months of a taxable year to serve as a mine rescue team
member by virtue of either having completed the initial 20-hour
course of instruction prescribed by the Mine Safety and Health
Administration's Office of Educational Policy and Development,
or receiving at least 40 hours of refresher training in such
instruction.\114\
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\114\ Sec. 45N(b).
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An eligible employer is any taxpayer that employs
individuals as miners in underground mines in the United
States.\115\ The term ``wages'' has the meaning given to such
term by section 3306(b) \116\ (determined without regard to any
dollar limitation contained in that section).\117\
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\115\ Sec. 45N(c).
\116\ Section 3306(b) defines wages for purposes of Federal
Unemployment Tax.
\117\ Sec. 45N(d).
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No deduction is allowed for the portion of the expenses
otherwise deductible that is equal to the amount of the
credit.\118\ The credit does not apply to taxable years
beginning after December 31, 2016.\119\ Additionally, the
credit is not allowable for purposes of computing the
alternative minimum tax.\120\
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\118\ Sec. 280C(e).
\119\ Sec. 45N(e).
\120\ Sec. 38(c).
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Explanation of Provision
The provision extends the credit for one year, through
taxable years beginning before January 1, 2018.
Effective Date
The provision applies to taxable years beginning after
December 31, 2016.
4. Extension of classification of certain race horses as three-year
property (sec. 40304 of the Act and sec. 168 of the Code)
Present Law
In general
A taxpayer generally must capitalize the cost of property
used in a trade or business or held for the production of
income and recover such cost over time through annual
deductions for depreciation or amortization.\121\ The period
for depreciation or amortization generally begins when the
asset is placed in service by the taxpayer.\122\ Tangible
property generally is depreciated under the modified
accelerated cost recovery system (``MACRS''), which determines
depreciation for different types of property based on an
assigned applicable depreciation method, recovery period, and
convention.\123\
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\121\ See secs. 263(a) and 167. In general, only the tax owner of
property (i.e., the taxpayer with the benefits and burdens of
ownership) is entitled to claim tax benefits such as cost recovery
deductions with respect to the property. In addition, where property is
not used exclusively in a taxpayer's business, the amount eligible for
a deduction must be reduced by the amount related to personal use. See,
e.g., sec. 280A.
\122\ See Treas. Reg. secs. 1.167(a)-10(b), -3, -14, and 1.197-
2(f). See also Treas. Reg. sec. 1.167(a)-11(e)(1)(i).
\123\ Sec. 168.
---------------------------------------------------------------------------
The applicable recovery period for an asset is determined
in part by statute and in part by historic Treasury
guidance.\124\ The ``type of property'' of an asset is used to
determine the ``class life'' of the asset, which in turn
dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
\124\ Exercising authority granted by Congress, the Secretary
issued Rev. Proc. 87-56, 1987-2 C.B. 674, laying out the framework of
recovery periods for enumerated classes of assets. The Secretary
clarified and modified the list of asset classes in Rev. Proc. 88-22,
1988-1 C.B. 785. In November 1988, Congress revoked the Secretary's
authority to modify the class lives of depreciable property. Rev. Proc.
87-56, as modified, remains in effect except to the extent that the
Congress has, since 1988, statutorily modified the recovery period for
certain depreciable assets, effectively superseding any administrative
guidance with regard to such property.
---------------------------------------------------------------------------
The MACRS recovery periods applicable to most tangible
personal property range from three to 20 years. The
depreciation methods generally applicable to tangible personal
property are the 200-percent and 150-percent declining balance
methods,\125\ switching to the straight line method for the
first taxable year where using the straight line method with
respect to the adjusted basis as of the beginning of that year
yields a larger depreciation allowance.
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\125\ Under the declining balance method the depreciation rate is
determined by dividing the appropriate percentage (here 150 or 200) by
the appropriate recovery period. This leads to accelerated depreciation
when the declining balance percentage is greater than 100. The table
below illustrates depreciation for an asset with a cost of $1,000 and a
seven-year recovery period under the 200-percent declining balance
method, the 150-percent declining balance method, and the straight line
method.
Recovery method Year 1 Year 2 Year 3 Year 4 Year 5
Year 6 Year 7 Total
200-percent declining balance 285.71 204.08 145.77 104.12 86.77
86.77 86.77 1,000.00
150-percent declining balance 214.29 168.37 132.29 121.26 121.26
121.26 121.26 1,000.00
Straight-line 142.86 142.86 142.86 142.86 142.86
142.86 142.86 1,000.00
* Details may not add to totals due to rounding.
---------------------------------------------------------------------------
Race horses
The statute assigns a three-year recovery period to any
race horse that is (1) placed in service before January 1,
2017, and (2) placed in service after December 31, 2016, and
more than two years old at such time it is placed in service by
the purchaser.\126\ A seven-year recovery period applies to any
race horse that is placed in service after December 31, 2016,
and that is two years old or younger at the time it is placed
in service.\127\
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\126\ Sec. 168(e)(3)(A)(i). A horse is more than two years old
after the day that is 24 months after its actual birthdate. See Prop.
Treas. Reg. sec. 1.168-3(c)(1)(iii) (interpreting ACRS); and Rev. Proc.
87-56, as clarified and modified by Rev. Proc. 88-22. Note that this
measurement of a horse's age for depreciation purposes is different
from the horse racing industry's convention that a race horse ages one
year each January 1. See, e.g., U.S. Department of the Treasury, Report
to Congress on the Depreciation of Horses, March 1990, p. 35
(``Although the conventional age of a horse is usually derived from a
fictional January 1 birthdate, the current classification of horses for
depreciation purposes is dependent upon their true ages.''); and
Jennifer Caldwell, ``Why do Thoroughbreds share the same birth date of
New Year's Day?'' Kentucky Derby News, November 17, 2017, available at
https://www.kentuckyderby.com/horses/news/why-do-thoroughbreds-share-
the-same-birth-date-of-new-years-day.
\127\ See sec. 168(e)(3)(C)(v) and asset class 01.225 of Rev. Proc.
87-56, as clarified and modified by Rev. Proc. 88-22.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the three-year recovery period for
race horses for one year to apply to any race horse (regardless
of age when placed in service) which is placed in service
before January 1, 2018. Subsequently, the three-year recovery
period for race horses will only apply to those which are more
than two years old when placed in service by the purchaser
after December 31, 2017.
Effective Date
The provision applies to property placed in service after
December 31, 2016.
5. Extension of seven-year recovery period for motorsports
entertainment complexes (sec. 40305 of the Act and sec. 168 of
the Code)
Present Law
In general
A taxpayer generally must capitalize the cost of property
used in a trade or business or held for the production of
income and recover such cost over time through annual
deductions for depreciation or amortization.\128\ The period
for depreciation or amortization generally begins when the
asset is placed in service by the taxpayer.\129\ Tangible
property generally is depreciated under the modified
accelerated cost recovery system (``MACRS''), which determines
depreciation for different types of property based on an
assigned applicable depreciation method, recovery period, and
convention.\130\
---------------------------------------------------------------------------
\128\ See secs. 263(a) and 167. In general, only the tax owner of
property (i.e., the taxpayer with the benefits and burdens of
ownership) is entitled to claim tax benefits such as cost recovery
deductions with respect to the property. In addition, where property is
not used exclusively in a taxpayer's business, the amount eligible for
a deduction must be reduced by the amount related to personal use. See,
e.g., sec. 280A.
\129\ See Treas. Reg. secs. 1.167(a)-10(b), -3, -14, and 1.197-
2(f). See also Treas. Reg. sec. 1.167(a)-11(e)(1)(i).
\130\ Sec. 168.
---------------------------------------------------------------------------
The applicable recovery period for an asset is determined
in part by statute and in part by historic Treasury
guidance.\131\ The ``type of property'' of an asset is used to
determine the ``class life'' of the asset, which in turn
dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
\131\ Exercising authority granted by Congress, the Secretary
issued Rev. Proc. 87-56, 1987-2 C.B. 674, laying out the framework of
recovery periods for enumerated classes of assets. The Secretary
clarified and modified the list of asset classes in Rev. Proc. 88-22,
1988-1 C.B. 785. In November 1988, Congress revoked the Secretary's
authority to modify the class lives of depreciable property. Rev. Proc.
87-56, as modified, remains in effect except to the extent that the
Congress has, since 1988, statutorily modified the recovery period for
certain depreciable assets, effectively superseding any administrative
guidance with regard to such property.
---------------------------------------------------------------------------
The MACRS recovery periods applicable to most tangible
personal property range from three to 20 years. The
depreciation methods generally applicable to tangible personal
property are the 200-percent and 150-percent declining balance
methods,\132\ switching to the straight line method for the
first taxable year where using the straight line method with
respect to the adjusted basis as of the beginning of that year
yields a larger depreciation allowance.
---------------------------------------------------------------------------
\132\ Under the declining balance method the depreciation rate is
determined by dividing the appropriate percentage (here 150 or 200) by
the appropriate recovery period. This leads to accelerated depreciation
when the declining balance percentage is greater than 100. The table
below illustrates depreciation for an asset with a cost of $1,000 and a
seven-year recovery period under the 200-percent declining balance
method, the 150-percent declining balance method, and the straight line
method.
Recovery method Year 1 Year 2 Year 3 Year 4 Year 5
Year 6 Year 7 Total
200-percent declining balance 285.71 204.08 145.77 104.12 86.77
86.77 86.77 1,000.00
150-percent declining balance 214.29 168.37 132.29 121.26 121.26
121.26 121.26 1,000.00
Straight-line 142.86 142.86 142.86 142.86 142.86
142.86 142.86 1,000.00
* Details may not add to totals due to rounding.
---------------------------------------------------------------------------
Real property
The recovery periods for most real property are 39 years
for nonresidential real property and 27.5 years for residential
rental property.\133\ The straight line depreciation method is
required for the aforementioned real property.\134\ In
addition, nonresidential real and residential rental property
are both subject to the mid-month convention, which treats all
property placed in service during any month (or disposed of
during any month) as placed in service (or disposed of) on the
mid-point of such month.\135\ All other property generally is
subject to the half-year convention, which treats all property
placed in service during any taxable year (or disposed of
during any taxable year) as placed in service (or disposed of)
on the mid-point of such taxable year.\136\
\133\ Sec. 168(c).
\134\ Sec. 168(b)(3).
\135\ Sec. 168(d)(2) and (d)(4)(B).
\136\ Sec. 168(d)(1) and (d)(4)(A). However, if substantial
property is placed in service during the last three months of a taxable
year, a special rule requires use of the mid-quarter convention, which
treats all property placed in service (or disposed of) during any
quarter as placed in service (or disposed of) on the mid-point of such
quarter. Sec. 168(d)(3) and (d)(4)(C). Nonresidential real property,
residential rental property, and railroad grading or tunnel bore are
not taken into account for purposes of the mid-quarter convention.
---------------------------------------------------------------------------
Land improvements (such as roads and fences) are generally
recovered using the 150-percent declining balance method, a
recovery period of 15 years, and the half-year convention.\137\
An exception exists for the theme and amusement park industry,
whose assets are generally assigned a recovery period of seven
years by asset class 80.0 of Rev. Proc. 87-56.\138\ Racetrack
facilities are excluded from the definition of theme and
amusement park facilities classified under asset class
80.0.\139\
---------------------------------------------------------------------------
\137\ Sec. 168(b)(2)(A) and asset class 00.3 of Rev. Proc. 87-56.
Under the 150-percent declining balance method, the depreciation rate
is determined by dividing 150 percent by the appropriate recovery
period, switching to the straight-line method for the first taxable
year where using the straight-line method with respect to the adjusted
basis as of the beginning of that year will yield a larger depreciation
allowance. Sec. 168(b)(2) and (b)(1)(B).
\138\ This asset class includes assets used in the provision of
rides, attractions, and amusements in activities defined as theme and
amusement parks, and includes appurtenances associated with a ride,
attraction, amusement or theme setting within the park such as ticket
booths, facades, shop interiors, and props, special purpose structures,
and buildings other than warehouses, administration buildings, hotels,
and motels. It also includes all land improvements for or in support of
park activities (e.g., parking lots, sidewalks, waterways, bridges,
fences, and landscaping) and support functions (e.g., food and beverage
retailing, souvenir vending and other nonlodging accommodations) if
owned by the park and provided exclusively for the benefit of park
patrons. Theme and amusement parks are defined as combinations of
amusements, rides, and attractions which are permanently situated on
park land and open to the public for the price of admission. This asset
class is a composite of all assets used in this industry except
transportation equipment (general purpose trucks, cars, airplanes,
etc., which are included in asset classes with the prefix 00.2), assets
used in the provision of administrative services (asset classes with
the prefix 00.1), and warehouses, administration buildings, hotels and
motels.
\139\ See Joint Committee on Taxation, General Explanation of Tax
Legislation Enacted in the 108th Congress (JCS-5-05), May 2005, p. 328.
---------------------------------------------------------------------------
Although racetrack facilities are excluded from asset class
80.0, the statute assigns a recovery period of seven years to
motorsports entertainment complexes placed in service before
January 1, 2017.\140\ For this purpose, a motorsports
entertainment complex means a racing track facility that (i) is
permanently situated on land, and (ii) during the 36-month
period following its placed-in-service date hosts one or more
racing events for automobiles (of any type), trucks, or
motorcycles that are open to the public for the price of
admission.\141\
---------------------------------------------------------------------------
\140\ Sec. 168(e)(3)(C)(ii) and (i)(15)(D).
\141\ Sec. 168(i)(15)(A).
---------------------------------------------------------------------------
A motorsports entertainment complex also includes ancillary
facilities, land improvements (e.g., parking lots, sidewalks,
waterways, bridges, fences, and landscaping), support
facilities (e.g., food and beverage retailing, souvenir
vending, and other nonlodging accommodations), and
appurtenances associated with such facilities and related
attractions and amusements (e.g., ticket booths, race track
surfaces, suites and hospitality facilities, grandstands and
viewing structures, props, walls, facilities that support the
delivery of entertainment services, other special purpose
structures, facades, shop interiors, and buildings).\142\ Such
ancillary and support facilities must be (i) owned by the
taxpayer who owns the motorsports entertainment complex, and
(ii) provided for the benefit of patrons of the motorsports
entertainment complex.
---------------------------------------------------------------------------
\142\ Sec. 168(i)(15)(B).
---------------------------------------------------------------------------
A motorsports entertainment complex does not include any
transportation equipment, administrative services assets,
warehouses, administrative buildings, hotels, or motels.\143\
---------------------------------------------------------------------------
\143\ Sec. 168(i)(15)(C).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the seven-year recovery period for
motorsports entertainment complexes for one year to apply to
property placed in service before January 1, 2018.
Effective Date
The provision applies to property placed in service after
December 31, 2016.
6. Extension of accelerated depreciation for business property on an
Indian reservation (sec. 40306 of the Act and sec. 168(j) of
the Code)
Present Law
With respect to certain property used in connection with
the conduct of a trade or business within an Indian
reservation, depreciation deductions under section 168(j) are
determined using the following recovery periods: \144\
---------------------------------------------------------------------------
\144\ Section 168(j)(2) does not provide shorter recovery periods
for water utility property, residential rental property, or railroad
grading and tunnel bores.
3-year property........................................... 2 years
5-year property........................................... 3 years
7-year property........................................... 4 years
10-year property.......................................... 6 years
15-year property.......................................... 9 years
20-year property.......................................... 12 years
Nonresidential real property.............................. 22 years
``Qualified Indian reservation property'' eligible for
accelerated depreciation includes property described in the
table above that is: (1) used by the taxpayer predominantly in
the active conduct of a trade or business within an Indian
reservation; (2) not used or located outside the reservation on
a regular basis; (3) not acquired (directly or indirectly) by
the taxpayer from a person who is related to the taxpayer;\145\
and (4) is not property placed in service for purposes of
conducting or housing certain gaming activities.\146\
---------------------------------------------------------------------------
\145\ For these purposes, the term ``related persons'' is defined
in section 465(b)(3)(C).
\146\ Sec. 168(j)(4)(A).
---------------------------------------------------------------------------
Certain ``qualified infrastructure property'' may be
eligible for the accelerated depreciation, even if located
outside an Indian reservation, provided that the purpose of
such property is to connect with qualified infrastructure
property located within the reservation (e.g., roads, power
lines, water systems, railroad spurs, and communications
facilities).\147\
---------------------------------------------------------------------------
\147\ Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
An ``Indian reservation'' means a reservation as defined in
section 3(d) of the Indian Financing Act of 1974 (25 U.S.C.
1452(d)) \148\ or section 4(10) of the Indian Child Welfare Act
of 1978 (25 U.S.C. 1903(10)).\149\ For purposes of the
preceding sentence, section 3(d) is applied by treating
``former Indian reservations in Oklahoma'' as including only
lands that are (1) within the jurisdictional area of an
Oklahoma Indian tribe as determined by the Secretary of the
Interior, and (2) recognized by such Secretary as an area
eligible for trust land status under 25 C.F.R. Part 151 (as in
effect on August 5, 1997).\150\
---------------------------------------------------------------------------
\148\ Pub. L. No. 93-262.
\149\ Pub. L. No. 95-608.
\150\ Sec. 168(j)(6).
---------------------------------------------------------------------------
The depreciation deduction allowed for regular tax purposes
is also allowed for purposes of the alternative minimum
tax.\151\
---------------------------------------------------------------------------
\151\ Sec. 168(j)(3).
---------------------------------------------------------------------------
The accelerated depreciation for qualified Indian
reservation property is available with respect to property
placed in service before January 1, 2017.\152\ A taxpayer may
annually make an irrevocable election out of section 168(j) on
a class-by-class basis.\153\
---------------------------------------------------------------------------
\152\ Sec. 168(j)(9).
\153\ Sec. 168(j)(8).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for one year the accelerated
depreciation for qualified Indian reservation property to apply
to property placed in service before January 1, 2018.
Effective Date
The provision applies to property placed in service after
December 31, 2016.
7. Extension of election to expense mine safety equipment (sec. 40307
of the Act and sec. 179E of the Code)
Present Law
A taxpayer may elect to treat 50 percent of the cost of any
qualified advanced mine safety equipment property as an expense
in the taxable year in which the equipment is placed in
service.\154\ In computing earnings and profits, the amount
deductible under section 179E is allowed as a deduction ratably
over five taxable years beginning with the year the amount is
deductible under section 179E.\155\
---------------------------------------------------------------------------
\154\ Sec. 179E(a). Such election may only be revoked with the
consent of the Secretary. Sec. 179E(b).
\155\ Sec. 312(k)(3)(B).
---------------------------------------------------------------------------
Qualified advanced mine safety equipment property means any
advanced mine safety equipment property for use in any
underground mine located in the United States the original use
of which commences with the taxpayer and which is placed in
service before January 1, 2017.\156\
---------------------------------------------------------------------------
\156\ Sec. 179E(c) and (g).
---------------------------------------------------------------------------
Advanced mine safety equipment property means any of the
following: (1) emergency communication technology or devices
used to allow a miner to maintain constant communication with
an individual who is not in the mine; (2) electronic
identification and location devices that allow individuals not
in the mine to track at all times the movements and location of
miners working in or at the mine; (3) emergency oxygen-
generating, self-rescue devices that provide oxygen for at
least 90 minutes; (4) pre-positioned supplies of oxygen
providing each miner on a shift the ability to survive for at
least 48 hours; and (5) comprehensive atmospheric monitoring
systems that monitor the levels of carbon monoxide, methane,
and oxygen that are present in all areas of the mine and that
can detect smoke in the case of a fire in a mine.\157\
---------------------------------------------------------------------------
\157\ Sec. 179E(d).
---------------------------------------------------------------------------
The portion of the cost of any property with respect to
which an expensing election under section 179 is made may not
be taken into account for purposes of the 50-percent deduction
under section 179E.\158\ In addition, a taxpayer making an
election under section 179E must file with the Secretary a
report containing information with respect to the operation of
the mines of the taxpayer as required by the Secretary.\159\
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\158\ Sec. 179E(e).
\159\ Sec. 179E(f).
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Explanation of Provision
The provision extends for one year (through December 31,
2017) the placed-in-service date allowing a taxpayer to expense
50 percent of the cost of any qualified advanced mine safety
equipment property.
Effective Date
The provision applies to property placed in service after
December 31, 2016.
8. Extension of special expensing rules for certain productions (sec.
40308 of the Act and sec. 181 of the Code)
Present Law
Under section 181, a taxpayer may elect \160\ to deduct up
to $15 million of the aggregate production costs of any
qualified film, television or live theatrical production,
commencing prior to January 1, 2017,\161\ in the year the costs
are paid or incurred by the taxpayer, in lieu of capitalizing
the costs and recovering them through depreciation allowances
once the production is placed in service.\162\ The dollar
limitation is increased to $20 million if a significant amount
of the production costs are incurred in areas eligible for
designation as a low-income community or eligible for
designation by the Delta Regional Authority as a distressed
county or isolated area of distress.\163\
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\160\ See Treas. Reg. sec. 1.181-2 for rules on making (and
revoking) an election under section 181.
\161\ For purposes of determining whether a production is eligible
for section 181 expensing, a qualified film or television production is
treated as commencing on the first date of principal photography. The
date on which a qualified live theatrical production commences is the
date of the first public performance of such production for a paying
audience.
\162\ Sec. 181(a)(2)(A). See Treas. Reg. sec. 1.181-1 for rules on
determining eligible production costs. Eligible production costs under
section 181 include participations and residuals paid or incurred.
Treas. Reg. sec. 1.181-1(a)(3)(i). The special rule in section
167(g)(7) that allows taxpayers using the income forecast method of
depreciation to include participations and residuals that have not met
the economic performance requirements in the adjusted basis of the
property for the taxable year the property is placed in service does
not apply for purposes of section 181. Treas. Reg. sec. 1.181-1(a)(8).
Thus, under section 181, a taxpayer may only include participations and
residuals actually paid or incurred in eligible production costs.
Further, production costs do not include the cost of obtaining a
production after its initial release or broadcast. See Treas. Reg. sec.
1.181-1(a)(3). For this purpose, ``initial release or broadcast'' means
the first commercial exhibition or broadcast of a production to an
audience. Treas. Reg. sec. 1.181-1(a)(7). Thus, for example, a taxpayer
may not expense the purchase of an existing film library under section
181. See T.D. 9551, 76 Fed. Reg. 64816, October 19, 2011.
\163\ Sec. 181(a)(2)(B).
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A section 181 election may only be made by an owner of the
production.\164\ An owner of a production is any person that is
required under section 263A to capitalize the costs of
producing the production into the cost basis of the production,
or that would be required to do so if section 263A applied to
that person.\165\ In addition, the aggregate production costs
of a qualified production that is co-produced include all
production costs, regardless of funding source, in determining
if the applicable dollar limit is exceeded. Thus, the term
``aggregate production costs'' means all production costs paid
or incurred by any person, whether paid or incurred directly by
an owner or indirectly on behalf of an owner.\166\ The costs of
the production in excess of the applicable dollar limitation
are capitalized and recovered under the taxpayer's method of
accounting for the recovery of such property once placed in
service.\167\
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\164\ Treas. Reg. sec. 1.181-1(a).
\165\ Treas. Reg. sec. 1.181-1(a)(2)(i).
\166\ Treas. Reg. sec. 1.181-1(a)(4). See Treas. Reg. sec. 1.181-
2(c)(3) for the information required to be provided to the Internal
Revenue Service when more than one person will claim deductions under
section 181 for a production (to ensure that the applicable deduction
limitation is not exceeded).
\167\ See Joint Committee on Taxation, General Explanation of Tax
Legislation Enacted in the 110th Congress (JCS-1-09), March 2009, p.
448; and Treas. Reg. sec. 1.181-1(c)(2). A production is generally
considered to be placed in service at the time of initial release,
broadcast, or live staged performance (i.e., at the time of the first
commercial exhibition, broadcast, or live staged performance of a
production to an audience). See, e.g., Rev. Rul. 79-285, 1979-2 C.B.
91; and Priv. Ltr. Rul. 9010011, March 9, 1990. See also Treas. Reg.
sec. 1.181-1(a)(7). However, a production generally may not be
considered to be placed in service if it is only exhibited, broadcasted
or performed for a limited test audience in advance of the commercial
exhibition, broadcast, or performance to general audiences. See Priv.
Ltr. Rul. 9010011 and Treas. Reg. sec. 1.181-1(a)(7).
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A qualified film, television, or live theatrical production
means any production of a motion picture (whether released
theatrically or directly to video cassette or any other
format), television program, or live staged play if at least 75
percent of the total compensation expended on the production is
for services performed in the United States by actors,
directors, producers, and other relevant production
personnel.\168\ Solely for purposes of this rule, the term
``compensation'' does not include participations and residuals
(as defined in section 167(g)(7)(B)).\169\
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\168\ Sec. 181(d)(3)(A).
\169\ Sec. 181(d)(3)(B). Participations and residuals are defined
as, with respect to any property, costs the amount of which by contract
varies with the amount of income earned in connection with such
property. See also Treas. Reg. sec. 1.181-3(c).
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Each episode of a television series is treated as a
separate production, and only the first 44 episodes of a
particular series qualify under the provision.\170\ Qualified
productions do not include sexually explicit productions as
referenced by section 2257 of title 18 of the U.S. Code.\171\
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\170\ Sec. 181(d)(2)(B).
\171\ Sec. 181(d)(2)(C).
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A qualified live theatrical production is defined as a live
staged production of a play (with or without music) that is
derived from a written book or script and is produced or
presented by a commercial entity in any venue which has an
audience capacity of not more than 3,000, or a series of venues
the majority of which have an audience capacity of not more
than 3,000.\172\ In addition, qualified live theatrical
productions include any live staged production which is
produced or presented by a taxable entity no more than 10 weeks
annually in any venue that has an audience capacity of not more
than 6,500.\173\ In general, in the case of multiple live-
staged productions, each such live-staged production is treated
as a separate production. Similar to the exclusion for sexually
explicit productions from the definition of qualified film or
television productions, qualified live theatrical productions
do not include stage performances that would be excluded by
section 2257(h)(1) of title 18 of the U.S. Code, if such
provision were extended to live stage performances.\174\
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\172\ Sec. 181(e)(2)(A).
\173\ Sec. 181(e)(2)(D).
\174\ Sec. 181(e)(2)(E).
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For purposes of recapture under section 1245, any deduction
allowed under section 181 is treated as if it were a deduction
allowable for amortization.\175\ Thus, the deduction under
section 181 may be subject to recapture as ordinary income in
the taxable year in which (i) the taxpayer revokes a section
181 election, (ii) the production fails to meet the
requirements of section 181, or (iii) the taxpayer sells or
otherwise disposes of the production.\176\
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\175\ Sec. 1245(a)(2)(C). For a discussion of the recapture rules
applicable to depreciation and amortization deductions, see Joint
Committee on Taxation, Background and Present Law Relating to Cost
Recovery and Domestic Production Activities, (JCX-19-12) February 27,
2012, pp. 45-46.
\176\ See Treas. Reg. sec. 1.181-4.
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Explanation of Provision
The provision extends the special treatment for qualified
film, television, and live theatrical productions under section
181 for one year to qualified productions commencing prior to
January 1, 2018.
Effective Date
The provision applies to productions commencing after
December 31, 2016.
9. Extension of deduction allowable with respect to income attributable
to domestic production activities in Puerto Rico (sec. 40309 of
the Act and former sec. 199 of the Code)
Present Law
In general
For taxable years beginning before January 1, 2018, former
section 199 \177\ provides a deduction from taxable income (or,
in the case of an individual, adjusted gross income) that is
equal to nine percent of the lesser of the taxpayer's qualified
production activities income or taxable income for the taxable
year.\178\ For corporations subject to the 35-percent corporate
income tax rate, the nine-percent deduction effectively reduces
the corporate income tax rate to slightly less than 32 percent
on qualified production activities income.\179\ A similar
reduction applies to the graduated rates applicable to
individuals with qualifying domestic production activities
income.
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\177\ Section 199 was repealed by Public Law 115-97, for taxable
years beginning after December 31, 2017. All references to former
section 199 in this document refer to section 199 as in effect before
its repeal.
\178\ In the case of oil related qualified production activities
income, the deduction is reduced by three percent of the least of the
taxpayer's oil related qualified production activities income,
qualified production activities income, or taxable income (determined
without regard to the section 199 deduction) for the taxable year. See
sec. 199(d)(9).
\179\ This example assumes the deduction does not exceed the wage
limitation discussed below.
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In general, qualified production activities income is equal
to domestic production gross receipts reduced by the sum of:
(1) the costs of goods sold that are allocable to those
receipts; and (2) other expenses, losses, or deductions that
are properly allocable to those receipts.\180\
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\180\ Sec. 199(c)(1). In computing qualified production activities
income, the domestic production activities deduction itself is not an
allocable deduction. Sec. 199(c)(1)(B)(ii). See Treas. Reg. secs.
1.199-1 through 1.199-9 where the Secretary has prescribed rules for
the proper allocation of items of income, deduction, expense, and loss
for purposes of determining qualified production activities income.
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Domestic production gross receipts generally are gross
receipts of a taxpayer that are derived from: (1) any sale,
exchange, or other disposition, or any lease, rental, or
license, of qualifying production property \181\ that was
manufactured, produced, grown or extracted by the taxpayer in
whole or in significant part within the United States; (2) any
sale, exchange, or other disposition, or any lease, rental, or
license, of qualified film \182\ produced by the taxpayer; (3)
any lease, rental, license, sale, exchange, or other
disposition of electricity, natural gas, or potable water
produced by the taxpayer in the United States; (4) construction
of real property performed in the United States by a taxpayer
in the ordinary course of a construction trade or business; or
(5) engineering or architectural services performed in the
United States for the construction of real property located in
the United States.\183\
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\181\ Qualifying production property generally includes any
tangible personal property, computer software, and sound recordings.
Sec. 199(c)(5).
\182\ Qualified film includes any motion picture film or videotape
(including live or delayed television programming, but not including
certain sexually explicit productions) if 50 percent or more of the
total compensation relating to the production of the film (including
compensation in the form of residuals and participations) constitutes
compensation for services performed in the United States by actors,
production personnel, directors, and producers. Sec. 199(c)(6).
\183\ Sec. 199(c)(4)(A).
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The amount of the deduction for a taxable year is limited
to 50 percent of the W-2 wages paid by the taxpayer, and
properly allocable to domestic production gross receipts,
during the calendar year that ends in such taxable year.\184\
Wages paid to bona fide residents of Puerto Rico generally are
not included in the definition of wages for purposes of
computing the wage limitation amount.\185\
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\184\ Sec. 199(b)(1). For purposes of the provision, ``W-2 wages''
include the sum of the amounts of wages as defined in section401(a) and
elective deferrals that the taxpayer properly reports to the Social
Security Administration with respect to the employment of employees of
the taxpayer during the calendar year ending during the taxpayer's
taxable year. See sec. 199(b)(2).
\185\ Section 3401(a)(8)(C) excludes wages paid to U.S. citizens
who are bona fide residents of Puerto Rico from the term wages for
purposes of income tax withholding.
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Rules for Puerto Rico
When used in the Code in a geographical sense, the term
``United States'' generally includes only the States and the
District of Columbia.\186\ A special rule for determining
domestic production gross receipts, however, provides that in
the case of any taxpayer with gross receipts for a taxable year
from sources within the Commonwealth of Puerto Rico, the term
``United States'' includes the Commonwealth of Puerto Rico, but
only if all of the taxpayer's Puerto Rico-sourced gross
receipts are taxable under the Federal income tax for
individuals or corporations for such taxable year.\187\ In
computing the 50-percent wage limitation, the taxpayer is
permitted to take into account wages paid to bona fide
residents of Puerto Rico for services performed in Puerto
Rico.\188\
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\186\ Sec. 7701(a)(9).
\187\ Sec. 199(d)(8)(A).
\188\ Sec. 199(d)(8)(B).
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The special rules for Puerto Rico apply only with respect
to the first 11 taxable years of a taxpayer beginning after
December 31, 2005, and before January 1, 2017.\189\
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\189\ Sec. 199(d)(8)(C).
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Explanation of Provision
The provision extends the special domestic production
activities rules for Puerto Rico to apply for the first 12
taxable years of a taxpayer beginning after December 31, 2005,
and before January 1, 2018.
Effective Date
The provision is effective for taxable years beginning
during 2017.
10. Extension of special rule relating to qualified timber gain (sec.
40310 of the Act and former sec. 1201 of the Code)
Present Law \190\
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\190\ Section 1201 was repealed for taxable years beginning after
December 31, 2017, by Public Law 115-97 as a conforming amendment to
changes made to section 11 (which included lowering the top marginal
corporate tax rate to 21 percent). This provision, enacted after that
repeal, applies to taxable years beginning in 2017. For that reason,
this description of present law describes the law in effect immediately
before the first day on which the provision is effective.
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Treatment of certain timber gain
If a taxpayer cuts standing timber, the taxpayer may elect
to treat the cutting as a sale or exchange eligible for capital
gains treatment.\191\ The fair market value of the timber on
the first day of the taxable year in which the timber is cut is
used to determine the gain attributable to such cutting. Such
fair market value is thereafter considered the taxpayer's cost
of the cut timber for all purposes, such as to determine the
taxpayer's income from later sales of the timber or timber
products. Also, if a taxpayer disposes of the timber with a
retained economic interest or makes an outright sale of the
timber, the gain is eligible for capital gain treatment.\192\
This treatment under either section 631(a) or (b) requires that
the taxpayer has owned the timber or held the contract right
for a period of more than one year.
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\191\ Sec. 631(a).
\192\ Sec. 631(b).
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The maximum regular rate of tax on the net capital gain of
an individual is 20 percent.\193\ Certain gains are subject to
an additional 3.8-percent tax.\194\
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\193\ Sec. 1(h).
\194\ Sec. 1411.
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The net capital gain of a corporation is taxed at the same
rates as ordinary income, up to a maximum rate of 35
percent.\195\
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\195\ Secs. 11 and 1201.
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Explanation of Provision
The provision extends for one year a 23.8-percent
alternative tax rate for corporations on the portion of a
corporation's taxable income that consists of qualified timber
gain (or, if less, the net capital gain) for a taxable year.
Qualified timber gain means the net gain described in
section 631(a) and (b) for the taxable year, determined by
taking into account only trees held more than 15 years.
Effective Date
The provision applies to taxable years beginning in 2017.
11. Extension of empowerment zone tax incentives (sec. 40311 of the Act
and secs. 1391 and 1394 of the Code)
Present Law
The Omnibus Budget Reconciliation Act of 1993 (``OBRA 93'')
\196\ authorized the designation of nine empowerment zones
(``Round I empowerment zones'') to provide tax incentives for
businesses to locate within certain targeted areas \197\
designated by the Secretaries of the Department of Housing and
Urban Development (``HUD'') and the U.S. Department of
Agriculture (``USDA''). The first empowerment zones were
established in large rural areas and large cities. OBRA 93 also
authorized the designation of 95 enterprise communities,\198\
which were located in smaller rural areas and cities.\199\
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\196\ Pub. L. No. 103-66.
\197\ The targeted areas are those that have pervasive poverty,
high unemployment, and general economic distress, and that satisfy
certain eligibility criteria, including specified poverty rates and
population and geographic size limitations.
\198\ Sec. 1391(b)(1).
\199\ Enterprise communities were eligible for only one tax
benefit: tax-exempt bond financing. For tax purposes, the areas
designated as enterprise communities continued as such for the ten-year
period starting 1995 and ending at the end of 2004. However, after 2004
the enterprise communities may still be eligible for other Federal
benefits (e.g., grants and preferences).
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The Taxpayer Relief Act of 1997 \200\ authorized the
designation of two additional urban Round I empowerment zones,
and 20 additional empowerment zones (``Round II empowerment
zones''). The Community Renewal Tax Relief Act of 2000 (``2000
Community Renewal Act'') \201\ authorized a total of 10 new
empowerment zones (``Round III empowerment zones''), bringing
the total number of authorized, and not relinquished,
empowerment zones to 41.\202\ In addition, the 2000 Community
Renewal Act conformed the tax incentives that are available to
businesses in the Round I, Round II, and Round III empowerment
zones, and extended the empowerment zone tax incentives through
December 31, 2009. Subsequent legislation extended the
empowerment zone tax incentives through December 31, 2016.\203\
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\200\ Pub. L. No. 105-34.
\201\ Pub. L. No. 106-554. The 2000 Community Renewal Act also
authorized the designation of 40 ``renewal communities'' within which
special tax incentives were available. The tax incentives were
generally available through December 31, 2009 when the renewal
community designation expired. One of the tax incentives involving the
exclusion of capital gain from the sale or exchange of a qualified
community asset continued through 2014.
\202\ The urban part of the program is administered by HUD and the
rural part of the program is administered by the USDA. The eight urban
Round I empowerment zones are Atlanta, GA; Baltimore, MD; Chicago, IL;
Cleveland, OH; Detroit, MI; Los Angeles, CA; New York, NY; and
Philadelphia, PA/Camden, NJ. Atlanta relinquished its empowerment zone
designation in Round III. The three rural Round I empowerment zones are
Kentucky Highlands, KY; Mid-Delta, MI; and Rio Grande Valley, TX. The
15 urban Round II empowerment zones are Boston, MA; Cincinnati, OH;
Columbia, SC; Columbus, OH; Cumberland County, NJ; El Paso, TX; Gary/
Hammond/East Chicago, IN; Ironton, OH/Huntington, WV; Knoxville, TN;
Miami/Dade County, FL; Minneapolis, MN; New Haven, CT; Norfolk/
Portsmouth, VA; Santa Ana, CA; and St. Louis, Missouri/East St. Louis,
IL. The five rural Round II empowerment zones are Desert Communities,
CA; Griggs-Steele, ND; Oglala Sioux Tribe, SD; Southernmost Illinois
Delta, IL; and Southwest Georgia United, GA. The eight urban Round III
empowerment zones are Fresno, CA; Jacksonville, FL; Oklahoma City, OK;
Pulaski County, AR; San Antonio, TX; Syracuse, NY; Tucson, AZ; and
Yonkers, NY. The two rural Round III empowerment zones are Aroostook
County, ME; and Futuro, TX.
\203\ Pub. L. No. 111-312, sec. 753 (2010); Pub. L. No. 112-240,
sec. 327(a) (2013); Pub. L. No. 113-295, sec. 139 (2014); Pub. L. No.
114-113, Div. Q, sec. 171(a) (2015); and Pub. L. No. 115-123, sec.
40311 (2018). The empowerment zone tax incentives may expire earlier
than December 31, 2017 if a State or local government provided for an
expiration date in the nomination of an empowerment zone, or the
appropriate Secretary revokes an empowerment zone's designation. The
State or local government may, however, amend the nomination to provide
for a new termination date.
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The tax incentives available within the designated
empowerment zones include a Federal income tax credit for
employers who hire qualifying employees (the ``wage credit''),
increased expensing of qualifying depreciable property, tax-
exempt bond financing, deferral of capital gains tax on the
sale of qualified assets sold and replaced, and partial
exclusion of capital gains tax on certain sales of qualified
small business stock.
The following is a description of the empowerment zone tax
incentives as in effect through 2016.
Wage credit
A 20-percent wage credit is available to employers for the
first $15,000 of qualified wages paid to each employee (i.e., a
maximum credit of $3,000 with respect to each qualified
employee) who (1) is a resident of the empowerment zone, and
(2) performs substantially all employment services within the
empowerment zone in a trade or business of the employer.\204\
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\204\ Sec. 1396. The $15,000 limit is annual, not cumulative, such
that the limit is the first $15,000 of wages paid in a calendar year
which ends with or within the taxable year.
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The wage credit rate applies to qualifying wages paid
before January 1, 2017. Wages paid to a qualified employee who
earns more than $15,000 are eligible for the wage credit
(although only the first $15,000 of wages is eligible for the
credit). The wage credit is available with respect to a
qualified full-time or part-time employee (employed for at
least 90 days), regardless of the number of other employees who
work for the employer. In general, any taxable business
carrying out activities in the empowerment zone may claim the
wage credit.\205\
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\205\ However, the wage credit is not available for wages paid in
connection with certain business activities described in section
144(c)(6)(B), including a golf course, country club, massage parlor,
hot tub facility, suntan facility, racetrack, liquor store, or certain
farming activities. In addition, wages are not eligible for the wage
credit if paid to: (1) a person who owns more than five percent of the
stock (or capital or profits interests) of the employer, (2) certain
relatives of the employer, or (3) if the employer is a corporation or
partnership, certain relatives of a person who owns more than 50
percent of the business.
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An employer's deduction otherwise allowed for wages paid is
reduced by the amount of wage credit claimed for that taxable
year.\206\ Wages are not to be taken into account for purposes
of calculating the wage credit if such wages are taken into
account in determining the employer's work opportunity tax
credit under section 51.\207\ In addition, the $15,000 cap is
reduced by any wages taken into account in calculating the work
opportunity tax credit.\208\ The wage credit may be used to
offset up to 25 percent of the employer's alternative minimum
tax liability.\209\
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\206\ Sec. 280C(a).
\207\ Sec. 1396(c)(3)(A).
\208\ Sec. 1396(c)(3)(B).
\209\ Sec. 38(c)(2).
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Increased section 179 expensing limitation
An enterprise zone business \210\ is allowed up to an
additional $35,000 of section 179 expensing for qualified zone
property placed in service before January 1, 2017.\211\ The
section 179 expensing allowed to a taxpayer is reduced (but not
below zero) by the amount by which the cost of qualifying
property placed in service during the taxable year exceeds a
specified dollar amount.\212\ However, an enterprise zone
business is only required to take into account 50 percent of
the cost of qualified zone property placed in service during
the year in determining whether the cost of qualifying property
exceeds the specified dollar amount.\213\
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\210\ Sec. 1397C. The term ``enterprise zone business'' is separate
and distinct from the term ``enterprise community.'' Enterprise
community, for purposes of the Code, means the areas designated as such
under section 1391. Sec. 1393(b). Note, however, that for purposes of
section 1394 relating to tax-exempt enterprise zone facility bonds,
references to empowerment zones shall be treated as including
references to enterprise communities. Sec. 1394(b)(3).
\211\ Sec. 1397A.
\212\ For taxable years beginning in 2016, the relevant dollar
amount is 2,010,000. Sec. 179(b)(2) and 3.03 of Rev. Proc. 2016-14,
2016-9 I.R.B. 365.
\213\ Sec. 1397A(a)(2). For example, assume that during 2016 a
calendar year taxpayer in an enterprise zone business purchased and
placed in service $4,500,000 of section 179 property that is qualified
zone property. The $500,000 section 179(b)(1) dollar amount for 2016 is
increased to $535,000 (by the lesser of $35,000 or $4,500,000). That
amount is reduced by the excess section 179 property cost amount of
$240,000 ((50 percent x $4,500,000) - $2,010,000)). The taxpayer's
expensing limitation is $295,000 ($535,000 - $240,000). If the taxpayer
had not been an enterprise zone business, its expensing limitation
would be zero because the taxpayer would have been fully phased out.
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The term ``qualified zone property'' is defined as
depreciable tangible property (including buildings) provided
that (i) the property is acquired by the taxpayer by purchase
(from an unrelated party) after the date on which the
designation of the empowerment zone took effect, (ii) the
original use of the property in an empowerment zone commences
with the taxpayer, and (iii) substantially all of the use of
the property is in an empowerment zone in the active conduct of
a qualified trade or business by the taxpayer in such
zone.\214\ Special rules are provided in the case of property
that is substantially renovated by the taxpayer.\215\
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\214\ Sec. 1397D(a)(1). Note, however, that to be eligible for the
increased section 179 expensing, the qualified zone property has to
also meet the definition of section 179 property (e.g., building
property would only qualify if it constitutes qualified real property
under section 179(f)), prior to amendment by Pub. L. No. 115-97).
\215\ Sec. 1397D(a)(2).
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An enterprise zone business means any qualified business
entity and any qualified proprietorship. A qualified business
entity means any corporation or partnership if for such year:
(1) every trade or business of such entity is the active
conduct of a qualified business within an empowerment zone; (2)
at least 50 percent of the total gross income of such entity is
derived from the active conduct of such business; (3) a
substantial portion of the use of the tangible property of such
entity (whether owned or leased) is within an empowerment zone;
(4) a substantial portion of the intangible property of such
entity is used in the active conduct of any such business; (5)
a substantial portion of the services performed for such entity
by its employees are performed in an empowerment zone; (6) at
least 35 percent of its employees are residents of an
empowerment zone; (7) less than five percent of the average of
the aggregate unadjusted bases of the property of such entity
is attributable to collectibles other than collectibles that
are held primarily for sale to customers in the ordinary course
of such business; and (8) less than five percent of the average
of the aggregate unadjusted bases of the property of such
entity is attributable to nonqualified financial property.\216\
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\216\ Sec. 1397C(b).
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A qualified proprietorship is any qualified business
carried on by an individual as a proprietorship if for such
year: (1) at least 50 percent of the total gross income of such
individual from such business is derived from the active
conduct of such business in an empowerment zone; (2) a
substantial portion of the use of the tangible property of such
individual in such business (whether owned or leased) is within
an empowerment zone; (3) a substantial portion of the
intangible property of such business is used in the active
conduct of such business; (4) a substantial portion of the
services performed for such individual in such business by
employees of such business are performed in an empowerment
zone; (5) at least 35 percent of such employees are residents
of an empowerment zone; (6) less than five percent of the
average of the aggregate unadjusted bases of the property of
such individual that is used in such business is attributable
to collectibles other than collectibles that are held primarily
for sale to customers in the ordinary course of such business;
and (7) less than five percent of the average of the aggregate
unadjusted bases of the property of such individual that is
used in such business is attributable to nonqualified financial
property.\217\
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\217\ Sec. 1397C(c). For these purposes, the term ``employee''
includes the proprietor.
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A qualified business is defined as any trade or business
other than a trade or business that consists predominantly of
the development or holding of intangibles for sale or license
or any business prohibited in connection with the empowerment
zone employment credit.\218\ In addition, the leasing of real
property that is located within the empowerment zone is treated
as a qualified business only if (1) the leased property is not
residential rental property, and (2) at least 50 percent of the
gross rental income from the real property is from enterprise
zone businesses.\219\ The rental of tangible personal property
is not a qualified business unless at least 50 percent of the
rental of such property is by enterprise zone businesses or by
residents of an empowerment zone.
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\218\ Sec. 1397C(d). Excluded businesses include any private or
commercial golf course, country club, massage parlor, hot tub facility,
sun tan facility, racetrack or other facility used for gambling, or any
store the principal business of which is the sale of alcoholic
beverages for off-premises consumption. Sec. 144(c)(6). Also, a
qualified business does not include certain large farms. Sec.
1397C(d)(5)(B).
\219\ Sec. 1397C(d)(2).
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Expanded tax-exempt financing for certain zone facilities
States or local governments can issue enterprise zone
facility bonds to raise funds to provide an enterprise zone
business with qualified zone property.\220\ These bonds can be
used in areas designated as enterprise communities as well as
areas designated as empowerment zones. To qualify, 95 percent
(or more) of the net proceeds from the bond issue must be used
to finance: (1) qualified zone property whose principal user is
an enterprise zone business, and (2) certain land functionally
related and subordinate to such property.
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\220\ Sec. 1394.
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The term enterprise zone business is the same as that used
for purposes of the increased section 179 deduction limitation
(discussed above) with certain modifications for start-up
businesses. First, an employee is considered a resident of an
empowerment zone for purposes of the 35-percent in-zone
employment requirement if they are a resident of an empowerment
zone, an enterprise community, or a qualified low-income
community within an applicable nominating jurisdiction.\221\
The applicable nominating jurisdiction means, with respect to
any empowerment zone or enterprise community, any local
government that nominated such community for designation under
section 1391. The definition of a qualified low-income
community is similar to the definition of a low-income
community provided in section 45D(e) (concerning eligibility
for the new markets tax credit). A ``qualified low-income
community'' is a population census tract with either (1) a
poverty rate of at least 20 percent, or (2) median family
income that does not exceed 80 percent of the greater of
metropolitan area median family income or statewide median
family income (for a nonmetropolitan census tract, does not
exceed 80 percent of statewide median family income). In the
case of a population census tract located within a high
migration rural county, low-income is defined by reference to
85 percent (as opposed to 80 percent) of statewide median
family income. For this purpose, a high migration rural county
is any county that, during the 20-year period ending with the
year in which the most recent census was conducted, has a net
out-migration of inhabitants from the county of at least 10
percent of the population of the county at the beginning of
such period.
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\221\ Pub. L. No. 114-113, Div. Q, sec. 171 (2015) (effective for
bonds issued after 2015).
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The Secretary is authorized to designate ``targeted
populations'' as qualified low-income communities. For this
purpose, a ``targeted population'' is defined by reference to
section 103(20) of the Riegle Community Development and
Regulatory Improvement Act of 1994 (the ``Act'') to mean
individuals, or an identifiable group of individuals, including
an Indian tribe, who are low-income persons or otherwise lack
adequate access to loans or equity investments. Section 103(17)
of the Act provides that ``low-income'' means (1) for a
targeted population within a metropolitan area, less than 80
percent of the area median family income; and (2) for a
targeted population within a nonmetropolitan area, less than
the greater of (a) 80 percent of the area median family income,
or (b) 80 percent of the statewide nonmetropolitan area median
family income.
Second, a business will be treated as an enterprise zone
business during a start-up period if (1) at the beginning of
the period, it is reasonable to expect the business to be an
enterprise zone business by the end of the start-up period, and
(2) the business makes bona fide efforts to be an enterprise
zone business. The start-up period is the period that ends with
the start of the first tax year beginning more than two years
after the later of (1) the issue date of the bond issue
financing the qualified zone property, and (2) the date this
property is first placed in service (or, if earlier, the date
that is three years after the issue date).\222\
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\222\ Sec. 1394(b)(3).
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Third, a business that qualifies as an enterprise zone
business at the end of the start-up period must continue to
qualify during a testing period that ends three tax years after
the start-up period ends. After the three-year testing period,
a business will continue to be treated as an enterprise zone
business as long as 35 percent of its employees are residents
of an empowerment zone, enterprise community, or a qualified
low-income community within an applicable nominating
jurisdiction.
The face amount of the bonds may not exceed $60 million for
an empowerment zone in a rural area, $130 million for an
empowerment zone in an urban area with zone population of less
than 100,000, and $230 million for an empowerment zone in an
urban area with zone population of at least 100,000.
Elective rollover of capital gain from the sale or exchange of any
qualified empowerment zone asset
Taxpayers can elect to defer recognition of gain on the
sale of a qualified empowerment zone asset held for more than
one year and replaced within 60 days by another qualified
empowerment zone asset in the same zone.\223\ A qualified
empowerment zone asset generally means stock or a partnership
interest acquired at original issue for cash in an enterprise
zone business, or tangible property originally used in an
enterprise zone business by the taxpayer. The deferral is
accomplished by reducing the basis of the replacement asset by
the amount of the gain recognized on the sale of the asset.
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\223\ Sec. 1397B.
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Explanation of Provision
The provision extends for one year, through December 31,
2017, the period for which the designation of an empowerment
zone is in effect, thus extending for one year the empowerment
zone tax incentives, including the wage credit, increased
section 179 expensing for qualifying property,\224\ tax-exempt
bond financing, and deferral of capital gains tax on the sale
of qualified assets replaced with other qualified assets. In
the case of a designation of an empowerment zone the nomination
for which included a termination date which is December 31,
2016, termination shall not apply with respect to such
designation if the entity that made such nomination amends the
nomination to provide for a new termination date in such manner
as the Secretary may provide.
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\224\ Thus, for taxable years beginning in 2017, the total amount
that may be expensed under section 179 is $545,000 ($510,000 section
179(b)(1) limitation + $35,000 increase for qualified zone property =
$545,000 maximum dollar limitation). See sec. 179(b)(1) and section
3.25 of Rev. Proc. 2016-55, 2016-45 I.R.B. 707.
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Effective Date
The provision applies to taxable years beginning after
December 31, 2016.
12. Extension of American Samoa economic development credit (sec. 40312
of the Act and sec. 119 of Division A of Pub. L. No. 109-432)
Present Law
Since 2006, certain domestic corporations have been
entitled to an economic development credit with respect to
operations in American Samoa. The credit is not part of the
Code but is computed based on the rules of former sections 30A,
199, and 936.
For taxable years beginning before January 1, 2011, as
originally enacted, the credit was limited to domestic
corporations that were existing credit claimants with respect
to American Samoa who had elected the application of section
936 for its last taxable year beginning before January 1, 2006.
The credit is based on the corporation's economic activity-
based limitation with respect to American Samoa. An existing
claimant is a domestic corporation that (1) was engaged in the
active conduct of a trade or business within American Samoa on
October 13, 1995, and (2) elected the benefits of the
possession tax credit \225\ in an election in effect for its
taxable year that included October 13, 1995.\226\ A corporation
that added a substantial new line of business (other than in a
qualifying acquisition of all the assets of a trade or business
of an existing credit claimant) ceased to be an existing credit
claimant as of the close of the taxable year ending before the
date on which that new line of business was added.
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\225\ For taxable years beginning before January 1, 2006, certain
domestic corporations with business operations in the U.S. possessions
were eligible for the possession tax credit. Secs. 27(b) and 936. This
credit offset the U.S. tax imposed on certain income related to
operations in the U.S. possessions. Subject to certain limitations, the
amount of the possession tax credit allowed to any domestic corporation
equaled the portion of that corporation's U.S. tax that was
attributable to the corporation's non-U.S. source taxable income from
(1) the active conduct of a trade or business within a U.S. possession,
(2) the sale or exchange of substantially all of the assets that were
used in such a trade or business, or (3) certain possessions
investment. No deduction or foreign tax credit was allowed for any
possessions or foreign tax paid or accrued with respect to taxable
income that was taken into account in computing the credit under
section 936. Under the economic activity-based limit, the amount of the
credit could not exceed an amount equal to the sum of (1) 60 percent of
the taxpayer's qualified possession wages and allocable employee fringe
benefit expenses, (2) 15 percent of depreciation allowances with
respect to short-life qualified tangible property, plus 40 percent of
depreciation allowances with respect to medium-life qualified tangible
property, plus 65 percent of depreciation allowances with respect to
long-life qualified tangible property, and (3) in certain cases, a
portion of the taxpayer's possession income taxes. A taxpayer could
elect, instead of the economic activity-based limit, a limit equal to
the applicable percentage of the credit that otherwise would have been
allowable with respect to possession business income, beginning in
1998, the applicable percentage was 40 percent.
To qualify for the possession tax credit for a taxable year, a
domestic corporation was required to satisfy two conditions. First, the
corporation was required to derive at least 80 percent of its gross
income for the three-year period immediately preceding the close of the
taxable year from sources within a possession. Second, the corporation
was required to derive at least 75 percent of its gross income for that
same period from the active conduct of a possession business. Sec.
936(a)(2). The section 936 credit generally expired for taxable years
beginning after December 31, 2005.
\226\ A corporation will qualify as an existing credit claimant if
it acquired all the assets of a trade or business of a corporation that
(1) actively conducted that trade or business in a possession on
October 13, 1995, and (2) had elected the benefits of the possession
tax credit in an election in effect for the taxable year that included
October 13, 1995.
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The amount of the credit allowed to a qualifying domestic
corporation under the provision is equal to the sum of the
amounts used in computing the corporation's economic activity-
based limitation with respect to American Samoa, except that no
credit is allowed for the amount of any American Samoa income
taxes. Thus, for any qualifying corporation the amount of the
credit equals the sum of (1) 60 percent of the corporation's
qualified American Samoa wages and allocable employee fringe
benefit expenses and (2) 15 percent of the corporation's
depreciation allowances with respect to short-life qualified
American Samoa tangible property, plus 40 percent of the
corporation's depreciation allowances with respect to medium-
life qualified American Samoa tangible property, plus 65
percent of the corporation's depreciation allowances with
respect to long-life qualified American Samoa tangible
property.
The section 936(c) rule denying a credit or deduction for
any possessions or foreign tax paid with respect to taxable
income taken into account in computing the credit under section
936 does not apply with respect to the credit allowed by the
provision.
For taxable years beginning after December 31, 2011, the
credit rules are modified in two ways. First, domestic
corporations with operations in American Samoa are allowed the
credit even if those corporations are not existing credit
claimants. Second, the credit is available to a domestic
corporation (either an existing credit claimant or a new credit
claimant) only if the corporation has qualified production
activities income (as defined in section 199(c) by substituting
``American Samoa'' for ``the United States'' in each place that
the latter term appears).
In the case of a corporation that is an existing credit
claimant with respect to American Samoa and that elected the
application of section 936 for its last taxable year beginning
before January 1, 2006, the credit applies to the first eleven
taxable years of the corporation that begin after December 31,
2005, and before January 1, 2017. For any other corporation,
the credit applies to the first five taxable years of that
corporation that begin after December 31, 2011 and before
January 1, 2017.
Explanation of Provision
The provision extends the credit to apply (a) in the case
of a corporation that is an existing credit claimant with
respect to American Samoa and that elected the application of
section 936 for its last taxable year beginning before January
1, 2006, to the first 12 taxable years of the corporation that
begin after December 31, 2005, and before January 1, 2018, and
(b) in the case of any other corporation, to the first six
taxable years of the corporation that begin after December 31,
2011 and before January 1, 2018.
For purposes of this credit, section 119(e) of Division A
of the Tax Relief and Health Care Act of 2006 \227\ is amended
to provide that any reference to section 199 of the Code is to
be treated as a reference to section 199 as in effect before
its repeal.
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\227\ Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432,
Division A, sec. 119.
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Effective Date
The provision is effective for taxable years beginning
after December 31, 2016.
E. Incentives for Energy Production and Conservation
1. Extension of credit for nonbusiness energy property (sec. 40401 of
the Act and sec. 25C of the Code)
Present Law
A 10-percent credit is available for the purchase of
qualified energy efficiency improvements to existing
homes.\228\ A qualified energy efficiency improvement is any
energy efficient building envelope component (1) that is
installed in or on a dwelling located in the United States and
owned and used by the taxpayer as the taxpayer's principal
residence; (2) the original use of which commences with the
taxpayer; and (3) that reasonably can be expected to remain in
use for at least five years. The credit is nonrefundable.
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\228\ Sec. 25C.
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Energy efficient building envelope components are building
envelope components that meet (1) the applicable Energy Star
program requirements, in the case of a roof or roof products;
(2) version 6.0 Energy Star program requirements, in the case
of an exterior window, a skylights, or an exterior door, and
(3) the prescriptive criteria for such components established
by the 2009 International Energy Conservation Code, as in
effect on the date of enactment of the American Recovery and
Reinvestment Tax Act of 2009, in the case of any other
component.
Building envelope components are (1) insulation materials
or systems that are specifically and primarily designed to
reduce the heat loss or gain for a dwelling when installed in
or on such dwelling unit, (2) exterior windows (including
skylights); (3) exterior doors; and (4) metal or asphalt roofs
installed on a dwelling unit, but only if such roof has
appropriate pigmented coatings or cooling granules that are
specifically and primarily designed to reduce the heat gain for
a dwelling.
Additionally, credits are also available for the purchase
of specific energy efficient property originally placed in
service by the taxpayer during the taxable year. The allowable
credit for the purchase of certain property is (1) $50 for each
advanced main air circulating fan, (2) $150 for each qualified
natural gas, propane, or oil furnace or hot water boiler, and
(3) $300 for each item of energy efficient building property.
An advanced main air circulating fan is a fan used in a
natural gas, propane, or oil furnace and that has an annual
electricity use of no more than two percent of the total annual
energy use of the furnace (as determined in the standard
Department of Energy test procedures).
A qualified natural gas, propane, or oil furnace or hot
water boiler is a natural gas, propane, or oil furnace or hot
water boiler with an annual fuel utilization efficiency rate of
at least 95.
Energy-efficient building property is: (1) an electric heat
pump water heater that yields an energy factor of at least 2.0
in the standard Department of Energy test procedure, (2) an
electric heat pump that achieves the highest efficiency tier
established by the Consortium for Energy Efficiency, as in
effect on January 1, 2009,\229\ (3) a central air conditioner
that achieves the highest efficiency tier established by the
Consortium for Energy Efficiency as in effect on January 1,
2009,\230\ (4) a natural gas, propane, or oil water heater that
has an energy factor of at least 0.82 or thermal efficiency of
at least 90 percent, and (5) a stove that burns biomass fuel to
heat a dwelling unit located in the United States and used as a
residence by the taxpayer, or to heat water for use in such
dwelling unit, and that has a thermal efficiency rating of at
least 75 percent. Biomass fuel is any plant-derived fuel
available on a renewable or recurring basis, including
agricultural crops and trees, wood and wood waste and residues
(including wood pellets), plants (including aquatic plants),
grasses, residues, and fibers.
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\229\ These standards are a seasonal energy efficiency ratio
(``SEER'') greater than or equal to 15, an energy efficiency ratio
(``EER'') greater than or equal to 12.5, and heating seasonal
performance factor (``HSPF'') greater than or equal to 8.5 for split
heat pumps, and SEER greater than or equal to 14, EER greater than or
equal to 12, and HSPF greater than or equal to 8.0 for packaged heat
pumps.
\230\ These standards are a SEER greater than or equal to 16 and
EER greater than or equal to 13 for split systems, and SEER greater
than or equal to 14 and EER greater than or equal to 12 for packaged
systems.
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Generally, the credit is available for property placed in
service prior to January 1, 2017. The maximum credit for a
taxpayer for all taxable years is $500, and no more than $200
of such credit may be attributable to expenditures on windows.
The taxpayer's basis in the property is reduced by the
amount of the credit. Special proration rules apply in the case
of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations. If less than
80 percent of the property is used for nonbusiness purposes,
only that portion of expenditures that is used for nonbusiness
purposes is taken into account.
For purposes of determining the amount of expenditures made
by any individual with respect to any dwelling unit,
expenditures that are made from subsidized energy financing are
not taken into account. The term ``subsidized energy
financing'' means financing provided under a Federal, State, or
local program a principal purpose of which is to provide
subsidized financing for projects designed to conserve or
produce energy.
Explanation of Provision
The provision extends the nonbusiness energy property
credit through December 31, 2017.
Effective Date
The provision is effective for property placed in service
after December 31, 2016.
2. Extension and modification of credit for residential energy property
(sec. 40402 of the Act and sec. 25D of the Code)
Present Law
In general
A personal tax credit is available for the purchase of
qualified solar electric property and qualified solar water
heating property that is used exclusively for purposes other
than heating swimming pools and hot tubs.\231\ In general, the
credit rate is equal to 30 percent of qualifying expenditures.
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\231\ Sec. 25D.
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A 30-percent credit is also available for the purchase of
qualified geothermal heat pump property, qualified small wind
energy property, and qualified fuel cell power plants. The
credit for any fuel cell may not exceed $500 for each 0.5
kilowatt of capacity.
The credit is nonrefundable. The credit with respect to all
qualifying property may be claimed against the alternative
minimum tax.
The credit for non-solar property expires for property
placed in service after December 31, 2016. With respect to
solar property, the credit expires for property placed in
service after December 31, 2021. The credit rate for solar
property is reduced to 26 percent for property placed in
service in calendar year 2020 and to 22 percent for property
placed in service in calendar year 2021.
Qualified property
Qualified solar electric property is property that uses
solar energy to generate electricity for use in a dwelling
unit. Qualifying solar water heating property is property used
to heat water for use in a dwelling unit located in the United
States and used as a residence if at least half of the energy
used by such property for such purpose is derived from the sun.
A qualified fuel cell power plant is an integrated system
comprised of a fuel cell stack assembly and associated balance
of plant components that (1) converts a fuel into electricity
using electrochemical means, (2) has an electricity-only
generation efficiency of greater than 30 percent, and (3) has a
nameplate capacity of at least 0.5 kilowatt. The qualified fuel
cell power plant must be installed on or in connection with a
dwelling unit located in the United States and used by the
taxpayer as a principal residence.
Qualified small wind energy property is property that uses
a wind turbine to generate electricity for use in a dwelling
unit located in the United States and used as a residence by
the taxpayer.
Qualified geothermal heat pump property means any equipment
that (1) uses the ground or ground water as a thermal energy
source to heat the dwelling unit or as a thermal energy sink to
cool such dwelling unit, (2) meets the requirements of the
Energy Star program that are in effect at the time that the
expenditure for such equipment is made, and (3) is installed on
or in connection with a dwelling unit located in the United
States and used as a residence by the taxpayer.
Additional rules
The depreciable basis of the property is reduced by the
amount of the credit. Expenditures for labor costs allocable to
onsite preparation, assembly, or original installation of
property eligible for the credit are eligible expenditures.
Special proration rules apply in the case of jointly owned
property, condominiums, and tenant-stockholders in cooperative
housing corporations. If less than 80 percent of the property
is used for nonbusiness purposes, only that portion of
expenditures that is used for nonbusiness purposes is taken
into account.
Explanation of Provision
The provision extends for five years, through December 31,
2021, the residential energy efficient property credit with
respect to the purchase of qualified geothermal heat pump
property, qualified small wind energy property, and qualified
fuel cell power plants. The provision modifies the credit rate,
reducing it to 26 percent for property placed in service in
2020 and 22 percent for property placed in service in 2021.
Thus, the provision equalizes the phasedown and expiration
dates for qualified solar and non-solar property.
Effective Date
The provision is effective for property placed in service
after December 31, 2016.
3. Extension of credit for new qualified fuel cell motor vehicles (sec.
40403 of the Act and sec. 30B of the Code)
Present Law
A credit is available through 2016 for vehicles propelled
by chemically combining oxygen with hydrogen and creating
electricity (``fuel cell vehicles''). The base credit is $4,000
for vehicles weighing 8,500 pounds or less. Heavier vehicles
can get up to a $40,000 credit, depending on their weight. An
additional $1,000 to $4,000 credit is available to cars and
light trucks to the extent their fuel economy exceeds the 2002
base fuel economy set forth in the Code.
Explanation of Provision
The provision extends the credit for fuel cell vehicles for
one year, through December 31, 2017.
Effective Date
The provision applies to property purchased after December
31, 2016.
4. Extension of credit for alternative fuel vehicle refueling property
(sec. 40404 of the Act and sec. 30C of the Code)
Present Law
Taxpayers may claim a 30-percent credit for the cost of
installing qualified clean-fuel vehicle refueling property to
be used in a trade or business of the taxpayer or installed at
the principal residence of the taxpayer.\232\ The credit may
not exceed $30,000 per taxable year per location, in the case
of qualified refueling property used in a trade or business and
$1,000 per taxable year per location, in the case of qualified
refueling property installed on property which is used as a
principal residence.
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\232\ Sec. 30C.
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Qualified refueling property is property (not including a
building or its structural components) for the storage or
dispensing of a clean-burning fuel or electricity into the fuel
tank or battery of a motor vehicle propelled by such fuel or
electricity, but only if the storage or dispensing of the fuel
or electricity is at the point of delivery into the fuel tank
or battery of the motor vehicle. The original use of such
property must begin with the taxpayer.
Clean-burning fuels are any fuel at least 85 percent of the
volume of which consists of ethanol, natural gas, compressed
natural gas, liquefied natural gas, liquefied petroleum gas, or
hydrogen. In addition, any mixture of biodiesel and diesel
fuel, determined without regard to any use of kerosene and
containing at least 20 percent biodiesel, qualifies as a clean
fuel.
Credits for qualified refueling property used in a trade or
business are part of the general business credit and may be
carried back for one year and forward for 20 years. Credits for
residential qualified refueling property cannot exceed for any
taxable year the difference between the taxpayer's regular tax
(reduced by certain other credits) and the taxpayer's tentative
minimum tax. Generally, in the case of qualified refueling
property sold to a tax-exempt entity, the taxpayer selling the
property may claim the credit.
A taxpayer's basis in qualified refueling property is
reduced by the amount of the credit. In addition, no credit is
available for property used outside the United States or for
which an election to expense has been made under section 179.
The credit is available for property placed in service
before January 1, 2017.
Explanation of Provision
The provision extends for one year the 30-percent credit
for alternative fuel refueling property, through December 31,
2017.
Effective Date
The provision applies to property placed in service after
December 31, 2016.
5. Extension of credit for two-wheeled plug-in electric vehicles (sec.
40405 of the Act and sec. 30D of the Code)
Present Law
In general, for vehicles acquired before 2017, a 10-percent
credit is available for qualifying plug-in electric
motorcycles.\233\ Qualifying electric motorcycles must have a
battery capacity of at least 2.5 kilowatt-hours, be
manufactured primarily for use on public streets, roads, and
highways, and be capable of achieving speeds of at least 45
miles per hour. The maximum credit for any qualifying vehicle
is $2,500.
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\233\ Sec. 30D(g). The credit lapsed and was not available for
vehicles placed in service in calendar year 2014.
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Explanation of Provision
The provision extends the electric motorcycles credit for
one year, through December 31, 2017.
Effective Date
The provision applies to vehicles acquired after December
31, 2016.
6. Extension of second generation biofuel producer credit (sec. 40406
of the Act and sec. 40(b)(6) of the Code)
Present Law
The second generation biofuel producer credit is a
nonrefundable income tax credit for each gallon of qualified
second generation biofuel fuel production of the producer for
the taxable year. The amount of the credit per gallon is $1.01.
The provision does not apply to qualified second generation
biofuel production after December 31, 2016.
``Qualified second generation biofuel production'' is any
second generation biofuel that is produced by the taxpayer and
that, during the taxable year, is: (1) sold by the taxpayer to
another person (a) for use by such other person in the
production of a qualified second generation biofuel mixture in
such person's trade or business (other than casual off-farm
production), (b) for use by such other person as a fuel in a
trade or business, or (c) who sells such second generation
biofuel at retail to another person and places such cellulosic
biofuel in the fuel tank of such other person; or (2) used by
the producer for any purpose described in (1)(a), (b), or (c).
Special rules apply for fuel derived from algae.\234\
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\234\ In addition, for fuels derived from algae, cyanobacterial or
lemna, a special rule provides that qualified second generation biofuel
includes fuel that is sold by the taxpayer to another person for
refining by such other person into a fuel that meets the registration
requirements for fuels and fuel additives under section 211 of the
Clean Air Act.
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``Second generation biofuel'' means any liquid fuel that
(1) is produced in the United States and used as fuel in the
United States, (2) is derived by or from qualified feedstocks,
and (3) meets the registration requirements for fuels and fuel
additives established by the Environmental Protection Agency
(``EPA'') under section 211 of the Clean Air Act. ``Qualified
feedstock'' means any lignocellulosic or hemicellulosic matter
that is available on a renewable or recurring basis, and any
cultivated algae, cyanobacteria or lemna. Second generation
biofuel does not include fuels that (1) are more than four
percent (determined by weight) water and sediment in any
combination, (2) have an ash content of more than one percent
(determined by weight), or (3) have an acid number greater than
25 (``unprocessed or excluded fuels''). It also does not
include any alcohol with a proof of less than 150.
The second generation biofuel producer credit cannot be
claimed unless the taxpayer is registered by the Internal
Revenue Service (``IRS'') as a producer of second generation
biofuel. Second generation biofuel eligible for the section 40
credit is precluded from qualifying as biodiesel, renewable
diesel, or alternative fuel for purposes of the applicable
income tax credit, excise tax credit, or payment provisions
relating to those fuels.
Because it is a credit under section 40(a), the second
generation biofuel producer credit is part of the general
business credits in section 38. However, the credit can only be
carried forward three taxable years after the termination of
the credit. The credit is also allowable against the
alternative minimum tax. Under section 87, the credit is
included in gross income.
Explanation of Provision
The provision extends the credit through December 31, 2017.
Effective Date
The provision applies to qualified second generation
biofuel production after December 31, 2016.
7. Extension of biodiesel and renewable diesel incentives (sec. 40407
of the Act and secs. 40A, 6426(c), and 6427(e) of the Code)
Present Law
Biodiesel
The biodiesel fuels credit is the sum of three credits: (1)
the biodiesel mixture credit; (2) the biodiesel credit; and (3)
the small agri-biodiesel producer credit. The biodiesel fuels
credit is treated as a general business credit. The amount of
the biodiesel fuels credit is includible in gross income. The
biodiesel fuels credit is coordinated to take into account
benefits from the biodiesel excise tax credit and payment
provisions discussed below. The credit does not apply to fuel
sold or used after December 31, 2016.
Biodiesel is monoalkyl esters of long chain fatty acids
derived from plant or animal matter that meet (1) the
registration requirements established by the EPA under section
211 of the Clean Air Act (42 U.S.C. sec. 7545) and (2) the
requirements of the American Society of Testing and Materials
(``ASTM'') D6751. Agri-biodiesel is biodiesel derived solely
from virgin oils including oils from corn, soybeans, sunflower
seeds, cottonseeds, canola, crambe, rapeseeds, safflowers,
flaxseeds, rice bran, mustard seeds, camelina, or animal fats.
Biodiesel may be taken into account for purposes of the
credit only if the taxpayer obtains a certification (in such
form and manner as prescribed by the Secretary) from the
producer or importer of the biodiesel that identifies the
product produced and the percentage of biodiesel and agri-
biodiesel in the product.
Biodiesel mixture credit
The biodiesel mixture credit is $1.00 for each gallon of
biodiesel (including agri-biodiesel) used by the taxpayer in
the production of a qualified biodiesel mixture. A qualified
biodiesel mixture is a mixture of biodiesel and diesel fuel
that is (1) sold by the taxpayer producing such mixture to any
person for use as a fuel or (2) used as a fuel by the taxpayer
producing such mixture. The sale or use must be in the trade or
business of the taxpayer and is to be taken into account for
the taxable year in which such sale or use occurs. No credit is
allowed with respect to any casual off-farm production of a
qualified biodiesel mixture.
Per IRS guidance, a mixture need only contain 1/10th of one
percent of diesel fuel to be a qualified mixture. Thus, a
qualified biodiesel mixture can contain 99.9 percent biodiesel
and 0.1 percent diesel fuel.
Biodiesel credit (B-100)
The biodiesel credit is $1.00 for each gallon of biodiesel
that is not in a mixture with diesel fuel (100 percent
biodiesel or B-100) and that during the taxable year is (1)
used by the taxpayer as a fuel in a trade or business or (2)
sold by the taxpayer at retail to a person and placed in the
fuel tank of such person's vehicle.
Small agri-biodiesel producer credit
The Code provides a small agri-biodiesel producer income
tax credit, in addition to the biodiesel and biodiesel mixture
credits. The credit is 10 cents per gallon for up to 15 million
gallons of agri-biodiesel produced by small producers, defined
generally as persons whose agri-biodiesel production capacity
does not exceed 60 million gallons per year. The agri-biodiesel
must (1) be sold by such producer to another person (a) for use
by such other person in the production of a qualified biodiesel
mixture in such person's trade or business (other than casual
off-farm production), (b) for use by such other person as a
fuel in a trade or business, or, (c) who sells such agri-
biodiesel at retail to another person and places such agri-
biodiesel in the fuel tank of such other person; or (2) used by
the producer for any purpose described in (a), (b), or (c).
Biodiesel mixture excise tax credit
The Code also provides an excise tax credit for biodiesel
mixtures. The credit is $1.00 for each gallon of biodiesel used
by the taxpayer in producing a biodiesel mixture for sale or
use in a trade or business of the taxpayer. A biodiesel mixture
is a mixture of biodiesel and diesel fuel that (1) is sold by
the taxpayer producing such mixture to any person for use as a
fuel or (2) is used as a fuel by the taxpayer producing such
mixture. No credit is allowed unless the taxpayer obtains a
certification (in such form and manner as prescribed by the
Secretary) from the producer of the biodiesel that identifies
the product produced and the percentage of biodiesel and agri-
biodiesel in the product.
The credit is not available for any sale or use for any
period after December 31, 2016. This excise tax credit is
coordinated with the income tax credit for biodiesel such that
credit for the same biodiesel cannot be claimed for both income
and excise tax purposes.
Payments with respect to biodiesel fuel mixtures
If any person produces a biodiesel fuel mixture in such
person's trade or business, the Secretary is to pay such person
an amount equal to the biodiesel mixture credit. The biodiesel
fuel mixture credit must first be taken against tax liability
for taxable fuels. To the extent the biodiesel fuel mixture
credit exceeds such tax liability, the excess may be received
as a payment. Thus, if the person has no section 4081
liability, the credit is refundable. The Secretary is not
required to make payments with respect to biodiesel fuel
mixtures sold or used after December 31, 2016.
Renewable diesel
Renewable diesel is liquid fuel that (1) is derived from
biomass (as defined in section 45K(c)(3)), (2) meets the
registration requirements for fuels and fuel additives
established by the EPA under section 211 of the Clean Air Act,
and (3) meets the requirements of the ASTM D975 or D396, or
equivalent standard established by the Secretary. ASTM D975
provides standards for diesel fuel suitable for use in diesel
engines. ASTM D396 provides standards for fuel oil intended for
use in fuel-oil burning equipment, such as furnaces. Renewable
diesel also includes fuel derived from biomass that meets the
requirements of a Department of Defense specification for
military jet fuel or an ASTM specification for aviation turbine
fuel.
For purposes of the Code, renewable diesel is generally
treated the same as biodiesel. In the case of renewable diesel
that is aviation fuel, kerosene is treated as though it were
diesel fuel for purposes of a qualified renewable diesel
mixture. Like biodiesel, the incentive may be taken as an
income tax credit, an excise tax credit, or as a payment from
the Secretary. The incentive for renewable diesel is $1.00 per
gallon. There is no small producer credit for renewable diesel.
The incentives for renewable diesel expired after December 31,
2016.
Explanation of Provision
The provision extends the income tax credit, excise tax
credit and payment provisions for biodiesel and renewable
diesel through December 31, 2017. As it relates to fuel sold or
used in 2017, the provision creates a special rule to address
claims regarding excise tax credits and claims for payment for
the period beginning on January 1, 2017, and ending on December
31, 2017. In particular the provision directs the Secretary to
issue guidance within 30 days of the date of enactment. Such
guidance is to provide for a one-time submission of claims
covering periods occurring during 2017. The guidance is to
provide for a 180-day period for the submission of such claims
(in such manner as prescribed by the Secretary) to begin no
later than 30 days after such guidance is issued. Such claims
shall be paid by the Secretary of the Treasury not later than
60 days after receipt. If the claim is not paid within 60 days
of the date of the filing, the claim shall be paid with
interest from such date determined by using the overpayment
rate and method under section 6621 of the Code.
Effective Date
The extension applies to fuel sold or used after December
31, 2016.
8. Extension of production credit for Indian coal facilities (sec.
40408 of the Act and sec. 45 of the Code)
Present Law
In general, a credit is available for each ton of Indian
coal produced from a qualified facility for during the 11-year
period beginning January 1, 2006, and ending December 31,
2016.\235\ Qualified Indian coal must be sold to an unrelated
third party (either directly by the taxpayer or after sale or
transfer to one or more related persons). The amount of the
credit is $2.00 per ton (adjusted for inflation; $2.387 per ton
for 2016). A qualified Indian coal facility is a facility that
produces coal from reserves that on June 14, 2005, were owned
by a Federally recognized tribe of Indians or were held in
trust by the United States for a tribe or its members.
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\235\ Sec. 45.
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Explanation of Provision
The provision extends the credit for the production of
Indian coal for one year, through December 31, 2017.
Effective Date
The extension of the credit applies to Indian coal produced
after December 31, 2016.
9. Extension of credits with respect to facilities producing energy
from certain renewable resources (sec. 40409 of the Act and
secs. 45 and 48 of the Code)
Present Law
Renewable electricity production credit
An income tax credit is allowed for the production of
electricity from qualified energy resources at qualified
facilities (the ``renewable electricity production
credit'').\236\ Qualified energy resources comprise wind,
closed-loop biomass, open-loop biomass, geothermal energy,
municipal solid waste, qualified hydropower production, and
marine and hydrokinetic renewable energy. Qualified facilities
are, generally, facilities that generate electricity using
qualified energy resources. To be eligible for the credit,
electricity produced from qualified energy resources at
qualified facilities must be sold by the taxpayer to an
unrelated person.
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\236\ Sec. 45. In addition to the renewable electricity production
credit, section 45 also provides income tax credits for the production
of Indian coal and refined coal at qualified facilities.
SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE RESOURCES
----------------------------------------------------------------------------------------------------------------
Eligible electricity production activity Credit amount for 2018 1
(sec. 45) (cents per kilowatt-hour) Expiration 2
----------------------------------------------------------------------------------------------------------------
Wind..................................... 2.4 December 31, 2019
Closed-loop biomass...................... 2.4 December 31, 2016
Open-loop biomass (including agricultural 1.2 December 31, 2016
livestock waste nutrient facilities).
Geothermal............................... 2.4 December 31, 2016
Municipal solid waste.................... 1.2 December 31, 2016
(including landfill gas facilities and
trash combustion facilities).
Qualified hydropower..................... 1.2 December 31, 2016
Marine and hydrokinetic.................. 1.2 December 31, 2016
----------------------------------------------------------------------------------------------------------------
1 In general, the credit is available for electricity produced during the first 10 years after a facility has
been placed in service. For wind facilities, the credit is reduced by 20 percent for facilities the
construction of which begins in calendar year 2017, by 40 percent for facilities the construction of which
begins in calendar year 2018, and by 60 percent for facilities the construction of which begins in calendar
year 2019.
2 Expires for property the construction of which begins after this date.
Election to claim energy credit in lieu of renewable electricity
production credit
A taxpayer may make an irrevocable election to have certain
property that is part of a qualified renewable electricity
production facility be treated as energy property eligible for
a 30 percent investment credit under section 48. For wind
facilities, the credit is reduced by 20 percent for facilities
the construction of which begins in calendar year 2017, by 40
percent for facilities the construction of which begins in
calendar year 2018, and by 60 percent for facilities the
construction of which begins in calendar year 2019. For
purposes of the investment credit, qualified facilities are
facilities otherwise eligible for the renewable electricity
production credit with respect to which no credit under section
45 has been allowed. A taxpayer electing to treat a facility as
energy property may not claim the renewable electricity
production credit. The eligible basis for the investment credit
for taxpayers making this election is the basis of the
depreciable (or amortizable) property that is part of a
facility capable of generating electricity eligible for the
renewable electricity production credit.
Explanation of Provision
For non-wind renewable power facilities, the provision
extends for one year the renewable electricity production
credit and the election to claim the energy credit in lieu of
the electricity production credit, through December 31, 2017.
Effective Date
The provision takes effect January 1, 2017.
10. Extension of credit for energy-efficient new homes (sec. 40410 of
the Act and sec. 45L of the Code)
Present Law
A credit is available to an eligible contractor for each
qualified new energy-efficient home that is constructed by the
eligible contractor and acquired by a person from such eligible
contractor for use as a residence during the taxable year. To
qualify as a new energy-efficient home, the home must be: (1) a
dwelling located in the United States; (2) substantially
completed after August 8, 2005; and (3) certified in accordance
with guidance prescribed by the Secretary to have a projected
level of annual heating and cooling energy consumption that
meets the standards for either a 30-percent or 50-percent
reduction in energy usage, compared to a comparable dwelling
constructed in accordance with the standards of chapter 4 of
the 2006 International Energy Conservation Code as in effect
(including supplements) on January 1, 2006, and any applicable
Federal minimum efficiency standards for equipment. With
respect to homes that meet the 30-percent standard, one-third
of such 30-percent savings must come from the building
envelope, and with respect to homes that meet the 50-percent
standard, one-fifth of such 50-percent savings must come from
the building envelope.
Manufactured homes that conform to Federal manufactured
home construction and safety standards are eligible for the
credit provided all the criteria for the credit are met. The
eligible contractor is the person who constructed the home, or
in the case of a manufactured home, the producer of such home.
The credit equals $1,000 in the case of a new home that
meets the 30-percent standard and $2,000 in the case of a new
home that meets the 50-percent standard. Only manufactured
homes are eligible for the $1,000 credit.
In lieu of meeting the standards of chapter 4 of the 2006
International Energy Conservation Code, manufactured homes
certified by a method prescribed by the Administrator of the
Environmental Protection Agency under the Energy Star Labeled
Homes program are eligible for the $1,000 credit provided
criteria (1) and (2), above, are met.
The credit applies to homes that are purchased prior to
January 1, 2017.
Explanation of Provision
The provision extends the credit for one year, to homes
that are acquired prior to January 1, 2018.
Effective Date
The provision applies to homes acquired after December 31,
2016.
11. Extension and phaseout of energy credit (sec. 40411 of the Act and
sec. 48 of the Code)
Present Law
In general
A permanent nonrefundable 10-percent business energy credit
\237\ is allowed for the cost of new property that is equipment
that either (1) uses solar energy to generate electricity, to
heat or cool a structure, or to provide solar process heat or
(2) is used to produce, distribute, or use energy derived from
a geothermal deposit, but only, in the case of electricity
generated by geothermal power, up to the electric transmission
stage. Property used to generate energy for the purposes of
heating a swimming pool is not eligible solar energy property.
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\237\ Sec. 48.
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In addition to the permanent credit, a number of energy
technologies are entitled to the energy credit at rates of 10
percent or 30 percent, depending on the technology. These
credits sunset for property placed in service after the
expiration date for that technology. In addition, the credit
rate for solar energy property has been temporarily increased.
The energy credit is a component of the general business
credit.\238\ An unused general business credit generally may be
carried back one year and carried forward 20 years.\239\ The
taxpayer's basis in the property is reduced by one-half of the
amount of the credit claimed.\240\ For projects whose
construction time is expected to equal or exceed two years, the
credit may be claimed as progress expenditures are made on the
project, rather than during the year the property is placed in
service. The credit is allowed against the alternative minimum
tax.
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\238\ Sec. 38(b)(1).
\239\ Sec. 39.
\240\ Sec. 50(c)(3).
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Increased credit rate for solar energy property
For property the construction of which begins before
January 1, 2020, the credit rate for otherwise eligible solar
energy property is increased to 30 percent. For property the
construction of which begins in calendar year 2020 and that is
placed in service by the end of calendar year 2023, the credit
rate for otherwise eligible solar energy property is 26
percent. For property the construction of which begins in
calendar year 2021 and that is placed in service by the end of
calendar year 2023, the credit rate for otherwise eligible
solar energy property is 22 percent. For property the
construction of which begins after calendar year 2021 or that
does not meet the 2023 deadline described above, the credit
rate drops to the permanent 10-percent rate.
Fiber optic solar property
Equipment that uses fiber-optic distributed sunlight to
illuminate the inside of a structure is eligible for a 30-
percent credit for property placed in service prior to January
1, 2017.
Fuel cells and microturbines
The energy credit applies to qualified fuel cell power
plants, but only for property placed in service prior to
January 1, 2017. The credit rate is 30 percent.
A qualified fuel cell power plant is an integrated system
composed of a fuel cell stack assembly and associated balance
of plant components that (1) converts a fuel into electricity
using electrochemical means, and (2) has an electricity-only
generation efficiency of greater than 30 percent and a capacity
of at least one-half kilowatt. The credit may not exceed $1,500
for each 0.5 kilowatt of capacity.
The energy credit applies to qualifying stationary
microturbine power plants for property placed in service prior
to January 1, 2017. The credit is limited to the lesser of 10
percent of the basis of the property or $200 for each kilowatt
of capacity.
A qualified stationary microturbine power plant is an
integrated system comprised of a gas turbine engine, a
combustor, a recuperator or regenerator, a generator or
alternator, and associated balance of plant components that
converts a fuel into electricity and thermal energy. Such
system also includes all secondary components located between
the existing infrastructure for fuel delivery and the existing
infrastructure for power distribution, including equipment and
controls for meeting relevant power standards, such as voltage,
frequency and power factors. Such system must have an
electricity-only generation efficiency of not less than 26
percent at International Standard Organization conditions and a
capacity of less than 2,000 kilowatts.
Geothermal heat pump property
The energy credit applies to qualified geothermal heat pump
property placed in service prior to January 1, 2017. The credit
rate is 10 percent. Qualified geothermal heat pump property is
equipment that uses the ground or ground water as a thermal
energy source to heat a structure or as a thermal energy sink
to cool a structure.
Small wind property
The energy credit applies to qualified small wind energy
property placed in service prior to January 1, 2017. The credit
rate is 30 percent. Qualified small wind energy property is
property that uses a qualified wind turbine to generate
electricity. A qualifying wind turbine means a wind turbine of
100 kilowatts of rated capacity or less.
Combined heat and power property
The energy credit applies to combined heat and power
(``CHP'') property placed in service prior to January 1, 2017.
The credit rate is 10 percent.
CHP property is property: (1) that uses the same energy
source for the simultaneous or sequential generation of
electrical power, mechanical shaft power, or both, in
combination with the generation of steam or other forms of
useful thermal energy (including heating and cooling
applications); (2) that has an electrical capacity of not more
than 50 megawatts or a mechanical energy capacity of not more
than 67,000 horsepower or an equivalent combination of
electrical and mechanical energy capacities; (3) that produces
at least 20 percent of its total useful energy in the form of
thermal energy that is not used to produce electrical or
mechanical power, and produces at least 20 percent of its total
useful energy in the form of electrical or mechanical power (or
a combination thereof); and (4) the energy efficiency
percentage of which exceeds 60 percent. CHP property does not
include property used to transport the energy source to the
generating facility or to distribute energy produced by the
facility.
The otherwise allowable credit with respect to CHP property
is reduced to the extent the property has an electrical
capacity or mechanical capacity in excess of any applicable
limits. Property in excess of the applicable limit (15
megawatts or a mechanical energy capacity of more than 20,000
horsepower or an equivalent combination of electrical and
mechanical energy capacities) is permitted to claim a fraction
of the otherwise allowable credit. The fraction is equal to the
applicable limit divided by the capacity of the property. For
example, a 45 megawatt property would be eligible to claim 15/
45ths, or one third, of the otherwise allowable credit. Again,
no credit is allowed if the property exceeds the 50 megawatt or
67,000 horsepower limitations described above.
Additionally, systems whose fuel source is at least 90
percent open-loop biomass and that would qualify for the credit
but for the failure to meet the efficiency standard are
eligible for a credit that is reduced in proportion to the
degree to which the system fails to meet the efficiency
standard. For example, a system that would otherwise be
required to meet the 60-percent efficiency standard, but which
only achieves 30-percent efficiency, would be permitted a
credit equal to one-half of the otherwise allowable credit
(i.e., a 5-percent credit).
Election of energy credit in lieu of section 45 production
tax credit
In general, a taxpayer may make an irrevocable election to
have certain property used in qualified facilities whose
construction begins before January 1, 2017, be treated as
energy property. For this purpose, qualified facilities are
facilities otherwise eligible for the renewable electricity
production credit with respect to which no credit under section
45 has been allowed. A taxpayer electing to treat a facility as
energy property may not claim the renewable electricity
production credit. For wind facilities, an election may be for
property used in facilities whose construction begins before
January 1, 2020. However, for such wind facilities, the credit
is reduced by 20 percent for facilities the construction of
which begins in calendar year 2017, by 40 percent for
facilities the construction of which begins in calendar year
2018, and by 60 percent for facilities the construction of
which begins in calendar year 2019.\241\
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\241\ See section 40409 of the Act for the provision extending
section 45 and the election to claim an energy credit in lieu of that
credit.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the energy credit for qualified non-
solar energy property.
For fiber optic solar property, fuel cell property, and
small wind energy property, the energy credit is extended for
property the construction of which begins before January 1,
2022. For property the construction of which begins before
January 1, 2020, the credit rate is 30 percent. For property
the construction of which begins in calendar year 2020 and that
is placed in service by the end of calendar year 2023, the
credit rate is 26 percent. For property the construction of
which begins in calendar year 2021 and that is placed in
service by the end of calendar year 2023, the credit rate is 22
percent. No credit is available for property the construction
of which begins after calendar year 2021 or that does not meet
the 2023 placed-in-service deadline.
For geothermal heat pump property, microturbine property,
and combined heat and power system property, the 10-percent
credit is extended for property the construction of which
begins before January 1, 2022.
Effective Date
In general, the provision is effective for periods after
December 31, 2016, under rules similar to the rules of section
48(m), as in effect for the date of enactment of the Revenue
Reconciliation Act of 1990. The extension of the credit for
combined heat and power system property is effective for
property placed in service after December 31, 2016. The
phaseouts and terminations are effective on the date of
enactment.
12. Extension of special allowance for second generation biofuel plant
property (sec. 40412 of the Act and sec. 168(l) of the Code)
Present Law
In general
A taxpayer generally must capitalize the cost of property
used in a trade or business or held for the production of
income and recover such cost over time through annual
deductions for depreciation or amortization.\242\ The period
for depreciation or amortization generally begins when the
asset is placed in service by the taxpayer.\243\ Tangible
property generally is depreciated under the modified
accelerated cost recovery system (``MACRS''), which determines
depreciation for different types of property based on an
assigned applicable depreciation method, recovery period,\244\
and convention.\245\
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\242\ See secs. 263(a) and 167. In general, only the tax owner of
property (i.e., the taxpayer with the benefits and burdens of
ownership) is entitled to claim tax benefits such as cost recovery
deductions with respect to the property. In addition, where property is
not used exclusively in a taxpayer's business, the amount eligible for
a deduction must be reduced by the amount related to personal use. See,
e.g., sec. 280A.
\243\ See Treas. Reg. secs. 1.167(a)-10(b), 1.167(a)-3, 1.167(a)-
14, and 1.197-2(f). See also Treas. Reg. sec. 1.167(a)-11(e)(1)(i).
\244\ The applicable recovery period for an asset is determined in
part by statute and in part by historic Treasury guidance. Exercising
authority granted by Congress, the Secretary issued Rev. Proc. 87-56,
1987-2 C.B. 674, laying out the framework of recovery periods for
enumerated classes of assets. The Secretary clarified and modified the
list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November
1988, Congress revoked the Secretary's authority to modify the class
lives of depreciable property. Rev. Proc. 87-56, as modified, remains
in effect except to the extent that the Congress has, since 1988,
statutorily modified the recovery period for certain depreciable
assets, effectively superseding any administrative guidance with regard
to such property.
\245\ Sec. 168.
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Special depreciation allowance for second generation biofuel plant
property
An additional first-year depreciation deduction is allowed
equal to 50 percent of the adjusted basis of qualified second
generation biofuel plant property for the taxable year in which
the property is placed in service.\246\ In order to qualify,
the property generally must be placed in service before January
1, 2017.\247\
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\246\ Sec. 168(l).
\247\ Sec. 168(l)(2)(D).
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The additional first-year depreciation deduction is allowed
for both regular tax and alternative minimum tax purposes,\248\
but is not allowed in computed earnings and profits.\249\ The
additional first-year depreciation deduction is subject to the
general rules regarding whether a cost is subject to
capitalization under section 263A. The basis of the property
and the depreciation allowances in the year of purchase and
later years are appropriately adjusted to reflect the
additional first-year depreciation deduction.\250\
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\248\ Sec. 168(l)(5).
\249\ Sec. 312(k)(3).
\250\ Sec. 168(l)(1)(B).
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Qualified property
Qualified second generation biofuel plant property means
depreciable property used in the U.S. solely to produce any
liquid fuel that (1) is derived by, or from, qualified
feedstocks, and (2) meets the registration requirements for
fuels and fuel additives established by the Environmental
Protection Agency (``EPA'') under section 211 of the Clean Air
Act.\251\ Qualified feedstock means any lignocellulosic or
hemicellulosic matter that is available on a renewable or
recurring basis,\252\ and any cultivated algae, cyanobacteria,
or lemna.\253\ Second generation biofuel does not include any
alcohol with a proof of less than 150 or certain unprocessed
fuel.\254\ Unprocessed fuels are fuels that (1) are more than
four percent (determined by weight) water and sediment in any
combination, (2) have an ash content of more than one percent
(determined by weight), or (3) have an acid number greater than
25.\255\
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\251\ Secs. 168(l)(2)(A) and 40(b)(6)(E).
\252\ For example, lignocellulosic or hemicellulosic matter that is
available on a renewable or recurring basis includes bagasse (from
sugar cane), corn stalks, and switchgrass. See Joint Committee on
Taxation, General Explanation of Tax Legislation Enacted in the 109th
Congress (JCS-1-07), January 2007, p. 722.
\253\ Sec. 40(b)(6)(F).
\254\ Sec. 40(b)(6)(E)(ii) and (iii).
\255\ Sec. 40(b)(6)(E)(iii).
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In order for such property to qualify for the additional
first-year depreciation deduction, it must also meet the
following requirements: (1) the original use of the property
must commence with the taxpayer; and (2) the property must be
(i) acquired by purchase (as defined under section 179(d)) by
the taxpayer, and (ii) placed in service before January 1,
2017.\256\ Property that is manufactured, constructed, or
produced by the taxpayer for use by the taxpayer qualifies if
the taxpayer begins the manufacture, construction, or
production of the property before January 1, 2017 (and all
other requirements are met).\257\ Property that is
manufactured, constructed, or produced for the taxpayer by
another person under a contract that is entered into prior to
the manufacture, construction, or production of the property is
considered to be manufactured, constructed, or produced by the
taxpayer.
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\256\ Sec. 168(l)(2). Requirements relating to actions taken before
2007 are not described herein since they have little (if any) remaining
effect.
\257\ Sec. 168(l)(4) and (k)(2)(E).
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Exceptions
Property not eligible for the additional first-year
depreciation deduction under section 168(l) includes (i) any
property to which the additional first-year depreciation
allowance under section 168(k) applies,\258\ (ii) any property
required to be depreciated under the alternative depreciation
system of section 168(g),\259\ (iii) any property any portion
of which is financed with the proceeds of a tax-exempt
obligation under section 103,\260\ and (iv) any property with
respect to which the taxpayer has elected 50-percent expensing
under section 179C (relating to election to expense certain
refineries).\261\
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\258\ Sec. 168(l)(3)(A).
\259\ Sec. 168(l)(3)(B).
\260\ Sec. 168(l)(3)(C).
\261\ Sec. 168(l)(7).
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A taxpayer may elect out of the additional first-year
depreciation for any class of property for any taxable
year.\262\
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\262\ Sec. 168(l)(3)(D).
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In addition, recapture rules apply if the property ceases
to be qualified second generation biofuel plant property.\263\
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\263\ Sec. 168(l)(6).
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Explanation of Provision
The provision extends the special depreciation allowance
for one year, to qualified second generation biofuel plant
property placed in service prior to January 1, 2018.
Effective Date
The provision applies to property placed in service after
December 31, 2016.
13. Extension of energy efficient commercial buildings deduction (sec.
40413 of the Act and sec. 179D of the Code)
Present Law
In general Section 179D provides an election under which a
taxpayer may take an immediate deduction equal to energy-
efficient commercial building property expenditures made by the
taxpayer. Energy-efficient commercial building property is
defined as property that is (1) installed on or in any building
located in the United States that is within the scope of
Standard 90.1-2007 of the American Society of Heating,
Refrigerating, and Air Conditioning Engineers and the
Illuminating Engineering Society of North America (``ASHRAE/
IESNA''), (2) installed as part of (i) the interior lighting
systems, (ii) the heating, cooling, ventilation, and hot water
systems, or (iii) the building envelope, and (3) certified as
being installed as part of a plan designed to reduce the total
annual energy and power costs with respect to the interior
lighting systems, heating, cooling, ventilation, and hot water
systems of the building by 50 percent or more in comparison to
a reference building that meets the minimum requirements of
Standard 90.1-2007 (as in effect before the date of the
adoption of ASHRAE/IESNA Standard 90.1-2010). The deduction is
limited to an amount equal to $1.80 per square foot of the
property for which such expenditures are made. The deduction is
allowed in the year in which the property is placed in service.
Certain certification requirements must be met in order to
qualify for the deduction. The Secretary, in consultation with
the Secretary of Energy, will promulgate regulations that
describe methods of calculating and verifying energy and power
costs using qualified computer software based on the provisions
of the 2005 California Nonresidential Alternative Calculation
Method Approval Manual.
The Secretary is granted authority to prescribe procedures
for the inspection and testing for compliance of buildings that
are comparable, given the difference between commercial and
residential buildings, to the requirements in the Mortgage
Industry National Accreditation Procedures for Home Energy
Rating Systems.\264\ Individuals qualified to determine
compliance shall only be those recognized by one or more
organizations certified by the Secretary for such purposes.
---------------------------------------------------------------------------
\264\ See IRS Notice 2006-52, 2006-1 C.B. 1175, June 2, 2006; IRS
Notice 2008-40, 2008-14 I.R.B. 725, March 11, 2008.
---------------------------------------------------------------------------
For energy-efficient commercial building property
expenditures made by a public entity, such as public schools,
the deduction may be allocated to the person primarily
responsible for designing the property in lieu of the public
entity.
If a deduction is allowed under this section, the basis of
the property is reduced by the amount of the deduction.
The deduction applies to property placed in service prior
to January 1, 2017.
Partial allowance of deduction
System-specific deductions
In the case of a building that does not meet the overall
building requirement of 50-percent energy savings, a partial
deduction is allowed with respect to each separate building
system that comprises energy efficient property and that is
certified by a qualified professional as meeting or exceeding
the applicable system-specific savings targets established by
the Secretary. The applicable system-specific savings targets
to be established by the Secretary are those that would result
in a total annual energy savings with respect to the whole
building of 50 percent, if each of the separate systems met the
system specific target. The separate building systems are (1)
the interior lighting system, (2) the heating, cooling,
ventilation and hot water systems, and (3) the building
envelope. The maximum allowable deduction is $0.60 per square
foot for each separate system.
Interim rules for lighting systems
In general, in the case of system-specific partial
deductions, no deduction is allowed until the Secretary
establishes system-specific targets.\265\ However, in the case
of lighting system retrofits, until such time as the Secretary
issues final regulations, the system-specific energy savings
target for the lighting system is deemed to be met by a
reduction in lighting power density of 40 percent (50 percent
in the case of a warehouse) of the minimum requirements in
Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-
2007. Also, in the case of a lighting system that reduces
lighting power density by 25 percent, a partial deduction of 30
cents per square foot is allowed. A pro-rated partial deduction
is allowed in the case of a lighting system that reduces
lighting power density between 25 percent and 40 percent.
Certain lighting level and lighting control requirements must
also be met in order to qualify for the partial lighting
deductions under the interim rule.
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\265\ IRS Notice 2008-40 set a target of a 10-percent reduction in
total energy and power costs with respect to the building envelope, and
20 percent each with respect to the interior lighting system and the
heating, cooling, ventilation and hot water systems. IRS Notice 2012-26
(2012-17 I.R.B. 847 April 23, 2012) established new targets of 10-
percent reduction in total energy and power costs with respect to the
building envelope, 25 percent with respect to the interior lighting
system and 15 percent with respect to the heating, cooling, ventilation
and hot water systems, effective beginning March 12, 2012. The targets
from Notice 2008-40 may be used until December 31, 2013, but the
targets of Notice 2012-26 apply thereafter.
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Explanation of Provision
The provision extends the deduction for one year, through
December 31, 2017.
Effective Date
The provision applies to property placed in service after
December 31, 2016.
14. Extension of special rule for sales or dispositions to implement
FERC or State electric restructuring policy for qualified
electric utilities (sec. 40414 of the Act and sec. 451(k) of
the Code)
Present Law
A taxpayer selling property generally realizes gain to the
extent the sales price (and any other consideration received)
exceeds the taxpayer's basis in the property.\266\ The realized
gain is subject to current income tax \267\ unless the
recognition of the gain is deferred or excluded from income
under a special tax provision.\268\
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\266\ See sec. 1001.
\267\ See secs. 61 and 451.
\268\ See, e.g., secs. 453, 1031, and 1033.
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One such special tax provision permits taxpayers to elect
to recognize gain from qualifying electric transmission
transactions ratably over an eight-year period beginning in the
year of sale if the amount realized from such sale is used to
purchase exempt utility property within the applicable period
\269\ (the ``reinvestment property'').\270\ If the amount
realized exceeds the amount used to purchase reinvestment
property, any realized gain is recognized to the extent of such
excess in the year of the qualifying electric transmission
transaction.
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\269\ The applicable period for a taxpayer to reinvest the proceeds
is four years after the close of the taxable year in which the
qualifying electric transmission transaction occurs.
\270\ Sec. 451(k).
---------------------------------------------------------------------------
A qualifying electric transmission transaction is the sale
or other disposition of property used by a qualified electric
utility to an independent transmission company prior to January
1, 2017.\271\ A qualified electric utility is defined as an
electric utility, which as of the date of the qualifying
electric transmission transaction, is vertically integrated in
that it is both (1) a transmitting utility (as defined in the
Federal Power Act \272\) with respect to the transmission
facilities to which the election applies, and (2) an electric
utility (as defined in the Federal Power Act \273\).\274\
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\271\ Sec. 451(k)(3).
\272\ Sec. 3(23), 16 U.S.C. sec. 796, defines ``transmitting
utility'' as any electric utility, qualifying cogeneration facility,
qualifying small power production facility, or Federal power marketing
agency that owns or operates electric power transmission facilities
that are used for the sale of electric energy at wholesale.
\273\ Sec. 3(22), 16 U.S.C. sec. 796, defines ``electric utility''
as any person or State agency (including any municipality) that sells
electric energy; such term includes the Tennessee Valley Authority, but
does not include any Federal power marketing agency.
\274\ Sec. 451(k)(6).
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In general, an independent transmission company is defined
as: (1) an independent transmission provider \275\ approved by
the Federal Energy Regulatory Commission (``FERC''); (2) a
person (i) who the FERC determines under section 203 of the
Federal Power Act \276\ (or by declaratory order) is not a
``market participant'' and (ii) whose transmission facilities
are placed under the operational control of a FERC-approved
independent transmission provider no later than four years
after the close of the taxable year in which the transaction
occurs; or (3) in the case of facilities subject to the
jurisdiction of the Public Utility Commission of Texas, (i) a
person that is approved by that Commission as consistent with
Texas State law regarding an independent transmission
organization, or (ii) a political subdivision, or affiliate
thereof, whose transmission facilities are under the
operational control of an organization described in (i).\277\
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\275\ For example, a regional transmission organization, an
independent system operator, or an independent transmission company.
\276\ 16 U.S.C. sec. 824b.
\277\ Sec. 451(k)(4).
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Exempt utility property is defined as: (1) property used in
the trade or business of (i) generating, transmitting,
distributing, or selling electricity or (ii) producing,
transmitting, distributing, or selling natural gas; or (2)
stock in a controlled corporation whose principal trade or
business consists of the activities described in (1).\278\
Exempt utility property does not include any property that is
located outside of the United States.\279\
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\278\ Sec. 451(k)(5).
\279\ Sec. 451(k)(5)(C).
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If a taxpayer is a member of an affiliated group of
corporations filing a consolidated return, the reinvestment
property may be purchased by any member of the affiliated group
(in lieu of the taxpayer).\280\
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\280\ Sec. 451(k)(7).
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Explanation of Provision
The provision extends for one year, through December 31,
2017, the deferral provision for qualifying electric
transmission transactions.
Effective Date
The provision applies to dispositions after December 31,
2016.
15. Extension of excise tax credits relating to alternative fuel (sec.
40415 of the Act and secs. 6426 and 6427 of the Code)
Present Law
Alternative fuel and alternative fuel mixture credits and payments
The Code provides two per-gallon excise tax credits with
respect to alternative fuel: the alternative fuel credit, and
the alternative fuel mixture credit. For this purpose, the term
``alternative fuel'' means liquefied petroleum gas, P Series
fuels (as defined by the Secretary of Energy under 42 U.S.C.
sec. 13211(2)), compressed or liquefied natural gas, liquefied
hydrogen, liquid fuel derived from coal through the Fischer-
Tropsch process (``coal-to-liquids''), compressed or liquefied
gas derived from biomass, or liquid fuel derived from biomass.
Such term does not include ethanol, methanol, or biodiesel.
For coal-to-liquids produced after December 30, 2009, the
fuel must be certified as having been derived from coal
produced at a gasification facility that separates and
sequesters 75 percent of such facility's total carbon dioxide
emissions.
The alternative fuel credit is allowed against section 4041
liability, and the alternative fuel mixture credit is allowed
against section 4081 liability. Neither credit is allowed
unless the taxpayer is registered with the Secretary. The
alternative fuel credit is 50 cents per gallon of alternative
fuel or gasoline gallon equivalents \281\ of nonliquid
alternative fuel sold by the taxpayer for use as a motor fuel
in a motor vehicle or motorboat, sold for use in aviation or so
used by the taxpayer.
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\281\ ``Gasoline gallon equivalent'' means, with respect to any
nonliquid alternative fuel (e.g., compressed natural gas), the amount
of such fuel having a Btu (British thermal unit) content of 124,800
(higher heating value).
---------------------------------------------------------------------------
The alternative fuel mixture credit is 50 cents per gallon
of alternative fuel used in producing an alternative fuel
mixture for sale or use in a trade or business of the taxpayer.
An ``alternative fuel mixture'' is a mixture of alternative
fuel and taxable fuel (gasoline, diesel fuel or kerosene) that
contains at least 1/10 of one percent taxable fuel. The mixture
must be sold by the taxpayer producing such mixture to any
person for use as a fuel, or used by the taxpayer producing the
mixture as a fuel. The credits expired after December 31, 2016.
A person may file a claim for payment equal to the amount
of the alternative fuel credit (but not the alternative fuel
mixture credit). The alternative fuel credit must first be
applied to the applicable excise tax liability under section
4041 or 4081, and any excess credit may be taken as a payment.
These payment provisions generally also expire after December
31, 2016.
For purposes of the alternative fuel credit, alternative
fuel mixture credit and related payment provisions,
``alternative fuel'' does not include fuel (including lignin,
wood residues, or spent pulping liquors) derived from the
production of paper or pulp.
Explanation of Provision
The provision extends the alternative fuel credit and
related payment provisions, and the alternative fuel mixture
credit through December 31, 2017.
In light of the retroactive nature of the provision, as it
relates to alternative fuel sold or used in 2017, the provision
creates a special rule to address claims regarding excise
credits and claims for payment for the period beginning January
1, 2017, and ending on December 31, 2017. In particular, the
provision directs the Secretary to issue guidance within 30
days of the date of enactment. Such guidance is to provide for
a one-time submission of claims covering periods occurring
during 2017. The guidance is to provide for a 180-day period
for the submission of such claims (in such manner as prescribed
by the Secretary) to begin no later than 30 days after such
guidance is issued. Such claims shall be paid by the Secretary
of the Treasury not later than 60 days after receipt. If the
claim is not paid within 60 days of the date of the filing, the
claim shall be paid with interest from such date determined by
using the overpayment rate and method under section 6621 of the
Code.
Effective Date
The provision generally applies to fuel sold or used after
December 31, 2016.
16. Extension of Oil Spill Liability Trust Fund financing rate (sec.
40416 of the Act and sec. 4611 of the Code)
Present Law
The Oil Spill Liability Trust Fund financing rate (``oil
spill tax'') of nine cents per barrel generally applies to
crude oil received at a U.S. refinery and to petroleum products
entered into the United States for consumption, use, or
warehousing.\282\ The oil spill tax also applies to certain
uses and the exportation of domestic crude oil.\283\ If any
domestic crude oil is used in or exported from the United
States, and before such use or exportation no oil spill tax was
imposed on such crude oil, then the oil spill tax is imposed on
such crude oil. The tax does not apply to any use of crude oil
for extracting oil or natural gas on the premises where such
crude oil was produced.
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\282\ The term ``crude oil'' includes crude oil condensates and
natural gasoline. The term ``petroleum product'' includes crude oil.
\283\ The term ``domestic crude oil'' means any crude oil produced
from a well located in the United States.
---------------------------------------------------------------------------
For crude oil received at a refinery, the operator of the
U.S. refinery is liable for the tax. For imported petroleum
products, the person entering the product for consumption, use,
or warehousing is liable for the tax. For certain uses and
exports, the person using or exporting the crude oil is liable
for the tax. No tax is imposed with respect to any petroleum
product if the person who would be liable for such tax
establishes that a prior oil spill tax has been imposed with
respect to such product.
The tax does not apply to any periods after December 31,
2017.
Explanation of Provision
The provision extends the oil spill tax through December
31, 2018.
Effective Date
The provision applies on and after the first day of the
first calendar month beginning after the date of enactment of
this Act.
F. Modifications of Energy Incentives
1. Modifications of credit for production from advanced nuclear power
facilities (sec. 40501 of the Act and sec. 45J of the Code)
Present Law
Taxpayers producing electricity at a qualifying advanced
nuclear power facility may claim a credit equal to 1.8 cents
per kilowatt-hour of electricity produced for the eight-year
period starting when the facility is placed in service.\284\
The aggregate amount of credit that a taxpayer may claim in any
year during the eight-year period is subject to limitation
based on allocated capacity and an annual limitation as
described below.
---------------------------------------------------------------------------
\284\ Sec. 45J. The 1.8-cents credit amount is reduced, but not
below zero, if the annual average contract price per kilowatt-hour of
electricity generated from advanced nuclear power facilities in the
preceding year exceeds eight cents per kilowatt-hour. The eight-cent
price comparison level is indexed for inflation after 1992 (12.9 cents
for 2018).
---------------------------------------------------------------------------
An advanced nuclear facility is any nuclear facility for
the production of electricity, the reactor design for which was
approved after 1993 by the Nuclear Regulatory Commission. For
this purpose, a qualifying advanced nuclear facility does not
include any facility for which a substantially similar design
for a facility of comparable capacity was approved before 1994.
A qualifying advanced nuclear facility is an advanced
nuclear facility for which the taxpayer has received an
allocation of megawatt capacity from the Secretary of the
Treasury (``the Secretary'') and is placed in service before
January 1, 2021. The taxpayer may only claim credit for
production of electricity equal to the ratio of the allocated
capacity that the taxpayer receives from the Secretary to the
rated nameplate capacity of the taxpayer's facility. For
example, if the taxpayer receives an allocation of 750
megawatts of capacity from the Secretary and the taxpayer's
facility has a rated nameplate capacity of 1,000 megawatts,
then the taxpayer may claim three-quarters of the otherwise
allowable credit, or 1.35 cents per kilowatt-hour, for each
kilowatt-hour of electricity produced at the facility (subject
to the annual limitation described below). The credit is
restricted to 6,000 megawatts of national capacity. Once that
limitation has been reached, the Secretary may make no
additional allocations. Treasury guidance required allocation
applications to be filed before February 1, 2014.\285\
---------------------------------------------------------------------------
\285\ I.R.S. Notice 2013-68, 2013-46 I.R.B. 501, October 24, 2013.
---------------------------------------------------------------------------
A taxpayer operating a qualified facility may claim no more
than $125 million in tax credits per 1,000 megawatts of
allocated capacity in any one year of the eight-year credit
period. If the taxpayer operates a 1,350 megawatt rated
nameplate capacity system and has received an allocation from
the Secretary for 1,350 megawatts of capacity eligible for the
credit, the taxpayer's annual limitation on credits that may be
claimed is equal to 1.35 times $125 million, or $168.75
million. If the taxpayer operates a facility with a nameplate
rated capacity of 1,350 megawatts, but has received an
allocation from the Secretary for 750 megawatts of credit
eligible capacity, then the two limitations apply such that the
taxpayer may claim a credit effectively equal to one cent per
kilowatt-hour of electricity produced (calculated as described
above) subject to an annual credit limitation of $93.75 million
in credits (three-quarters of $125 million).
The credit is part of the general business credit.
Explanation of Provision
The provision modifies the national megawatt capacity
limitation for the advanced nuclear power production credit. To
the extent any amount of the 6,000 megawatts of authorized
capacity remains unutilized after December 31, 2020, the
provision requires the Secretary to allocate such capacity
first to facilities placed in service before 2021, to the
extent such facilities did not receive an allocation equal to
their full nameplate capacity, and then to facilities placed in
service after such date in the order in which such facilities
are placed in service. The provision provides that the placed-
in-service sunset date of January 1, 2021, does not apply with
respect to allocations of such unutilized national megawatt
capacity.
The provision also allows qualified public entities to
elect to forgo credits to which they otherwise would be
entitled in favor of an eligible project partner. Qualified
public entities are defined as (1) a Federal, State, or local
government of any political subdivision, agency, or
instrumentality thereof; (2) a mutual or cooperative electric
company; or (3) a not-for-profit electric utility that has or
had received a loan or loan guarantee under the Rural
Electrification Act of 1936.\286\ An eligible project partner
under the provision generally includes any person who designed
or constructed the nuclear power plant, participates in the
provision of nuclear steam or nuclear fuel to the power plant,
or has an ownership interest in the facility. In the case of a
facility owned by a partnership, where the credit is determined
at the partnership level, any electing qualified public entity
is treated as the taxpayer with respect to such entity's
distributive share of such credits, and any other partner is an
eligible project partner.
---------------------------------------------------------------------------
\286\ 7 U.S.C. sec. 901 et seq.
---------------------------------------------------------------------------
Effective Date
The provision requiring the allocation of unutilized
national megawatt capacity limitation is effective on the date
of enactment. The provision allowing an election by qualified
public entities to forgo credits in favor of an eligible
project partner is effective for taxable years beginning after
the date of enactment.
G. Miscellaneous Provisions
1. Modifications to rum cover-over (sec. 41102 of the Act and sec. 7652
of the Code)
Present Law
Section 5001 imposes an excise tax on distilled spirits per
proof gallon \287\ produced in or imported into the United
States.\288\
---------------------------------------------------------------------------
\287\ A proof gallon is a liquid gallon consisting of 50 percent
alcohol. See sec. 5002(a)(10) and (11).
\288\ Sec. 5001(a)(1).
---------------------------------------------------------------------------
Liability for the excise tax on distilled spirits arises
when the alcohol is produced but is not determined and payable
until bottled distilled spirits are removed from the bonded
premises of the distilled spirits plant where they are produced
or customs custody.\289\ Generally, bulk distilled spirits may
be transferred in bond between bonded premises; however, tax
liability follows these products. Imported bulk distilled
spirits may be released from customs custody without payment of
tax and transferred in bond to a distillery. Distilled spirits
may be exported without payment of tax and may be withdrawn
from a distillery without payment of tax or free of tax for
certain authorized purposes, including exportation, industrial
uses, and non-beverage uses.
---------------------------------------------------------------------------
\289\ Sec. 5006.
---------------------------------------------------------------------------
The permanent rate of the excise tax is $13.50 per proof
gallon. For distilled spirits removed after December 31, 2017,
and before January 1, 2020, the temporary rate of tax is
reduced to $2.70 per proof gallon on the first 100,000 proof
gallons of distilled spirits produced, $13.34 for all proof
gallons in excess of that amount but below 22,130,000 proof
gallons, and $13.50 thereafter. The temporary provision also
contains rules so as to prevent members of the same controlled
group from receiving the lower rate on more than 100,000 proof
gallons of distilled spirits. Importers of distilled spirits
are eligible for the temporary lower rates under assignment
rules.
For purposes of the excise tax on distilled spirits under
section 5001, the territories of Puerto Rico and the U.S.
Virgin Islands are not considered part of the United
States.\290\ Additionally, distilled spirits brought into the
United States from these territories are not considered imports
for purposes of the excise tax.\291\ Thus, distilled spirits
produced in these territories, whether or not brought into the
United States, are not subject to tax under section 5001.
However, section 7652(a) imposes an equalization tax equal to
the tax imposed in the United States upon like articles of
merchandise of domestic manufacture, including distilled
spirits, produced in Puerto Rico and brought into the United
States, and section 7652(b) imposes an equalization tax equal
to the tax imposed in the United States upon like articles of
merchandise of domestic manufacture, including distilled
spirits, produced in the U.S. Virgin Islands and brought into
the United States.
---------------------------------------------------------------------------
\290\ Sec. 7701(a)(9).
\291\ See 19 C.F.R. sec. 7.2 and 19 C.F.R. sec. 101.1.
---------------------------------------------------------------------------
The revenue from the equalization tax on rum produced in
Puerto Rico and brought into the United States is transferred
(``covered over'') to the Treasury of Puerto Rico.\292\ The
revenue from the equalization tax on rum produced in the U.S.
Virgin Islands and brought into the United States is covered
over to the Treasury of the U.S. Virgin Islands.\293\ In
addition, the revenues from the excise tax imposed on rum
imported into the United States (less certain administrative
costs) are covered over to the Treasury of Puerto Rico and the
Treasury of the U.S. Virgin Islands.\294\ The revenues are
apportioned between the two treasuries according to a formula
determined by the Secretary.\295\
---------------------------------------------------------------------------
\292\ Sec. 7652(a)(3). For purposes of this provision, only
distilled spirits for which at least 92 percent of the alcohol content
is attributable to rum are eligible for cover over of equalization
taxes. See sec. 7652(c).
\293\ Sec. 7652(a)(3). For purposes of this provision, only
distilled spirits for which at least 92 percent of the alcohol content
is attributable to rum are eligible for cover over of equalization
taxes. See sec. 7652(c).
\294\ Sec. 7652(e). For purposes of this provision the term ``rum''
means any article classified under subheading 2208.40.00 of the
Harmonized Tariff Schedule of the United States (19 U.S.C. 1202). Sec.
7652(e)(4).
\295\ Sec. 7652(e)(2).
---------------------------------------------------------------------------
For purposes of both the cover over of the equalization tax
on rum and the cover over of the tax imposed on rum imported
into the United States, the amount covered over is the lesser
of the tax imposed or $10.50 per proof gallon.\296\ The $10.50
per proof gallon limitation is increased to $13.25 per proof
gallon during the period from July 1, 1999, through December
31, 2016.\297\
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\296\ Sec. 7652(f)(1).
\297\ Sec. 7652(f)(1).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the increased limitation of $13.25
per proof gallon, for purposes of both the cover over of the
equalization tax on rum and the cover over of the tax imposed
on rum imported into the United States, for rum brought into or
imported into the United States after December 31, 2016, and
before January 1, 2022. After December 31, 2021, the limitation
reverts to $10.50 per proof gallon.
The provision also provides that the amount covered over of
tax imposed on rum imported into the United States is
determined without regard to the temporary lower rates of tax
for distilled spirits removed after December 31, 2017, and
before January 1, 2020.\298\
---------------------------------------------------------------------------
\298\ Sec. 5001(c).
---------------------------------------------------------------------------
Effective Date
The extension of the increased limitation is effective with
respect to distilled spirits brought into or imported into the
United States after December 31, 2016. The provision providing
for calculation of the cover over of the tax imposed on rum
imported into the United States without regard to the temporary
lower rates of tax is effective with respect to distilled
spirits imported into the United States after December 31,
2017.
2. Extension of waiver of limitations with respect to excluding from
gross income amounts received by wrongly incarcerated
individuals (sec. 41103 of the Act and sec. 139F of the Code)
Present Law
Under a provision added in the PATH Act,\299\ with respect
to any wrongfully incarcerated individual, gross income does
not include any civil damages, restitution, or other monetary
award (including compensatory or statutory damages and
restitution imposed in a criminal matter) relating to the
incarceration of such individual for the covered offense for
which such individual was convicted.\300\
---------------------------------------------------------------------------
\299\ Pub. L. No. 114-113 (2015), Division Q (Protecting Americans
from Tax Hikes Act of 2015), sec. 304.
\300\ Sec. 139F.
---------------------------------------------------------------------------
A wrongfully incarcerated individual means an individual:
1. who was convicted of a covered offense;
2. who served all or part of a sentence of imprisonment
relating to that covered offense; and
3. (i) was pardoned, granted clemency, or granted amnesty
for such offense because the individual was innocent, or
(ii) for whom the judgment of conviction for the
offense was reversed or vacated, and for whom the
indictment, information, or other accusatory instrument
for that covered offense was dismissed or who was found
not guilty at a new trial after the judgment of
conviction for that covered offense was reversed or
vacated.
For these purposes, a covered offense is any criminal
offense under Federal or State law, and includes any criminal
offense arising from the same course of conduct as that
criminal offense.
The Code contains a special rule allowing individuals to
make a claim for credit or refund of any overpayment of tax
resulting from the exclusion, even if such claim would be
disallowed under the Code or by operation of any law or rule of
law (including res judicata), if the claim for credit or refund
is filed before the close of the one-year period beginning on
the date of enactment of the PATH Act (December 18, 2015).\301\
---------------------------------------------------------------------------
\301\ Sec. 139F.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the waiver on the statute of
limitations with respect to filing a claim for a credit or
refund of an overpayment of tax resulting from the exclusion
described above for an additional year. Thus, under the
provision, such claim for credit or refund must be filed before
December 18, 2017.
Effective Date
The provision is effective on the date of enactment.
3. Individuals held harmless on improper levy on retirement plans (sec.
41104 of the Act and sec. 6343 of the Code)
Present Law
Tax-favored retirement savings
Under the Code, tax-favored treatment applies to
traditional and Roth individual retirement arrangements
(``IRAs'') and certain employer-sponsored retirement plans
(``employer-sponsored plans'').\302\ The rules for tax-favored
treatment include annual limits on the amount that may be
contributed to an IRA or employer-sponsored plan.
---------------------------------------------------------------------------
\302\ Sections 219, 408, and 408A provide rules for IRAs. Tax-
favored employer-sponsored retirement plans consist of qualified
retirement plans under sections 401(a) and 403(a), tax-deferred annuity
plans under section 403(b), and State and local government eligible
deferred compensation plans under section 457(b). Under section
7701(j), the Thrift Savings Fund is treated as a qualified retirement
plan.
---------------------------------------------------------------------------
In general, a distribution from a traditional IRA or
employer-sponsored plan (other than from a designated Roth
account under an employer-sponsored plan) is includible in
income, except to the extent attributable to any contributions
that were made to the IRA or plan on an after-tax basis.\303\
Contributions made to a Roth IRA or a designated Roth account
are made on an after-tax basis, and with certain exceptions,
distributions are tax-free.\304\ Amounts that are withdrawn
from an IRA or employer-sponsored plan before age 59\1/2\ and
are includible in income are subject to a 10-percent early
withdrawal tax unless an exception applies.\305\
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\303\ Secs. 402 and 408(d).
\304\ Secs. 402A(a)(2), 402A(d), 408A(c) and 408A(d).
\305\ Sec. 72(t).
---------------------------------------------------------------------------
A distribution from a traditional IRA or employer-sponsored
plan (other than from a designated Roth account) generally may
be rolled over to another traditional IRA or employer-sponsored
plan (other than to a designated Roth account).\306\ The
rollover generally can be achieved by a direct payment from the
distributing IRA or plan to the recipient IRA or plan (``direct
rollover'') or by contributing the distribution to the
recipient IRA or plan within 60 days of receiving the
distribution (``60-day rollover''). Amounts that are rolled
over generally are not includible in gross income. A
distribution from a Roth IRA generally may be rolled over to
another Roth IRA by direct rollover or a 60-day rollover, and a
distribution from a designated Roth account generally may be
rolled over to a Roth IRA or another designated Roth account by
direct rollover or a 60-day rollover. In general, an individual
is permitted to make only one 60-day rollover from an IRA to
another IRA within a one-year period.
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\306\ A rollover is not permitted with respect to an IRA that an
individual has inherited from another individual (``inherited IRA'').
In addition, the beneficiary of a deceased employee under an employer-
sponsored plan, other than a surviving spouse, may roll a distribution
from the plan only to an IRA that is designated as an inherited IRA.
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In addition to these rollovers, an individual generally may
convert an amount in a traditional IRA or a non-Roth account
under an employer-sponsored defined contribution plan into a
Roth IRA or a designated Roth account, referred to as a ``Roth
conversion.'' The amount converted is generally includible in
the individual's income to the same extent as if a distribution
had been made. The conversion may be accomplished by a direct
transfer of the amount from the traditional IRA or non-Roth
account to the Roth IRA or designated Roth account or by a
distribution from the traditional IRA or non-Roth account and
contribution to the Roth IRA or designated Roth account within
60 days.
Levy and seizure of IRAs and employer-sponsored plans
A taxpayer's property or monies, including property or
money held in retirement plans, is subject to levy and seizure
if the taxpayer failed to satisfy a notice and demand for
payment of an assessed tax. If the property was wrongfully
levied upon (e.g., the property levied upon did not belong to
the taxpayer or was exempt from levy), the Secretary is
authorized to return the property to its owner, with
interest.\307\ If the property seized belongs to the taxpayer,
but the Secretary determines that the levy was inadvisable on
one of several grounds, the property may be returned to the
taxpayer without interest.\308\ If the property subject to an
improper levy is money, the amount to be returned to the
taxpayer is an amount equal to the amount levied upon.
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\307\ Sec. 6343(b) and (c).
\308\ Sec. 6343(d) identifies four grounds for returning the
property to a taxpayer as if the levy had been improper, but without
interest thereon. The four grounds are (1) the levy was premature or
not in accordance with administrative procedure, (2) the return of the
property would facilitate collection of the tax liability, (3) the
taxpayer has entered into an installment agreement, or (4) return of
the property is in the best interests of the taxpayer (as determined by
the National Taxpayer Advocate) and the United States.
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If the property levied upon is an IRA or employer-sponsored
plan, the amount withdrawn is applied toward the individual's
unpaid tax and is includible in income of that individual in
the same manner as other distributions. However, the 10-percent
early withdrawal tax does not apply.\309\ If the amounts
withdrawn from a retirement plan pursuant to levy are later
returned to an individual, and the individual wishes to
contribute such returned amounts to an IRA or employer-
sponsored plan, the contribution is subject to the normally
applicable rules, including limits on contributions and the
time for making a rollover.
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\309\ Sec. 72(t)(2)(vii).
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Explanation of Provision
Under the provision, if an amount withdrawn on behalf of an
individual from an IRA (``original IRA'') or employer-sponsored
plan pursuant to a levy is returned to the individual by the
Secretary because the levy on the original IRA or employer-
sponsored plan was wrongful or is determined to be premature or
otherwise not in accordance with administrative procedures, the
individual may contribute the amount returned, and any interest
thereon, either to the original IRA or to the employer-
sponsored plan, if permissible,\310\ or to a different IRA to
which a rollover from the original IRA or employer-sponsored
plan would be permitted.\311\ The contribution is allowed
without regard to the normally applicable limits on IRA
contributions and rollovers.
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\310\ The terms of an employer-sponsored plan might not permit the
amount returned by the Internal Revenue Service to be contributed to
the plan. In addition, in the case of an amount withdrawn from a
designated Roth account pursuant to the levy, the returned amount could
be contributed only to the original designated Roth account (or to a
Roth IRA).
\311\ The provision allows a rollover with respect to an inherited
IRA to an inherited IRA of the same type (traditional or Roth) as the
original IRA.
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A contribution under this provision must be made by the due
date (not including extensions) for the individual's income tax
return for the year in which the Internal Revenue Service
returns the amount previously levied on. The contribution is
treated as a rollover (``rollover contribution'') made for the
taxable year in which the distribution on account of the levy
occurred. It is not taken into account for purposes of the
limit of one IRA rollover within a one-year period. In
addition, except in the case of a rollover contribution that is
treated as a Roth conversion, any tax attributable to the
amount distributed from the original IRA or employer-sponsored
plan by reason of a levy (1) is not to be assessed, (2) if
assessed, is to be abated, and (3) if collected, is to be
credited or refunded as an overpayment made on the due date for
the return for the taxable year in which the amount was levied
on.
Interest at the overpayment rate is allowable on amounts
returned to the taxpayer under this provision (i.e., in the
case of a levy that is determined to be premature or otherwise
not in accordance with administrative procedures) as well as in
cases of a wrongful levy. Such interest on the amount returned
to the individual and contributed to an IRA or employer-
sponsored plan is treated as earnings within the IRA or
employer-sponsored plan after the rollover contribution was
made and is not includible in gross income upon receipt.
When property or money is returned to a taxpayer under this
provision, the Secretary is required to notify the individual
that a contribution as described above may be made.
Effective Date
The provision is effective for amounts paid to individuals
in taxable years beginning after December 31, 2017, as
reimbursement for amounts wrongfully levied upon or subject to
levies that the Secretary determines were premature or
otherwise not in accordance with administrative procedures,
plus any applicable interest thereon.
4. Modifications of user fee requirements for installment agreements
(sec. 41105 of the Act and new sec. 6159(f) of the Code)
Present Law
The Code authorizes the IRS to enter into written
agreements with any taxpayer under which the taxpayer agrees to
pay taxes owed, as well as interest and penalties, in
installments over an agreed schedule, if the IRS determines
that doing so will facilitate collection of the amounts owed.
This agreement provides for a period during which payments may
be made and while other IRS enforcement actions are held in
abeyance.\312\ An installment agreement generally does not
reduce the amount of taxes, interest, or penalties owed.
However, the IRS is authorized to enter into installment
agreements with taxpayers that do not provide for full payment
of the taxpayer's liability over the life of the agreement. The
IRS is required to review such partial payment installment
agreements at least every two years to determine whether the
financial condition of the taxpayer has significantly changed
so as to warrant an increase in the value of the payments being
made.
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\312\ Sec. 6331(k).
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Taxpayers can request an installment agreement by filing
Form 9465, Installment Agreement Request.\313\ If the request
for an installment agreement is approved by the IRS, the IRS
charges a user fee.\314\ The IRS currently charges $225 for
entering into an installment agreement.\315\ If the application
is for a direct debit installment agreement, whereby the
taxpayer authorizes the IRS to request the monthly electronic
transfer of funds from the taxpayer's bank account to the IRS,
the fee is reduced to $107.\316\ In addition, regardless of the
method of payment, the fee is $43 for low-income
taxpayers.\317\ For this purpose, low-income is defined as a
person who falls below 250 percent of the Federal poverty
guidelines published annually. Finally, there is no user fee if
the agreement qualifies for a short-term agreement (120 days or
less).
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\313\ The IRS accepts applications for installment agreements
online, from individuals and businesses, if the total tax, penalties
and interest is below $50,000 for the former, and $25,000 for the
latter.
\314\ 31 U.S.C. sec. 9701; Treas. Reg. sec. 300.1; The Independent
Offices Appropriations Act of 1952 (IOAA) 65 Stat. B70 (June 27, 1951).
A discussion of the IRS practice regarding user fees and a list of
actions for which fees are charged is included in the Internal Revenue
Manual. See ``User Fees,'' paragraph 1.32.19 IRM, available at https://
www.irs.gov/irm/part1/irm_01-035-019.
\315\ Treas. Reg. sec. 300.1.
\316\ Ibid.
\317\ Ibid.
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Explanation of Provision
The provision generally prohibits increases in the amount
of user fees charged by the IRS for installment agreements. For
low-income taxpayers (those whose income falls below 250
percent of the Federal poverty guidelines), it alleviates the
user fee requirement in two ways. First, it waives the user fee
if the low-income taxpayer enters into an installment agreement
under which the taxpayer agrees to make automated installment
payments through a debit account. Second, it provides that low-
income taxpayers who are unable to agree to make payments
electronically remain subject to the required user fee, but the
fee is reimbursed upon completion of the installment agreement.
Effective Date
The provision is effective for agreements entered into on
or after the date that is 60 days after the date of enactment.
5. Form 1040SR for seniors (sec. 41106 of the Act)
Present Law
Persons required to make returns of income are generally
required to file returns in the form prescribed by the
Secretary in regulations.\318\ Income tax returns are required
from each individual whose taxable year gross income equals or
exceeds the exemption amount, with certain exceptions.\319\ The
income tax returns are due on April 15 of the year following
the taxable year, for taxpayers using a calendar year.
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\318\ Sec. 6011.
\319\ See section 6012(a)(1)(A), which enumerates several
conditions under which individuals with gross income in excess of the
exemption amount in section 151(d) are nevertheless excused from the
filing requirements.
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The standard form available for individuals subject to
income tax are in the series of forms known as Form 1040, and
include two simplified versions, the Form 1040A and the Form
1040EZ. In recent filing seasons, the majority of returns filed
by individuals were filed electronically.\320\
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\320\ The Internal Revenue Service Restructuring and Reform Act of
1998 (``RRA 1998'') states a Congressional policy to promote the
paperless filing of Federal tax returns, and set a goal for the IRS to
have at least 80 percent of all Federal tax and information returns
filed electronically by 2007. See sec. 2001(a) of RRA 1998. The
Electronic Tax Administration Advisory Committee, the body charged with
oversight of IRS progress in reaching that goal reported that e-filing
by individuals exceeded 80 percent in the 2013 filing season, but
projected an overall rate of 72.8 percent based on all Federal returns.
See Electronic Tax Administration Advisory Committee, Annual Report to
Congress, June 2013, IRS Pub. 3415, p. 6.
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Explanation of Provision
The provision requires that the IRS publish a simplified
income tax return form designated a Form 1040SR, for use by
persons who are age 65 or older by the close of the taxable
year for which the form is to be used. The form is to be as
similar as practicable to the Form 1040EZ with certain
exceptions. The use of Form 1040SR cannot 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.
Effective Date
The provision requires that the form be available for
taxable years beginning after the date of enactment.
6. Attorneys' fees relating to awards to whistleblowers (sec. 41107 of
the Act and sec. 62(a)(21) of the Code)
Present Law
The Code provides an above-the-line deduction for
attorneys' fees and costs paid by, or on behalf of, the
taxpayer in connection with any action involving a claim of
unlawful discrimination, certain claims against the Federal
government, or a private cause of action under the Medicare
Secondary Payer statute.\321\ The amount that may be deducted
above the line may not exceed the amount includible in the
taxpayer's gross income for the taxable year on account of a
judgment or settlement (whether by suit or agreement and
whether as lump sum or periodic payments) resulting from such
claim. Additionally, the Code provides an above-the-line
deduction for attorneys' fees and costs paid by, or on behalf
of, the individual in connection with any award for providing
information regarding violations of the tax laws.\322\ The
amount that may be deducted above the line may not exceed the
amount includible in the taxpayer's gross income for the
taxable year on account of such award.\323\
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\321\ Sec. 62(a)(20) and (e). Section 62(e) defines ``unlawful
discrimination'' to include a number of specific statutes, any Federal
whistleblower statute, and any Federal, State, or local law ``providing
for the enforcement of civil rights'' or ``regulating any aspect of the
employment relationship . . . or prohibiting the discharge of an
employee, the discrimination against an employee, or any other form of
retaliation or reprisal against an employee for asserting rights or
taking other actions permitted by law.''
\322\ Secs. 7623 and 62(a)(21).
\323\ Secs. 7623 and 62(a)(21).
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Explanation of Provision
The provision provides an above-the-line deduction for
attorneys' fees and court costs paid by, or on behalf of, the
taxpayer in connection with any action involving a claim under
the SEC whistleblower program,\324\ State False Claim Acts, and
the Commodity Future Trading Commission whistleblower
program.\325\
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\324\ 15 U.S.C. secs. 78u-6 and 78u-7.
\325\ 7 U.S.C. sec. 26.
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Effective Date
The provision is effective for taxable years beginning
after December 31, 2017.
7. Clarification of whistleblower awards (sec. 41108 of the Act and new
sec. 7623(c) of the Code)
Present Law
Awards to whistleblowers
The Code authorizes the Internal Revenue Service (``IRS'')
to pay such sums as deemed necessary for: ``(1) detecting
underpayments of tax; or (2) detecting and bringing to trial
and punishment persons guilty of violating the internal revenue
laws or conniving at the same.'' \326\ Generally, amounts are
paid based on a percentage of proceeds collected based on the
information provided.
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\326\ Sec. 7623.
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The Tax Relief and Health Care Act of 2006 (the ``Act'')
\327\ established an enhanced reward program for actions in
which the tax, penalties, interest, additions to tax, and
additional amounts in dispute exceed $2,000,000 and, if the
taxpayer is an individual, the individual's gross income
exceeds $200,000 for any taxable year in issue. In such cases,
the award is calculated to be at least 15 percent but not more
than 30 percent of collected proceeds (including penalties,
interest, additions to tax, and additional amounts).
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\327\ Pub. L. No. 109-432.
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The Act permits an individual to appeal the amount or a
denial of an award determination to the United States Tax Court
(the ``Tax Court'') within 30 days of such determination. Tax
Court review of an award determination may be assigned to a
special trial judge.
Rules relating to taxpayers with foreign assets
U.S. persons who transfer assets to, and hold interests in,
foreign bank accounts or foreign entities may be subject to
self-reporting requirements under both the Foreign Account Tax
Compliance Act provisions in the Code and the provisions in the
Bank Secrecy Act and its underlying regulations (which provide
for FinCEN Form 114, Report of Foreign Bank and Financial
Accounts, known as the ``FBAR''), as discussed below. Amounts
recovered for violations of FATCA provisions in the Code may be
considered for purposes of computing a whistleblower award
under the Code. However, the IRS has found that amounts
recovered for violations of non-tax laws, including the
provisions of the Bank Secrecy Act (and FBAR) for which the IRS
has delegated authority, may not be considered for purposes of
computing an award under the Code.\328\
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\328\ Chief Counsel Memorandum, ``Scope of Awards Payable Under
I.R.C. section 7623,'' April 23, 2012, available at http://www.tax-
whistleblower.com/resources/PMTA-2012-10.pdf. Under Title 31, ``[t]he
Secretary may pay a reward to an individual who provides original
information which leads to a recovery of a criminal fine, civil
penalty, or forfeiture, which exceeds $50,000, for a violation of
[chapter 53 of Title 31]. The Secretary shall determine the amount of a
reward . . . [and] may not award more than 25 per centum of the net
amount of the fine, penalty, or forfeiture collected or $150,000,
whichever is less.'' 31 U.S.C. sec. 5323.
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Foreign Account Tax Compliance Act
The Code imposes a withholding and reporting regime for
U.S. persons engaged in foreign activities, directly or
indirectly, through a foreign business entity.\329\ This regime
for outbound payments,\330\ commonly referred to as the Foreign
Account Tax Compliance Act (``FATCA''),\331\ imposes a
withholding tax of 30 percent of the gross amount of certain
payments to foreign financial institutions (``FFIs'') unless
the FFI establishes that it is compliant with the information
reporting requirements of FATCA, which include identifying
certain U.S. accounts held in the FFI. An FFI must report with
respect to a U.S. account (1) the name, address, and taxpayer
identification number of each U.S. person holding an account or
a foreign entity with one or more substantial U.S. owners
holding an account; (2) the account number; (3) the account
balance or value; and (4) except as provided by the Secretary,
the gross receipts, including from dividends and interest, and
gross withdrawals or payments from the account.\332\
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\329\ See, e.g., secs. 6038, 6038B, and 6046.
\330\ Hiring Incentives to Restore Employment Act of 2010, Pub. L.
No. 111-147.
\331\ Foreign Account Tax Compliance Act of 2009 is the name of the
House and Senate bills in which the provisions first appeared. See H.R.
3933 and S. 1934 (October 27, 2009).
\332\ Sec. 1471(c).
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Individuals are required to disclose with their annual
Federal income tax return any interest in foreign accounts and
certain foreign securities if the aggregate value of such
assets is in excess of the greater of $50,000 or an amount
determined by the Secretary in regulations. Failure to do so is
punishable by a penalty of $10,000, which may increase for each
30-day period during which the failure continues after
notification by the IRS, up to a maximum penalty of
$50,000.\333\
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\333\ Sec. 6038D. Guidance on the scope of reporting required, the
threshold values triggering reporting requirements for various fact
patterns and how the value of assets is to be determined is found in
Treas. Reg. secs. 1.6038D-1 to -8.
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Report of Foreign Bank and Financial Accounts
In addition to the reporting requirements under the Code,
U.S. persons who transfer assets to, and hold interests in,
foreign bank accounts or foreign entities may be subject to
self-reporting requirements under the Bank Secrecy Act.\334\
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\334\ Bank Secrecy Act, 31 U.S.C. secs. 5311-5332.
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The Bank Secrecy Act imposes reporting obligations on both
financial institutions and account holders. With respect to
account holders, a U.S. citizen, resident, or person doing
business in the United States is required to keep records and
file reports, as specified by the Secretary, when that person
enters into a transaction or maintains an account with a
foreign financial agency.\335\ Regulations promulgated pursuant
to broad regulatory authority granted to the Secretary in the
Bank Secrecy Act \336\ provide additional guidance regarding
the disclosure obligation with respect to foreign accounts.
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\335\ 31 U.S.C. sec. 5314. The term ``agency'' in the Bank Secrecy
Act includes financial institutions.
\336\ 31 U.S.C. sec. 5314(a) provides: ``Considering the need to
avoid impeding or controlling the export or import of monetary
instruments and the need to avoid burdening unreasonably a person
making a transaction with a foreign financial agency, the Secretary of
the Treasury shall require a resident or citizen of the United States
or a person in, and doing business in, the United States, to keep
records, file reports, or keep records and file reports, when the
resident, citizen, or person makes a transaction or maintains a
relation for any person with a foreign financial agency.''
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The FBAR must be filed by June 30 \337\ of the year
following the year in which the $10,000 filing threshold is
met.\338\ Failure to file the FBAR is subject to both
criminal\339\ and civil penalties.\340\ Willful failure to file
an FBAR may be subject to penalties in amounts not to exceed
the greater of $100,000 or 50 percent of the amount in the
account at the time of the violation.\341\ A non-willful, but
negligent, failure to file is subject to a penalty of $10,000
for each negligent violation.\342\ The penalty may be waived if
(1) there is reasonable cause for the failure to report and (2)
the amount of the transaction or balance in the account was
properly reported. In addition, serious violations are subject
to criminal prosecution, potentially resulting in both monetary
penalties and imprisonment. Civil and criminal sanctions are
not mutually exclusive.
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\337\ The Surface Transportation and Veterans Health Care Choice
Improvement Act of 2015, Pub. L. No. 114-41, changed the filing date
for FinCEN Form 114 from June 30 to April 15 (with a maximum extension
for a 6-month period ending on October 15 and with provision for an
extension under rules similar to the rules in Treas. Reg. section
1.6081-5) for tax returns for taxable years beginning after December
31, 2015.
\338\ 31 C.F.R. sec. 103.27(c). The $10,000 threshold is the
aggregate value of all foreign financial accounts in which a U.S.
person has a financial interest or over which the U.S. person has
signature or other authority.
\339\ 31 U.S.C. sec. 5322 (failure to file is punishable by a fine
up to $250,000 and imprisonment for five years, which may double if the
violation occurs in conjunction with certain other violations).
\340\ 31 U.S.C. sec. 5321(a)(5).
\341\ 31 U.S.C. sec. 5321(a)(5)(C).
\342\ 31 U.S.C. sec. 5321(a)(5)(B)(i), (ii).
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FBAR enforcement responsibility
Until 2003, the Financial Crimes Enforcement Network
(``FinCEN''), an agency of the Department of the Treasury, had
exclusive responsibility for civil penalty enforcement of FBAR,
although administration of the FBAR reporting regime was
delegated to the IRS.\343\ As a result, persons who were more
than 180 days delinquent in paying any FBAR penalties were
referred for collection action to the Financial Management
Service of the Treasury Department, which is responsible for
such non-tax collections.\344\ Continued nonpayment resulted in
a referral to the Department of Justice for institution of
court proceedings against the delinquent person. In 2003, the
Secretary delegated FBAR civil enforcement authority to the
IRS.\345\ The authority delegated to the IRS in 2003 included
the authority to determine and enforce civil penalties,\346\ as
well as to revise the form and instructions. However, the Bank
Secrecy Act does not include collection powers similar to those
available for enforcement of the tax laws under the Code. As a
consequence, FBAR civil penalties remain collectible only in
accord with the procedures for non-tax collection described
above.
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\343\ Treas. Directive 15-14 (December 1, 1992), in which the
Secretary delegated to the IRS authority to investigate violations of
the Bank Secrecy Act. If the IRS Criminal Investigation Division
declines to pursue a possible criminal case, it is to refer the matter
to FinCEN for civil enforcement.
\344\ 31 U.S.C. sec. 3711(g).
\345\ 31 C.F.R. sec. 103.56(g). Memorandum of Agreement and
Delegation of Authority for Enforcement of FBAR Requirements (April 2,
2003); News Release, Internal Revenue Service, IR-2003-48 (April 10,
2003). Secretary of the Treasury, ``A Report to Congress in Accordance
with sec. 361(b) of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (USA Patriot Act)'' (April 24, 2003).
\346\ A penalty may be assessed before the end of the six-year
period beginning on the date of the transaction with respect to which
the penalty is assessed. 31 U.S.C. sec. 5321(b)(1). A civil action for
collection may be commenced within two years of the later of the date
of assessment and the date a judgment becomes final in any a related
criminal action. 31 U.S.C. sec. 5321(b)(2).
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FBAR and awards to whistleblowers
Recent cases have considered FBAR penalties in connection
with IRS whistleblower awards.\347\ One case analyzed the
provision dealing with ``additional amounts in dispute'' and
linked that concept to amounts assessed and collected under the
Code, which FBAR is not.\348\ The issue was whether FBAR
penalties constituted ``additional amounts'' for purposes of
determining whether ``additional amounts in dispute exceed
$2,000,000.'' The case was disposed on summary judgment on the
grounds that FBAR penalties are not assessed, collected or paid
in the same manner as taxes. As such, they are not additional
amounts in dispute and therefore the threshold was not
exceeded. Notably, the court suggested that the petitioner
present its policy arguments to Congress based on the fact that
the connection between FBAR and tax enforcement justified the
Secretary to redelegate FBAR administrative authority to the
IRS.\349\
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\347\ Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6
(March 14, 2016); and Whistleblower 21276-13W v. Commissioner, 147 T.C.
No. 4 (August 3, 2016).
\348\ Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6
(March 14, 2016).
\349\ Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 at
26-27.
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Another case dealt with the provision ``collected
proceeds'' and held that the term is not limited to amounts
assessed and collected under Title 26.\350\ The issue in the
case was whether payments of a criminal fine and civil
forfeitures constitute collected proceeds.
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\350\ Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4
(August 3, 2016).
---------------------------------------------------------------------------
The criminal fine was imposed under Title 18 as a result of
guilty plea to conspiring to defraud the IRS, file false
Federal income tax returns, and evade Federal income taxes. The
money was forfeited pursuant to Title 18. The IRS argued that
criminal fines and forfeitures are not collected proceeds
because only amounts assessed and collected under Title 26 can
be used to pay a whistleblower award. The IRS also argued that
a criminal fine collected by the Government cannot be
considered collected proceeds because (1) pursuant to 42 U.S.C.
sec. 10601 all criminal fines collected from persons convicted
of offenses against the United States are to be deposited in
the Crime Victims Fund; (2) criminal fines are paid by the
taxpayer directly to the imposing court, which in turn deposits
them into the Crime Victims Fund; and (3) at no time are
criminal fines available to the Secretary. The court said that
the Code did not refer to, or require, the availability of
funds to be used in making an award.\351\
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\351\ Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4 at
28-29.
---------------------------------------------------------------------------
Petitioners said the payment resulted from action taken by
Secretary and relates to acts committed by taxpayer in
violation of Title 26 provisions. The court agreed and held
that collected proceeds are not limited to amounts assessed and
collected under Title 26. In reaching its holding it referenced
Whistleblower 21276-13W v. Commissioner, discussed above, and
noted there is no inconsistency because the issue there was
about whether the threshold of $2,000,000 was exceeded. It is
not clear whether FBAR penalties would be included under the
holding because in the case, the taxpayer did violate Title 26
(even if the penalties were imposed under Title 18).
Explanation of Provision
Under the provision, collected proceeds eligible for awards
under the Code are defined to include: (1) penalties, interest,
additions to tax, and additional amounts; and (2) any proceeds
under enforcement programs that the Treasury has delegated to
the IRS the authority to administer, enforce, or investigate,
including criminal fines and civil forfeitures, and violations
of reporting requirements. This definition is also used to
determine eligibility for the enhanced reward program under
which proceeds and additional amounts in dispute exceed
$2,000,000.
The collected proceeds amounts are determined without
regard to whether such proceeds are available to the Secretary.
Effective Date
The provision is effective for information provided before,
on, or after the date of enactment (February 9, 2018) with
respect to which a final determination has not been made before
such date.
8. Clarification regarding excise tax based on investment income of
private colleges and universities (sec. 41109 of the Act and
sec. 4968 of the Code)
Present Law
Section 4968 imposes an excise tax on an applicable
educational institution for each taxable year equal to 1.4
percent of the net investment income of the institution for the
taxable year. Net investment income is determined using rules
similar to the rules of section 4940(c) (relating to the net
investment income of a private foundation).
An applicable educational institution is an eligible
education institution (as defined in section 25A): \352\ (1)
that has at least 500 students during the preceding taxable
year; (2) more than 50 percent of the students of which are
located in the United States; (3) that is not described in the
first section of section 511(a)(2)(B) of the Code (generally
describing State colleges and universities); and (4) the
aggregate fair market value of the assets of which at the end
of the preceding taxable year (other than those assets that are
used directly in carrying out the institution's exempt purpose)
\353\ is at least $500,000 per student. For these purposes, the
number of students of an institution is based on the average
daily number of full-time students attending the institution,
with part-time students being taken into account on a full-time
student equivalent basis.
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\352\ Section 25A(f)(2) defines an eligible educational institution
as an institution (1) is described in section 481 of the Higher
Education Act of 1965 (20 U.S.C. sec. 1088), as in effect on August 5,
1977, and (2) which is eligible to participate in a program under title
IV of such Act.
\353\ Assets used directly in carrying out the institution's exempt
purpose include, for example, classroom buildings and physical
facilities used for educational activities and office equipment or
other administrative assets used by employees of the institution in
carrying out exempt activities, among other assets.
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For purposes of determining whether an educational
institution meets the asset-per-student threshold \354\ and for
purposes of determining net investment income, assets and net
investment income of a related organization with respect to the
educational institution are treated as assets and net
investment income, respectively, of the educational
institution, except that:
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\354\ In cross-referencing the asset-per-student threshold for this
purpose, new section 4968(d)(1) includes a reference to subsection
``(b)(1)(C)'' that should instead read ``(b)(1)(D).'' A clerical
correction may be necessary to correct this cross-reference.
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No such amount is taken into account with
respect to more than one educational institution; and
Unless the related organization is
controlled by the educational institution or is a
supporting organization (described in section
509(a)(3)) with respect to the institution for the
taxable year, assets and net investment income that are
not intended or available for the use or benefit of the
educational institution are not taken into account. For
example, assets of a related organization that are
earmarked or restricted for (or fairly attributable to)
the educational institution would be treated as assets
of the educational institution, whereas assets of a
related organization that are held for unrelated
purposes (and are not fairly attributable to the
educational institution) would be disregarded.
An organization is treated as related to the institution
for this purpose if the organization: (1) controls, or is
controlled by, the institution; (2) is controlled by one or
more persons that control the institution; or (3) is a
supported organization \355\ or a supporting organization \356\
during the taxable year with respect to the institution.
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\355\ Sec. 509(f)(3).
\356\ Sec. 509(a)(3).
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It is intended that the Secretary promulgate regulations to
carry out the intent of the provision, including regulations
that describe: (1) assets that are used directly in carrying
out the educational institution's exempt purpose; (2) the
computation of net investment income; and (3) assets that are
intended or available for the use or benefit of the educational
institution.
The IRS and Treasury Department have issued a notice
addressing this provision.\357\
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\357\ Notice 2018-55, 2018-26 I.R.B. 773, June 25, 2018.
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Explanation of Provision
The provision modifies the definition of ``applicable
educational institution'' by requiring that students be tuition
paying students for purposes of the requirements that (1) the
institution must have at least 500 students during the
preceding taxable year,\358\ and (2) more than 50 percent of
the institution's students must be located in the United
States.\359\
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\358\ Sec. 4968(b)(1)(A).
\359\ Sec. 4968(b)(1)(B).
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Effective Date
The provision is effective for taxable years beginning
after December 31, 2017.
9. Exception from private foundation excess business holding tax for
independently-operated philanthropic business holdings (sec.
41110 of the Act and sec. 4943 of the Code)
Present Law
Public charities and private foundations
An organization qualifying for tax-exempt status under
section 501(c)(3) is further classified as either a public
charity or a private foundation. An organization may qualify as
a public charity in several ways.\360\ Certain organizations
are classified as public charities per se, regardless of their
sources of support. These include churches, certain schools,
hospitals and other medical organizations (including medical
research organizations), certain organizations providing
assistance to colleges and universities, and governmental
units.\361\ Other organizations qualify as public charities
because they are broadly publicly supported. First, a charity
may qualify as publicly supported if at least one-third of its
total support is from gifts, grants, or other contributions
from governmental units or the general public.\362\
Alternatively, it may qualify as publicly supported if it
receives more than one-third of its total support from a
combination of gifts, grants, and contributions from
governmental units and the public plus revenue arising from
activities related to its exempt purposes (e.g., fee-for-
service income). In addition, this category of public charity
must not rely excessively on endowment income as a source of
support.\363\ A supporting organization (i.e., an organization
that provides support to another section 501(c)(3) entity that
is not a private foundation and meets certain other
requirements of the Code) also is classified as a public
charity.\364\
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\360\ The Code does not expressly define the term ``public
charity,'' but rather provides exceptions for those entities that are
treated as private foundations.
\361\ Sec. 509(a)(1) (referring to sec. 170(b)(1)(A)(i) through
(iv) for a description of these organizations).
\362\ Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical
test, the organization may qualify as a public charity if it passes a
``facts and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
\363\ To meet this requirement, the organization must normally
receive more than one-third of its support from a combination of (1)
gifts, grants, contributions, or membership fees and (2) certain gross
receipts from admissions, sales of merchandise, performance of
services, and furnishing of facilities in connection with activities
that are related to the organization's exempt purposes. Sec.
509(a)(2)(A). In addition, the organization must not normally receive
more than one-third of its public support in each taxable year from the
sum of (1) gross investment income and (2) the excess of unrelated
business taxable income as determined under section 512 over the amount
of unrelated business income tax imposed by section 511. Sec.
509(a)(2)(B).
\364\ Sec. 509(a)(3). Organizations organized and operated
exclusively for testing for public safety also are classified as public
charities. Sec. 509(a)(4). Such organizations, however, are not
eligible to receive deductible charitable contributions under section
170.
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A section 501(c)(3) organization that does not fit within
any of the above categories is a private foundation. In
general, private foundations receive funding from a limited
number of sources (e.g., an individual, a family, or a
corporation).
The deduction for charitable contributions to private
foundations is in some instances less generous than the
deduction for charitable contributions to public charities. In
addition, private foundations are subject to a number of
operational rules and restrictions that do not apply to public
charities, as well as a tax on their net investment
income.\365\
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\365\ Unlike public charities, private foundations are subject to
tax on their net investment income at a rate of two percent (one
percent in some cases). Sec. 4940. Private foundations also are subject
to more restrictions on their activities than are public charities. For
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount
of charitable distributions each year (sec. 4942), are limited in the
extent to which they may control a business (sec. 4943), may not make
speculative investments (sec. 4944), and may not make certain
expenditures (sec. 4945). Violations of these rules result in excise
taxes on the foundation and, in some cases, may result in excise taxes
on the managers of the foundation.
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Excess business holdings of private foundations
Private foundations are subject to tax on excess business
holdings.\366\ In general, a private foundation is permitted to
hold 20 percent of the voting stock in a corporation, reduced
by the amount of voting stock held by all disqualified persons
(as defined in section 4946). If it is established that no
disqualified person has effective control of the corporation, a
private foundation and disqualified persons together may own up
to 35 percent of the voting stock of a corporation. A private
foundation shall not be treated as having excess business
holdings in any corporation if it owns (together with certain
other related private foundations) not more than two percent of
the voting stock and not more than two percent in value of all
outstanding shares of all classes of stock in that corporation.
Similar rules apply with respect to holdings in a partnership
(substituting ``profits interest'' for ``voting stock'' and
``capital interest'' for ``nonvoting stock'') and to other
unincorporated enterprises (by substituting ``beneficial
interest'' for ``voting stock''). Private foundations are not
permitted to have holdings in a proprietorship. Foundations
generally have a five-year period to dispose of excess business
holdings (acquired other than by purchase) without being
subject to tax.\367\ This five-year period may be extended an
additional five years in limited circumstances.\368\ The excess
business holdings rules do not apply to holdings in a
functionally related business or to holdings in a trade or
business at least 95 percent of the gross income of which is
derived from passive sources.\369\
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\366\ Sec. 4943. Taxes imposed may be abated if certain conditions
are met. Secs. 4961 and 4962.
\367\ Sec. 4943(c)(6).
\368\ Sec. 4943(c)(7).
\369\ Sec. 4943(d)(3).
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The initial tax is equal to five percent of the value of
the excess business holdings held during the foundation's
applicable taxable year. An additional tax is imposed if an
initial tax is imposed and at the close of the applicable
taxable period, the foundation continues to hold excess
business holdings. The amount of the additional tax is equal to
200 percent of such holdings.
Explanation of Provision
The provision creates an exception to the excess business
holdings rules for certain philanthropic business holdings.
Specifically, the tax on excess business holdings does not
apply with respect to the holdings of a private foundation in
any business enterprise that, for the taxable year, satisfies
the following requirements: (1) the ownership requirements; (2)
the ``all profits to charity'' distribution requirement; and
(3) the independent operation requirements.
The ownership requirements are satisfied if: (1) all
ownership interests in the business enterprise are held by the
private foundation at all times during the taxable year; and
(2) all the private foundation's ownership interests in the
business enterprise were acquired by means other than by
purchase.
The ``all profits to charity'' distribution requirement is
satisfied if the business enterprise, not later than 120 days
after the close of the taxable year, distributes an amount
equal to its net operating income for such taxable year to the
private foundation. For this purpose, the net operating income
of any business enterprise for any taxable year is an amount
equal to the gross income of the business enterprise for the
taxable year, reduced by the sum of: (1) the deductions allowed
by chapter 1 of the Code for the taxable year that are directly
connected with the production of the income; (2) the tax
imposed by chapter 1 on the business enterprise for the taxable
year; and (3) an amount for a reasonable reserve for working
capital and other business needs of the business enterprise.
The independent operation requirements are met if, at all
times during the taxable year, the following three requirements
are satisfied. First, no substantial contributor to the private
foundation, or family member of such a contributor, is a
director, officer, trustee, manager, employee, or contractor of
the business enterprise (or an individual having powers or
responsibilities similar to any of the foregoing). Second, at
least a majority of the board of directors of the private
foundation are not also directors or officers of the business
enterprise or members of the family of a substantial
contributor to the private foundation. Third, there is no loan
outstanding from the business enterprise to a substantial
contributor to the private foundation or a family member of
such contributor. For purposes of the independent operation
requirements, ``substantial contributor'' has the meaning given
to the term under section 4958(c)(3)(C), and family members are
determined under section 4958(f)(4).
The provision does not apply to the following
organizations: (1) donor advised funds or supporting
organizations that are subject to the excess business holdings
rules by reason of section 4943(e) or (f); (2) any trust
described in section 4947(a)(1) (relating to charitable
trusts); or (3) any trust described in section 4947(a)(2)
(relating to split-interest trusts).
Effective Date
The provision is effective for taxable years beginning
after December 31, 2017.
10. Rule of construction for Craft Beverage Modernization and Tax
Reform (sec. 41111 of the Act)
Present Law
Subpart A of part IX of subtitle C of title I of Public Law
115-97 amended the Code to reform the taxation of alcoholic
beverages. That subpart includes eight provisions that address
the production period for beer, wine, and distilled spirits;
reduce the rate of excise tax on beer; address the transfer of
beer between bonded facilities; reduce the rate of excise tax
on certain wine; adjust the alcohol content level for
application of excise tax rates; address the definition of mead
and low alcohol by volume wine; reduce the rate of excise tax
on certain distilled spirits; and address the taxation of bulk
distilled spirits.
Explanation of Provision
The provision adds a rule of construction to Subpart A of
part IX of subtitle C of title I of Public Law 115-97,
clarifying that nothing in the reforms to the taxation of
alcoholic beverages made by such subpart or any regulations
promulgated under such subpart should be construed to preempt,
supersede, or otherwise limit or restrict any State, local, or
tribal law that prohibits or regulates the production or sale
of distilled spirits, wine, or malt beverages.
Effective Date
The provision is effective as if included in Public Law
115-97.
11. Simplification of rules regarding records, statements, and returns
(sec. 41112 of the Act and sec. 5555 of the Code)
Present Law
The Code requires those liable for taxation on alcoholic
beverages to keep such records, render such statements, make
such returns, and comply with such rules and regulations as
prescribed by the Secretary.\370\
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\370\ Sec. 5555(a).
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Explanation of Provision
Under the provision, the Secretary shall permit a unified
system for any records, statements, and returns required to be
kept, rendered, or made for any beer produced in a brewery for
which tax is imposed, including any beer that has been removed
for consumption on the premises of the brewery.
Effective Date
The provision is effective for calendar quarters beginning
after February 9, 2018, and before January 1, 2020.
12. Modifications of rules governing hardship distributions (sec. 41113
of the Act and secs. 401(k) and 403(b) of the Code)
Present Law
A qualified defined contribution plan may include a
qualified cash or deferred arrangement, under which employees
may elect to have contributions made to the plan (referred to
as ``elective deferrals'') rather than receive the same amount
as current compensation (referred to as a ``section 401(k)
plan''). A section 403(b) plan may also include an elective
deferral arrangement. Amounts attributable to elective
deferrals under a section 401(k) plan or a section 403(b) plan
generally cannot be distributed before the occurrence of one or
more specified events, including financial hardship of the
employee.\371\
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\371\ Secs. 401(k)(2)(B)(i)(IV) and 403(b)(7)(A)(ii) and (11)(B).
Other types of contributions may also be subject to this restriction.
Under section 72(t), distributions on account of hardship may be
subject to an additional 10-percent early withdrawal tax.
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Applicable Treasury regulations provide that a distribution
is made on account of hardship only if the distribution is made
on account of an immediate and heavy financial need of the
employee and is necessary to satisfy the heavy need.\372\
Generally, the determination of whether these two requirements
is met is based on the relevant facts and circumstances.
However, the Treasury regulations provide a safe harbor under
which a distribution may be deemed necessary to satisfy an
immediate and heavy financial need. One requirement of this
safe harbor is that the employee be prohibited from making
elective deferrals and employee contributions to the plan and
all other plans maintained by the employer for at least six
months after receipt of the hardship distribution.
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\372\ Treas. Reg. sec. 1.401(k)-1(d)(3).
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Explanation of Provision
The provision directs the Secretary of the Treasury to
modify the applicable regulations \373\ relating to the
hardship safe harbor within one year of the date of enactment
to (1) delete the requirement that an employee be prohibited
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, 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. Thus, under the modified regulations, an employee
would not be prevented for any period after the receipt of a
hardship distribution from continuing to make elective
deferrals and employee contributions.
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\373\ Treas. Reg. sec. 1.401(k)-1(d)(3)(iv)(E).
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Effective Date
The regulations as revised by the provision shall apply to
plan years beginning after December 31, 2018.
13. Modification of rules relating to hardship withdrawals from cash or
deferred arrangements (sec. 41114 of the Act and sec. 401(k) of
the Code)
Present Law
Amounts attributable to elective deferrals (including
earnings thereon) under a section 401(k) plan generally cannot
be distributed before the earliest of the employee's severance
from employment, death, disability or attainment of age 59\1/
2\, or termination of the plan. Elective deferrals, but not
associated earnings, may be distributed on account of
hardship.\374\
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\374\ Sec. 401(k)(2)(B)(i). Under section 72(t), distributions on
account of hardship may be subject to an additional 10-percent early
withdrawal tax.
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An employer may also make nonelective and matching
contributions for employees under a section 401(k) plan.
Elective deferrals, and matching contributions and after-tax
employee contributions, are subject to special tests
(``nondiscrimination tests'') to prevent discrimination in
favor of highly compensated employees. Nonelective
contributions and matching contributions that satisfy certain
requirements (``qualified nonelective contributions and
qualified matching contributions'') may be used to enable the
plan to satisfy these nondiscrimination tests. One of the
requirements is that these contributions be subject to the same
distribution restrictions as elective deferrals, except that
these contributions (and associated earnings) are not permitted
to be distributed on account of hardship.
Applicable Treasury regulations provide that a distribution
is made on account of hardship only if the distribution is made
on account of an immediate and heavy financial need of the
employee and is necessary to satisfy the heavy need.\375\
Generally, the determination of whether these two requirements
is met is based on the relevant facts and circumstances.
However, the Treasury regulations provide a safe harbor under
which a distribution may be deemed necessary to satisfy an
immediate and heavy financial need. One requirement of the safe
harbor is that the employee represent that the need cannot be
satisfied through currently available plan loans. This in
effect requires an employee to take any available plan loan
before receiving a hardship distribution.
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\375\ Treas. Reg. sec. 1.401(k)-1(d)(3).
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Explanation of Provision
The provision allows earnings on elective deferrals under a
section 401(k) plan, as well as qualified nonelective
contributions and qualified matching contributions (and
associated earnings), to be distributed on account of hardship.
Further, a distribution is not treated as failing to be on
account of hardship solely because the employee does not take
any available plan loan.
Effective Date
The provision applies to plan years beginning after
December 31, 2018.
14. Opportunity zones rule for Puerto Rico (sec. 41115 of the Act and
sec. 1400Z-1 of the Code)
Present Law
In general
The provision allows taxpayers to make an election when
investing in a qualified opportunity fund. The election results
in the following three tax benefits: (1) the temporary deferral
of inclusion in gross income of capital gains,\376\ (2) the
partial exclusion of such capital gains from gross income to
the extent invested in the qualified opportunity fund for a
certain length of time, and (3) the permanent exclusion of
post-acquisition capital gains from the sale or exchange of an
interest in a qualified opportunity fund held for at least 10
years.
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\376\ A technical correction may be needed to reflect this intent.
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The provision allows for the designation of certain low-
income community population census tracts as qualified
opportunity zones.\377\ In addition, a limited number of other
census tracts that are not low-income communities can be
designated if they are contiguous to a designated low-income
community and the median family income of such tracts does not
exceed 125 percent of the median family income of the
contiguous low-income community. The designation of a
population census tract as a qualified opportunity zone remains
in effect for the period beginning on the date of the
designation and ending at the close of the tenth calendar year
beginning on or after the date of designation.
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\377\ See sec. 45D(e) for the definition of low-income community.
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The chief executive officer of the State, possession, or
the District of Columbia (i.e., Governor or mayor in the case
of the District of Columbia) may submit nominations for a
limited number of opportunity zones to the Secretary for
certification and designation. If the number of low-income
communities in a State is fewer than 100, the Governor may
designate up to 25 tracts, otherwise the Governor may designate
tracts not exceeding 25 percent of the number of low-income
communities in the State.
Qualified opportunity funds
A qualified opportunity fund is an investment vehicle
organized as a corporation or a partnership for the purpose of
investing in qualified opportunity zone property (other than
another qualified opportunity fund) that holds at least 90
percent of its assets in qualified opportunity zone property.
The provision intends that the certification process for a
qualified opportunity fund will be carried out in a manner
similar to the process for allocating the new markets tax
credit. The Secretary is granted the authority to administer
this process.
If a qualified opportunity fund fails to meet the 90
percent requirement, unless the fund establishes reasonable
cause, the fund is required to pay a monthly penalty of the
excess of the amount equal to 90 percent of its aggregate
assets, over the aggregate amount of qualified opportunity zone
property held by the fund multiplied by the underpayment rate
in the Code.\378\ If the fund is a partnership, the penalty is
taken into account proportionately as part of each partner's
distributive share.
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\378\ Sec. 6621.
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Qualified opportunity zone property
Qualified opportunity zone property means: (1) qualified
opportunity zone stock, (2) qualified opportunity zone
partnership interest, and (3) qualified opportunity zone
business property.
Qualified opportunity zone stock consists of stock in a
domestic corporation that is a qualified opportunity zone
business. There are three requirements that must be met for
property to be considered qualified opportunity zone
stock.\379\ First, the stock must be acquired at original
issuance (directly or indirectly through an underwriter) solely
for cash after December 31, 2017. Second, the corporation must
have been a qualified opportunity zone business when the stock
was issued (or, for a new corporation, was being organized to
be a qualified opportunity zone business). Third, the
corporation must qualify as a qualified opportunity zone
business during substantially all of the qualified opportunity
fund's holding period for the stock.
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\379\ Sec. 1400Z-2(d)(2)(B).
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Qualified opportunity zone partnership interest consists of
capital or profits interests in a domestic partnership that is
a qualified opportunity zone business. There are three
requirements that must be met for property to be considered a
qualified opportunity zone partnership interest.\380\ First,
the interest must be acquired from the partnership solely for
cash after December 31, 2017. Second, the partnership must have
been a qualified opportunity zone business when the interest
was acquired (or, for a new partnership, was being organized to
be a qualified opportunity zone business). Third, the
partnership must qualify as a qualified opportunity zone
business during substantially all of the qualified opportunity
fund's holding period for the interest.
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\380\ Sec. 1400Z-2(d)(2)(C).
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Qualified opportunity zone business property consists of
tangible property used in the trade or business of a qualified
opportunity fund or qualified opportunity zone business. There
are three main requirements that must be met for property to be
considered qualified opportunity zone business property.\381\
First, the property must be acquired by purchase \382\ after
December 31, 2017. Second, the original use of the property in
the qualified opportunity zone must begin with the qualified
opportunity fund or qualified opportunity zone business, or the
qualified opportunity fund or qualified opportunity zone
business must substantially improve the property. Only new or
substantially improved property qualifies as opportunity zone
business property.\383\ Third, substantially all of the
property must be in a qualified opportunity zone during
substantially all of qualified opportunity fund's or qualified
opportunity zone business's holding period for the property.
Property is treated as substantially improved only if capital
expenditures on the property in the 30 months after acquisition
exceeds the property's adjusted basis on the date of
acquisition.
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\381\ Sec. 1400Z-2(d)(2)(D).
\382\ Certain related party purchases are excluded. See secs.
1400Z-2(d)(2)(D)(i)(I), 1400Z-2(d)(2)(D)(iii), and 1400Z-2(e)(2).
\383\ A technical correction may be necessary to reflect this
intent.
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A qualified opportunity zone business is any trade or
business in which substantially all of the underlying value of
the tangible property owned or leased by the business is
qualified opportunity zone business property.
In addition, (1) at least 50 percent of the total gross
income of the trade or business must be derived from the active
conduct of business in the qualified opportunity zone, (2) a
substantial portion of the business's intangible property must
be used in the active conduct of business in the qualified
opportunity zone, and (3) less than five percent of the average
of the aggregate adjusted bases of the property of the business
is attributable to nonqualified financial property.\384\
Nonqualified financial property means debt, stock, partnership
interests, annuities, and derivative financial instruments
(including options, futures, forward contracts, and notional
principal contracts), other than (1) reasonable amounts of
working capital held in cash, cash equivalents, or debt
instruments with a term of no more than 18 months, and (2)
accounts or notes receivable acquired in the ordinary course of
a trade or business for services rendered or from the sale of
inventory property.\385\ The business cannot be a golf course,
country club, massage parlor, hot tub or suntan facility,
racetrack or other facility used for gambling, or store whose
principal business is the sale of alcoholic beverages for
consumption off premises.\386\
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\384\ Sec. 1400Z-2(d)(3)(A)(ii).
\385\ Secs. 1400Z-2(d)(3)(A)(ii), 1397C(b)(8), and 1397C(e).
\386\ Secs. 1400Z-2(d)(3)(A)(iii) and 144(c)(6)(B).
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Tangible property that ceases to be a qualified opportunity
zone business property continues to be treated as a qualified
opportunity zone business property for the lesser of five years
after the date on which such tangible property ceases to be so
qualified, or the date on which such tangible property is no
longer held by the qualified opportunity zone business.\387\
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\387\ Sec. 1400Z-2(d)(3)(B).
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Tax treatment of a deferred-gain investment
A taxpayer may elect to temporarily defer and partially
exclude capital gains from gross income to the extent that the
taxpayer invests the amount of those gains in a qualified
opportunity fund. The maximum amount of the deferred gain is
equal to the amount invested in a qualified opportunity fund by
the taxpayer during the 180-day period beginning on the date of
the asset sale that produced the gain to be deferred. Capital
gains in excess of the deferred amount must be recognized and
included in gross income.
In the case of any investment in a qualified opportunity
fund, only a portion of which consists of the investment of
gain with respect to which an election is made, such investment
is treated as two separate investments, consisting of one
investment that includes only amounts to which the election
applies (herein ``deferred-gain investment''), and a separate
investment consisting of other amounts. The temporary deferral
and permanent exclusion provisions do not apply to the separate
investment. For example, if a taxpayer sells stock at a gain
and invests the entire sales proceeds (capital and return of
basis) in a qualified opportunity zone fund, an election may be
made only with respect to the capital gain amount. No election
may be made with respect to amounts attributable to a return of
basis, and no special tax benefits apply to such amounts.
The basis of a deferred-gain investment in a qualified
opportunity zone fund immediately after its acquisition is
zero. If the deferred-gain investment in the qualified
opportunity zone fund is held by the taxpayer for at least five
years, the basis in the deferred-gain investment is increased
by 10 percent of the original deferred gain. If the opportunity
zone asset or investment is held by the taxpayer for at least
seven years, the basis in the deferred gain investment is
increased by an additional five percent of the original
deferred gain. Some or all of the deferred gain is recognized
on the earlier of the date on which the qualified opportunity
zone investment is disposed of or December 31, 2026. The amount
of gain recognized is the excess of the lesser of the amount
deferred and the current fair market value of the investment
(taking into account any increases at the end of five or seven
years). The taxpayer's basis in the investment is increased by
the amount of gain recognized. No election under the provision
may be made after December 31, 2026.
Exclusion of capital gains from the sale or exchange of an investment
in a qualified opportunity fund
The provision excludes from gross income the post-
acquisition capital gains on deferred-gain investments in
opportunity zone funds that are held for at least 10 years.
Specifically, in the case of the sale or exchange of an
investment in a qualified opportunity zone fund held for more
than 10 years, a further election is allowed by the taxpayer to
modify the basis of such deferred-gain investment in the hands
of the taxpayer to be the fair market value of the deferred-
gain investment at the date of such sale or exchange.
In the case of a fund organized as a pass-through entity,
investors recognize gains and losses associated with both
deferred-gain and non-deferred gain investments in the fund,
under the rules generally applicable to pass-through entities.
Thus, for example, investor-partners in a fund organized as a
partnership would recognize income and increase their basis
with respect to their distributive share of the fund's taxable
income.
The Treasury Department has proposed guidance addressing
this provision.\388\
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\388\ Notice 2018-48, I.R.B. 2018-28 (July 9, 2018) and Prop.
Treas. Reg. sec. 1.1400Z-2.
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Example
Assume a taxpayer sells stock for a gain of $1,000 on
January 1, 2019, and invests $1,000 in the stock of a qualified
opportunity fund. Assume also that the taxpayer holds the
investment for 10 years and then sells the investment for
$1,500.
The taxpayer's initial basis in the deferred-gain
investment is zero. After five years, the basis is increased to
$100. After seven years, the basis is increased to $150. At the
end of 2026, assume that the fair market value of the deferred-
gain investment is at least $1,000, and thus the taxpayer has
to recognize $850 of the deferred capital gain. So at that
point the basis in the deferred-gain investment is $1,000 ($150
+ $850). If the taxpayer holds the deferred-gain investment for
10 years and makes the election to increase the basis, the $500
post-acquisition capital gain on the sale is excluded.
Explanation of Provision
Each population census tract in Puerto Rico that is a low-
income community is deemed certified and designated as a
qualified opportunity zone.
Effective Date
The provision is effective on the date of enactment of Pub.
L. No. 115-97 (December 22, 2017).
15. Tax home of certain citizens or residents of the United States
living abroad (sec. 41116 of the Act and sec. 911 of the Code)
Present Law
U.S. citizens generally are subject to U.S. income tax on
all their income, whether derived in the United States or
elsewhere. Under section 911, a U.S. citizen or resident living
abroad may be eligible to exclude from U.S. taxable income
certain foreign earned income and foreign housing costs,
without regard to whether any foreign tax is paid on the
foreign earned income or housing costs, if the individual can
establish that he or she is a ``qualified individual.'' \389\
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\389\ Sec. 911. Amounts paid by the United States or any U.S.
agency to an employee thereof are not treated as foreign earned income
and therefore are not eligible for the exclusion from income. See sec.
911(b)(1)(B). Officers and employees may be eligible to exclude certain
payments for service abroad under section 912 (civilian Federal
employees and Peace Corps volunteers) or section 112 (exempting certain
combat zone compensation for members of the U.S. Armed Forces).
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A qualified individual is a taxpayer with a tax home in a
foreign country who meets one of two tests of foreign
residency. First, a U.S. citizen may establish foreign
residence by proving bona fide residence in a foreign country
or countries for an uninterrupted period that includes an
entire taxable year. Alternatively, both U.S. citizens and U.S.
residents may establish foreign residence by demonstrating
physical presence in a foreign country or countries for at
least 330 full days in any 12-consecutive-month period.
For purposes of the qualified individual tests, a special
definition of tax home is used. It is based on the general
principle that tax home is the taxpayer's principal place of
employment or business, unless such employment is temporary
rather than indefinite, as used to determine deductibility of
travel expenses. Unlike the general rules regarding existence
of a tax home, a foreign tax home cannot be established for any
period in which a person maintains his abode in the United
States.\390\ The determination of whether an individual
maintains an abode in the United States is based on facts and
circumstances, sometimes leading to anomalous results.\391\
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\390\ Sec. 911(d)(3).
\391\ Compare Linde v. Commissioner, T.C. Memo. 2017-180
(helicopter pilot in Iraq working for a government contractor entitled
to foreign earned income exclusion despite maintaining home for wife
and children in Alabama, based on testimony) with Lock v. Commissioner,
T.C. Summary Opinion, 2017-10 (government contractor employee working
in Iraq, with wife and children in Florida, not entitled to foreign
income exclusion).
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The maximum amount of foreign earned income that an
individual may exclude is adjusted annually. For taxable year
2018, the maximum exclusion is $103,900.\392\ The maximum
amount of foreign housing costs that an individual may exclude
is also adjusted annually, based on the maximum foreign earned
income excludible as well as Treasury adjustments for
geographic differences in housing costs.\393\ The combined
foreign earned income exclusion and housing cost exclusion may
not exceed the taxpayer's total foreign earned income for the
taxable year. The taxpayer's foreign tax credit is reduced by
the amount of the credit that is attributable to excluded
income.
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\392\ Sec. 911(b)(2)(D)(i). This amount is adjusted annually for
inflation. Rev. Proc. 2017-58, available at https://www.irs.gov/pub/
irs-drop/rp-17-58.pdf.
\393\ Sec. 911(c)(1) and (2).
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Explanation of Provision
The provision creates an exception to the definition of tax
home for purposes of the foreign earned income exclusion. An
individual who maintains an abode in the United States may
satisfy the tax home requirement for the foreign earned income
exclusion if his principal place of employment is in an area
designated by the President as a combat zone for purposes of
determining military personnel eligibility for certain benefits
and the individual's services are in support of the U.S.
military.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2017.
16. Treatment of foreign persons for returns relating to payments made
in settlement of payment card and third party network
transactions (sec. 41117 of the Act and sec. 6050W of the Code)
Present Law
A variety of information reporting requirements apply to
participants in certain transactions.\394\ These requirements
are intended to assist taxpayers in preparing their income tax
returns and to help the IRS determine whether such returns are
correct and complete.
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\394\ Secs. 6031 through 6060.
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The primary provision governing information reporting by
payors requires an information return by every person engaged
in a trade or business who makes payments aggregating $600 or
more in any taxable year to a single payee in the course of the
payor's trade or business.\395\ Payments to corporations
generally are excepted from this requirement. Payments subject
to reporting include fixed or determinable income or
compensation, but do not include payments for goods or certain
enumerated types of payments that are subject to other specific
reporting requirements.\396\ Detailed rules are provided for
the reporting of various types of investment income, including
interest, dividends, and gross proceeds from brokered
transactions (such as a sale of stock) paid to U.S.
persons.\397\
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\395\ The information return generally is submitted electronically
as a Form 1099 or Form 1096, although certain payments to beneficiaries
or employees may require use of Form 1041 or Forms W-2 and W-3,
respectively. Treas. Reg. sec. 1.6041-1(a)(2).
\396\ Sec. 6041(a) requires reporting as to fixed or determinable
gains, profits, and income (other than payments to which secs.
6042(a)(1), 6044(a)(1), 6047(c), 6049(a), or 6050N(a) apply and other
than payments with respect to which a statement is required under
authority of section 6042(a), 6044(a)(2) or 6045). These payments
excepted from section 6041(a) include most interest, royalties, and
dividends.
\397\ Secs. 6042 (dividends), 6045 (broker reporting), and 6049
(interest), and the Treasury regulations thereunder.
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Special information reporting requirements exist for
employers required to deduct and withhold tax from employees'
income.\398\ In addition, any service recipient engaged in a
trade or business and paying for services is required to make a
return according to regulations when the aggregate of payments
is $600 or more.\399\
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\398\ Sec. 6051(a).
\399\ Sec. 6041A.
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The payor of amounts described above is required to provide
the recipient of the payment with an annual statement showing
the aggregate payments made and contact information for the
payor.\400\ The statement must be supplied to taxpayers by the
payors by January 31 of the following calendar year. Payors
generally must file the information return with the IRS on or
before January 31 of the year following the calendar year to
which such returns relate.\401\
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\400\ Secs. 6041(d) and 6041A(e).
\401\ Sec. 6071(c).
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Returns relating to payments made in settlement of third
party network transactions
Any payment settlement entity making payment to a
participating payee in settlement of reportable payment
transactions must report annually to the IRS and to the
participating payee the gross amount of such reportable payment
transactions, as well as the name, address, and taxpayer
identification number of the participating payees. A
``reportable payment transaction'' means any payment card
transaction and any third party network transaction.
A ``payment settlement entity'' means, in the case of a
payment card transaction, a merchant acquiring entity and, in
the case of a third party network transaction, a third party
settlement organization. A ``participating payee'' means, in
the case of a third party network transaction, any person who
accepts payment from a third party settlement organization in
settlement of such transaction.
For purposes of the reporting requirement, the term ``third
party network transaction'' means any transaction that is
settled through a third party payment network. A ``third party
payment network'' is defined as any agreement or arrangement
(1) that involves the establishment of accounts with a central
organization by a substantial number of persons (i.e., more
than 50) who are unrelated to such organization, provide goods
or services, and have agreed to settle transactions for the
provision of such goods or services pursuant to such agreement
or arrangement; (2) that provides for standards and mechanisms
for settling such transactions; and (3) that guarantees persons
providing goods or services pursuant to such agreement or
arrangement that such persons will be paid for providing such
goods or services. In the case of a third party network
transaction, the payment settlement entity is the third party
settlement organization, which is defined as the central
organization that has the contractual obligation to make
payment to participating payees of third party network
transactions. Thus, an organization generally is required to
report if it provides a network enabling buyers to transfer
funds to sellers who have established accounts with the
organization and have a contractual obligation to accept
payment through the network. However, an organization operating
a network that merely processes electronic payments (such as
wire transfers, electronic checks, and direct deposit payments)
between buyers and sellers, but does not have contractual
agreements with sellers to use such network, is not required to
report under the provision. Similarly, an agreement to transfer
funds between two demand deposit accounts will not, by itself,
constitute a third party network transaction.
A third party payment network does not include any
agreement or arrangement that provides for the issuance of
payment cards. In addition, a third party settlement
organization is not required to report unless the aggregate
value of third party network transactions for the year exceeds
$20,000 and the aggregate number of such transactions exceeds
200.\402\ If a payment of funds is made to a third party
settlement organization by means of a payment card (e.g., as
part of a transaction that is a payment card transaction), the
$20,000 and 200 transaction de minimis rule continues to apply
to any reporting obligation with respect to payment of such
funds to a participating payee by the third party settlement
organization made as part of a third party network transaction.
---------------------------------------------------------------------------
\402\ Sec. 6050W(e).
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Explanation of Provision
The provision amends the reporting requirements for payment
settlement entities making payments from inside the United
States to accounts outside the United States. In such cases, a
payment settlement entity will not be required to report
payments to a payee with only a foreign address merely because
that payee submits requests for payment in U.S. dollars.
Effective Date
The provision applies to returns for calendar years
beginning after December 31, 2017.
17. Repeal of shift in time of payment of corporate estimated taxes
(sec. 41118 of the Act and sec. 6655 of the Code)
Present Law
In general, corporations are required to make quarterly
estimated tax payments of their income tax liability.\403\ For
a corporation whose taxable year is a calendar year, these
estimated tax payments must be made by April 15, June 15,
September 15, and December 15. The amount of any required
estimated payment is 25 percent of the required annual
payment.\404\ The required annual payment is 100 percent of the
tax liability for the taxable year or the preceding taxable
year. The option to use the preceding taxable year is not
available if the preceding taxable year was not a 12-month
taxable year or the corporation did not file a return in the
preceding taxable year showing a liability for tax. Further, in
the case of a corporation with taxable income of at least $1
million in any of the three immediately preceding taxable
years, the option to use the preceding taxable year is only
available for the first installment of such corporation's
taxable year.\405\
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\403\ Sec. 6655.
\404\ Sec. 6655(d)(1).
\405\ Sec. 6655(d)(2) and (g)(2).
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In the case of a corporation with assets of at least $1
billion (determined as of the end of the preceding taxable
year), the amount of the required installment due in July,
August, or September of 2020, is increased by eight percent of
that amount (determined without regard to any increase in such
amount not contained in the Internal Revenue Code) (i.e., the
installment due in July, August, or September of 2020, is
increased to 108 percent of the payment otherwise due).\406\
The next required installment is reduced accordingly (i.e., the
payment due in October, November, or December of 2020 is
reduced by the amount that the prior payment was increased).
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\406\ Trade Preferences Extension Act of 2015, Pub. L. No. 114-27,
sec. 803.
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Explanation of Provision
The provision repeals the shift in the timing of corporate
estimated tax payments for 2020. Thus, corporations will be
required to make estimated tax payments in 2020 as if the prior
legislation (i.e., section 803 of the Trade Preferences
Extension Act of 2015 \407\) had never been enacted.
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\407\ Pub. L. No. 114-27.
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Effective Date
The provision is effective on the date of enactment
(February 9, 2018).
18. Credit for carbon oxide sequestration (sec. 41119 of the Act and
sec. 45Q of the Code)
Present Law
A credit of $10 per metric ton is available for qualified
carbon dioxide that is captured by the taxpayer at a qualified
facility, used by such taxpayer as a tertiary injectant
(including carbon dioxide augmented waterflooding and
immiscible carbon dioxide displacement) in a qualified enhanced
oil or natural gas recovery project (``EOR uses'') and disposed
of by such taxpayer in secure geological storage.\408\ In
addition, a credit of $20 per metric ton is available for
qualified carbon dioxide captured by a taxpayer at a qualified
facility and disposed of by such taxpayer in secure geological
storage without being used as a tertiary injectant. Both credit
amounts are adjusted for inflation after 2009. For 2018, as
adjusted for inflation, the two credit amounts are $11.44 per
metric ton and $22.87 per metric ton of carbon dioxide.\409\
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\408\ Sec. 45Q.
\409\ IRS Notice 2018-40, May 14, 2018.
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Secure geological storage includes storage at deep saline
formations, oil and gas reservoirs, and unminable coal seams.
The Secretary, in consultation with the Administrator of the
Environmental Protection Agency, the Secretary of Energy, and
the Secretary of the Interior, is required to establish
regulations for determining adequate security measures for the
secure geological storage of carbon dioxide such that the
carbon dioxide does not escape into the atmosphere.
Qualified carbon dioxide is defined as carbon dioxide
captured from an industrial source that (1) would otherwise be
released into the atmosphere as an industrial emission of
greenhouse gas, and (2) is measured at the source of capture
and verified at the point or points of injection. Qualified
carbon dioxide includes the initial deposit of captured carbon
dioxide used as a tertiary injectant but does not include
carbon dioxide that is recaptured, recycled, and re-injected as
part of an enhanced oil or natural gas recovery project
process. A qualified enhanced oil or natural gas recovery
project is a project that would otherwise meet the definition
of an enhanced oil recovery project under section 43, if
natural gas projects were included within that definition.
A qualified facility means any industrial facility (1) that
is owned by the taxpayer, (2) at which carbon capture equipment
is placed in service, and (3) that captures not less than
500,000 metric tons of carbon dioxide during the taxable year.
The credit applies only with respect to qualified carbon
dioxide captured and sequestered or injected in the United
States \410\ or one of its possessions.\411\
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\410\ Sec. 638(1).
\411\ Sec. 638(2).
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Except as provided in regulations, credits are attributable
to the person that captures and physically or contractually
ensures the disposal, or use as a tertiary injectant, of the
qualified carbon dioxide. Credits are subject to recapture, as
provided by regulation, with respect to any qualified carbon
dioxide that ceases to be recaptured, disposed of, or used as a
tertiary injectant in a manner consistent with the rules of the
provision.
The credit is part of the general business credit. The
credit sunsets at the end of the calendar year in which the
Secretary, in consultation with the Administrator of the
Environmental Protection Agency, certifies that 75 million
metric tons of qualified carbon dioxide have been captured and
sequestered. As of May 11, 2018, the credit had been claimed
for 59,767,924 tons of qualified carbon dioxide.\412\
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\412\ IRS Notice 2018-40, May 14, 2018.
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Explanation of Provision
In general
The provision makes significant changes to the credit for
carbon dioxide sequestration. For carbon dioxide captured using
equipment placed in service before February 9, 2018 (the
provision's date of enactment), the provision adds a qualified
use for the carbon that does not involve secure geological
storage. For carbon dioxide captured using equipment placed in
service on or after February 9, 2018, the provision extends,
enhances, and modifies the credit.
Carbon dioxide captured using equipment placed in service before
February 9, 2018
For carbon dioxide captured using equipment placed in
service before February 9, 2018, the provision expands the $10
per metric ton credit (adjusted for inflation; $11.44 per
metric ton for 2018) to permit such credit where the taxpayer
``utilizes'' the carbon dioxide in a prescribed manner. For
this purpose, ``utilization'' of qualified carbon dioxide
means: (1) the fixation of such carbon dioxide through
photosynthesis or chemosynthesis, such as through the growing
of algae or bacteria; (2) the chemical conversion of such
qualified carbon dioxide to a material or compound that results
in secure storage; or (3) the use of such carbon dioxide for
any other purpose for which a commercial market exists (except
for EOR uses), as determined by the Secretary of the
Treasury.\413\
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\413\ Sec. 45Q(f)(5).
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Carbon dioxide captured using equipment placed in service on or after
February 9, 2018
For carbon dioxide captured using equipment placed in
service on or after February 9, 2018, the provision modifies
the carbon dioxide sequestration credit to include
``utilization,'' as described above, as a credit-eligible means
of capturing the carbon. The provision also expands the
definition of qualified carbon to include carbon oxide as well
as carbon dioxide, and allows for the direct air capture of
carbon dioxide. Direct air capture involves the use of carbon
capture equipment to capture carbon dioxide directly from the
ambient air, excluding the capture of carbon dioxide
deliberately released from naturally occurring subsurface
springs or carbon dioxide captured using natural
photosynthesis.
For EOR uses and for qualified carbon utilization, the
provision increases the credit to $12.83 per metric ton
increasing linearly each calendar year to $35 per metric ton by
December 31, 2026, and adjusted for inflation thereafter. For
direct sequestration in secure geological storage, the
provision increases the credit to $22.66 per metric ton
increasing linearly each calendar year to $50 per metric ton by
December 31, 2026, and adjusted for inflation thereafter.
The provision eliminates the 75 million metric ton cap for
carbon captured using equipment placed in service on or after
February 9, 2018. Instead, taxpayers may claim the credit
during the 12-year period beginning on the date the carbon
capture equipment is originally placed in service. For this
purpose, eligible carbon capture equipment must be placed in
service at a qualified facility the construction of which
begins before January 1, 2024.\414\ In general, a qualified
facility is any industrial facility or direct air capture
facility subject to certain minimum capture requirements
depending on the type of sequestration activity.
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\414\ Sec. 45Q(d).
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Effective Date
The provision is effective for taxable years beginning
after December 31, 2017.
PART FOUR: CONSOLIDATED APPROPRIATIONS ACT, 2018 (PUBLIC LAW 115-141)
\415\
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\415\ H.R. 1625. The House passed H.R. 1625 on May 22, 2017. The
Senate passed the bill with an amendment on February 28, 2018. The
House agreed to the Senate amendment with an amendment on March 22,
2018. The Senate agreed to the House amendment on March 23, 2018. The
President signed the bill on March 23, 2018.
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A. Aviation Revenue Provisions
1. Extension of expenditure authority and taxes funding Airport and
Airway Trust Fund (secs. 201 and 202 of Division M of the Act
(the ``Airport and Airway Extension Act of 2018'') and secs.
4081, 4083, 4261, 4271, and 9502 of the Code)
Present Law
Taxes dedicated to the Airport and Airway Trust Fund
Excise taxes are imposed on amounts paid for commercial air
passenger and freight transportation and on fuels used in
commercial and noncommercial (i.e., transportation that is not
``for hire'') aviation to fund the Airport and Airway Trust
Fund.\416\ The present aviation excise taxes are as follows:
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\416\ Air transportation through U.S. airspace that neither lands
in nor takes off from a point in the United States (or the ``225-mile
zone'') is exempt from the aviation excise taxes, but the
transportation provider is subject to certain ``overflight fees''
imposed by the Federal Aviation Administration pursuant to section
45301 of Title 49 of the United States Code. The ``225 mile zone'' is
defined as ``that portion of Canada or Mexico that is not more than 225
miles from the nearest point in the continental United States.'' Sec.
4262(c)(2).
------------------------------------------------------------------------
Tax (and Code section) Tax Rates
------------------------------------------------------------------------
Domestic air passengers (sec. 4261)...... 7.5 percent of fare, plus
$4.10 (2018) per domestic
flight segment generally
\417\
International air passengers (sec. 4261). $18.30 (2018) per arrival
or departure \418\
Amounts paid for right to award free or 7.5 percent of amount paid
reduced rate passenger air transportation (and the value of any other
(sec. 4261). benefit provided) to an air
carrier (or any related
person)
Air cargo (freight) transportation (sec. 6.25 percent of amount
4271). charged for domestic
transportation; no tax on
international cargo
transportation
Aviation fuels (sec. 4081): \419\
Commercial aviation.................. 4.3 cents per gallon
Noncommercial (general) aviation:
Aviation gasoline................ 19.3 cents per gallon
Jet fuel......................... 21.8 cents per gallon
Fractional aircraft fuel surtax (sec. 14.1 cents per gallon
4043).
------------------------------------------------------------------------
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\417\ The domestic flight segment portion of the tax is adjusted
annually (effective each January 1) for inflation.
\418\ The international arrival and departure tax rate is adjusted
annually for inflation. Under a special rule for Alaska and Hawaii, the
tax only applies to departures at a rate of $9.10 per departure for
2018.
\419\ Like most other taxable motor fuels, aviation fuels are
subject to an additional 0.1-cent-per-gallon excise tax to fund the
LUST Trust Fund.
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The Airport and Airway Trust Fund excise taxes (except for
4.3 cents per gallon of the taxes on aviation fuels and the
14.1 cents per gallon fractional aircraft fuel surtax) are
scheduled to expire after March 31, 2018. The 4.3-cents-per-
gallon fuels tax rate is permanent. The fractional aircraft
fuel surtax expires after September 30, 2021.
Airport and Airway Trust Fund expenditure provisions
The Airport and Airway Trust Fund was established in 1970
to finance a major portion of national aviation programs
(previously funded entirely with General Fund revenues).
Operation of the Trust Fund is governed by parallel provisions
of the Code and authorizing statutes.\420\ The Code provisions
govern deposit of revenues into the Trust Fund and approve
expenditure purposes in authorizing statutes as in effect on
the date of enactment of the latest authorizing Act. The
authorizing Acts provide for specific Trust Fund expenditure
programs.
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\420\ Sec. 9502 and 49 U.S.C. sec. 48101, et seq.
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No expenditures are permitted to be made from the Airport
and Airway Trust Fund after March 31, 2018. The purposes for
which Airport and Airway Trust Fund monies are permitted to be
expended are fixed as of the date of enactment of the Disaster
Tax Relief and Airport and Airway Extension Act of 2017;
therefore, the Code must be amended in order to authorize new
Airport and Airway Trust Fund expenditure purposes.\421\ The
Code contains a specific enforcement provision to prevent
expenditure of Trust Fund monies for purposes not authorized
under section 9502.\422\ This provision provides that, should
such unapproved expenditures occur, no further aviation excise
tax receipts will be transferred to the Trust Fund. Rather, the
aviation taxes will continue to be imposed, but the receipts
will be retained in the General Fund.
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\421\ Sec. 9502(d).
\422\ Sec. 9502(e)(1).
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Explanation of Provision
The Airport and Airway Extension Act of 2018 extends
through September 30, 2018, the taxes and expenditure authority
that were scheduled to expire on March 31, 2018.
Effective Date
The provision is effective on the date of enactment (March
23, 2018).
B. Revenue Provisions
1. Modification of deduction for qualified business income of a
cooperative and its patrons (sec. 101 of Division T of Pub. L.
No. 115-141 and sec. 199A of the Code)
Prior and Present Law
Treatment of taxpayers with domestic production activities income
(prior-law section 199)
In general
Former section 199 \423\ provides a deduction from taxable
income (or, in the case of an individual, adjusted gross income
\424\) that is equal to nine percent of the lesser of the
taxpayer's qualified production activities income or taxable
income (determined without regard to the section 199 deduction)
for the taxable year.\425\ The amount of the deduction for a
taxable year is limited to 50 percent of the W-2 wages paid by
the taxpayer, and properly allocable to domestic production
gross receipts, during the calendar year that ends in such
taxable year.\426\ W-2 wages are the total wages subject to
wage withholding,\427\ elective deferrals,\428\ and deferred
compensation \429\ paid by the taxpayer with respect to
employment of its employees during the calendar year ending
during the taxable year of the taxpayer.\430\ W-2 wages do not
include any amount that is not properly allocable to domestic
production gross receipts as a qualified item of
deduction.\431\ In addition, W-2 wages do not include any
amount that was not properly included in a return filed with
the Social Security Administration on or before the 60th day
after the due date (including extensions) for such return.\432\
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\423\ Section 199 was repealed by Pub. L. No. 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, for taxable
years beginning after December 31, 2017. All references to former
section 199 in this document refer to section 199 as in effect before
its repeal.
\424\ For this purpose, adjusted gross income is determined after
application of sections 86, 135, 137, 219, 221, 222, and 469, and
without regard to the section 199 deduction. Sec. 199(d)(2).
\425\ Sec. 199(a).
\426\ Sec. 199(b).
\427\ Defined in sec. 3401(a).
\428\ Within the meaning of sec. 402(g)(3).
\429\ Deferred compensation includes compensation deferred under
section 457, as well as the amount of any designated Roth contributions
(as defined in section 402A).
\430\ Sec. 199(b). In the case of a taxpayer with a short taxable
year that does not contain a calendar year ending during such short
taxable year, the following amounts are treated as the W-2 wages of the
taxpayer for the short taxable year: (1) wages paid during the short
taxable year to employees of the qualified trade or business; (2)
elective deferrals (within the meaning of section 402(g)(3)) made
during the short taxable year by employees of the qualified trade or
business; and (3) compensation actually deferred under section 457
during the short taxable year with respect to employees of the
qualified trade or business. Amounts that are treated as W-2 wages for
a taxable year are not treated as W-2 wages of any other taxable year.
See Treas. Reg. sec. 1.199-2(b). In addition, in the case of a taxpayer
who is an individual with otherwise qualified production activities
income from sources within the Commonwealth of Puerto Rico, if all the
income for the taxable year is taxable under section 1 (income tax
rates for individuals), the determination of W-2 wages with respect to
the taxpayer's trade or business conducted in Puerto Rico is made
without regard to any exclusion under the wage withholding rules (as
provided in section 3401(a)(8)) for remuneration paid for services in
Puerto Rico. See sec. 199(d)(8)(B).
\431\ Sec. 199(b)(2)(B).
\432\ Sec. 199(b)(2)(C).
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In the case of oil related qualified production activities
income, the deduction is reduced by three percent of the least
of the taxpayer's oil related qualified production activities
income, qualified production activities income, or taxable
income (determined without regard to the section 199 deduction)
for the taxable year.\433\ For this purpose, oil related
qualified production activities income for any taxable year is
the portion of qualified production activities income
attributable to the production, refining, processing,
transportation, or distribution of oil, gas, or any primary
product thereof \434\ during the taxable year.
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\433\ Sec. 199(d)(9).
\434\ Within the meaning of sec. 927(a)(2)(C) as in effect before
its repeal.
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In general, qualified production activities income is equal
to domestic production gross receipts reduced by the sum of:
(1) the cost of goods sold that are allocable to those
receipts; \435\ and (2) other expenses, losses, or deductions
that are properly allocable to those receipts.\436\ Domestic
production gross receipts generally are gross receipts of a
taxpayer that are derived from: (1) any sale, exchange, or
other disposition, or any lease, rental, or license, of
qualifying production property \437\ that was manufactured,
produced, grown, or extracted by the taxpayer in whole or in
significant part within the United States; \438\ (2) any sale,
exchange, or other disposition, or any lease, rental, or
license, of any qualified film \439\ produced by the taxpayer;
(3) any sale, exchange, or other disposition, or any lease,
rental, or license, of electricity, natural gas, or potable
water produced by the taxpayer in the United States; (4)
construction of real property performed in the United States by
a taxpayer in the ordinary course of a construction trade or
business; or (5) engineering or architectural services
performed in the United States by the taxpayer for the
construction of real property in the United States.\440\
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\435\ For this purpose, any item or service brought into the United
States is treated as acquired by purchase, and its cost is treated as
not less than its value immediately after it entered the United States.
A similar rule applies in determining the adjusted basis of leased or
rented property where the lease or rental gives rise to domestic
production gross receipts. In addition, for any property exported by
the taxpayer for further manufacture, the increase in cost or adjusted
basis may not exceed the difference between the value of the property
when exported and the value of the property when brought back into the
United States after the further manufacture. See sec. 199(c)(3)(A) and
(B).
\436\ Sec. 199(c)(1). In computing qualified production activities
income, the domestic production activities deduction itself is not an
allocable deduction. Sec. 199(c)(1)(B)(ii). See Treas. Reg. secs.
1.199-1 through 1.199-9 where the Secretary has prescribed rules for
the proper allocation of items of income, deduction, expense, and loss
for purposes of determining qualified production activities income.
\437\ Qualifying production property generally includes any
tangible personal property, computer software, and sound recordings.
Sec. 199(c)(5).
\438\ When used in the Code in a geographical sense, the term
``United States'' generally includes only the States and the District
of Columbia. Sec. 7701(a)(9). A special rule for determining domestic
production gross receipts, however, provides that for taxable years
beginning after December 31, 2005, and before January 1, 2018, in the
case of any taxpayer with gross receipts from sources within the
Commonwealth of Puerto Rico, the term ``United States'' includes the
Commonwealth of Puerto Rico, but only if all of the taxpayer's Puerto
Rico-sourced gross receipts are taxable under the Federal income tax
for individuals or corporations for such taxable year. Sec.
199(d)(8)(A) and (C). In computing the 50-percent wage limitation, the
taxpayer is permitted to take into account wages paid to bona fide
residents of Puerto Rico for services performed in Puerto Rico. Sec.
199(d)(8)(B).
\439\ Qualified film includes any motion picture film or videotape
(including live or delayed television programming, but not including
certain sexually explicit productions) if 50 percent or more of the
total compensation relating to the production of the film (including
compensation in the form of residuals and participations) constitutes
compensation for services performed in the United States by actors,
production personnel, directors, and producers. Sec. 199(c)(6).
\440\ Sec. 199(c)(4)(A).
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Domestic production gross receipts do not include any gross
receipts of the taxpayer derived from property leased,
licensed, or rented by the taxpayer for use by any related
person.\441\ In addition, domestic production gross receipts do
not include gross receipts that are derived from (1) the sale
of food and beverages prepared by the taxpayer at a retail
establishment, (2) the transmission or distribution of
electricity, natural gas, or potable water, or (3) the lease,
rental, license, sale, exchange, or other disposition of
land.\442\
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\441\ Sec. 199(c)(7). For this purpose, a person is treated as
related to another person if such persons are treated as a single
employer under subsection (a) or (b) of section 52 or subsection (m) or
(o) of section 414, except that determinations under subsections (a)
and (b) of section 52 are made without regard to section 1563(b).
\442\ Sec. 199(c)(4)(B).
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Special rules
All members of an expanded affiliated group \443\ are
treated as a single corporation and the deduction is allocated
among the members of the expanded affiliated group in
proportion to each member's respective amount, if any, of
qualified production activities income. In addition, for
purposes of determining domestic production gross receipts, if
all of the interests in the capital and profits of a
partnership are owned by members of a single expanded
affiliated group at all times during the taxable year of such
partnership, the partnership and all members of such group are
treated as a single taxpayer during such period.\444\
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\443\ For this purpose, an expanded affiliated group is an
affiliated group as defined in section 1504(a) determined (i) by
substituting ``more than 50 percent'' for ``more than 80 percent'' each
place it appears, and (ii) without regard to paragraphs (2) and (4) of
section 1504(b). See sec. 199(d)(4)(B).
\444\ Sec. 199(d)(4)(D).
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For a tax-exempt taxpayer subject to tax on its unrelated
business taxable income by section 511, the section 199
deduction is determined by substituting unrelated business
taxable income for taxable income where applicable.\445\
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\445\ Sec. 199(d)(7).
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The section 199 deduction is determined by only taking into
account items that are attributable to the actual conduct of a
trade or business.\446\
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\446\ Sec. 199(d)(5).
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Partnerships and S corporations
With regard to the domestic production activities income of
a partnership or S corporation, the deduction is determined at
the partner or shareholder level. Each partner or shareholder
generally takes into account such person's allocable share of
the components of the calculation (including domestic
production gross receipts; the cost of goods sold allocable to
such receipts; and other expenses, losses, or deductions
allocable to such receipts) from the partnership or S
corporation, as well as any items relating to the partner's or
shareholder's own qualified production activities income, if
any.\447\
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\447\ Sec. 199(d)(1)(A).
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In applying the wage limitation, each partner or
shareholder is treated as having been allocated wages from the
partnership or S corporation in an amount that is equal to such
person's allocable share of W-2 wages.\448\
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\448\ In the case of a trust or estate, the components of the
calculation are apportioned between (and among) the beneficiaries and
the fiduciary. See sec. 199(d)(1)(B) and Treas. Reg. sec. 1.199-5(d)
and (e).
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Specified agricultural and horticultural cooperatives
In general
With regard to specified agricultural and horticultural
cooperatives, section 199 provides the same treatment of
qualified production activities income derived from
agricultural or horticultural products that are manufactured,
produced, grown, or extracted by such cooperatives,\449\ as it
provides for qualified production activities income of other
taxpayers, including non-specified cooperatives (i.e., the
cooperative may claim a deduction for qualified production
activities income). The cooperative is treated as having
manufactured, produced, grown, or extracted in whole or
significant part any qualifying production property marketed by
the cooperative if such items were manufactured, produced,
grown, or extracted in whole or significant part by its
patrons.\450\ In addition, the cooperative is treated as having
manufactured, produced, grown, or extracted agricultural
products with respect to which the cooperative performs
storage, handling, or other processing activities (other than
transportation activities) within the United States related to
the sale, exchange, or other disposition of agricultural
products, provided the products are consumed in connection with
or incorporated into the manufacturing, production, growth, or
extraction of qualifying production property (whether or not by
the cooperative).\451\ Finally, for purposes of determining the
cooperative's section 199 deduction, qualified production
activities income and taxable income are determined without
regard to any deduction allowable under section 1382(b) and (c)
(relating to patronage dividends, per-unit retain allocations,
and nonpatronage distributions) for the taxable year.\452\
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\449\ For this purpose, agricultural or horticultural products also
include fertilizer, diesel fuel, and other supplies used in
agricultural or horticultural production that are manufactured,
produced, grown, or extracted by the cooperative. See Treas. Reg. sec.
1.199-6(f).
\450\ Sec. 199(d)(3)(D) and Treas. Reg. sec. 1.199-6(d).
\451\ See Treas. Reg. sec. 1.199-3(e)(1).
\452\ See sec. 199(d)(3)(C) and Treas. Reg. sec. 1.199-6(c).
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Definition of a specified agricultural or horticultural
cooperative
A specified agricultural or horticultural cooperative is an
organization to which part I of subchapter T applies that is
engaged in (a) the manufacturing, production, growth, or
extraction in whole or significant part of any agricultural or
horticultural product, or (b) the marketing of agricultural or
horticultural products that its patrons have so manufactured,
produced, grown, or extracted.\453\
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\453\ Sec. 199(d)(3)(F). For this purpose, agricultural or
horticultural products also include fertilizer, diesel fuel and other
supplies used in agricultural or horticultural production that are
manufactured, produced, grown, or extracted by the cooperative. See
Treas. Reg. sec. 1.199-6(f).
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Allocation of the cooperative's deduction to patrons
Any patron that receives a qualified payment from a
specified agricultural or horticultural cooperative is allowed
as a deduction for the taxable year in which such payment is
received an amount equal to the portion of the cooperative's
deduction for qualified production activities income that is
(i) allowed with respect to the portion of the qualified
production activities income to which such payment is
attributable, and (ii) identified by the cooperative in a
written notice mailed to the patron during the payment period
described in section 1382(d).\454\ A qualified payment is any
amount that (i) is described in paragraph (1) or (3) of section
1385(a) (i.e., patronage dividends and per-unit retain
allocations), (ii) is received by an eligible patron from a
specified agricultural or horticultural cooperative, and (iii)
is attributable to qualified production activities income with
respect to which a deduction is allowed to such
cooperative.\455\
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\454\ Sec. 199(d)(3)(A) and Treas. Reg. sec. 1.199-6(a). The
written notice must be mailed by the cooperative to it patrons no later
than the 15th day of the ninth month following the close of the taxable
year. The cooperative must report the amount of the patron's section
199 deduction on Form 1099-PATR, ``Taxable Distributions Received From
Cooperatives,'' issued to the patron. Treas. Reg. sec. 1.199-6(g).
\455\ Sec. 199(d)(3)(E). For this purpose, patronage dividends and
per-unit retain allocations include any advances on patronage and per-
unit retains paid in money during the taxable year. Treas. Reg. sec.
1.199-6(e).
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The cooperative cannot reduce its income under section 1382
for any deduction allowable to its patrons under this rule
(i.e., the cooperative must reduce its deductions allowed for
certain payments to its patrons in an amount equal to the
section 199 deduction allocated to its patrons).\456\
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\456\ Sec. 199(d)(3)(B) and Treas. Reg. sec. 1.199-6(b).
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Treatment of taxpayers other than corporations, in general
Individual income tax rates
To determine regular tax liability, an individual taxpayer
generally must apply the tax rate schedules (or the tax tables)
to his or her regular taxable income. The rate schedules are
broken into several ranges of income, known as income brackets,
and the marginal tax rate increases as a taxpayer's income
increases. Separate rate schedules apply based on an
individual's filing status (i.e., single, head of household,
married filing jointly, or married filing separately). For
2018, the regular individual income tax rate schedule provides
rates of 10, 12, 22, 24, 32, 35, and 37 percent.
Partnerships
Partnerships generally are treated for Federal income tax
purposes as pass-through entities not subject to tax at the
entity level.\457\ Items of income (including tax-exempt
income), gain, loss, deduction, and credit of the partnership
are taken into account by the partners in computing their
income tax liability (based on the partnership's method of
accounting and regardless of whether the income is distributed
to the partners).\458\ A partner's deduction for partnership
losses is limited to the partner's adjusted basis in its
partnership interest.\459\ Losses not allowed as a result of
that limitation generally are carried forward to the next year.
A partner's adjusted basis in the partnership interest
generally equals the sum of (1) the partner's capital
contributions to the partnership, (2) the partner's
distributive share of partnership income, and (3) the partner's
share of partnership liabilities, less (1) the partner's
distributive share of losses allowed as a deduction and certain
nondeductible expenditures, and (2) any partnership
distributions to the partner.\460\ Partners generally may
receive distributions of partnership property without
recognition of gain or loss, subject to some exceptions.\461\
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\457\ Sec. 701.
\458\ Sec. 702(a).
\459\ Sec. 704(d). In addition, passive loss and at-risk
limitations limit the extent to which certain types of income can be
offset by partnership deductions (sections 469 and 465). These
limitations do not apply to corporate partners (except certain closely-
held corporations) and may not be important to individual partners who
have partner-level passive income from other investments.
\460\ Sec. 705.
\461\ Sec. 731. Gain or loss may nevertheless be recognized, for
example, on the distribution of money or marketable securities,
distributions with respect to contributed property, or in the case of
disproportionate distributions (which can result in ordinary income).
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Partnerships may allocate items of income, gain, loss,
deduction, and credit among the partners, provided the
allocations have substantial economic effect.\462\ In general,
an allocation has substantial economic effect to the extent the
partner to which the allocation is made receives the economic
benefit or bears the economic burden of such allocation and the
allocation substantially affects the dollar amounts to be
received by the partners from the partnership independent of
tax consequences.\463\
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\462\ Sec. 704(b)(2).
\463\ Treas. Reg. sec. 1.704-1(b)(2).
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State laws of every State provide for limited liability
companies \464\ (``LLCs''), which are neither partnerships nor
corporations under applicable State law, but which are
generally treated as partnerships for Federal tax
purposes.\465\
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\464\ The first LLC statute was enacted in Wyoming in 1977. All
States (and the District of Columbia) now have an LLC statute, though
the tax treatment of LLCs for State tax purposes may differ.
\465\ Any domestic nonpublicly traded unincorporated entity with
two or more members generally is treated as a partnership for federal
income tax purposes, while any single-member domestic unincorporated
entity generally is treated as disregarded for Federal income tax
purposes (i.e., treated as not separate from its owner). Instead of the
applicable default treatment, however, an LLC may elect to be treated
as a corporation for Federal income tax purposes. Treas. Reg. sec.
301.7701-3 (known as the ``check-the-box'' regulations).
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A publicly traded partnership generally is treated as a
corporation for Federal tax purposes.\466\ For this purpose, a
publicly traded partnership means any partnership if interests
in the partnership are traded on an established securities
market or interests in the partnership are readily tradable on
a secondary market (or the substantial equivalent
thereof).\467\
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\466\ Sec. 7704(a).
\467\ Sec. 7704(b).
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An exception from corporate treatment is provided for
certain publicly traded partnerships, 90 percent or more of
whose gross income is qualifying income.\468\
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\468\ Sec. 7704(c)(2). Qualifying income is defined to include
interest, dividends, and gains from the disposition of a capital asset
(or of property described in section 1231(b)) that is held for the
production of income that is qualifying income. Sec. 7704(d).
Qualifying income also includes rents from real property, gains from
the sale or other disposition of real property, and income and gains
from the exploration, development, mining or production, processing,
refining, transportation (including pipelines transporting gas, oil, or
products thereof), or the marketing of any mineral or natural resource
(including fertilizer, geothermal energy, and timber), industrial
source carbon dioxide, or the transportation or storage of certain fuel
mixtures, alternative fuel, alcohol fuel, or biodiesel fuel. Qualifying
income also includes income and gains from commodities (not described
in section 1221(a)(1)) or futures, options, or forward contracts with
respect to such commodities (including foreign currency transactions of
a commodity pool) where a principal activity of the partnership is the
buying and selling of such commodities, futures, options, or forward
contracts. However, the exception for partnerships with qualifying
income does not apply to any partnership resembling a mutual fund
(i.e., that would be described in section 851(a) if it were a domestic
corporation), which includes a corporation registered under the
Investment Company Act of 1940 (Pub. L. No. 76-768 (1940)) as a
management company or unit investment trust. Sec. 7704(c)(3).
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S corporations
For Federal income tax purposes, an S corporation \469\
generally is not subject to tax at the corporate level.\470\
Items of income (including tax-exempt income), gain, loss,
deduction, and credit of the S corporation are taken into
account by the S corporation shareholders in computing their
income tax liabilities (based on the S corporation's method of
accounting and regardless of whether the income is distributed
to the shareholders). A shareholder's deduction for corporate
losses is limited to the sum of the shareholder's adjusted
basis in its S corporation stock and the indebtedness of the S
corporation to such shareholder. Losses not allowed as a result
of that limitation generally are carried forward to the next
year. A shareholder's adjusted basis in the S corporation stock
generally equals the sum of (1) the shareholder's capital
contributions to the S corporation and (2) the shareholder's
pro rata share of S corporation income, less (1) the
shareholder's pro rata share of losses allowed as a deduction
and certain nondeductible expenditures, and (2) any S
corporation distributions to the shareholder.\471\
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\469\ An S corporation is so named because its Federal tax
treatment is governed by subchapter S of the Code.
\470\ Secs. 1363 and 1366.
\471\ Sec. 1367. If any amount that would reduce the adjusted basis
of a shareholder's S corporation stock exceeds the amount that would
reduce that basis to zero, the excess is applied to reduce (but not
below zero) the shareholder's basis in any indebtedness of the S
corporation to the shareholder. If, after a reduction in the basis of
such indebtedness, there is an event that would increase the adjusted
basis of the shareholder's S corporation stock, such increase is
instead first applied to restore the reduction in the basis of the
shareholder's indebtedness. Sec. 1367(b)(2).
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In general, an S corporation shareholder is not subject to
tax on corporate distributions unless the distributions exceed
the shareholder's basis in the stock of the corporation.
To be eligible to elect S corporation status, a corporation
may not have more than 100 shareholders and may not have more
than one class of stock.\472\ Only individuals (other than
nonresident aliens), certain tax-exempt organizations, and
certain trusts and estates are permitted shareholders of an S
corporation.
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\472\ Sec. 1361. For this purpose, a husband and wife and all
members of a family are treated as one shareholder. Sec. 1361(c)(1).
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Sole proprietorships
Unlike a C corporation, partnership, or S corporation, a
business conducted as a sole proprietorship is not treated as
an entity distinct from its owner for Federal income tax
purposes.\473\ Rather, the business owner is taxed directly on
business income, and files Schedule C (sole proprietorships
generally), Schedule E (rental real estate and royalties), or
Schedule F (farms) with his or her individual tax return.
Furthermore, transfer of a sole proprietorship is treated as a
transfer of each individual asset of the business. Nonetheless,
a sole proprietorship is treated as an entity separate from its
owner for employment tax purposes,\474\ for certain excise
taxes,\475\ and certain information reporting
requirements.\476\
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\473\ A single-member unincorporated entity is disregarded for
Federal income tax purposes, unless its owner elects to be treated as a
Corporation. Treas. Reg. sec. 301.7701-3(b)(1)(ii). Sole
proprietorships often are conducted through legal entities for nontax
reasons. While sole proprietorships generally may have no more than one
owner, a married couple that files a joint return and jointly owns and
operates a business may elect to have that business treated as a sole
proprietorship under section 761(f).
\474\ Treas. Reg. sec. 301.7701-2(c)(2)(iv).
\475\ Treas. Reg. sec. 301.7701-2(c)(2)(v).
\476\ Treas. Reg. sec. 301.7701-2(c)(2)(vi).
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Taxpayers other than corporations with qualified business income \477\
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\477\ The provision, section 199A, as originally enacted in 2017,
is described in more detail in Joint Committee on Taxation, General
Explanation of Public Law 115-97, JCS-1-18, December 2018, pages 11-38.
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For taxable years beginning after December 31, 2017, and
before January 1, 2026, an individual taxpayer generally may
deduct 20 percent of qualified business income from a
partnership, S corporation, or sole proprietorship, as well as
20 percent of aggregate qualified REIT dividends, qualified
cooperative dividends, and qualified publicly traded
partnership income.\478\ Limitations based on W-2 wages and
capital investment phase in above a threshold amount of taxable
income.\479\ A disallowance of the deduction on income of
specified service trades or businesses also phases in above the
threshold amount of taxable income.
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\478\ Sec. 199A. Eligible taxpayers also include fiduciaries and
beneficiaries of trusts and estates with qualified business income.
\479\ For this purpose, taxable income is computed without regard
to the 20-percent deduction. Sec. 199A(e)(1).
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Qualified business income
In general
Qualified business income is determined for each qualified
trade or business of the taxpayer. For any taxable year,
qualified business income means the net amount of qualified
items of income, gain, deduction, and loss with respect to the
qualified trade or business of the taxpayer. The determination
of qualified items of income, gain, deduction, and loss takes
into account such items only to the extent included or allowed
in the determination of taxable income for the year.
Items are treated as qualified items of income, gain,
deduction, and loss only to the extent they are effectively
connected with the conduct of a trade or business within the
United States.\480\ In the case of an individual with qualified
business income from sources within the Commonwealth of Puerto
Rico, if all such income for the taxable year is taxable under
section 1 (income tax rates for individuals), then the term
``United States'' is considered to include Puerto Rico for
purposes of determining the individual's qualified business
income.\481\
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\480\ For this purpose, section 864(c) is applied by substituting
``qualified trade or business (within the meaning of section 199A)''
for ``nonresident alien individual or a foreign corporation'' or for
``a foreign corporation,'' each place they appear. Sec. 199A(c)(3)(A).
\481\ Sec. 199A(f)(1)(C).
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Certain items are not qualified items of income, gain,
deduction, or loss.\482\ Specifically, qualified items of
income, gain, deduction, and loss do not include (1) any item
taken into account in determining net capital gain or net
capital loss, (2) dividends, income equivalent to a dividend,
or payments in lieu of dividends, (3) interest income other
than that which is properly allocable to a trade or business,
(4) the excess of gain over loss from commodities transactions
other than (i) those entered into in the normal course of the
trade or business or (ii) with respect to stock in trade or
property held primarily for sale to customers in the ordinary
course of the trade or business, property used in the trade or
business, or supplies regularly used or consumed in the trade
or business, (5) the excess of foreign currency gains over
foreign currency losses from section 988 transactions other
than transactions directly related to the business needs of the
business activity, (6) net income from notional principal
contracts other than clearly identified hedging transactions
that are treated as ordinary (i.e., not treated as capital
assets), and (7) any amount received from an annuity that is
not received in connection with the trade or business.
Qualified items do not include any item of deduction or loss
properly allocable to any of the preceding items.
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\482\ See sec. 199A(c)(3)(B).
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If the net amount of qualified business income from all
qualified trades or businesses during the taxable year is a
loss, then such loss is carried forward and in the next taxable
year is treated as a loss from a qualified trade or
business.\483\ Any deduction that would otherwise be allowed in
a subsequent taxable year with respect to the taxpayer's
qualified trades or businesses is reduced by 20 percent of any
carryover qualified business loss.
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\483\ Sec. 199A(c)(2).
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Reasonable compensation and guaranteed payments
Qualified business income does not include any amount paid
by an S corporation that is treated as reasonable compensation
of the taxpayer.\484\ Similarly, qualified business income does
not include any guaranteed payment for services rendered with
respect to the trade or business,\485\ and, to the extent
provided in regulations, does not include any amount paid or
incurred by a partnership to a partner, acting other than in
his or her capacity as a partner, for services.\486\
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\484\ Sec. 199A(c)(4).
\485\ Described in sec. 707(c).
\486\ Described in sec. 707(a).
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Qualified trade or business
A qualified trade or business means any trade or business
other than a specified service trade or business and other than
the trade or business of performing services as an
employee.\487\
---------------------------------------------------------------------------
\487\ Sec. 199A(d)(1).
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Specified service trade or business
A specified service trade or business means any trade or
business involving the performance of services in the fields of
health, law, accounting, actuarial science, performing arts,
consulting, athletics, financial services, brokerage services,
or any trade or business where the principal asset of such
trade or business is the reputation or skill of one or more of
its employees or owners, or which involves the performance of
services that consist of investing and investment management,
trading, or dealing in securities, partnership interests, or
commodities.\488\ For this purpose the terms ``security'' and a
``commodity'' have the meanings provided in the rules for the
mark-to-market accounting method for dealers in securities
(section 475(c)(2) and (e)(2), respectively).
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\488\ Sec. 199A(d)(2).
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The exclusion from the definition of a qualified trade or
business for specified service trades or businesses phases in
for a taxpayer with taxable income in excess of a threshold
amount. The threshold amount is $157,500 (200 percent of that
amount, or $315,000, in the case of a joint return) (together,
the ``threshold amount''), adjusted for inflation in taxable
years beginning after 2018.\489\ The exclusion from the
definition of a qualified trade or business for specified
service trades or businesses is fully phased in for a taxpayer
with taxable income in excess of the threshold amount plus
$50,000 ($100,000 in the case of a joint return).\490\
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\489\ Sec. 199A(e)(2).
\490\ See sec. 199A(d)(3).
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Tentative deductible amount for a qualified trade or
business
In general
For a taxpayer with taxable income below the threshold
amount, the deductible amount for each qualified trade or
business is equal to 20 percent of the qualified business
income with respect to the trade or business.\491\ For a
taxpayer with taxable income above the threshold, the taxpayer
is allowed a deductible amount for each qualified trade or
business equal to the lesser of (1) 20 percent of the qualified
business income with respect to such trade or business, or (2)
the greater of (a) 50 percent of the W-2 wages paid with
respect to the qualified trade or business, or (b) the sum of
25 percent of the W-2 wages paid with respect to the qualified
trade or business plus 2.5 percent of the unadjusted basis,
immediately after acquisition, of all qualified property of the
qualified trade or business.\492\
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\491\ Sec. 199A(b)(3).
\492\ Sec. 199A(b)(2).
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Limitations based on W-2 wages and capital
The wage and capital limitations phase in for a taxpayer
with taxable income in excess of the threshold amount.\493\ The
wage and capital limitations apply fully for a taxpayer with
taxable income in excess of the threshold amount plus $50,000
($100,000 in the case of a joint return).
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\493\ See sec. 199A(b)(3)(B).
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W-2 wages are the total wages subject to wage
withholding,\494\ elective deferrals,\495\ and deferred
compensation \496\ paid by the qualified trade or business with
respect to employment of its employees during the calendar year
ending during the taxable year of the taxpayer.\497\ In the
case of a taxpayer who is an individual with otherwise
qualified business income from sources within the Commonwealth
of Puerto Rico, if all the income for the taxable year is
taxable under section 1 (income tax rates for individuals), the
determination of W-2 wages with respect to the taxpayer's trade
or business conducted in Puerto Rico is made without regard to
any exclusion under the wage withholding rules \498\ for
remuneration paid for services in Puerto Rico. W-2 wages do not
include any amount that is not properly allocable to qualified
business income as a qualified item of deduction.\499\ In
addition, W-2 wages do not include any amount that was not
properly included in a return filed with the Social Security
Administration on or before the 60th day after the due date
(including extensions) for such return.\500\
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\494\ Defined in sec. 3401(a).
\495\ Within the meaning of sec. 402(g)(3).
\496\ Deferred compensation includes compensation deferred under
section 457, as well as the amount of any designated Roth contributions
(as defined in section 402A).
\497\ Sec. 199A(b)(4). In the case of a taxpayer with a short
taxable year that does not contain a calendar year ending during such
short taxable year, the following amounts are treated as the W-2 wages
of the taxpayer for the short taxable year: (1) wages paid during the
short taxable year to employees of the qualified trade or business; (2)
elective deferrals (within the meaning of section 402(g)(3)) made
during the short taxable year by employees of the qualified trade or
business; and (3) compensation actually deferred under section 457
during the short taxable year with respect to employees of the
qualified trade or business. Amounts that are treated as W-2 wages for
a taxable year are not treated as W-2 wages of any other taxable year.
See Conference Report to accompany H.R. 1, Tax Cuts and Jobs Act, H.R.
Rep. No. 115-466, December 15, 2017, p. 217.
\498\ As provided in sec. 3401(a)(8).
\499\ Sec. 199A(b)(4)(B).
\500\ Sec. 199A(b)(4)(C).
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Qualified property means tangible property of a character
subject to depreciation under section 167 that is held by, and
available for use in, the qualified trade or business at the
close of the taxable year, which is used at any point during
the taxable year in the production of qualified business
income, and for which the depreciable period has not ended
before the close of the taxable year.\501\ The depreciable
period with respect to qualified property of a taxpayer means
the period beginning on the date the property is first placed
in service by the taxpayer and ending on the later of (a) the
date that is 10 years after the date the property is first
placed in service, or (b) the last day of the last full year in
the applicable recovery period that would apply to the property
under section 168 (determined without regard to section
168(g)).
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\501\ Sec. 199A(b)(6).
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Partnerships and S corporations
In the case of a partnership or S corporation, the section
199A deduction is determined at the partner or shareholder
level. Each partner in a partnership takes into account the
partner's allocable share of each qualified item of income,
gain, deduction, and loss, and is treated as having W-2 wages
and unadjusted basis of qualified property for the taxable year
equal to the partner's allocable share of W-2 wages and
unadjusted basis of qualified property of the partnership. The
partner's allocable share of W-2 wages and unadjusted basis of
qualified property are required to be determined in the same
manner as the partner's allocable share of wage expenses and
depreciation, respectively. Similarly, each shareholder of an S
corporation takes into account the shareholder's pro rata share
of each qualified item of income, gain, deduction, and loss of
the S corporation, and is treated as having W-2 wages and
unadjusted basis of qualified property for the taxable year
equal to the shareholder's pro rata share of W-2 wages and
unadjusted basis of qualified property of the S corporation.
Qualified REIT dividends, cooperative dividends, and
publicly traded partnership income
A deduction is allowed for 20 percent of the taxpayer's
aggregate amount of qualified REIT dividends, qualified
cooperative dividends, and qualified publicly traded
partnership income for the taxable year.\502\
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\502\ See sec. 199A(a) and (b).
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Qualified REIT dividends do not include any portion of a
dividend received from a REIT that is a capital gain dividend
\503\ or a qualified dividend.\504\
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\503\ Defined in sec. 857(b)(3).
\504\ Defined in sec. 1(h)(11). See sec. 199A(e)(3).
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A qualified cooperative dividend means any patronage
dividend,\505\ per-unit retain allocation,\506\ qualified
written notice of allocation,\507\ or any other similar amount,
provided such amount is includible in gross income and is
received from either (1) a tax-exempt organization described in
section 501(c)(12) \508\ or a taxable or tax-exempt cooperative
that is described in section 1381(a), or (2) a taxable
cooperative governed by tax rules applicable to cooperatives
before the enactment of subchapter T of the Code in 1962.\509\
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\505\ Defined in sec. 1388(a).
\506\ Defined in sec. 1388(f).
\507\ Defined in sec. 1388(c).
\508\ Organizations described in section 501(c)(12) are benevolent
life insurance associations of a purely local character, mutual ditch
or irrigation companies, mutual or cooperative telephone companies, or
like organizations; but only if 85 percent or more of the income
consists of amounts collected from members for the sole purpose of
meeting losses and expenses. Sec. 501(c)(12)(A).
\509\ Sec. 199A(e)(4).
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Qualified publicly traded partnership income means (with
respect to any qualified trade or business of the taxpayer) the
sum of (a) the net amount of the taxpayer's allocable share of
each qualified item of income, gain, deduction, and loss of the
partnership from a publicly traded partnership not treated as a
corporation,\510\ and (b) gain recognized by the taxpayer on
disposition of its interest in such partnership that is treated
as ordinary income (for example, by reason of section
751).\511\
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\510\ Such items must be effectively connected with a U.S. trade or
business, be included or allowed in determining taxable income for the
taxable year, and not constitute excepted enumerated investment-type
income. Such items do not include the taxpayer's reasonable
compensation, guaranteed payments for services, or (to the extent
provided in regulations) section 707(a) payments for services.
\511\ Sec. 199A(e)(5).
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Determination of the taxpayer's deduction
The taxpayer's deduction for qualified business income for
the taxable year is equal to the sum of (1) the lesser of (a)
the combined qualified business income amount for the taxable
year, or (b) an amount equal to 20 percent of taxable income
(reduced by any net capital gain \512\ and qualified
cooperative dividends), plus (2) the lesser of (a) 20 percent
of qualified cooperative dividends, or (b) taxable income
(reduced by net capital gain). This sum may not exceed the
taxpayer's taxable income for the taxable year (reduced by net
capital gain).\513\ The combined qualified business income
amount for the taxable year is the sum of the deductible
amounts determined for each qualified trade or business carried
on by the taxpayer and 20 percent of the taxpayer's qualified
REIT dividends and qualified publicly traded partnership
income.\514\
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\512\ Defined in sec. 1(h).
\513\ Sec. 199A(a).
\514\ Sec. 199A(b)(1).
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The taxpayer's deduction for qualified business income is
not allowed in computing adjusted gross income; instead, the
deduction is allowed in computing taxable income.\515\ The
deduction is available to both individuals who do itemize their
deductions and individuals who do not itemize their
deductions.\516\
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\515\ Sec. 62(a).
\516\ Sec. 63(b) and (d).
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Treatment of cooperatives and their patrons
In general
Certain corporations are eligible to be treated as
cooperatives and taxed under the special rules of subchapter T
of the Code.\517\ In general, the subchapter T rules apply to
any corporation operating on a cooperative basis (except mutual
savings banks, insurance companies, most tax-exempt
organizations, and certain utilities).
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\517\ Secs. 1381-1388.
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For Federal income tax purposes, a cooperative subject to
the cooperative tax rules of subchapter T generally computes
its income as if it were a taxable corporation, except that, in
determining its taxable income, the cooperative does not take
into account amounts paid for the taxable year as (1) patronage
dividends, to the extent paid in money, qualified written
notices of allocation,\518\ or other property (except
nonqualified written notices of allocation) \519\ with respect
to patronage occurring during such taxable year, and (2) per-
unit retain allocations, to the extent paid in money, qualified
per-unit retain certificates,\520\ or other property (except
nonqualified per-unit retain certificates) \521\ with respect
to marketing occurring during such taxable year.\522\
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\518\ As defined in sec. 1388(c).
\519\ As defined in sec. 1388(d).
\520\ As defined in sec. 1388(h).
\521\ As defined in sec. 1388(i).
\522\ Sec. 1382(b)(1) and (3). In determining its taxable income,
the cooperative also does not take into account amounts paid in money
or other property in redemption of a nonqualified written notice of
allocation which was paid as a patronage dividend during the payment
period for the taxable year during which the patronage occurred, or in
redemption of a nonqualified per-unit retain certificate which was paid
as a per-unit retain allocation during the payment period for the
taxable year during which the marketing occurred. Sec. 1382(b)(2) and
(4).
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Patronage dividends are amounts paid to a patron (1) on the
basis of quantity or value of business done with or for such
patron, (2) under an obligation of the cooperative to pay such
amount that existed before the cooperative received the amount
so paid, and (3) that are determined by reference to the net
earnings of the cooperative from business done with or for its
patrons. \523\ Per-unit retain allocations are allocations to a
patron with respect to products marketed for him, the amount of
which is fixed without reference to the net earnings of the
organization pursuant to an agreement between the organization
and the patron.\524\
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\523\ Sec. 1388(a).
\524\ Sec. 1388(f).
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Because a patron of a cooperative that receives patronage
dividends or per-unit retain allocations generally must include
such amounts in gross income,\525\ excluding patronage
dividends and per-unit retain allocations paid by the
cooperative from the cooperative's taxable income in effect
allows the cooperative to be a conduit with respect to profits
derived from transactions with its patrons.
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\525\ Sec. 1385(a)(1) and (3).
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Specified agricultural or horticultural cooperatives with
qualified business income
For taxable years beginning after December 31, 2017, and
before January 1, 2026, a deduction is allowed to any specified
agricultural or horticultural cooperative equal to the lesser
of (a) 20 percent of the excess (if any) of the cooperative's
gross income over the qualified cooperative dividends paid
during the taxable year for the taxable year, or (b) the
greater of 50 percent of the W-2 wages paid by the cooperative
with respect to its trade or business or the sum of 25 percent
of the W-2 wages of the cooperative with respect to its trade
or business plus 2.5 percent of the unadjusted basis
immediately after acquisition of qualified property of the
cooperative.\526\ The cooperative's section 199A(g) deduction
may not exceed its taxable income \527\ for the taxable year.
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\526\ Sec. 199A(g).
\527\ For this purpose, taxable income is computed without regard
to the cooperative's deduction under section 199A(g).
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A specified agricultural or horticultural cooperative is an
organization to which part I of subchapter T applies that is
engaged in (a) the manufacturing, production, growth, or
extraction in whole or significant part of any agricultural or
horticultural product, (b) the marketing of agricultural or
horticultural products that its patrons have so manufactured,
produced, grown, or extracted, or (c) the provision of
supplies, equipment, or services to farmers or organizations
described in the foregoing.
Explanation of Provision
Treatment of specified agricultural or horticultural cooperatives
Deduction for qualified production activities income under
section 199A
The provision modifies the deduction for qualified business
income of a specified agricultural or horticultural cooperative
under section 199A(g) to instead provide a deduction for
qualified production activities income of a specified
agricultural or horticultural cooperative that is similar to
the deduction for qualified production activities income under
former section 199.
The provision provides a deduction from taxable income that
is equal to nine percent of the lesser of the cooperative's
qualified production activities income or taxable income
(determined without regard to the cooperative's section 199A(g)
deduction and any deduction allowable under section 1382(b) and
(c) (relating to patronage dividends, per-unit retain
allocations, and nonpatronage distributions)) for the taxable
year. The amount of the deduction for a taxable year is limited
to 50 percent of the W-2 wages paid by the cooperative during
the calendar year that ends in such taxable year. For this
purpose, W-2 wages are determined in the same manner as under
the other provisions of section 199A, except that such wages do
not include any amount that is not properly allocable to
domestic production gross receipts.\528\
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\528\ Under the provision, because Puerto Rico is not treated as
part of the United States for purposes of determining domestic
production gross receipts under section 199A(g), W-2 wages do not
include any remuneration paid for services in Puerto Rico.
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In the case of oil related qualified production activities
income, the provision provides that the section 199A(g)
deduction is reduced by three percent of the least of the
cooperative's oil related qualified production activities
income, qualified production activities income, or taxable
income (determined without regard to the cooperative's section
199A(g) deduction and any deduction allowable under section
1382(b) and (c) (relating to patronage dividends, per-unit
retain allocations, and nonpatronage distributions)) for the
taxable year. For this purpose, oil related qualified
production activities income for any taxable year is the
portion of qualified production activities income attributable
to the production, refining, processing, transportation, or
distribution of oil, gas, or any primary product thereof \529\
during the taxable year.
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\529\ Within the meaning of section 927(a)(2)(C) as in effect
before its repeal.
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In general, qualified production activities income is equal
to domestic production gross receipts reduced by the sum of:
(1) the cost of goods sold that are allocable to such receipts;
\530\ and (2) other expenses, losses, or deductions that are
properly allocable to such receipts.\531\ Domestic production
gross receipts generally are gross receipts of the cooperative
that are derived from any lease, rental, license, sale,
exchange, or other disposition of any agricultural or
horticultural product \532\ that was manufactured, produced,
grown, or extracted by the cooperative in whole or in
significant part within the United States.\533\ The cooperative
is treated as having manufactured, produced, grown, or
extracted in whole or significant part any agricultural or
horticultural products marketed by the cooperative if such
items were manufactured, produced, grown, or extracted in whole
or significant part by its patrons.
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\530\ For this purpose, any item or service brought into the United
States is treated as acquired by purchase, and its cost is treated as
not less than its value immediately after it entered the United States.
A similar rule applies in determining the adjusted basis of leased or
rented property where the lease or rental gives rise to domestic
production gross receipts. In addition, for any property exported by
the cooperative for further manufacture, the increase in cost or
adjusted basis may not exceed the difference between the value of the
property when exported and the value of the property when brought back
into the United States after the further manufacture.
\531\ In computing qualified production activities income, the
section 199A(g) deduction itself is not an allocable deduction. As
under former section 199, the cooperative's qualified production
activities income is determined without regard to any deduction
allowable under section 1382(b) and (c) (relating to patronage
dividends, per-unit retain allocations, and nonpatronage
distributions). See Treas. Reg. sec. 1.199-6(c).
\532\ Consistent with former section 199, it is intended that
agricultural or horticultural products also include fertilizer, diesel
fuel, and other supplies used in agricultural or horticultural
production that are manufactured, produced, grown, or extracted by the
cooperative. See Treas. Reg. sec. 1.199-6(f).
\533\ Consistent with former section 199, it is intended that
domestic production gross receipts include gross receipts of a
cooperative derived from any sale, exchange, or other disposition of
agricultural products with respect to which the cooperative performs
storage, handling, or other processing activities (other than
transportation activities) within the United States, provided such
products are consumed in connection with, or incorporated into, the
manufacturing, production, growth, or extraction of agricultural or
horticultural products (whether or not by the cooperative). See Treas.
Reg. sec. 1.199-3(e)(1).
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Domestic production gross receipts do not include any gross
receipts of the cooperative derived from property leased,
licensed, or rented by the taxpayer for use by any related
person.\534\ In addition, domestic production gross receipts do
not include gross receipts that are derived from the lease,
rental, license, sale, exchange, or other disposition of land.
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\534\ For this purpose, a person is treated as related to another
person if such persons are treated as a single employer under
subsection (a) or (b) of section 52 or subsection (m) or (o) of section
414, except that determinations under subsections (a) and (b) of
section 52 are made without regard to section 1563(b).
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Definition of specified agricultural or horticultural
cooperative
The provision limits the definition of specified
agricultural or horticultural cooperative to organizations to
which part I of subchapter T applies that (1) manufacture,
produce, grow, or extract in whole or significant part any
agricultural or horticultural product, or (2) market any
agricultural or horticultural product that their patrons have
so manufactured, produced, grown, or extracted in whole or
significant part.\535\ The definition no longer includes a
cooperative solely engaged in the provision of supplies,
equipment, or services to farmers or other specified
agricultural or horticultural cooperatives.
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\535\ Consistent with former section 199, it is intended that
agricultural or horticultural products also include fertilizer, diesel
fuel, and other supplies used in agricultural or horticultural
production that are manufactured, produced, grown, or extracted by the
cooperative. See Treas. Reg. sec. 1.199-6(f).
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Special rules
All members of an expanded affiliated group \536\ are
treated as a single corporation and the deduction is allocated
among the members of the expanded affiliated group in
proportion to each member's respective amount, if any, of
qualified production activities income. In addition, for
purposes of determining domestic production gross receipts, if
all of the interests in the capital and profits of a
partnership are owned by members of a single expanded
affiliated group at all times during the taxable year of such
partnership, the partnership and all members of such group are
treated as a single taxpayer during such period.
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\536\ For this purpose, an expanded affiliated group is an
affiliated group as defined in section 1504(a) determined (i) by
substituting ``more than 50 percent'' for ``more than 80 percent'' each
place it appears, and (ii) without regard to paragraphs (2) and (4) of
section 1504(b).
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In the case of a specified agricultural or horticultural
cooperative that is a partner in a partnership, rules similar
to the rules applicable to a partner in a partnership under
section 199A(f)(1) apply.
For a tax-exempt cooperative subject to tax on its
unrelated business taxable income by section 511, the provision
is applied by substituting unrelated business taxable income
for taxable income where applicable.
The section 199A(g) deduction is determined by only taking
into account items that are attributable to the actual conduct
of a trade or business.
Allocation of the cooperative's deduction to patrons
The provision provides that an eligible patron that
receives a qualified payment from a specified agricultural or
horticultural cooperative is allowed as a deduction for the
taxable year in which such payment is received an amount equal
to the portion of the cooperative's deduction for qualified
production activities income that is (i) allowed with respect
to the portion of the qualified production activities income to
which such payment is attributable, and (ii) identified by the
cooperative in a written notice mailed to the patron during the
payment period described in section 1382(d).\537\
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\537\ Consistent with the allocation of the cooperative's deduction
to its patrons under former section 199 and consistent with the
requirements for the payment of patronage dividends in section
1388(a)(1), the cooperative's section 199A(g) deduction is allocated
among its patrons on the basis of the quantity or value of business
done with or for such patron by the cooperative.
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The patron's deduction of such amount may not exceed the
patron's taxable income for the taxable year (determined
without regard to such deduction but after taking into account
the patron's other deductions under section 199A(a)). A
qualified payment is any amount that (i) is described in
paragraph (1) or (3) of section 1385(a) (i.e., patronage
dividends and per-unit retain allocations), (ii) is received by
an eligible patron from a specified agricultural or
horticultural cooperative, and (iii) is attributable to
qualified production activities income with respect to which a
deduction is allowed to such cooperative. An eligible patron is
(i) a taxpayer other than a corporation,\538\ or (ii) another
specified agricultural or horticultural cooperative.
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\538\ For this purpose, corporation does not include an S
corporation.
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Finally, the cooperative cannot reduce its income under
section 1382 for any deduction allowable to its patrons under
this rule (i.e., the cooperative must reduce its deductions
allowed for certain payments to its patrons in an amount equal
to the section 199A(g) deduction allocated to its patrons).
Regulatory authority
Specific regulatory authority is provided for the Secretary
of the Treasury to promulgate necessary regulations under
section 199A(g), including regulations that prevent more than
one cooperative taxpayer from being allowed a deduction with
respect to the same activity (i.e., the same lease, rental,
license, sale, exchange, or other disposition of any
agricultural or horticultural product that was manufactured,
produced, grown, or extracted in whole or in significant part
within the United States). In addition, regulatory authority is
provided to address the proper allocation of items of income,
deduction, expense, and loss for purposes of determining
qualified production activities income. The provision provides
that the regulations be based on the regulations applicable to
cooperatives and their patrons under former section 199 (as in
effect before its repeal).\539\
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\539\ See Treas. Reg. secs. 1.199-1 through -9.
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Treatment of cooperative patrons
Repeal of special deduction for qualified cooperative
dividends
The provision repeals the special deduction for qualified
cooperative dividends. In addition, the provision repeals the
rule that excludes qualified cooperative dividends from
qualified business income of a qualified trade or business. The
provision also clarifies that items of income excluded from
qualified items of income, and thus excluded from qualified
business income, do not include any amount described in section
1385(a)(1) (i.e., patronage dividends). Accordingly, qualified
business income of a qualified trade or business includes any
patronage dividend,\540\ per-unit retain allocation,\541\
qualified written notice of allocation,\542\ or any other
similar amount received from a cooperative, provided such
amount is otherwise a qualified item of income, gain,
deduction, or loss (i.e., such amount is (i) effectively
connected with the conduct of a trade or business within the
United States, and (ii) included or allowed in determining
taxable income for the taxable year).\543\
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\540\ Defined in sec. 1388(a).
\541\ Defined in sec. 1388(f).
\542\ Defined in sec. 1388(c).
\543\ See sec. 199A(c)(3)(A).
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Reduced deduction for qualified payments received from a
specified agricultural or horticultural cooperative
In the case of any qualified trade or business of a patron
of a specified agricultural or horticultural cooperative, the
deductible amount determined under section 199A(b)(2) for such
trade or business is reduced by the lesser of (1) nine percent
of the amount of qualified business income with respect to such
trade or business as is properly allocable to qualified
payments received from such specified agricultural or
horticultural cooperative, or (2) 50 percent of the amount of
W-2 wages with respect to such qualified trade or business that
are properly allocable to such amount.
Transition rule relating to the repeal of section 199
The provision clarifies that the repeal of section 199 for
taxable years beginning after December 31, 2017, does not apply
to a qualified payment received by a patron from a specified
agricultural or horticultural cooperative in a taxable year
beginning after December 31, 2017, to the extent such qualified
payment is attributable to qualified production activities
income with respect to which a deduction is allowable to the
cooperative under former section 199 for a taxable year of the
cooperative beginning before January 1, 2018. Such qualified
payment remains subject to former section 199 and any section
199 deduction allocated by the cooperative to its patrons
related to such qualified payment may be deducted by such
patrons in accordance with former section 199. In addition, no
deduction is allowed under section 199A for such qualified
payments.
Examples
The following examples illustrate the provision.
Example 1
Cooperative is a grain marketing cooperative with
$5,250,000 in gross receipts during 2018 from the sale of grain
grown by its patrons. Cooperative paid $4,000,000 to its
patrons at the time the grain was delivered in the form of per-
unit retain allocations and another $1,000,000 in patronage
dividends after the close of the 2018 taxable year. Cooperative
has other expenses of $250,000 during 2018, including $100,000
of W-2 wages.
Cooperative has domestic production gross receipts of
$5,250,000 and qualified production activities income of
$5,000,000 \544\ for 2018. Cooperative's section 199A(g)
deduction is $50,000 and is equal to the least of nine percent
of qualified production activities income ($450,000),\545\ nine
percent of taxable income ($450,000),\546\ or 50 percent of W-2
wages ($50,000).\547\ Cooperative passes through the entire
section 199A(g) deduction to its patrons. Accordingly,
Cooperative reduces its $5,000,000 deduction allowable under
section 1382(b) and (c) (relating to the $1,000,000 patronage
dividends and $4,000,000 per-unit retain allocations) by
$50,000.
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\544\ $5,250,000 gross receipts - $250,000 expenses = $5,000,000.
\545\ $5,000,000 * 0.09 = $450,000.
\546\ For this purpose, taxable income is $5,000,000 and is
determined without regarding to the section 199A(g) deduction and
without regard to the $5,000,000 deduction allowable under section
1382(b) and (c) relating to the $1,000,000 patronage dividends and
$4,000,000 per-unit retain allocations.
\547\ $100,000 * 0.50 = $50,000.
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Patron's grain delivered to Cooperative during 2018 is two
percent of all grain marketed through Cooperative during such
year. During 2019, Patron receives $20,000 in patronage
dividends and $1,000 of allocated section 199A(g) deduction
from Cooperative related to the grain delivered to Cooperative
during 2018.
Patron is a grain farmer with taxable income of $75,000 for
2019 (determined without regard to section 199A) and has a
filing status of married filing jointly. Patron's qualified
business income related to its grain trade or business for 2019
is $50,000, which consists of gross receipts of $150,000 from
sales to an independent grain elevator, per-unit retain
allocations received from Cooperative during 2019 of $80,000,
patronage dividends received from Cooperative during 2019
related to Cooperative's 2018 net earnings of $20,000, and
expenses of $200,000 (including $50,000 of W-2 wages).
The portion of the qualified business income from Patron's
grain trade or business related to qualified payments received
from Cooperative during 2019 is $10,000, which consists of per-
unit retain allocations received from Cooperative during 2019
of $80,000, patronage dividends received from Cooperative
during 2019 related to Cooperative's 2018 net earnings of
$20,000, and properly allocable expenses of $90,000 (including
$25,000 of W-2 wages).\548\
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\548\ Which expenses are properly allocable in a given case will
depend on all the facts and circumstances. The example assumes that the
fraction of properly allocable W-2 wages differs from the fraction of
other properly allocable expenses.
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Patron's deductible amount related to the grain trade or
business is 20 percent of qualified business income ($10,000)
\549\ reduced by the lesser of nine percent of qualified
business income related to qualified payments received from
Cooperative ($900) \550\ or 50 percent of W-2 wages related to
qualified payments received from Cooperative ($12,500),\551\ or
$9,100. As Patron does not have any other qualified trades or
business, the combined qualified business income amount is also
$9,100.
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\549\ $50,000 * 0.20 = $10,000.
\550\ $10,000 * 0.09 = $900.
\551\ $25,000 * 0.50 = $12,500.
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Patron's deduction under section 199A for 2019 is $10,100,
which consists of the combined qualified business income amount
of $9,100, plus Patron's deduction passed through from
Cooperative of $1,000.
Example 2
Cooperative and Patron have the same facts as above for
2018 and 2019 except that Patron has expenses of $200,000 that
include zero W-2 wages during 2019.
Patron's deductible amount related to the grain trade or
business is 20 percent of qualified business income ($10,000)
reduced by the lesser of nine percent of qualified business
income related to qualified payments received from Cooperative
($900), or 50 percent of W-2 wages related to qualified
payments received from Cooperative ($0), or $10,000.
Patron's deduction under section 199A for 2019 is $11,000,
which consists of the combined qualified business income amount
of $10,000, plus Patron's deduction passed through from
Cooperative of $1,000.
The Treasury Department has issued proposed guidance
addressing this provision.\552\
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\552\ See REG-118425-18, 84. Fed. Reg. 28668, June 19, 2019, and
Notice 2019-27, June 18, 2019.
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Effective Date
The provision is effective as if included in the amendments
made by sections 11011 and 13305 of Public Law 115-97, that is,
for taxable years beginning after December 31, 2017.
2. State housing credit ceiling and average income test for low-income
housing credit (secs. 102 and 103 of Division T of the Act and
sec. 42 of the Code)
Present Law
The low-income housing credit may be claimed over a 10-year
credit period after each low-income building is placed in
service. The amount of the credit for any taxable year in the
credit period is the applicable percentage of the qualified
basis of each qualified low-income building. A State housing
credit ceiling applies to potential housing credits allocated
by a State or local housing credit agency. For determining the
current-year State dollar amount of the ceiling in any calendar
year, the greater of (i) $1.75 multiplied by the State
population, or (ii) $2,000,000, is taken into account. These
amounts are indexed for inflation. For calendar year 2019, the
amounts are $2.75625 and $3,166,875.
To be eligible for the low-income housing credit, a
qualified low-income building must be part of a qualified low-
income housing project. In general, a qualified low-income
housing project is defined as a project that satisfies one of
two tests at the election of the taxpayer. The first test is
met if 20 percent or more of the residential units in the
project are both rent-restricted and occupied by individuals
whose income is 50 percent or less of area median gross income
(the ``20-50 test''). The second test is met if 40 percent or
more of the residential units in the project are both rent-
restricted and occupied by individuals whose income is 60
percent or less of area median gross income (the ``40-60
test''). A residential unit is rent-restricted if the gross
rent from the unit does not exceed 30 percent of the imputed
income limitation applicable to the unit.
A unit occupied by individuals whose incomes rise above 140
percent of the applicable income limit shall continue to be
treated as a low-income unit if the income of such occupants
initially met such income limitation and such unit continues to
be rent-restricted so long as the next available unit is
occupied by a tenant whose income does not exceed such
limitation. In the case of deep rent skewed projects, special
rules apply. A deep rent skewed project is a project in which
(i) 15 percent or more of the low-income units in the project
are occupied by individuals whose incomes are 40 percent or
less of area median gross income, (ii) the gross rent with
respect to each low-income unit in the project does not exceed
30 percent of the applicable income limit that applies to
individuals occupying the unit, and (iii) the gross rent with
respect to each low-income unit in the project does not exceed
half of the average gross rent with respect to units of
comparable size that are not occupied by individuals who meet
the applicable income limit.
Explanation of Provisions
State housing credit ceiling
The first provision provides an increase in the State
housing credit ceiling for 2018, 2019, 2020, and 2021. In each
of those calendar years, the dollar amounts in effect for
determining the current-year ceiling (after any increase due to
the applicable cost of living adjustment) are increased by
multiplying the dollar amounts for that year by 1.125.
Average income test for qualified low-income housing project
The second provision adds a third optional test to the 20-
50 and 40-60 tests for a qualified low-income housing project.
A project meets the minimum requirements of the average income
test if 40 percent or more (25 percent or more in the case of a
project located in a high cost housing area) of the residential
units in such project are both rent-restricted and occupied by
individuals whose income does not exceed the imputed income
limitation designated by the taxpayer with respect to the
respective unit.
The taxpayer designates the imputed income limitation. The
imputed income limitation is determined in 10-percentage-point
increments, and may be designated as 20, 30, 40, 50, 60, 70, or
80 percent. The average of the imputed income limitations
designated must not exceed 60 percent of area median gross
income.
For purposes of the rental of the next available unit in a
project with respect to which the taxpayer elects the average
income test, if the income of the occupants of the unit
increases above 140 percent of the greater of (i) 60 percent of
area median gross income, or (ii) the imputed income limitation
designated by the taxpayer with respect to the unit, then the
unit ceases to be treated as a low-income unit if any
residential rental unit in the building (of a size comparable
to, or smaller than, such unit) is occupied by a new resident
whose income exceeds the applicable imputed income limitation.
In the case of a deep rent skewed project, 170 percent applies
instead of 140 percent, and other special rules apply.
Effective Date
The provision relating to the State housing credit ceiling
is effective for calendar years beginning after December 31,
2017, and before January 1, 2022.
The provision relating to the average income test is
effective for elections made after the date of enactment.
TAX TECHNICAL CORRECTIONS ACT OF 2018
Division U of the Act includes technical corrections, other
corrections, and clerical and deadwood corrections to recent
tax legislation enacted before 2017. Except as otherwise
provided, the amendments made by the technical corrections and
other corrections contained in Division U of the Act take
effect as if included in the original legislation to which each
amendment relates.
A. Tax Technical Corrections
1. Amendments relating to Protecting Americans from Tax Hikes
(``PATH'') Act of 2015 (Division Q of the Consolidated
Appropriations Act, 2016) (sec. 101 of Division U of the Act)
Earned income tax credit permanent rules (Act sec. 103)._
The PATH Act made permanent the $5,000 increase in the phase-
out amount for married couples filing joint returns. The Act
retained rules providing for the indexation of the prior-law
$3,000 amount (notwithstanding that this amount had been
repealed). The provision deletes references to the prior law
amount and consolidates the inflation adjustment in one
subsection.
Transit parity (Act sec. 105)._Under section 132(f)(2) as
in effect before the changes made by the PATH Act, the monthly
limit on the fringe benefit exclusion for employer-provided
parking was $175, and the monthly limit on employer-provided
benefits for mass transit and van pooling combined was $100.
These monthly limits were indexed under section 132(f)(6) using
a base year determined by when the particular monthly limit
became effective--a base year of 1998 for parking and 2001 for
transit/vanpooling. Parity between the exclusions was provided
on a temporary basis from 2009 through 2014. The PATH Act
created permanent parity in the exclusions by changing the
monthly transit/vanpooling limit in section 132(f)(2) to $175.
However, the PATH Act failed to include a conforming change to
repeal the base-year rule in section 132(f)(6) for transit/
vanpooling. The provision repeals the transit/vanpooling base-
year rule.
Research credit: not reinstate alternative incremental
credit (Act sec. 121)._The alternative incremental credit
expired in 2008. The provision clarifies that the alternative
incremental credit is not reinstated by the PATH Act, and makes
conforming changes.
Bonus depreciation (Act sec. 143)._The provision clarifies
that, among the criteria enacted in the PATH Act defining
certain property having a longer production period that is
treated as qualified property, the requirement that the
property be acquired pursuant to a written contract before 2020
requires that the contract be a written binding contract. This
corrects an unintended error that changed prior law.
The provision clarifies that the preproductive period under
section 168(k)(5)(B)(ii) is consistent with the preproductive
period under section 263A(e)(3).
The provision amends section 168(k)(6), as in effect prior
to the amendments made by section 13201 of Public Law 115-97,
to provide the intended applicable percentages. Thus, the
provision clarifies that in the case of longer production
period property and certain aircraft acquired before September
28, 2017, and placed in service in 2018, the 50-percent
applicable percentage applies to the entire adjusted basis, and
if placed in service in 2019, the 40-percent applicable
percentage applies to the entire adjusted basis.
The provision clarifies that if, for a taxable year, a
taxpayer makes both an election under section 168(k)(7) not to
claim bonus depreciation for all property in a particular class
of property and an election under section 168(k)(4) to claim
AMT credits in lieu of bonus depreciation, section 168(k)(4)
does not apply to property in the particular class. This
corrects an unintended error which changed prior law.
Election out of accelerated recovery periods for qualified
Indian reservation property (Act sec. 167)._As amended by the
PATH Act, section 168(j) permits taxpayers to elect out of the
otherwise applicable accelerated recovery periods in the case
of qualified Indian reservation property. In general, if
section 168(j) applies, there is no AMT adjustment (see section
168(j)(3)). The provision clarifies that no AMT adjustment
applies in the case of qualified Indian reservation property if
the taxpayer makes the election out.
Failure to furnish correct payee statements (Act sec.
202)._The provision clarifies section 6722(c)(3)(A), relating
to failure to furnish correct payee statements, to refer to the
payee statement (rather than to information returns) that are
furnished (rather than filed). A corresponding change in the
effective date stated in the PATH Act refers to statements that
are furnished (rather than provided). Similarly structured
language in section 6721(c)(3)(A) is conformed so that it
refers to the information return (rather than to any
information return).
Requirements for the issuance of Individual Taxpayer
Identification Numbers (``ITINs'') (Act sec. 203)._The
provision clarifies that community-based Certifying Acceptance
Agents are among the entities that are available to individuals
living abroad who wish to obtain ITINs for purposes of meeting
their U.S. tax filing obligations.
The provision clarifies that the expiration of ITINs that
have not been used for three consecutive taxable years is to
occur on the date following the due date of the tax return for
such third consecutive taxable year. For ITINs issued prior to
January 1, 2013, the ITIN will expire on the applicable date,
or if earlier, the day following the due date of the tax return
for the third consecutive taxable year such ITIN was not used
on a return. In the event that such an ITIN has not been used
for three (or more) consecutive taxable years on the tax return
due date for the 2015 taxable year, such ITIN shall expire on
the day following that date.
The provision clarifies that the effective date of section
203 of the PATH Act, which provides that PATH Act section 203
is effective for ITIN applications made after the date of
enactment, does not prevent the provision relating to
outstanding ITINs from taking effect.
Retroactive claims of credits (Act secs. 204, 205, and
206)._The provision conforms a reference in section 24(e)(2) to
the taxpayer identification number (not to the identifying
number). The provisions remove special effective date rules in
each of these PATH Act sections that have no practical effect.
Effective date for treatment of credits for certain
penalties (Act sec. 209)._The PATH Act inadvertently failed to
state the effective date for the rule providing a reasonable
cause exception for erroneous claims for refund or credit. The
provision states that the effective date is for claims filed
after the date of enactment of the PATH Act.
Making American Opportunity Tax Credit permanent (Act secs.
102, 206, 207, 208, and 211)._The provision reflects the
permanent extension of the American Opportunity Tax Credit by
eliminating deadwood and consolidating the provisions of
section 25A.
Section 529 programs and qualified ABLE programs (Act secs.
302(b))._Among other changes made by the PATH Act to section
529 qualified tuition programs, the PATH Act repealed the rules
providing that section 529 accounts must be aggregated for
purposes of calculating the amount of a distribution that is
included in a taxpayer's income. Though PATH Act section 303
modified certain rules for qualified ABLE programs, it did not
make a parallel change to the rules for distributions from ABLE
accounts. The provision makes a parallel change that conforms
the treatment of multiple distributions during a taxable year
from an ABLE account in Code section 529A to the treatment of
multiple distributions during a taxable year from a section 529
account.
Restriction on tax-free distributions involving Real Estate
Investment Trusts (``REITs'') (Act sec. 311)._The provision
clarifies that, for purposes of section 355(h)(2)(B)(iii),
control of a partnership means ownership of at least 80 percent
of the profits interests and at least 80 percent of the capital
interests. That is, control of a partnership for purposes of
section 355(h)(2)(B)(iii) does not require exactly 80-percent
ownership of the profits interests and 80-percent ownership of
the capital interests of the partnership.
Ancillary personal property of a REIT (Act sec. 318)._
Section 856(c)(9) treats ancillary personal property as a real
estate asset for purposes of the REIT 75-percent asset test to
the extent that rents attributable to such ancillary personal
property are treated, under a separate provision, as rents from
real property. The provision makes two conforming changes with
respect to the REIT income tests. First, the provision treats
gain from the sale or disposition of such ancillary personal
property as gain from the sale or disposition of a real estate
asset for purposes of the REIT income tests. Second, the
provision treats gain from the sale or disposition of certain
obligations secured by mortgages on both real property and
personal property as gain from the sale or disposition of real
property for purposes of the REIT income tests.
Exception from Foreign Investment in U.S. Real Property Tax
Act (``FIRPTA'') for certain stock of REITs (Act sec. 322)._The
provision restates provisions of section 897(k) as amended,
makes clerical conforming changes, and strikes a modification
to a repealed provision.
Further, under section 897(k) as amended, the provision
addresses the definition of a qualified collective investment
vehicle that is eligible for benefits of a comprehensive income
tax treaty with the United States that includes an exchange of
information program. Specifically, the provision clarifies that
the definition can be met only if the dividends article in the
treaty imposes conditions on the benefits allowable in the case
of dividends paid by a REIT.
The provision clarifies the effective date for the
determination of domestic control by stating that the rule
applies with respect to each testing period ending on or after
the date of enactment (not that the rule takes effect on the
date of enactment).
FIRPTA exception for qualified foreign pension funds (Act
sec. 323)._Section 897(l)(1) provides that section 897 does not
apply (i) to any United States real property interest held
directly (or indirectly through one or more partnerships) by,
or (ii) to any distribution received from a REIT by, a
qualified foreign pension fund or an entity all the interests
of which are held by a qualified foreign pension fund. The
provision clarifies that, for purposes of section 897, a
qualified foreign pension fund is not treated as a nonresident
alien individual or as a foreign corporation; in other words,
in determining the U.S. income tax of a qualified foreign
pension fund, section 897 does not apply. The provision
provides that, also for that purpose, an entity all the
interests of which are held by a qualified foreign pension fund
is treated as such a fund.
Section 897(l)(2) establishes a five-prong definition of
the term ``qualified foreign pension fund.'' The provision
revises the second prong of the definition to clarify that a
government-established fund to provide public retirement or
pension benefits may qualify, as well as a fund established by
more than one employer to provide retirement or pension
benefits to their employees, such as a multiple-employer or
multiemployer plan. In addition, the provision makes clarifying
changes to the fourth and fifth prongs of the definition.
Election of certain small insurance companies to be taxed
only on taxable investment income (Act sec. 333)._Section
831(b) requires that an otherwise eligible electing insurance
company meet one of two diversification requirements. The first
requires that no more than 20 percent of the company's net (or
if greater, direct) written premiums for the taxable year is
attributable to any one policyholder. The second, applicable if
the first is not met, requires that no person holds (directly
or indirectly) aggregate interests in the company that
constitute a percentage of the entire interest in the company
that is more than a de minimis percentage higher than the
percentage of interests in specified assets with respect to the
company held (directly or indirectly) by a specified holder.
The provision clarifies the first diversification rule to
provide a look-through rule with respect to an intermediary
(for example, an aggregate fund). Specifically, the provision
provides that in the case of reinsurance or any fronting,
intermediary, or similar arrangement, a policyholder means each
policyholder of the underlying direct written insurance with
respect to the reinsurance or arrangement.
The provision clarifies the determination of percentages
under the second diversification rule by making the
determination with respect to relevant specified assets. They
are defined (with respect to any specified holder with respect
to any insurance company) to mean the aggregate amount of the
specified assets, with respect to the insurance company, any
interest in which is held directly or indirectly by a spouse or
specified relation. A specified relation is a lineal descendent
(including by adoption) of an individual who holds, directly or
indirectly, an interest in the insurance company, and the
lineal descendant's spouse. Thus, for example, a specified
relation of an individual includes the individual's step-
children. The provision further clarifies that relevant
specified assets do not include any specified asset that was
acquired by the spouse or specified relation by bequest,
devise, or inheritance from a decedent for a two-year period.
A specified holder is defined to include a lineal
descendent (including by adoption) of an individual who holds,
directly or indirectly, an interest in the insurance company,
and the lineal descendant's spouse. Thus, a specified holder
includes an individual's step-children. A specified holder is
defined also to include a non-U.S.-citizen spouse of an
individual who holds, directly or indirectly, an interest in
the specified assets with respect to the insurance company. A
non-U.S.-citizen spouse would generally not be an eligible
recipient for purposes of the unified estate and gift tax
marital deduction, for example, and so assets passing to such a
spouse from such an individual would not be deductible for
estate and gift tax purposes. By contrast, a U.S.-citizen
spouse could receive assets from the individual without giving
rise to estate tax or gift tax with respect to those assets.
Treasury Department guidance under the provision may
provide that factors such as ownership, premiums, gross
revenue, and factors taken into account under applicable State
law for assessing risk are taken into account, to the extent
this is consistent with the purpose of the provision to
accurately determine percentages based on the real economic
arrangement among the parties.
2. Amendment relating to Consolidated Appropriations Act, 2016 (sec.
102 of Division U of the Act)
Treatment of transportation costs of independent refiners
(Act sec. 305)._The provision clarifies that section
199(c)(3)(C) applies for purposes of calculating qualified
production activities income under section 199(c) and for
purposes of calculating oil related qualified production
activities income under section 199(d)(9), as in effect before
the repeal of section 199 as part of Public Law 115-97.
The provision clarifies that an independent refiner may
elect to apply section 199(c)(3)(C) to its oil transportation
costs for purposes of calculating its deduction under section
199 (i.e., it is not required to apply the provision to its oil
transportation costs). It is anticipated that the Secretary
will issue guidance prescribing the manner in which such
election shall be made.
3. Amendments relating to Fixing America's Surface Transportation Act
(2015) (sec. 103 of Division U of the Act)
Revocation or denial of passport in case of certain unpaid
taxes (Act sec. 32101)._The Fixing America's Surface
Transportation Act (2015) provides for judicial review of the
Secretary's certification that an individual has a seriously
delinquent tax debt, either in a U.S. district court or in the
Tax Court. The provision clarifies that the party against whom
a Tax Court petition is filed is the Commissioner of Internal
Revenue. The provision also provides a tie-breaker rule
clarifying that the court first acquiring jurisdiction over the
action has sole jurisdiction, and corrects a cross reference.
4. Amendments relating to Surface Transportation and Veterans Health
Care Choice Improvement Act of 2015 (sec. 104 of Division U of
the Act)
Consistent value for transfer and income tax purposes (Act
sec. 2004)._Section 1014(f) generally requires that an heir who
acquires property from a decedent (whether or not reported on
an estate tax return) claim a basis no greater than the final
value of the property for estate tax purposes. Section
6662(b)(8) imposes a penalty in the case of an inconsistent
estate basis. Under the provision, the term ``inconsistent
estate basis'' means any portion of an underpayment
attributable to the failure to comply with section 1014(f). The
penalty could have been viewed as applying when an heir claims
a basis higher than the final estate tax value by reason of
making basis adjustments relating to post-acquisition events
(e.g., improvements to the property). This result is not
intended. The provision modifies the definition of inconsistent
estate basis to avoid this unintended result.
Mass Transit Account (``MTA'') financing (Act sec. 2008)._
The Surface Transportation and Veterans Health Care Choice
Improvement Act of 2015 changes the taxation of liquefied
natural gas (LNG) and liquefied petroleum gas (LPG) from a per-
gallon basis to an energy-equivalent basis. That is, it
provides that the tax is based on the LNG energy equivalent to
a gallon of diesel (DGE) (24.3 cents per DGE, which is 6.06
pounds of LNG), and on the LPG energy equivalent to a gallon of
gasoline (GGE) (18.3 cents per GGE, which is 5.75 pounds of
LPG). Section 9503(e)(2) allocates 1.86 cents per gallon of LNG
and 2.13 cents per gallon of LPG to the MTA of the Highway
Trust Fund, but it does not specifically conform the per-gallon
basis to an energy-equivalent basis for purposes of the
allocation. The provision conforms the per-gallon basis in
section 9503(e)(2) to the energy-equivalent basis, using DGE
for LNG and GGE for LPG, to reflect the energy-equivalent basis
used for the taxes imposed on LNG and LPG.
5. Amendments relating to Stephen Beck, Jr., ABLE Act of 2014 (sec. 105
of Division U of the Act)
Inflation adjustment for certain civil penalties under the
Internal Revenue Code of 1986 (Act sec. 208)._An annual
inflation adjustment is provided for fixed-dollar civil tax
penalties in the case of: (i) section 6651(a), failure to file
a tax return; (ii) section 6652(c), failure to file or disclose
information returns by exempt organizations and certain trusts,
(iii) section 6695, preparation of tax returns for other
persons, (iv) section 6698, failure to file a partnership
return, (v) section 6699, failure to file an S corporation
return, (vi) section 6721, failure to file correct information
returns, and (vii) section 6722, failure to furnish correct
payee statements. The provision clarifies that the effective
date of the annual inflation adjustments added to these civil
penalties generally is for returns required to be filed, and
statements required to be furnished, after December 31, 2014,
and in the case of the annual inflation adjustment for
penalties relating to preparation of tax returns for other
persons, is for returns or claims for refund filed after
December 31, 2014.
6. Amendment relating to American Taxpayer Relief Act of 2012 (sec. 106
of Division U of the Act)
Reference in definition of a deficiency to American
Opportunity Tax Credit (Act sec. 104)._The provision conforms a
reference in section 6211(b)(4)(A), relating to the definition
of a deficiency, to a provision of the American Opportunity Tax
Credit that was renumbered by the American Taxpayer Relief Act
of 2012.
7. Amendment relating to United States-Korea Free Trade Agreement
Implementation Act (2011) (sec. 107 of Division U of the Act)
Increase in penalty on paid preparers who fail to comply
with earned income tax credit due diligence requirements (Act
sec. 501).--The provision clarifies that the effective date of
the section 6695(g) penalty increase is for documents prepared
(not returns required to be filed) after December 31, 2011.
8. Amendment relating to SAFETEA-LU (sec. 108 of Division U of the Act)
Penalty relating to signs (Act sec. 1125).--Persons engaged
in distilled spirits operations are required to place and keep
conspicuously on the outside of such place of business a sign
showing the name of such person and denoting the business, or
businesses, in which engaged. Section 5681 imposes penalties
for failure to post a required sign and posting or displaying a
false sign. Under section 5681(b), a wholesale dealer in
liquors may display a distilled spirits operations sign only if
that person has paid the special occupational tax applicable to
those wholesalers, payment of the tax being the indication that
such person was eligible to post such a sign. SAFETEA-LU
repealed the special occupational taxes, but did not make a
conforming change to the penalty provision under 5681(b). The
provision corrects the outdated reference in the penalty for
displaying a false sign. Specifically, the provision modifies
section 5681(b) to provide that a wholesale dealer in liquors
may post a sign indicating that it is engaged in distilled
spirits operations only if that person has complied with the
recordkeeping requirements required by section 5121(a) and the
registration requirements under section 5124.
9. Amendments relating to the American Jobs Creation Act of 2004
(``AJCA'') (sec. 109 of Division U of the Act)
Treatment of certain trusts as shareholder of S corporation
(Act sec. 233).--AJCA amended Code section 1361 to permit a
trust that is an IRA or ROTH IRA to be a shareholder of a bank
that is an S corporation, but only to the extent of bank stock
held by the trust on enactment (October 22, 2004). The
provision clarifies that only the individual for whose benefit
the trust is created is treated as ``the shareholder.''
Rural electric cooperatives (Act sec. 319).--Section
501(c)(12) provides an income tax exemption for rural electric
cooperatives if at least 85 percent of the cooperative's income
consists of amounts collected from members for the sole purpose
of meeting losses and expenses of providing service to its
members. The Energy Policy Act of 2005 made permanent a rule to
exclude from the 85 percent test income from transactions
related to open access transmission if approved by the Federal
Energy Regulatory Commission (``FERC''). FERC regulates
transmission lines in all States except Alaska, Hawaii, and
most of Texas. Because of an oversight, only transmission
systems in Texas received the treatment accorded to FERC-
regulated electric cooperatives. Electric cooperatives in
Alaska are regulated by the Regulatory Commission of Alaska
(``RCA''). Regulated utilities in Alaska with an RCA-approved
open access transmission tariff modeled after FERC should have
received the same tax treatment as their similarly-situated
counterparts in the other States. The provision clarifies that
that such utilities in Alaska and Hawaii are treated the same
as those in Texas for purposes of the exclusion from the 85-
percent test.
B. Technical Corrections Related to Partnership Audit Rules
The provisions correct and clarify provisions relating to
the partnership audit rules enacted in the Bipartisan Budget
Act of 2015, as amended by the PATH Act of 2015, to express the
intended rule. Section and chapter references are to the
Internal Revenue Code of 1986 unless otherwise indicated.
1. Scope of adjustments subject to partnership audit rules (sec. 201 of
Division U of the Act and secs. 6241(2) and (9), 6501(c), 6221,
6225, 6226, 6227, 6231, 6234, and 7485 of the Code)
The provision clarifies the scope of the partnership audit
rules. The provision eliminates references to adjustments to
partnership income, gain, loss, deduction, or credit, and
instead refers to partnership-related items, defined as any
item or amount with respect to the partnership that is relevant
in determining the income tax liability of any person, without
regard to whether the item or amount appears on the
partnership's return and including an imputed underpayment and
an item or amount relating to any transaction with, basis in,
or liability of, the partnership. Thus, these partnership audit
rules are not narrower than the Tax Equity and Fiscal
Responsibility Act of 1982 (``TEFRA'') partnership audit rules,
but rather, are intended to have a scope sufficient to address
those items described as partnership items, affected items, and
computational items in the TEFRA context in TEFRA-related
Treasury Regulations sections 301.6231(a)(3), 301.6231(a)(5),
and 301.6231(a)(6), as well as any other items meeting the
statutory definition of a partnership-related item.
For example, because a partnership-related item includes an
item or amount relating to any transaction with the
partnership, an item or amount relating to a partner's
transaction with a partnership other than in his capacity as a
member of the partnership (which is considered as occurring
between the partnership and one who is not a partner under
section 707) is a partnership-related item. As another example,
because a partnership-related item includes an item or amount
relating to basis in the partnership, an item or amount
relating to the determination of the adjusted basis of a
partner's interest in the partnership or relating to the basis
of the partnership in partnership property is a partnership-
related item. As a further example, because a partnership-
related item includes an item or amount relating to liability
of the partnership, an item or amount relating to the
determination of partnership liabilities is a partnership-
related item. Similarly, an item or amount relating to the
effect on a partner of a decrease or increase in a partner's
share of partnership liabilities is a partnership-related item.
The provision clarifies that the partnership audit rules do
not apply to taxes imposed, or to amounts required to be
deducted or withheld, under Code chapters 2 (tax on self-
employment income) or 2A (tax on net investment income), 3
(withholding tax on nonresident alien individuals or foreign
corporations), or 4 (withholding tax for certain foreign
accounts), except as otherwise specifically provided. However,
any partnership adjustment determined under the income tax is
taken into account for purposes of determining and assessing
tax under these chapters of the Code to the extent that the
partnership adjustment is relevant to the determination.
Further, a timing rule applies in the case of chapters 3 and 4.
For example, if a partnership adjustment results in a
change in the amount of income of an individual from a
partnership, the change is reflected as required under the
rules of chapter 2 in the calculation of the individual's net
earnings from self-employment with respect to the partnership,
and the chapter 2 tax may be collected through a process that
is outside the partnership audit rules.
The period for assessing any tax under chapter 2 or 2A that
is attributable to a partnership adjustment does not expire
before the date that is one year after (1) in the case of an
adjustment pursuant to the decision of a court in a proceeding
brought under section 6234, such decision becomes final, or (2)
in any other case, 90 days after the date on which the notice
of final partnership adjustment is mailed under section 6231.
The provision applies a specific timing rule in the case of
any tax imposed, including any amount that is required to be
deducted or withheld, under chapter 3 (withholding tax on
nonresident alien individuals or foreign corporations) or 4
(withholding tax for certain foreign accounts). In these cases,
the tax is determined with respect to the reviewed year. The
tax is imposed with respect to the adjustment year; similarly,
the amount required to be deducted or withheld is deducted or
withheld with respect to the adjustment year. The reviewed year
and the adjustment year are defined in section 6225(d). For
example, assume that a partnership has foreign partners, and
that following an audit of the partnership, an adjustment is
made to the amount of the partnership's effectively connected
taxable income. The adjustment results in an increase of $100x
of such income that is allocable to foreign partners with
respect to the reviewed year. Pursuant to section 1446, assume
that the amount of withholding tax that the partnership is
required to pay with respect to this income allocable to the
foreign partners is $35x. The $35x is required to be paid by
the partnership with respect to the adjustment year (as defined
in section 6225(d)(2)). As a further example, assume that a
partnership, P, with foreign partners is not the audited
partnership, but rather, is an upper-tier partner of an audited
partnership that has elected to push out under section 6226.
Partnership P has received a statement pursuant to section
6226, described below. The amount of withholding tax
partnership P is required to pay is determined with respect to
the reviewed year of the audited partnership, as it affects the
relevant taxable year of partnership P. The amount of
withholding tax is required to be paid by partnership P for the
partnership taxable year that is the adjustment year, in this
case, the adjustment year of the audited partnership (sec.
6225(d)). The due date for partnership P's payment of the
withholding tax is no later than the due date (including
allowable extensions) for the return for the adjustment year of
the audited partnership.
In determining the amount of any deficiency, adjustments to
partnership-related items are made only as provided under the
partnership audit rules (Subchapter C of Chapter 63 of the
Code), except to the extent otherwise provided. Conforming
references to partnership-related items are made in several
other provisions, including the provision relating to the scope
of judicial review of a partnership adjustment (sec. 6234(c)).
Thus, it is clarified that the court has jurisdiction to
determine all partnership-related items of the partnership for
the partnership taxable year to which the notice of final
partnership adjustment relates, the proper allocation of such
items among the partners, and the applicability of any penalty,
addition to tax, or additional amount for which the partnership
may be liable under subchapter C of chapter 63 of the Code. For
example, because partnership-related items include items or
amounts with respect to (a) section 707 transactions, (b)
liabilities of the partnership and the partners' shares of the
liabilities, and (c) the basis of a partnership interest or of
partnership property, determination of these items or amounts
is within the scope of judicial review.
2. Netting in the determination of imputed underpayments (sec. 202 of
Division U of the Act and sec. 6225(a) and (b) of the Code)
When the Secretary makes adjustments to any partnership-
related item with respect to the reviewed year of a
partnership, if the adjustments result in an imputed
underpayment, the partnership pays an amount equal to the
imputed underpayment, and if the adjustments do not result in
an imputed underpayment, the adjustments are taken into account
by the partnership in the adjustment year and passed through to
the adjustment year partners. The provision clarifies this rule
by conforming the language referring to partnership-related
items and by striking erroneous references to separately stated
income or loss.
The provision clarifies the manner of netting items to
determine the amount of an imputed underpayment of a
partnership. The provision clarifies that items of different
character (capital or ordinary), for example, are not netted
together in determining the amount of an imputed underpayment.
Rather, an imputed underpayment of a partnership with respect
to a reviewed year is determined by the Secretary by
appropriately netting partnership adjustments for that year and
by applying the highest rate of tax in effect for the reviewed
year under section 1 or 11.
In the case of partners' distributive shares, like items
within categories under section 702(a)(1)-(8) are separately
netted. For example, netting within categories of items that
are netted for purposes of reporting to partners on Schedule K-
1 pursuant to section 702 may be considered as appropriately
netting.
In determining an imputed underpayment, any adjustment that
reallocates the distributive share of any item from one partner
to another is taken into account by disregarding any part of
the adjustment that results in a decrease in the amount of the
imputed underpayment. For example, this rule could be
implemented by disregarding the decrease in any item of income
or gain and disregarding the increase in any item of deduction,
loss, or credit.
Limitations that would apply at the direct or indirect
partner level are treated as applying, unless otherwise
determined. Under the provision, if an adjustment would
decrease the imputed underpayment, and could be subject to a
limitation or not be allowed against ordinary income if the
adjustment were taken into account by any person, then the
adjustment is not taken into account in determining the imputed
underpayment of the partnership, except to the extent the
Secretary otherwise provides.
For example, if an adjustment would increase the amount of
a partnership loss allocable to partners, but the loss could be
subject to the passive loss rule of section 469 in the hands of
direct and indirect partners of the partnership, then the
Secretary does not take into account the adjustment increasing
the loss in determining the amount of the partnership's imputed
underpayment, unless the Secretary provides otherwise. For
example, the Secretary may provide otherwise if the partnership
supplies accurate information that all direct and indirect
partners of the partnership are publicly-traded domestic C
corporations not subject to the passive loss rule.
Adjustments to credits are separately determined and netted
as appropriate. Adjustments to credits are not multiplied by
the tax rate, but rather, adjustments to items of credit are
taken into account as an increase or decrease in determining
the amount of the imputed underpayment.
It is intended that an imputed underpayment may be modified
under procedures described in section 6225(c).
3. Alternative procedure to filing amended returns for purposes of
modifications to imputed underpayments (secs. 202(b) and
(c)(2), 203, and 206(b) of Division U of the Act and secs.
6225(c) and 6201(a)(1) of the Code)
The provision clarifies the modification rules of section
6225(c) to better carry out their function as intended by
Congress, that is, to determine the amount of tax due as
closely as possible to the tax due if the partnership and
partners had correctly reported and paid while at the same time
to implement the most efficient and prompt assessment and
collection of tax attributable to the income of the partnership
and partners.
The provision clarifies the procedures under section
6225(c)(2) that permit a partnership to seek modification of an
imputed underpayment. These procedures allow reviewed-year
partners to take adjustments into account so that the
partnership's imputed underpayment can be determined by the
Secretary without regard to that portion of the adjustments.
Like other modification procedures in section 6225(c), these
procedures take place within the period ending 270 days after
the date the notice of proposed partnership adjustment is
mailed, unless the period is extended with the consent of the
Secretary, as provided in section 6225(c)(7).
Amended returns of partners
The provision clarifies the requirements for reviewed-year
partners filing amended returns with payment of any tax due.
First, the amended return procedure requires the partner to
file returns for the taxable year of the partner that includes
the end of the partnership's reviewed year, as well as for any
taxable year with respect to which any tax attribute of the
partner is affected by reason of any adjustment to a reviewed-
year partnership-related item. Second, the amended returns are
required to take into account all such adjustments that are
properly allocable to the partner, as well as the effect of the
adjustments on any tax attributes. Third, payment of any tax
due is required to be included with the amended returns. As is
the case for other amended returns, the Secretary may require
the payment of interest, penalties, and additions to tax (for
example, by billing the partner as under present practice).
If the requirements are satisfied, then the partnership's
imputed underpayment amount is determined without regard to the
portion of the adjustments taken into account by such partners.
The amended return modification procedure does not require the
participation of all reviewed-year partners of the partnership.
Direct and indirect reviewed-year partners may participate. The
amended return procedure is not intended to cover adjustments
to items on an amended return of a partner that do not
correspond to adjustments to a reviewed-year partnership-
related item and the effect of the adjustments on tax
attributes.
Alternative procedure to filing amended returns (pull-in)
The provision sets forth an alternative procedure to filing
amended returns. The alternative procedure is referred to as
the pull-in procedure. Under the pull-in procedure, the
Secretary determines the partnership's imputed underpayment as
reduced by the portion of the adjustments to partnership-
related items that direct and indirect reviewed-year partners
take into account and with respect to which those partners pay
the tax due, provided the requirements of the pull-in procedure
are met.
Under pull-in, reviewed-year partners pay the tax that
would be due with amended returns, make binding changes to
their tax attributes for subsequent years, and provide the
Secretary with the information necessary to substantiate that
the tax was correctly computed and paid. However, the partners
file no amended returns. Thus, there are generally no corollary
effects on the partners' returns beyond the effects on tax
attributes, in other taxable years, of the adjustments to
partnership-related items.
Pull-in, as well as the amended return modification
procedure, is available generally to direct and indirect
reviewed-year partners, in the case of tiered partnerships. The
pull-in procedure generally does not require the participation
of all direct and indirect reviewed-year partners of the
partnership.
Pull-in requires the participating partner to pay the tax
that would be due under the amended return filing procedure.
The partner is responsible for remitting the payment unless the
Secretary provides that another person, such as the partnership
or a third party, may remit the payment on the partner's
behalf. Payment is due within the period ending 270 days after
the date the notice of proposed partnership adjustment is
mailed (unless the period is extended with the Secretary's
consent).
Pull-in requires that the partner agree to take into
account, in the form and manner required by the Secretary, the
adjustments and the effects on the partner's tax attributes of
the adjustments to partnership-related items properly allocable
to the partner.
Pull-in requires that the partner provide, in the form and
manner specified by the Secretary, such information as the
Secretary may require to carry out the pull-in procedure. This
requirement can include information in the same form as on an
amended return, if the Secretary so specifies. The information
is to be provided within the period ending 270 days after the
date the notice of proposed partnership adjustment is mailed
(unless the period is extended with the Secretary's consent).
If all of the requirements are satisfied, the imputed
underpayment can be modified. In the event that a partner
provides the required information, but does not make the
required payment, for example, the imputed underpayment of the
partnership is not modified with respect to those adjustments.
For the administrative convenience of taxpayers and the
Secretary, it is intended that partner payments and partner
information may be collected centrally and remitted to the
Secretary under the pull-in procedure. This centralization
could be administered by the Secretary, by the partnership
representative, or by a third party. For example, the procedure
may permit a third party such as an accounting or law firm
designated by the partnership representative to collect partner
information required under the procedure and tally partner
payments before remitting this information to the Secretary.
Such a practice may be useful both to facilitate centralized
tracking and collection of the information and payments, and to
address privacy concerns partners may have in sharing
information with the partnership representative. Particularly
in the case of partnerships with numerous partners or direct
and indirect partners, such a practice may alleviate the
administrative burdens on the Secretary and taxpayers,
consistently with the Congressional intent for the centralized
partnership audit system to improve the efficiency, promptness,
and accuracy of collection of partners' taxes due with respect
to partnership-related items.
Assessment authority with respect to payments under the
pull-in procedure is provided under section 6201.
Rules applicable both to the amended returns of partners
and to the pull-in procedure
If an adjustment involves reallocation of an item from one
partner to another, the opportunity to modify the imputed
underpayment under amended return procedure (sec.
6225(c)(2)(A)) or pull-in procedures (sec. 6225(c)(2)(B)) is
available only if the requirements of one or the other of the
amended return or pull-in procedures are satisfied with respect
to all partners affected by the adjustment involving
reallocation.
For purposes of the amended return and pull-in procedures,
tax relating to adjustments to a reviewed-year partnership-
related item and the effect of the adjustments on tax
attributes may be determined and assessed without regard to the
otherwise applicable statute of limitations of sections 6501
and 6511. For example, if a notice of proposed partnership
adjustment is mailed to a partnership by the Secretary more
than three years after a partner filed his or her return for
the year including the end of the reviewed year, the three-year
statute of limitations under section 6501 or 6511 does not
preclude the filing of an amended return, the assessment and
payment of the partner's tax due for that year, or the proper
crediting or refund of an amount paid by a partner, but these
results apply only with respect to adjustments to partnership-
related items for the reviewed year (and the effect of such
adjustments on any tax attributes).
In the case of adjustments taken into account on an amended
return of a partner or in a pull-in with respect to a partner,
the effects of these adjustments on tax attributes are binding.
This binding effect applies for the taxable year of the partner
that includes the end of the reviewed year of the partnership
and any taxable year for which a tax attribute is affected by
such an adjustment. Any failure to take into account the
effects of adjustments on tax attributes is treated for all
Federal tax purposes in the same manner as a failure by a
partner to treat a partnership-related item consistently with
the treatment of the item on the partnership return (as
provided in section 6222). For example, if a partner who files
an amended return or provides information in a pull-in fails to
take into account in other taxable years the effect on tax
attributes of adjustments to partnership-related items that are
properly allocable to the partner, any underpayment
attributable to the failure may be assessed under math error
procedures as provided in section 6222(b).
The provision clarifies the rules applicable in the case of
partnerships and S corporations in tiered structures when a
partner files an amended return and pays, or provides
information to the Secretary and pays in a pull-in.
Specifically, in the case of any partnership, any partner of
which is a partnership, the amended return and pull-in rules of
section 6225(c)(2)(A) and (B) apply with respect to any partner
(the ``relevant partner'') in the chain of ownership of such
partnerships, provided that certain requirements are met. As a
practical matter, this rule generally permits the filing of
amended returns even if some, but not all, of the partners (or
S corporation shareholders treated as partners for this
purpose) file amended returns. Similarly, this rule generally
permits some but not all partners to participate in a pull-in,
provided requirements are met.
Requirements applicable to both the amended return
procedure and the pull-in procedure include the requirement
that such information as the Secretary may require be furnished
to the Secretary for purposes of administering the amended
return or pull-in rules in the case of tiered structures. In
this context, the Secretary may require information with
respect to any chain of ownership of the relevant partner. The
Secretary may require that each partnership in the chain of
ownership between the relevant partner and the audited
partnership must satisfy the requirements for filing amended
returns or for participating in the pull-in, so that all
partnerships in the chain of ownership between the relevant
partner and the audited partnership either meets the
requirement of filing an amended return, or meets the
requirements for supplying information in a pull-in.
For example, an audited partnership has three partners, A,
B, and C, each of which is a partnership. Partnership B in turn
has two partners, D and E, each of which is a partnership.
Partnerships A, C, D, and E each have only five partners.
Individual Q is a partner in partnership E, and agrees to
participate in a pull-in, pay the tax due, and provide
information as required by the Secretary (including information
similar to information that would be supplied on an amended
return of Q, and information with respect to the chain of
ownership between Q as the relevant partner and the audited
partnership). The provision does not contemplate that the
Secretary may require Q to supply information about the chain
of ownership between the audited partnership and upper-tier
partners of partnerships A, C, or D. However, partners of A, C,
or D that file amended returns or participate in the pull-in
may be required to supply information on the chain of ownership
between themselves and the audited partnership, as well as
information on their own chains of ownership should they be
partnerships or S corporations.
Other modification procedures: references to adjustments
The provision clarifies the operation of modification
procedures under sections 6225(c)(3) (relating to tax-exempt
partners), 6225(c)(4) (relating to applicable highest tax
rates), and 6225(c)(5) (relating to certain passive losses of
publicly traded partnerships). In each of these modification
procedures, the provision clarifies that the determination of
the imputed underpayment is made without regard to the
adjustment or portion of the adjustment being described (not
without regard to a portion of the imputed underpayment).
Other modification procedures: adjustment not resulting in
an imputed underpayment
The provision states specifically that the modification
procedures are available if adjustments to partnership-related
items do not result in an imputed underpayment. Under section
6225(c)(9), information relating to a modification may be
offered by the partnership in the case of adjustments that do
not result in an imputed underpayment, and such adjustments may
be modified by the Secretary as the Secretary determines
appropriate.
4. Push-out treatment of passthrough partners in tiered structures
(sec. 204 of Division U of the Act and sec. 6226 of the Code)
The provision addresses the situation of a partnership (or
an S corporation, which is treated similarly to a partnership
under this rule) that is a direct or indirect partner of an
audited partnership that has elected to push out adjustments of
partnership-related items to partners (or S corporation
shareholders, which are treated similarly to partners under
this rule) under section 6226. The provision sets forth
requirements applicable to such partners and the time frame for
satisfying these requirements.
If a partner that receives a statement in a push-out is a
partnership, that partner must satisfy two requirements. First,
the partner must file with the Secretary a partnership
adjustment tracking report that includes information required
by the Secretary. For example, the required information may
include identifying the partner's own partners or shareholders,
describing and quantifying adjustments necessary to determine
partnership-related items or the equivalent in the hands of
those partners or shareholders, or other information necessary
or appropriate to assessment and collection from tiers of
partners in a push-out.
Second, that partner is required to furnish statements to
its partners under rules similar to section 6226(a)(2), or, if
no such statements are furnished, to compute and pay its
imputed underpayment under rules similar to section 6225 (other
than certain modification-related rules). That is, the
partnership must push out the adjustments to its partners, or
if not, it must compute and pay its imputed underpayment. If
such a partnership computes and pays its imputed underpayment,
the rules of section 6225 apply (other than the modifications
provided in sections 6225(c)(2) (amended returns and pull-in),
6225(c)(7) (270-day period for modifications), and 6225(c)(9)
(modification of adjustment not resulting in imputed
underpayment)). The imputed underpayment of the partnership is
determined by appropriately netting all partnership adjustments
on the statement (taking into account limitations to which
adjustments that decrease the imputed underpayment could be
subject) and applying the highest rate of tax in effect for the
reviewed year under section 1 or 11, as provided in section
6225. The partnership pays its imputed underpayment as so
determined.
The due date for the payment of the imputed underpayment or
furnishing of partner statements and the filing of the
partnership adjustment tracking report is the return due date
(including allowable extensions) for the adjustment year of the
audited partnership. That is, the partnership adjustment
tracking report must be filed with the Secretary, and the
imputed underpayment paid or statements furnished to partners
or S corporation shareholders (or if not so furnished, an
imputed underpayment must be paid), not later than the return
due date for the adjustment year of the audited partnership. In
the case of a partner that is not a partnership or an S
corporation and that receives a statement in a push-out, the
partner's tax is increased for the partner's taxable year that
includes the date of the statement, as provided in section
6226(b). In the case of a partner that is a trust and that
receives a statement in a push-out, regulatory authority to
provide any necessary rules is set forth.
The provision defines an audited partnership for purposes
of the push-out treatment of passthrough partners in tiered
structures under section 6226(b)(4). With respect to a partner
that is a partnership or an S corporation and that receives a
statement in a push-out, the audited partnership is the
partnership in the chain of ownership originally electing the
application of section 6226.
5. Treatment of failure of partnership or S corporation to pay imputed
underpayment and assessment and collection authority with
respect to imputed underpayments (sec. 205 of Division U of the
Act and secs. 6232 and 6501(c)(4)(a) of the Code)
Under the provision, if, following an assessment, a
partnership fails to pay an imputed underpayment within 10 days
after the date of notice and demand by the Secretary, the
applicable interest rate increases, and assessment and
collection against adjustment-year partners for their
proportionate shares may be made. The interest rate under the
provision is the underpayment rate as modified, that is, the
rate is the sum of the Federal short-term rate (determined
monthly) plus five percentage points. An S corporation and its
shareholders are treated like a partnership and its partners
under the provision.
The provision applies if, within 10 days of notice and
demand for payment, a partnership fails to pay an imputed
underpayment under section 6225 or any interest or penalties
under section 6233. For example, the increased interest rate
applies and assessment and collection from adjustment-year
partners may be made in the case in which a partnership that
has not elected under section 6226 to push out adjustments to
partners nevertheless fails to pay within 10 days of notice and
demand.
The provision also applies if any specified similar amount
(or interest or penalties with respect to the amount) have not
been paid. A specified similar amount arises if a partner that
is an upper-tier partnership or S corporation in a push-out
fails to pay an imputed underpayment under section
6226(b)(4)(A)(ii) (including any failure to furnish statements
that is treated as a failure to pay an imputed underpayment
under section 6651(i)). A specified similar amount also
includes an amount required to be paid by former partners
(including partners that are themselves partnerships) of a
partnership that has ceased to exist or terminated as well as
interest or penalties with respect to the amount.
The date of the notice and demand for payment initiates a
two-year period in which the Secretary may assess against the
adjustment-year partners (or former partners). The two-year
period of limitations also applies to a proceeding begun in
court without assessment with respect to a partner. The period
may be extended by agreement.
The provision expands the present-law section 6501(c)(4)
rule permitting extension by agreement between the Secretary
and the taxpayer of the time period for assessment. As a
result, that rule permitting extension by agreement is not
limited to assessment periods prescribed in section 6501, but
rather, applies more broadly to assessment periods and in
particular applies to the period for assessment against
partners in the case of failure of a partnership to pay an
imputed underpayment after notice and demand under section
6232(f).
If a partnership has ceased to exist or terminated within
the meaning of section 6241(7), the provision applies with
respect to the former partners of the partnership. For example,
the former partners of the partnership may be the partners for
the most recent period before the partnership ceased to exist
or terminated, such as the partners for purposes of the last
return filed by the partnership.
A partner is liable for no more than the partner's
proportionate share of the imputed underpayment, interest, and
penalties, measured as the Secretary determines on the basis of
the partner's distributive share of items. For example, the
distributive shares set forth in the partnership agreement, or
as determined for purposes of Schedule K-1, may serve as a
measure of a partner's proportionate share. The Secretary is
required to determine partners' proportionate shares so that
the aggregate proportionate shares so determined total 100
percent. Thus, no partner is required to pay more than the
partner's proportionate share of the imputed underpayment,
interest, and penalties.
Partner payments under this provision reduce the
partnership's liability to pay. The partnership's liability is
not reduced by partner payments if such payments are made after
the date on which the partnership pays, however. For example,
if a partnership's liability is $100, and partner payments
aggregating $60 before July 15 reduce the partnership's
liability to $40, and the partnership pays $40 on July 15, a
partner payment of $40 on August 1 does not reduce the
partnership's liability. The partnership may not receive a
credit or refund for any part of the partner payment of $40;
the partner, however, may.
The Secretary may assess the tax, interest, and penalties
on the proportionate share of each partner (as of the close of
the adjustment year) of the partnership without regard to the
deficiency procedures generally applicable to income tax. Under
the provision, assessment may not be made (or proceeding in
court begun without assessment) after the date that is two
years after the date on which the Secretary provides notice and
demand.
6. Amendment of statements (Schedules K-1) to partners (sec. 206(a) of
Division U of the Act and sec. 6031(b) of the Code)
The provision clarifies that a partnership that has validly
elected out of the partnership audit rules under section
6221(b), and therefore is not subject to the partnership audit
rules, may amend partner statements (Schedules K-1) after the
due date of the partnership return to which the statements
relate.
7. Partnership adjustment tracking report and administrative adjustment
request not treated as amended return (sec. 206(b) of Division
U of the Act and sec. 6225(c)(2) of the Code)
The provision clarifies that neither the partnership
adjustment tracking report required to be filed in a push-out,
nor an administrative adjustment request submitted under
section 6227, is treated as a return for purposes of modifying
an imputed underpayment of a partnership through partner
amended return filings and payments under section
6225(c)(2)(A). Only a return of a partner satisfies the
requirement under the partner amended return filing
modification procedure.
8. Authority to require e-filing of materials (sec. 206(c) of Division
U of the Act and sec. 6241(10) of the Code)
Authority is provided for the Secretary to require
electronic filing or submission of anything that has to be
filed or submitted in connection with procedures for modifying
the imputed underpayment amount under section 6225(c).
Authority is also provided for the Secretary to require
electronic filing or furnishing of anything that has to be
furnished to or filed with the Secretary in connection with the
push-out procedures under section 6226.
9. Clarification of assessment authority in a push-out (sec. 206(d) of
Division U of the Act and sec. 6226 of the Code)
The provision clarifies that, in the case of a partnership
that has validly elected under section 6226 (push-out) in the
manner that the Secretary provides, no assessment of tax, levy,
or proceeding in court for the collection of the imputed
underpayment is to be made against the audited partnership.
10. Treatment of partnership adjustments that result in decrease in tax
in push-out (sec. 206(e) of Division U of the Act and sec.
6226(b) of the Code)
As an alternative to partnership payment of the imputed
underpayment in the adjustment year, the audited partnership
may elect to furnish to the Secretary and to each partner of
the partnership for the reviewed year a statement of the
partner's share of any adjustments to partnership-related items
as determined by reference to the final determination with
respect to the adjustment. In this situation section 6225,
requiring the audited partnership to pay the imputed
underpayment, does not apply. Instead, each reviewed-year
partner takes the adjustments into account for the taxable year
that includes the date of the statement and pays the tax as
provided in section 6226 (taking into account section
6226(b)(4)).
The provision provides that in taking into account
adjustments to determine a partner's tax in a push-out,
decreases as well as increases in the partner's tax are taken
into account. The provision clarifies that in a push-out, the
partner's tax for the taxable year that includes the date of
the statement is adjusted by the aggregate of the correction
amounts (not adjustment amounts).
The correction amount for a particular taxable year of a
partner takes into account both decreases and increases. That
is, the correction amount for the partner's taxable year that
includes the end of the reviewed year is the amount by which
the income tax would increase or decrease if the partner's
share of adjustments were taken into account for that year.
Similarly, the correction amount for any taxable year of the
partner after that year, and before the year that includes the
date of the statement, is the amount by which the income tax
would increase or decrease if the partner's share of
adjustments were taken into account for that year. The present-
law treatment of mathematical or clerical errors applies with
respect to correction amounts and aggregate correction amounts.
11. Coordination with adjustments related to foreign tax credits (sec.
206(f) of Division U of the Act and sec. 6227(d) of the Code)
The provision clarifies that the Secretary is to issue
regulations or other guidance providing for the proper
coordination of section 6227, relating to administrative
adjustment requests by the partnership, with the rule of
section 905(c), relating to foreign tax credits and
redetermination of the amount of tax in certain circumstances.
12. Clarification of assessment of imputed underpayments (sec. 206(g)
of Division U of the Act and sec. 6232(a) and (b) of the Code)
The provision clarifies that the assessment of any imputed
underpayment is not subject to the deficiency procedures of
subchapter B of chapter 63. Rather, they are assessed and
collected in accordance with the rules of subchapter C of
chapter 63. Any imputed underpayment (including an imputed
underpayment under section 6226(b)(4)(A)(ii) of a partnership
or S corporation that is a direct or indirect partner of an
audited partnership in a push-out) is assessable under the
provision.
The provision clarifies that in the case of an
administrative adjustment request to which section 6227(b)(1)
applies, the underpayment must be paid, and may be assessed,
when the request is filed.
A reference in section 6232(b) to the assessment of a
deficiency is corrected to refer to the assessment of an
imputed underpayment. Generally, then, an imputed underpayment
of a partnership may not be assessed or collected before the
close of the 90th day after the day on which a notice of final
partnership adjustment was mailed, and if a petition is filed
under section 6234 with respect to the notice, the decision of
the court has become final.
However, the restrictions on assessment and collection of
an imputed underpayment provided generally under section
6232(b) do not apply in the case of any specified similar
amount within the meaning of section 6232(f)(2). A specified
similar amount includes not only the amount described in
section 6226(b)(4)(A)(ii)(II) in the case of a pushout, but
also includes any failure to furnish statements to partners or
S corporation shareholders that is treated as a failure to pay
that amount under section 6651(i). As a result, the
restrictions on assessment and collection do not apply to the
imputed underpayment of a partner that is a partnership or S
corporation, or, in the case of a partnership that has ceased
to exist, to an amount required to be paid by the former
partners. For example, the restrictions do not apply to
assessment and collection of an imputed underpayment of a
partnership or S corporation that receives a statement in a
push-out and neither timely furnishes statements to its
partners or shareholders nor pays its imputed underpayment.
13. Time limit for notice of proposed partnership adjustment (sec.
206(h) of Division U of the Act and sec. 6231(a) and (b) of the
Code)
The provision clarifies that a notice of proposed
partnership adjustment must be mailed within the applicable
period of limitations on making adjustments under the
partnership audit rules (subchapter C of chapter 63 of the
Code). The notice of proposed partnership adjustment cannot be
relied upon to revive an otherwise expired limitations period
under section 6235. For purposes of determining whether a
notice of proposed partnership adjustment is timely, the
applicable limitations period is determined under section 6235,
determined without regard to section 6235(a)(2) (relating to
the period for modification of an imputed underpayment under
section 6225(c)(7)), and without regard to section 6235(a)(3)
(relating to the 330-day period (or the period as extended) for
making an adjustment after the date of a notice of proposed
partnership adjustment).
The provision does not alter the section 6231(b)(2)
prohibition against mailing any notice of final partnership
adjustment earlier than 270 days after the date on which the
notice of proposed partnership adjustment is mailed (except to
the extent the partnership elects to waive the prohibition).
14. Deposit to suspend interest on imputed underpayment (sec. 206(i) of
Division U of the Act and sec. 6233 of the Code)
The provision clarifies that, before the due date for
payment of an imputed underpayment, a partnership (or, in the
case of a partner payment pursuant to an election under section
6226, a partner) may make a cash deposit to suspend the running
of interest as provided under present-law rules in section
6603. The deposit is not treated as a tax payment.
15. Deposit to meet jurisdictional requirement (sec. 206(j) of Division
U of the Act and sec. 6234(b) of the Code)
The provision clarifies that the amount of the
jurisdictional deposit that the partnership must make in order
to file a readjustment petition in court is the amount of (as
of the date of the filing of the petition) the imputed
underpayment, penalties, additions to tax, and additional
amounts with respect to the imputed underpayment (not just the
imputed underpayment amount).
16. Period of limitations on making adjustments (sec. 206(k) of
Division U of the Act and sec. 6235 of the Code)
The provision clarifies several rules relating to the
period of limitations on making adjustments. The provision
makes clear that the period of limitations on making
adjustments under subchapter C of chapter 63 does not limit the
period for notification of the Secretary and redetermination of
tax under section 905(c). The provision corrects a cross
reference so that it refers to subchapter C of chapter 63
(rather than to a nonexistent subpart). The provision clarifies
a reference to the penalty for substantial omission of income
to incorporate a reference to constructive dividends, not just
to other omitted items. The provision clarifies that the time
for making any adjustment under subchapter C of chapter 63 with
respect to any tax return, event, or period does not expire
before the date determined under section 6501(c)(8) (relating
to the failure to notify the Secretary of certain foreign
transfers), that is, generally, the date that is three years
after the date on which the Secretary is furnished the
information required to be reported. The provision clarifies
that the time for making any adjustment under subchapter C of
chapter 63 with respect to a listed transaction described in
section 6501(c)(10) does not expire on the date determined
under section 6501(c)(10), that is, generally, the date that is
one year after the earlier of the date on which the Secretary
is furnished the information required to be reported or the
date on which a material advisor meets certain applicable
requirements. The provision is clarified by striking section
6235(d), a provision included in prior law that has no effect
under subchapter C of chapter 63.
17. Treatment of special enforcement matters (sec. 206(l) of Division U
of the Act and sec. 6241(10) of the Code)
The provision provides regulatory authority similar to that
under the prior-law TEFRA partnership audit rules. It provides
that in the case of partnership-related items involving special
enforcement matters, the Secretary may prescribe guidance under
which the partnership audit rules (or any portion of the rules)
do not apply, and the special enforcement items are subject to
special rules, including rules related to assessment and
collection that are needed for effective and efficient
enforcement. Special enforcement matters mean: failure to
comply with the requirements of section 6226(b)(4)(A)(ii) to
pay the imputed underpayment if the requirement to furnish
statements has not been satisfied, termination and jeopardy
assessments, criminal investigations, indirect methods of proof
of income, foreign partners or partnerships, and other matters
presenting special enforcement considerations.
18. United States shareholders and certain other persons treated as
partners (sec. 206(m) of Division U of the Act and sec.
6241(12) of the Code)
The provision clarifies the treatment under the rules of
subchapter C of chapter 63 of United States shareholders and
certain other persons treated as partners. Except as otherwise
provided in guidance promulgated by the Secretary, in the case
of a controlled foreign corporation (defined in section 957 or
953(c)(1)) that is a partner of a partnership, each United
States shareholder is treated under subchapter C of chapter 63
as a partner in the partnership. For this purpose, except as
otherwise provided by the Secretary, the distributive share
with respect to the partnership equals the United States
shareholder's pro rata share with respect to the controlled
foreign corporation, determined under rules similar to the
rules for determining its pro rata share of subpart F income
under section 951(a)(2).
The provision also makes clear the treatment under
subchapter C of chapter 63 of a passive foreign investment
company (``PFIC'') that is a partner in a partnership and that
is a qualified electing fund with respect to a taxpayer
pursuant to the taxpayer's election under section 1295. In the
case of such a taxpayer, for purposes of the foregoing rule
treating the taxpayer as a partner in the partnership, the
taxpayer's distributive share with respect to the partnership
equals the taxpayer's pro rata share with respect to the PFIC,
determined under rules similar to the rules for determining the
taxpayer's pro rata share under section 1293(b) (relating to
pro rata share for purposes of current taxation of income from
qualified electing funds).
Under the provision, authority for Treasury regulations or
other guidance is provided as is necessary or appropriate to
carry out the legislative purpose or to apply the rule treating
persons as partners in similar circumstances or with respect to
similarly-situated persons.
19. Penalties relating to administrative adjustment requests and
partnership adjustment tracking reports (sec. 206(n) of
Division U of the Act and secs. 6651, 6696, 6698, and 6702 of
the Code)
The provision clarifies existing penalty provisions to
ensure that they address compliance with the partnership audit
rules. A partnership adjustment tracking report required to be
filed pursuant to a section 6226 election is treated as a
return for purposes of penalties relating to failure to file a
partnership return, frivolous position submissions, and
preparation of tax returns for other persons. A failure to
comply with section 6226(b)(4)(A)(ii)(II), relating to the
requirement to furnish statements in a push-out, is treated as
a failure to pay an imputed underpayment for purposes of the
penalty relating to failure to file a tax return or to pay tax.
An administrative adjustment request under section 6227 is
treated as a return for purposes of penalties relating to
frivolous position submissions and the preparation of tax
returns for other persons. Section 206(b) of Division U of the
amendment, however, clarifies that neither an administrative
adjustment request under section 6227 nor a partnership
adjustment tracking report under section 6226(b)(4)(A) is
treated as a return for purposes of the partner amended return
modification procedure of section 6225(c)(2)(A).
20. Statements to partners (adjusted Schedules K-1) treated as payee
statements (sec. 206(o) of Division U of the Act and sec. 6724
of the Code)
The provision clarifies that for purposes of the penalty
for failure to furnish correct payee statements and the penalty
for failure to file correct information returns, statements
required to be furnished to partners in a push-out under
section 6226(a)(2), or statements required to be furnished to
partners under rules similar to section 6226(a)(2), are treated
as payee statements. Statements required to be furnished to
partners under rules similar to section 6226(a)(2) include
statements furnished to partners pursuant to an administrative
adjustment request under section 6227.
21. Clerical corrections relating to partnership audit rules (sec.
206(p) of Division U of the Act)
The provision makes clerical corrections to the partnership
audit rules.
C. Other Corrections
1. Amendment relating to the Bipartisan Budget Act of 2015 (sec. 301 of
Division U of the Act)
Electronic filing of partnership returns.--Section 6011
requires that, under regulations, a person may be required to
file returns electronically if the person is required to file
at least 250 returns during the calendar year. Regulations
provide that for purposes of determining the 250-return
threshold, returns filed within one calendar year by a
corporation include any type, including information returns
(e.g., Forms W-2, Forms 1099), income tax returns, employment
tax returns, and excise tax returns. However, partnerships
having more than 100 partners are required to file returns
electronically. For partnerships only, the provision phases in
reductions in the number of returns and statements during a
calendar year that can subject the partnership to a regulatory
requirement to file returns electronically. Specifically, the
provision provides that under regulations, partnerships are
required to file returns electronically if the partnership is
required to file at least 200 returns for calendar year 2018,
150 returns for calendar year 2019, 100 returns for calendar
year 2020, 50 returns for calendar year 2021, or 20 returns for
calendar years after 2021. The provision is effective as if
included with the partnership audit provisions of section 1101
of the Bipartisan Budget Act of 2015.
2. Amendment relating to the Energy Policy Act of 2005 (sec. 302 of
Division U of the Act)
Qualifying small power production facility (Act sec.
1253(b)(1)).--A provision of the MACRS depreciation rules,
originally enacted in 1986 (sec. 168(e)(3)(B)(vi)(II)), refers
to a provision of the Federal Power Act, as then in effect,
defining a ``qualifying small power production facility'' as a
facility that is ``small'' (i.e., power production capacity not
greater than 80 megawatts) and not owned by an electric utility
(as determined by FERC). The ownership limitation was repealed
by the Energy Policy Act of 2005 (the ``2005 Act''). Since that
2005 repeal, the determination is made by relying on FERC to
determine whether a facility was a ``qualifying small power
production facility'' as that term was defined prior to the
2005 Act, a determination no longer relevant to FERC (see,
e.g., Private Letter Ruling 201539024). The provision adds to
the Code the language of FERC's definition of a qualifying
small power production facility (retaining the power production
capacity not greater than 80 megawatts) without the electric
utility ownership prohibition. The effect of the provision is
that such a power production facility is five-year property for
purposes of section 168(e)(3)(B)(vi)(II), not 15-year property.
The provision is effective for property placed in service after
the date of enactment.
D. Clerical Corrections and Deadwood
1. Clerical corrections and deadwood-related provisions (sec. 401 of
Division U of the Act)
The provision includes clerical corrections and deadwood-
related provisions.
PART FIVE: AIRPORT AND AIRWAY EXTENSION ACT OF 2018, PART II (PUBLIC
LAW 115-250) \553\
---------------------------------------------------------------------------
\553\ H.R. 6897. The House passed H.R. 6897 on September 26, 2018.
The Senate passed the bill without amendment on September 28, 2018. The
President signed the bill on September 29, 2018.
---------------------------------------------------------------------------
1. Expenditure authority from the Airport and Airway Trust Fund and
extension of taxes funding the Airport and Airway Trust Fund
(secs. 4 and 5 of the Act and secs. 4081, 4083, 4261, 4271, and
9502 of the Code)
Present Law
Taxes dedicated to the Airport and Airway Trust Fund
Excise taxes are imposed on amounts paid for commercial air
passenger and freight transportation and on fuels used in
commercial and noncommercial (i.e., transportation that is not
``for hire'') aviation to fund the Airport and Airway Trust
Fund.\554\ The present aviation excise taxes are as follows:
---------------------------------------------------------------------------
\554\ Air transportation through U.S. airspace that neither lands
in nor takes off from a point in the United States (or the ``225-mile
zone'') is exempt from the aviation excise taxes, but the
transportation provider is subject to certain ``overflight fees''
imposed by the Federal Aviation Administration pursuant to section
45301 of Title 49 of the United States Code. The ``225 mile zone'' is
defined as ``that portion of Canada or Mexico which is not more than
225 miles from the nearest point in the continental United States.''
Sec. 4262(c)(2).
------------------------------------------------------------------------
Tax (and Code section) Tax Rates
------------------------------------------------------------------------
Domestic air passengers (sec. 4261)....... 7.5 percent of fare, plus
$4.10 (2018) per domestic
flight segment generally
\555\
International air passengers (sec. 4261).. $18.30 (2018) per arrival or
departure \556\
Amounts paid for right to award free or 7.5 percent of amount paid
reduced rate passenger air transportation (and the value of any other
(sec. 4261) benefit provided) to an air
................................. carrier (or any related
person)
Air cargo (freight) transportation (sec. 6.25 percent of amount
4271). charged for domestic
transportation; no tax on
international cargo
transportation
Aviation fuels (sec. 4081): \557\
Commercial aviation................... 4.3 cents per gallon
Noncommercial (general) aviation:.....
Aviation gasoline................. 19.3 cents per gallon
Jet fuel.......................... 21.8 cents per gallon
Fractional aircraft fuel surtax (sec. 14.1 cents per gallon
4043).
------------------------------------------------------------------------
The Airport and Airway Trust Fund excise taxes (except for
4.3 cents per gallon of the taxes on aviation fuels and the
14.1 cents per gallon fractional aircraft fuel surtax) are
scheduled to expire after September 30, 2018. The 4.3-cents-
per-gallon fuels tax rate is permanent. The fractional aircraft
fuel surtax expires after September 30, 2021.
---------------------------------------------------------------------------
\555\ The domestic flight segment portion of the tax is adjusted
annually (effective each January 1) for inflation.
\556\ The international arrival and departure tax rate is adjusted
annually for inflation. Under a special rule for Alaska and Hawaii, the
tax only applies to departures at a rate of $9.10 per departure for
2018.
\557\ Like most other taxable motor fuels, aviation fuels are
subject to an additional 0.1-cent-per-gallon excise tax to fund the
LUST Trust Fund.
---------------------------------------------------------------------------
Airport and Airway Trust Fund expenditure provisions
The Airport and Airway Trust Fund was established in 1970
to finance a major portion of national aviation programs
(previously funded entirely with General Fund revenues).
Operation of the Trust Fund is governed by parallel provisions
of the Code and authorizing statutes.\558\ The Code provisions
govern deposit of revenues into the Trust Fund and approve
expenditure purposes in authorizing statutes as in effect on
the date of enactment of the latest authorizing Act. The
authorizing Acts provide for specific Trust Fund expenditure
programs.
---------------------------------------------------------------------------
\558\ Sec. 9502 and 49 U.S.C. sec. 48101, et seq.
---------------------------------------------------------------------------
No expenditures are permitted to be made from the Airport
and Airway Trust Fund after September 30, 2018. The purposes
for which Airport and Airway Trust Fund monies are permitted to
be expended are fixed as of the date of enactment of the
Airport and Airway Extension Act of 2018; therefore, the Code
must be amended in order to authorize new Airport and Airway
Trust Fund expenditure purposes.\559\ The Code contains a
specific enforcement provision to prevent expenditure of Trust
Fund monies for purposes not authorized under section
9502.\560\ This provision provides that, should such unapproved
expenditures occur, no further aviation excise tax receipts
will be transferred to the Trust Fund. Rather, the aviation
taxes will continue to be imposed, but the receipts will be
retained in the General Fund.
---------------------------------------------------------------------------
\559\ Sec. 9502(d).
\560\ Sec. 9502(e)(1).
---------------------------------------------------------------------------
Explanation of Provisions
The Airport and Airway Extension Act of 2018, Part II
extends through October 7, 2018, the taxes and expenditure
authority that were scheduled to expire on September 30, 2018.
Effective Date
The provisions are effective on the date of enactment
(September 29, 2018).
PART SIX: FAA REAUTHORIZATION ACT OF 2018 (PUBLIC LAW 115-254) \561\
---------------------------------------------------------------------------
\561\ H.R. 302. The House passed H.R. 302 on January 9, 2017.
Senate passed H.R. 302 with an amendment on September 6, 2018. On
September 26, 2018, the House agreed to the Senate amendment with an
amendment. Senate agreed to the House amendment to the Senate amendment
to H.R. 302 on October 3, 2018. The President signed the bill on
October 5, 2018.
---------------------------------------------------------------------------
1. Expenditure authority from the Airport and Airway Trust Fund and
extension of taxes funding the Airport and Airway Trust Fund
(secs. 801 and 802 of the Act and secs. 4081, 4083, 4261, 4271,
and 9502 of the Code)
Present Law
Taxes dedicated to the Airport and Airway Trust Fund
Excise taxes are imposed on amounts paid for commercial air
passenger and freight transportation and on fuels used in
commercial and noncommercial (i.e., transportation that is not
``for hire'') aviation to fund the Airport and Airway Trust
Fund.\562\ The present aviation excise taxes are as follows:
---------------------------------------------------------------------------
\562\ Air transportation through U.S. airspace that neither lands
in nor takes off from a point in the United States (or the ``225-mile
zone'') is exempt from the aviation excise taxes, but the
transportation provider is subject to certain ``overflight fees''
imposed by the Federal Aviation Administration pursuant to section
45301 of Title 49 of the United States Code. The ``225 mile zone'' is
defined as ``that portion of Canada or Mexico which is not more than
225 miles from the nearest point in the continental United States.''
Sec. 4262(c)(2).
------------------------------------------------------------------------
Tax (and Code section) Tax Rates
------------------------------------------------------------------------
Domestic air passengers (sec. 4261)....... 7.5 percent of fare, plus
$4.10 (2018) per domestic
flight segment
generally.\563\
International air passengers (sec. 4261).. $18.30 (2018) per arrival or
departure.\564\
Amounts paid for right to award free or 7.5 percent of amount paid
reduced rate passenger air transportation (and the value of any other
(sec. 4261) benefit provided) to an air
................................. carrier (or any related
person).
Air cargo (freight) transportation (sec. 6.25 percent of amount
4271). charged for domestic
transportation; no tax on
international cargo
transportation.
Aviation fuels (sec. 4081): \565\
Commercial aviation................... 4.3 cents per gallon
Noncommercial (general) aviation:.....
Aviation gasoline................. 19.3 cents per gallon
Jet fuel.......................... 21.8 cents per gallon
Fractional aircraft fuel surtax (sec. 14.1 cents per gallon
4043).
------------------------------------------------------------------------
The Airport and Airway Trust Fund excise taxes (except for
4.3 cents per gallon of the taxes on aviation fuels and the
14.1 cents per gallon fractional aircraft fuel surtax) are
scheduled to expire after October 7, 2018. The 4.3-cents-per-
gallon fuels tax rate is permanent. The fractional aircraft
fuel surtax expires after September 30, 2021.
---------------------------------------------------------------------------
\563\ The domestic flight segment portion of the tax is adjusted
annually (effective each January 1) for inflation.
\564\ The international arrival and departure tax rate is adjusted
annually for inflation. Under a special rule for Alaska and Hawaii, the
tax only applies to departures at a rate of $9.10 per departure for
2018.
\565\ Like most other taxable motor fuels, aviation fuels are
subject to an additional 0.1-cent-per-gallon excise tax to fund the
LUST Trust Fund.
---------------------------------------------------------------------------
Airport and Airway Trust Fund expenditure provisions
The Airport and Airway Trust Fund was established in 1970
to finance a major portion of national aviation programs
(previously funded entirely with General Fund revenues).
Operation of the Trust Fund is governed by parallel provisions
of the Code and authorizing statutes.\566\ The Code provisions
govern deposit of revenues into the Trust Fund and approve
expenditure purposes in authorizing statutes as in effect on
the date of enactment of the latest authorizing Act. The
authorizing Acts provide for specific Trust Fund expenditure
programs.
---------------------------------------------------------------------------
\566\ Sec. 9502 and 49 U.S.C. sec. 48101, et seq.
---------------------------------------------------------------------------
No expenditures are permitted to be made from the Airport
and Airway Trust Fund after October 7, 2018. The purposes for
which Airport and Airway Trust Fund monies are permitted to be
expended are fixed as of the date of enactment of the Airport
and Airway Extension Act of 2018, Part II; therefore, the Code
must be amended in order to authorize new Airport and Airway
Trust Fund expenditure purposes.\567\ The Code contains a
specific enforcement provision to prevent expenditure of Trust
Fund monies for purposes not authorized under section
9502.\568\ This provision provides that, should such unapproved
expenditures occur, no further aviation excise tax receipts
will be transferred to the Trust Fund. Rather, the aviation
taxes will continue to be imposed, but the receipts will be
retained in the General Fund.
---------------------------------------------------------------------------
\567\ Sec. 9502(d).
\568\ Sec. 9502(e)(1).
---------------------------------------------------------------------------
Explanation of Provision
The FAA Reauthorization Act of 2018 extends through
September 30, 2023, all of the taxes dedicated to, and the
expenditure authority for, the Airport and Airway Trust Fund.
Effective Date
The provisions are effective on the date of enactment
(October 5, 2018).
PART SEVEN: PROTECTING ACCESS TO THE COURTS FOR TAXPAYERS ACT (PUBLIC
LAW 115-332) \569\
---------------------------------------------------------------------------
\569\ H.R. 3996. The House passed H.R. 3996 on March 14, 2018. The
Senate passed the bill without amendment on December 11, 2018. The
President signed the bill on December 19, 2018.
---------------------------------------------------------------------------
1. Transfer of certain cases (sec. 2 of the Act)
Present Law
Certain Federal courts \570\ are authorized to transfer
civil actions and appeals to other of these courts when (1) the
transferor court lacks jurisdiction, (2) the transferee court
would have had jurisdiction at the time the original complaint
or appeal was filed, and (3) the transfer would serve the
interests of justice.\571\ The United States Tax Court (the
``Tax Court'') is not included in the definition of courts for
this purpose. Accordingly, the courts cannot transfer to the
Tax Court a case over which the Tax Court has jurisdiction.
---------------------------------------------------------------------------
\570\ Section 610 of Title 28 of the United States Code provides
that ``courts'' includes the court of appeals and district courts of
the United States, the United States District Court for the District of
the Canal Zone, the District Court of Guam, the District Court of the
Virgin Islands, the United States Court of Federal Claims, and the
Court of International Trade.
\571\ 28 U.S.C. sec. 1631.
---------------------------------------------------------------------------
Explanation of Provision
The provision amends section 1631 of Title 28 of the United
States Code to enable Federal courts to transfer cases within
the jurisdiction of the Tax Court to that court.
Effective Date
The provision is effective on the date of enactment
(December 19, 2018).
APPENDIX: ESTIMATED BUDGET EFFECTS OF CERTAIN TAX LEGISLATION ENACTED
IN THE 115TH CONGRESS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]