[JPRT 116-1-22]
[From the U.S. Government Publishing Office]
[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
TAX LEGISLATION ENACTED IN THE 116TH CONGRESS
----------
Prepared by the Staff
OF THE
JOINT COMMITTEE ON TAXATION
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
FEBRUARY 2022
JCS-1-22
GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN THE 116TH CONGRESS
[JOINT COMMITTEE PRINT]
GENERAL EXPLANATION OF
TAX LEGISLATION ENACTED IN THE 116TH CONGRESS
----------
Prepared by the Staff
OF THE
JOINT COMMITTEE ON TAXATION
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
FEBRUARY 2022
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-906 WASHINGTON : 2022 JCS-1-22
-----------------------------------------------------------------------------------
JOINT COMMITTEE ON TAXATION
117th Congress, 2nd Session
------
HOUSE SENATE
RICHARD NEAL, Massachusetts RON WYDEN, Oregon
Vice Chairman Chairman
LLOYD DOGGETT, Texas DEBBIE STABENOW, Michigan
MIKE THOMPSON, California MARIA CANTWELL, Washington
KEVIN BRADY, Texas MIKE CRAPO, Idaho
VERN BUCHANAN, Florida CHUCK GRASSLEY, Iowa
Thomas A. Barthold, Chief of Staff
Robert P. Harvey, Deputy Chief of Staff
C O N T E N T S
----------
Page
INTRODUCTION..................................................... 1
PART ONE: THE TAXPAYER FIRST ACT (PUBLIC LAW 116-25)............. 3
TITLE I--PUTTING TAXPAYERS FIRST................................. 3
Subtitle A--Independent Appeals Process.......................... 3
1. Establishment of Internal Revenue Service Independent Office
of Appeals (sec. 1001 of the Act and sec. 7803 of the Code).. 3
Subtitle B--Improved Service..................................... 6
1. Comprehensive customer service strategy (sec. 1101 of the
Act)......................................................... 6
2. Low-income exception for payments otherwise required in
connection with a submission of an offer-in-compromise (sec.
1102 of the Act and sec. 7122 of the Code)................... 7
Subtitle C--Sensible Enforcement................................. 8
1. Internal Revenue Service seizure requirements with respect
to structuring transactions (sec. 1201 of the Act)........... 8
2. Exclusion of interest received in action to recover property
seized by the Internal Revenue Service based on structuring
transaction (sec. 1202 of the Act and new sec. 139H of the
Code)........................................................ 10
3. Clarification of equitable relief from joint liability (sec.
1203 of the Act and sec. 6015 of the Code)................... 11
4. Modification of procedures for issuance of third-party
summons (sec. 1204 of the Act and sec. 7609 of the Code)..... 13
5. Private debt collection and special compliance personnel
program (sec. 1205 of the Act and sec. 6306 of the Code)..... 14
6. Reform of notice of contact of third parties (sec. 1206 of
the Act and sec. 7602 of the Code)........................... 16
7. Modification of authority to issue designated summons (sec.
1207 of the Act and sec. 6503(j) of the Code)................ 17
8. Limitation on access of non-Internal Revenue Service
employees to returns and return information (sec. 1208 of the
Act and sec. 7602 of the Code)............................... 19
Subtitle D--Organizational Modernization......................... 21
1. Office of the National Taxpayer Advocate (sec. 1301 of the
Act and sec. 7803(c) of the Code)............................ 21
2. Modernization of Internal Revenue Service organizational
structure (sec. 1302 of the Act)............................. 24
Subtitle E--Other Provisions..................................... 24
1. Return preparation programs for applicable taxpayers (sec.
1401 of the Act and new sec. 7526A of the Code).............. 24
2. Provision of information regarding low-income taxpayer
clinics (sec. 1402 of the Act and sec. 7526 of the Code)..... 27
3. Notice from IRS regarding closure of Taxpayer Assistance
Centers (sec. 1403 of the Act)............................... 28
4. Rules for seizure and sale of perishable goods restricted to
only perishable goods (sec. 1404 of the Act and sec. 6336 of
the Code).................................................... 28
5. Whistleblower reforms (sec. 1405 of the Act and secs. 6103
and 7623 of the Code)........................................ 29
6. Customer service information (sec. 1406 of the Act)......... 31
7. Misdirected tax refund deposits (sec. 1407 of the Act and
sec. 6402 of the Code)....................................... 31
TITLE II--21ST CENTURY IRS....................................... 32
Subtitle A--Cybersecurity and Identity Protection................ 32
1. Public-private partnership to address identity theft tax
refund fraud (sec. 2001 of the Act).......................... 32
2. Recommendations of Electronic Tax Administration Advisory
Committee regarding identity theft refund fraud (sec. 2002 of
the Act)..................................................... 33
3. Information sharing and analysis center (sec. 2003 of the
Act and sec. 6103 of the Code)............................... 33
4. Compliance by contractors with confidentiality safeguards
(sec. 2004 of the Act and sec. 6103 of the Code)............. 37
5. Identity protection personal identification numbers (sec.
2005 of the Act)............................................. 39
6. Single point of contact for tax-related identity theft
victims (sec. 2006 of the Act)............................... 40
7. Notification of suspected identity theft (sec. 2007 of Act
and new sec. 7529 of the Code)............................... 41
8. Guidelines for stolen identity theft refund fraud cases
(sec. 2008 of the Act)....................................... 43
9. Increased penalty for improper disclosure or use of
information by preparers of returns (sec. 2009 of the Act and
sec. 6713 of the Code)....................................... 44
Subtitle B--Development of Information Technology................ 45
1. Management of IRS information technology (sec. 2101 of the
Act and sec. 7803 of the Code)............................... 45
2. Internet platform for Form 1099 filings (sec. 2102 of the
Act)......................................................... 46
3. Streamlined critical pay authority for information
technology positions (sec. 2103 of the Act and new sec. 7812
of the Code)................................................. 47
Subtitle C--Modernization of Consent-Based Income Verification
System......................................................... 48
1. Disclosure of taxpayer information for third-party income
verification (sec. 2201 of the Act and sec. 6103 of the Code) 48
2. Limit redisclosures and uses of consent-based disclosures of
tax return information (sec. 2202 of the Act and sec. 6103 of
the Code).................................................... 50
Subtitle D--Expanded Use of Electronic Systems................... 52
1. Electronic filing of returns (sec. 2301 of the Act and sec.
6011 of the Code)............................................ 52
2. Uniform standards for the use of electronic signatures for
disclosure authorizations to, and other authorizations of,
practitioners (sec. 2302 of the Act and sec. 6061 of the
Code)........................................................ 54
3. Payment of taxes by debit and credit cards (sec. 2303 of the
Act and sec. 6311 of the Code)............................... 55
4. Authentication of users of electronic services accounts
(sec. 2304 of the Act)....................................... 56
Subtitle E--Other Provisions.................................... 56
1. Repeal of provision regarding certain tax compliance
procedures and reports (sec. 2401 of the Act)................ 56
2. Comprehensive training strategy (sec. 2402 of the Act)...... 56
TITLE III--MISCELLANEOUS PROVISIONS.............................. 58
Subtitle A--Reform of Laws Governing Internal Revenue Service
Employees...................................................... 58
1. Prohibition on rehiring any employee of the Internal Revenue
Service who was involuntarily separated from service for
misconduct (sec. 3001 of the Act and sec. 7804 of the Code).. 58
2. Notification of unauthorized inspection or disclosure of
returns and return information (sec. 3002 of the Act and sec.
7431 of the Code)............................................ 59
Subtitle B--Provisions Relating to Exempt Organizations.......... 60
1. Mandatory e-filing by exempt organizations (sec. 3101 of the
Act and secs. 6033 and 6104 of the Code)..................... 60
2. Notice required before revocation of tax-exempt status for
failure to file return (sec. 3102 of the Act and sec. 6033(j)
of the Code)................................................. 62
Subtitle C--Revenue Provision.................................... 65
1. Increase in penalty for failure to file (sec. 3201 of the
Act and sec. 6651(a) of the Code)............................ 65
PART TWO: FOSTERING UNDERGRADUATE TALENT BY UNLOCKING RESOURCES
FOR EDUCATION (``FUTURE'') ACT (PUBLIC LAW 116-91)............. 67
1. Secure disclosure of tax-return information to carry out the
Higher Education Act of 1965 (sec. 3 of the Act and section
6103(l)(13) of the Code)..................................... 67
PART THREE: FURTHER CONSOLIDATED APPROPRIATIONS ACT, 2020 (PUBLIC
LAW 116-94).................................................... 71
DIVISION M--BIPARTISAN AMERICAN MINERS ACT OF 2019............... 71
1. Transfers to 1974 UMWA pension plan and inclusion in
multiemployer health benefit plan (secs. 102 and 103 of the
Act and sec. 402 of the Surface Mining Control and
Reclamation Act of 1977)..................................... 71
2. Reduction in minimum age for allowable in-service
distributions (sec. 104 of the Act and secs. 401 and 457 of
the Code).................................................... 77
DIVISION N--HEALTH AND HUMAN SERVICES EXTENDERS.................. 78
TITLE I--HEALTH AND HUMAN SERVICES EXTENDERS..................... 78
Subtitle A--Medicare Provisions.................................. 78
1. Extension of appropriations to the Patient-Centered Outcomes
Research Trust Fund; extension of certain health insurance
fees (sec. 104 of Div. N of the Act and secs. 4375, 4376, and
9511 of the Code)............................................ 78
Subtitle E--Revenue Provisions................................... 81
1. Repeal of medical device excise tax (sec. 501 of Div. N of
the Act and sec. 4191 of the Code)........................... 81
2. Repeal of annual fee on health insurance providers (sec. 502
of Div. N of the Act)........................................ 83
3. Repeal of excise tax on high cost employer-sponsored health
coverage (sec. 503 of Div. N of the Act and sec. 4980I of the
Code)........................................................ 83
DIVISION O--SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT
ACT OF 2019.................................................... 86
TITLE I--EXPANDING AND PRESERVING RETIREMENT SAVINGS............. 86
1. Multiple employer plans; pooled employer plans (sec. 101 of
the Act, secs. 3, 103, and 104 of ERISA, and sec. 413 of the
Code)........................................................ 86
2. Increase in 10 percent cap for automatic enrollment safe
harbor after first plan year (sec. 102 of the Act and sec.
401(k) of the Code).......................................... 99
3. Rules relating to election of safe harbor 401(k) status
(sec. 103 of the Act and sec. 401(k) of the Code)............ 100
4. Increase in credit limitation for small employer pension
plan startup costs (sec. 104 of the Act and sec. 45E of the
Code)........................................................ 104
5. Small employer automatic enrollment credit (sec. 105 of the
Act and new sec. 45T of the Code)............................ 105
6. Certain taxable non-tuition fellowship and stipend payments
treated as compensation for IRA purposes (sec. 106 of the Act
and sec. 219 of the Code).................................... 106
7. Repeal of maximum age for traditional IRA contributions
(sec. 107 of the Act and sec. 219 of the Code)............... 107
8. Qualified employer plans prohibited from making loans
through credit cards and other similar arrangements (sec. 108
of the Act and sec. 72(p) of the Code)....................... 109
9. Portability of lifetime income options (sec. 109 of the Act
and secs. 401(a), 401(k), 403(b), and 457(d) of the Code).... 110
10. Treatment of custodial accounts on termination of section
403(b) plans (sec. 110 of the Act and sec. 403(b) of the
Code)........................................................ 113
11. Clarification of retirement income account rules relating
to church-controlled organizations (sec. 111 of the Act and
sec. 403(b)(9) of the Code).................................. 116
12. Qualified cash or deferred arrangements must allow long-
term employees working more than 500 but less than 1,000
hours per year to participate (sec. 112 of the Act and secs.
401(k) and 410 of the Code).................................. 117
13. Penalty-free withdrawals from retirement plans for
individuals in case of birth of child or adoption (sec. 113
of the Act and secs. 72(t), 401-403, 408, 457, and 3405 of
the Code).................................................... 124
14. Increase in age for required beginning date for mandatory
distributions (sec. 114 of the Act and sec. 401(a)(9) of the
Code)........................................................ 126
15. Special rules for minimum funding standards for community
newspaper plans (sec. 115 of the Act, sec. 303 of ERISA, and
sec. 430 of the Code)........................................ 129
16. Treating excluded difficulty of care payments as
compensation for determining retirement contribution
limitations (sec. 116 of the Act and secs. 408 and 415 of the
Code)........................................................ 132
TITLE II--ADMINISTRATIVE IMPROVEMENTS ........................... 134
1. Plan adopted by filing due date for year may be treated as
in effect as of close of year (sec. 201 of the Act and sec.
401(b) of the Code).......................................... 134
2. Combined annual report for group of plans (sec. 202 of the
Act, sec. 104 of ERISA, and sec. 6058 of the Code)........... 135
3. Disclosure regarding lifetime income (sec. 203 of the Act
and sec. 105 of ERISA)....................................... 136
4. Fiduciary safe harbor for selection of lifetime income
provider (sec. 204 of the Act and sec. 404 of ERISA)......... 137
5. Modification of nondiscrimination rules to protect older,
longer service participants (sec. 205 of the Act and sec. 401
of the Code)................................................. 140
6. Modification of PBGC premiums for CSEC plans (sec. 206 of
the Act and sec. 4006 of ERISA).............................. 150
TITLE III--OTHER BENEFITS........................................ 152
1. Benefits provided to volunteer firefighters and emergency
medical responders (sec. 301 of the Act and sec. 139B of the
Code)........................................................ 152
2. Expansion of section 529 plans (sec. 302 of the Act and sec.
529 of the Code)............................................. 153
TITLE IV--REVENUE PROVISIONS..................................... 156
1. Modification of required minimum distribution rules for
designated beneficiaries (sec. 401 of the Act and sec.
401(a)(9) of the Code)....................................... 156
2. Increase in penalty for failure to file (sec. 402 of the Act
and sec. 6651 of the Code)................................... 165
3. Increased penalties for failure to file retirement plan
returns (sec. 403 of the Act and sec. 6652 of the Code)...... 166
4. Increase information sharing to administer excise taxes
(sec. 404 of the Act and sec. 6103(o) of the Code)........... 168
TITLE V--TAX RELIEF FOR CERTAIN CHILDREN......................... 169
1. Modification of rules relating to the taxation of unearned
income of certain children (sec. 501 of the Act and sec. 1 of
the Code).................................................... 169
TITLE VI--ADMINISTRATIVE PROVISIONS.............................. 173
1. Provisions relating to plan amendments (sec. 601 of the Act
and sec. 401 of the Code).................................... 173
DIVISION Q--TAXPAYER CERTAINTY AND DISASTER TAX RELIEF ACT OF
2019........................................................... 175
TITLE I--EXTENSION OF CERTAIN EXPIRING PROVISIONS................ 175
Subtitle A--Tax Relief and Support for Families and Individuals.. 175
1. Exclusion from gross income of discharge of qualified
principal residence indebtedness (sec. 101 of the Act and
sec. 108(a)(1)(E) of the Code)............................... 175
2. Treatment of mortgage insurance premiums as qualified
residence interest (sec. 102 of the Act and sec. 163(h) of
the Code).................................................... 177
3. Reduction in medical expense deduction floor (sec. 103 of
the Act and sec. 213 of the Code)............................ 178
4. Deduction of qualified tuition and related expenses (sec.
104 of the Act and sec. 222 of the Code)..................... 178
5. Black Lung Disability Trust Fund excise tax (sec. 105 of the
Act and sec. 4121 of the Code)............................... 180
Subtitle B--Incentives for Employment, Economic Growth, and
Community Development.......................................... 180
1. Indian employment credit (sec. 111 of the Act and sec. 45A
of the Code)................................................. 180
2. Railroad track maintenance credit (sec. 112 of the Act and
sec. 45G of the Code)........................................ 182
3. Mine rescue team training credit (sec. 113 of the Act and
sec. 45N of the Code)........................................ 185
4. Classification of certain race horses as three-year property
(sec. 114 of the Act and sec. 168(e)(3)(A) of the Code)...... 186
5. Seven-year recovery period for motorsports entertainment
complexes (sec. 115 of the Act and sec. 168(i)(15) of the
Code)........................................................ 187
6. Accelerated depreciation for business property on Indian
reservations (sec. 116 of the Act and sec. 168(j) of the
Code)........................................................ 190
7. Expensing rules for certain productions (sec. 117 of the Act
and sec. 181 of the Code).................................... 191
8. Empowerment zone tax incentives (sec. 118 of the Act and
secs. 1391, 1394, 1396, 1397A, and 1397B of the Code)........ 193
9. American Samoa economic development credit (sec. 119 of the
Act)......................................................... 199
Subtitle C--Incentives for Energy Production, Efficiency, and
Green Economy Jobs............................................. 201
1. Biodiesel and renewable diesel (sec. 121 of the Act and
secs. 40A, 6426(c), and 6427(e) of the Code)................. 201
2. Second generation biofuel producer credit (sec. 122 of the
Act and sec. 40 of the Code)................................. 204
3. Nonbusiness energy property (sec. 123 of the Act and sec.
25C of the Code)............................................. 205
4. Qualified fuel cell motor vehicles (sec. 124 of the Act and
sec. 30B of the Code)........................................ 207
5. Alternative fuel refueling property credit (sec. 125 of the
Act and sec. 30C of the Code)................................ 208
6. Two-wheeled plug-in electric vehicle credit (sec. 126 of the
Act and sec. 30D of the Code)................................ 209
7. Credit for electricity produced from certain renewable
resources (sec. 127 of the Act and sec. 45 of the Code)...... 209
8. Production credit for Indian coal facilities (sec. 128 of
the Act and sec. 45 of the Code)............................. 210
9. Energy-efficient homes credit (sec. 129 of the Act and sec.
45L of the Code)............................................. 211
10. Special allowance for second generation biofuel plant
property (sec. 130 of the Act and sec. 168(l) of the Code)... 212
11. Energy efficient commercial buildings deduction (sec. 131
of the Act and sec. 179D of the Code)........................ 214
12. Special rule for sales or dispositions to implement FERC or
State electric restructuring policy for qualified electric
utilities (sec. 132 of the Act and sec. 451(k) of the Code).. 216
13. Extension and clarification of excise tax credits relating
to alternative fuels (sec. 133 of the Act and secs. 6426 and
6427 of the Code)............................................ 218
14. Oil Spill Liability Trust Fund rate (sec. 134 of the Act
and sec. 4611 of the Code)................................... 219
Subtitle D--Certain Provisions Expiring at the End of 2019....... 220
1. New markets tax credit (sec. 141 of the Act and sec. 45D of
the Code).................................................... 220
2. Employer credit for paid family and medical leave (sec. 142
of the Act and sec. 45S of the Code)......................... 224
3. Work opportunity credit (sec. 143 of the Act and sec. 51 of
the Code).................................................... 226
4. Certain provisions related to beer, wine, and distilled
spirits (sec. 144 of the Act and secs. 263A, 5001, 5041,
5051, 5212, 5415, and 5555 of the Code)...................... 232
5. Extension of look-through treatment of payments between
related controlled foreign corporations under foreign
personal holding company rules (sec. 145 of the Act and sec.
954(c)(6) of the Code)....................................... 239
6. Credit for health insurance costs of eligible individuals
(sec. 146 of the Act and sec. 35 of the Code)................ 240
TITLE II--DISASTER TAX RELIEF.................................... 242
1. Definitions (sec. 201 of the Act and secs. 24, 32, 38, 72,
165, and 170 of the Code).................................... 242
2. Special disaster-related rules for use of retirement funds
(sec. 202 of the Act and sec. 72 of the Code)................ 243
3. Employee retention credit for employers affected by
qualified disasters (sec. 203 of the Act and sec. 38 of the
Code)........................................................ 247
4. Temporary suspension of limitation on charitable
contributions (sec. 204(a) of the Act and sec. 170 of the
Code)........................................................ 248
5. Special rules for qualified disaster-related personal
casualty losses (sec. 204(b) of the Act and sec. 165 of the
Code)........................................................ 250
6. Special rule for determining earned income (sec. 204(c) of
the Act and secs. 24 and 32 of the Code)..................... 251
7. Automatic extension of filing deadlines in case of certain
taxpayers affected by Federally declared disasters (sec. 205
of the Act and sec. 7508A of the Code)....................... 252
8. Modification of the tax rate for the excise tax on
investment income of private foundations (sec. 206 of the Act
and sec. 4940 of the Code)................................... 254
9. Additional low-income housing tax credit allocations for
qualified 2017 and 2018 California disaster areas (sec. 207
of the Act and sec. 42 of the Code).......................... 256
10. Treatment of certain possessions (sec. 208 of the Act)..... 258
TITLE III--OTHER PROVISIONS...................................... 259
1. Modification of income for purposes of determining tax-
exempt status of certain mutual or cooperative telephone or
electric companies (sec. 301 of the Act and sec. 501(c)(12)
of the Code)................................................. 259
2. Repeal of increase in unrelated business taxable income for
certain fringe benefit expenses (sec. 302 of the Act and sec.
512(a)(7) of the Code)....................................... 260
PART FOUR: VIRGINIA BEACH STRONG ACT (PUBLIC LAW 116-98)......... 265
1. Special rules for contributions for relief of the families
of the mass shooting in Virginia Beach (sec. 2 of the Act)... 265
PART FIVE: FAMILIES FIRST CORONAVIRUS RESPONSE ACT (PUBLIC LAW
116-127)....................................................... 267
DIVISION G--TAX CREDITS FOR PAID SICK AND PAID FAMILY AND MEDICAL
LEAVE.......................................................... 267
1. Payroll credit for required paid sick leave (sec. 7001 of
the Act)..................................................... 272
2. Credit for sick leave for certain self-employed individuals
(sec. 7002 of the Act)....................................... 275
3. Payroll credit for required paid family leave (sec. 7003 of
the Act)..................................................... 277
4. Credit for family leave for certain self-employed
individuals (sec. 7004 of the Act)........................... 280
5. Special rule related to tax on employers (sec. 7005 of the
Act)......................................................... 282
PART SIX: CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY
(``CARES'') ACT (PUBLIC LAW 116-136)........................... 285
TITLE II--ASSISTANCE FOR AMERICAN WORKERS, FAMILIES, AND
BUSINESSES..................................................... 285
Subtitle B--Rebates and Other Individual Provisions.............. 285
1. 2020 recovery rebates for individuals (sec. 2201 of the Act
and sec. 6428 of the Code)................................... 285
2. Special rules for use of retirement funds (sec. 2202 of the
Act and sec. 72 of the Code)................................. 295
3. Temporary waiver of required minimum distribution rules for
certain retirement plans and accounts (sec. 2203 of the Act
and secs. 401 and 402 of the Code)........................... 298
4. Allowance of partial above-the-line deduction for charitable
contributions (sec. 2204 of the Act and sec. 62 of the Code). 302
5. Modification of limitations on charitable contributions
during 2020 (sec. 2205 of the Act and sec. 170 of the Code).. 305
6. Exclusion for certain employer payments of student loans
(sec. 2206 of the Act and secs. 127, 3121, 3306, and 3401 of
the Code).................................................... 308
Subtitle C--Business Provisions.................................. 311
1. Employee retention credit for employers subject to closure
due to COVID-19 (sec. 2301 of the Act)....................... 311
2. Delay of payment of employer payroll taxes (sec. 2302 of the
Act and secs. 6302 and 6654 of the Code)..................... 319
3. Modifications for net operating losses (sec. 2303 of the Act
and sec. 172 of the Code).................................... 325
4. Modification of limitation on losses for taxpayers other
than corporations (sec. 2304 of the Act and secs. 461(l) and
(j) of the Code)............................................. 330
5. Modification of credit for prior year minimum tax liability
of corporations (sec. 2305 of the Act and sec. 53 of the
Code)........................................................ 333
6. Modifications of limitation on business interest (sec. 2306
of the Act and sec. 163(j) of the Code)...................... 335
7. Technical amendments regarding qualified improvement
property (sec. 2307 of the Act and sec. 168(e) of the Code).. 340
8. Temporary exception from excise tax for alcohol used to
produce hand sanitizer (sec. 2308 of the Act and sec. 5214 of
the Code).................................................... 343
TITLE III--SUPPORTING AMERICA'S HEALTH CARE SYSTEM IN THE FIGHT
AGAINST THE CORONAVIRUS........................................ 345
Subtitle B--Education Provisions................................. 345
1. Technical and other amendments relating to the FUTURE Act
(sec. 3516 of the Act and sec. 6103 of the Code)............. 345
Subtitle C--Labor Provisions..................................... 348
1. Advance refunding of credits (sec. 3606 of the Act)......... 348
2. Expansion of DOL authority to postpone certain deadlines
(sec. 3607 of the Act, sec. 518 of ERISA, and sec. 319 of the
Public Health Service Act)................................... 352
3. Single-employer plan funding rules (sec. 3608 of the Act and
secs. 430(j and 436 of the Code)............................. 353
4. Application of cooperative and small employer charity
pension plan rules to certain charitable employers whose
primary exempt purpose is providing services with respect to
mothers and children (sec. 3609 of the Act, sec. 210(f) of
ERISA, and sec. 414(y) of the Code).......................... 360
Subtitle D--Finance Committee.................................... 365
1. Exemption for telehealth services (sec. 3701 of the Act and
sec. 223 of the Code)........................................ 365
2. Inclusion of certain over-the-counter medical products as
qualified medical expenses (sec. 3702 of the Act and secs.
106, 220, and 223 of the Code)............................... 367
TITLE IV--ECONOMIC STABILIZATION AND ASSISTANCE TO SEVERELY
DISTRESSED SECTORS OF THE UNITED STATES ECONOMY................ 369
Subtitle A--Coronavirus Economic Stabilization Act of 2020....... 369
1. Suspension of certain aviation excise taxes (sec. 4007 of
the Act)..................................................... 369
OTHER PROVISIONS................................................. 371
1. Loan forgiveness (sec. 1106 of the Act)..................... 371
2. Emergency relief and taxpayer protections (sec. 4003 of the
Act)......................................................... 372
PART SEVEN: CONTINUING APPROPRIATIONS ACT, 2021 AND OTHER
EXTENSIONS ACT (PUBLIC LAW 116-159)............................ 375
DIVISION B--SURFACE TRANSPORTATION PROGRAM EXTENSION............. 375
TITLE II--TRUST FUNDS............................................ 375
1. Extension of expenditure and contract liquidation authority
for the Highway Trust Fund, the Sport Fish Restoration and
Boating Trust Fund, and the Leaking Underground Storage Tank
Trust Fund (secs. 1201, 1202, and 1203 of the Act and secs.
9503, 9504, and 9508 of the Code)............................ 375
2. Further additional transfers to the Highway Trust Fund and
additional transfer to the Airport and Airway Trust Fund
(secs. 1204 and 1205 of the Act and secs. 9502 and 9503 of
the Code).................................................... 375
PART EIGHT: CONSOLIDATED APPROPRIATIONS ACT, 2021 (PUBLIC LAW
116-260)....................................................... 377
DIVISION N--ADDITIONAL CORONAVIRUS RESPONSE AND RELIEF........... 377
TITLE II--ASSISTANCE TO INDIVIDUALS, FAMILIES, AND BUSINESSES.... 377
Subtitle B--COVID-Related Tax Relief Act of 2020................. 377
1. Additional 2020 recovery rebates for individuals (sec. 272
of the Act and sec. 6428A of the Code)....................... 377
2. Amendments to recovery rebates under the CARES Act (sec. 273
of the Act and sec. 6428 of the Code)........................ 381
3. Extension of certain deferred payroll taxes (sec. 274 of the
Act)......................................................... 382
4. Regulations or guidance clarifying application of educator
expense tax deduction (sec. 275 of the Act and sec. 62 of the
Code)........................................................ 388
5. Clarification of tax treatment of forgiveness of covered
loans, clarification of tax treatment of certain loan
forgiveness and other business financial assistance, and
authority to waive certain information reporting requirements
(secs. 276, 278, and 279 of the Act)......................... 389
6. Emergency financial aid grants (sec. 277 of the Act and
secs. 25A, 117, and 139 of the Code)......................... 402
7. Application of special rules to money purchase pension plans
(sec. 280 of the Act and sec. 401 of the Code)............... 405
8. Election to waive application of certain modifications to
farming losses (sec. 281 of the Act and sec. 172 of the Code) 407
9. Oversight and audit reporting (sec. 282 of the Act and sec.
19010 of the CARES Act)...................................... 409
10. Disclosures to identify tax receivables not eligible for
collection pursuant to qualified tax collection contracts
(sec. 283 of the Act and new sec. 6103(k)(15) and current
sec. 6306 of the Code)....................................... 410
11. Modification of certain protections for taxpayer return
information (sec. 284 of the Act and sec. 6103(l)(13) of the
Code)........................................................ 412
12. 2020 election to terminate transfer period for qualified
transfers from pension plan for covering future retiree costs
(sec. 285 of the Act and sec. 420 of the Code)............... 417
13. Extension of credits for paid sick and family leave (sec.
286 of the Act).............................................. 421
14. Election to use prior year net earnings from self-
employment in determining average daily self-employment
income for purposes of credits for paid sick and family leave
(sec. 287 of the Act)........................................ 429
15. Certain technical improvements to credits for paid sick and
family leave (sec. 288 of the Act)........................... 432
DIVISION Y--AMERICAN MINER BENEFITS IMPROVEMENT ACT OF 2020...... 440
1. Transfers to 1974 UMWA pension plan (sec. 2 of the Act and
sec. 402 of the Surface of Mining Control and Reclamation Act
of 1977)..................................................... 440
DIVISION BB--PRIVATE HEALTH INSURANCE AND PUBLIC HEALTH
PROVISIONS..................................................... 445
TITLE I--NO SURPRISES ACT........................................ 445
1. Health savings accounts and the No Surprises Act (sec. 102
of the Act and sec. 223 of the Code)......................... 445
DIVISION EE--TAXPAYER CERTAINTY AND DISASTER TAX RELIEF ACT OF
2020........................................................... 450
TITLE I--EXTENSION OF CERTAIN EXPIRING PROVISIONS................ 450
Subtitle A--Certain Provisions Made Permanent.................... 450
1. Reduction in medical expense deduction floor (sec. 101 of
the Act and sec. 213 of the Code)............................ 450
2. Energy efficient commercial buildings deduction (sec. 102 of
the Act and sec. 179D of the Code)........................... 450
3. Benefits provided to volunteer firefighters and emergency
medical responders (sec. 103 of the Act and sec. 139B of the
Code)........................................................ 453
4. Lifetime learning credit (sec. 104 of the Act and secs. 25A
and 222 of the Code)......................................... 453
5. Railroad track maintenance credit (sec. 105 of the Act and
sec. 45G of the Code)........................................ 456
6. Provisions related to beer, wine, and distilled spirits
(secs. 106-110 of the Act and sec. 263A, sec. 5001, sec.
5041, sec. 5051, new sec. 5067, sec. 5212, sec. 5415, sec.
5555, new sec. 6038E, and sec. 7652 of the Code)............. 459
Subtitle B--Certain Provisions Extended Through 2025............. 472
1. Extension of look-through treatment of payments between
related controlled foreign corporations under foreign
personal holding company rules (sec. 111 of the Act and sec.
954(c)(6) of the Code)....................................... 472
2. New markets tax credit (sec. 112 of the Act and sec. 45D of
the Code).................................................... 473
3. Work opportunity credit (sec. 113 of the Act and sec. 51 of
the Code).................................................... 477
4. Exclusion from gross income of discharge of qualified
principal residence indebtedness (sec. 114 of the Act and
sec. 108 of the Code)........................................ 477
5. Seven-year recovery period for motorsports entertainment
complexes (sec. 115 of the Act and sec. 168(i)(15) of the
Code)........................................................ 478
6. Expensing rules for certain productions (sec. 116 of the Act
and sec. 181 of the Code).................................... 480
7. Oil Spill Liability Trust Fund rate (sec. 117 of the Act and
sec. 4611 of the Code)....................................... 482
8. Empowerment zone tax incentives (sec. 118 of the Act and
secs. 1391, 1394, 1396, 1397A, and 1397B of the Code)........ 483
9. Employer credit for paid family and medical leave (sec. 119
of the Act and sec. 45S of the Code)......................... 489
10. Exclusion for certain employer payments of student loans
(sec. 120 of the Act and secs. 127, 3121, 3306, and 3401 of
the Code).................................................... 491
11. Credit for carbon oxide sequestration (sec. 121 of the Act
and sec. 45Q of the Code).................................... 494
Subtitle C--Extension of Certain Other Provisions................ 497
1. Credit for electricity produced from certain renewable
resources (secs. 131 and 204 of the Act and secs. 45 and 48
of the Code)................................................. 497
2. Modification of energy investment credit (secs. 132 and 203
of the Act and sec. 48 of the Code).......................... 498
3. Treatment of mortgage insurance premiums as qualified
residence interest (sec. 133 of the Act and sec. 163(h) of
the Code).................................................... 503
4. Credit for health insurance costs of eligible individuals
(sec. 134 of the Act and sec. 35 of the Code)................ 503
5. Indian employment credit (sec. 135 of the Act and sec. 45A
of the Code)................................................. 503
6. Mine rescue team training credit (sec. 136 of the Act and
sec. 45N of the Code)........................................ 504
7. Classification of certain race horses as three-year property
(sec. 137 of the Act and sec. 168(e)(3)(A) of the Code)...... 505
8. Accelerated depreciation for business property on Indian
reservations (sec. 138 of the Act and sec. 168(j) of the
Code)........................................................ 506
9. American Samoa economic development credit (sec. 139 of the
Act)......................................................... 508
10. Second generation biofuel producer credit (sec. 140 of the
Act and sec. 40 of the Code)................................. 510
11. Nonbusiness energy property (sec. 141 of the Act and sec.
25C of the Code)............................................. 510
12. Qualified fuel cell motor vehicles (sec. 142 of the Act and
sec. 30B of the Code)........................................ 510
13. Alternative fuel refueling property credit (sec. 143 of the
Act and sec. 30C of the Code)................................ 511
14. Two-wheeled plug-in electric vehicle credit (sec. 144 of
the Act and sec. 30D of the Code)............................ 511
15. Production credit for Indian coal facilities (sec. 145 of
the Act and sec. 45 of the Code)............................. 512
16. Energy-efficient homes credit (sec. 146 of the Act and sec.
45L of the Code)............................................. 512
17. Extension of excise tax credits relating to alternative
fuels (sec. 147 of the Act and secs. 6426 and 6427 of the
Code)........................................................ 512
18. Extension and modification of credit for residential energy
efficient property (sec. 148 of the Act and secs. 25C and 25D
of the Code)................................................. 513
19. Black Lung Disability Trust Fund excise tax (sec. 149 of
the Act and sec. 4121 of the Code)........................... 515
TITLE II--OTHER PROVISIONS....................................... 515
1. Minimum low-income housing tax credit rate (sec. 201 of the
Act and sec. 42 of the Code)................................. 515
2. Depreciation of certain residential rental property over 30-
year period (sec. 202 of the Act and sec. 168 of the Code)... 516
3. Modification of energy investment credit (sec. 203 of the
Act and sec. 48 of the Code)................................. 519
4. Extension of energy credit for offshore wind facilities
(sec. 204 of the Act and sec. 48 of the Code)................ 519
5. Minimum rate of interest for certain determinations related
to life insurance contracts (sec. 205 of the Act and sec.
7702 of the Code)............................................ 520
6. Clarification and technical improvements to CARES Act
employee retention credit (sec. 206 of the Act and sec. 2301
of the CARES Act)............................................ 523
7. Extension and modification of employee retention and
rehiring credit (sec. 207 of the Act and sec. 2301 of the
CARES Act)................................................... 525
8. Minimum age for distributions during working retirement
(sec. 208 of the Act and sec. 401(a) of the Code)............ 527
9. Temporary rule preventing partial plan termination (sec. 209
of the Act and sec. 411 of the Code)......................... 528
10. Temporary allowance of full deduction for business meals
(sec. 210 of the Act and sec. 274 of the Code)............... 530
11. Temporary special rule for determination of earned income
(sec. 211 of the Act and secs. 24 and 32 of the Code)........ 532
12. Certain charitable contributions deductible by non-
itemizers (sec. 212 of the Act and secs. 170, 6662, and 6751
of the Code)................................................. 533
13. Modification of limitations on charitable contributions
(sec. 213 of the Act and sec. 170 of the Code)............... 537
14. Temporary special rules for health and dependent care
flexible spending arrangements (sec. 214 of the Act and sec.
125 of the Code)............................................. 540
TITLE III--DISASTER TAX RELIEF................................... 545
1. Definitions (sec. 301 of the Act and secs. 24, 32, 38, 42,
72, 165, and 170 of the Code)................................ 545
2. Special disaster-related rules for use of retirement funds
(sec. 302 of the Act and sec. 72 of the Code)................ 545
3. Employee retention credit for employers affected by
qualified disasters (sec. 303 of the Act and sec. 38 of the
Code)........................................................ 549
4. Special rules for qualified disaster relief contributions of
corporations (sec. 304(a) of the Act and sec. 170 of the
Code)........................................................ 554
5. Special rules for qualified disaster-related personal
casualty losses (sec. 304(b) of the Act and sec. 165 of the
Code)........................................................ 557
6. Low-income housing tax credit (sec. 305 of the Act and sec.
42 of the Code).............................................. 558
7. Treatment of certain possessions (sec. 306 of the Act)...... 559
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 116th Congress.
---------------------------------------------------------------------------
\1\ This document may be cited as follows: Joint Committee on
Taxation, General Explanation of Tax Legislation Enacted in the 116th
Congress (JCS-1-22), February 2022.
---------------------------------------------------------------------------
For each provision, this document includes a description of
present law, an explanation of the provision, and the 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. For a bill with a Committee report (or, in the
absence of one, 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 report
(or 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 stated.
Part One is an explanation of the Taxpayer First Act (Pub.
L. No. 116-25).
Part Two is an explanation of certain provisions of the
Fostering Undergraduate Talent by Unlocking Resources for
Education (``FUTURE'') Act (Pub. L. No. 116-91).
Part Three is an explanation of the revenue provisions of
Divisions M, N, O, and Q of the Further Consolidated
Appropriations Act, 2020 (Pub. L. No. 116-94).
Part Four is an explanation of the Virginia Beach Strong
Act (Pub. L. No. 116-98).
Part Five is an explanation of Division G of the Families
First Coronavirus Response Act (Pub. L. No. 116-127).
Part Six is an explanation of the revenue provisions of the
Coronavirus Aid, Relief, and Economic Security (``CARES'') Act
(Pub. L. No. 116-136).
Part Seven is an explanation of the revenue provisions of
the Continuing Appropriations Act, 2021 and Other Extensions
Act (Pub. L. No. 116-159).
Part Eight is an explanation of the revenue provisions of
the Consolidated Appropriations Act, 2021 (Pub. L. No. 116-
260).
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: THE TAXPAYER FIRST ACT
(PUBLIC LAW 116-25) \2\
---------------------------------------------------------------------------
\2\ H.R. 3151. The bill was introduced in the House of
Representatives on June 6, 2019, and was passed by the House on June
10, 2019. The Senate passed the bill without amendment by voice vote on
June 13, 2019. The President signed the bill on July 1, 2019, together
with an accompanying signing statement regarding appointments of IRS
officials under sections 1001(a) and 2101(a) of the Act. See Statement
on Signing The Taxpayer First Act, Washington, D.C., July 1, 2019,
Daily Comp. Pres. Docs., 2019, DCPD No. 201900450, available at https:/
/www.govinfo.gov/content/pkg/DCPD-201900450/html/DCPD-201900450.htm.
---------------------------------------------------------------------------
TITLE I--PUTTING TAXPAYERS FIRST
Subtitle A--Independent Appeals Process
1. Establishment of Internal Revenue Service Independent Office of
Appeals (sec. 1001 of the Act and sec. 7803 of the Code)
Present Law
The IRS Reform and Restructuring Act of 1998 (``RRA98'')
directed the Commissioner of Internal Revenue (the
``Commissioner'') to restructure the Internal Revenue Service
(``IRS'') by establishing and implementing an organizational
structure that features operating units serving particular
groups of taxpayers with similar needs and ensures an
independent appeals function within the IRS.\3\ Although the
Code does not mandate the existence of an independent office
within the IRS to review administrative determinations, it does
require an independent administrative review of certain
determinations,\4\ and further requires that the Commissioner
ensure that the duties of IRS employees are executed in a
manner consistent with rights inferred from other Code
provisions.\5\
---------------------------------------------------------------------------
\3\ Pub. L. No. 105-206, sec. 1001(a).
\4\ See, e.g., secs. 6320 (notice and opportunity for hearing upon
filing of notice of lien), 6330 (notice and opportunity for hearing
before levy), 7122 (rejection of a proposed offer-in-compromise or
installment agreement), as well as 7123 (alternative dispute resolution
procedures).
\5\ Section 7803, as amended in 2015, requires that the
Commissioner ensure that the enumerated taxpayer rights are
incorporated in the training and evaluation of all employees.
---------------------------------------------------------------------------
Under the general authority of the Secretary of the
Treasury (``Secretary'') to interpret the Code and that of the
Commissioner to administer the Code and to employ the persons
necessary to do so,\6\ the IRS operates an Office of Appeals
(``Appeals'') headed by a Chief, Appeals.\7\ That office
traditionally functions as the settlement arm of the IRS. In
doing so, it reviews administrative determinations arising both
from collection and examination activities, and attempts to
resolve them without need for litigation, including by using
alternative dispute resolution methods. As a result, review of
administrative actions is generally available prior to payment
of any tax underlying the controversy. Exceptions occur, and
include cases in which inadequate time remains on the
limitations period for assessment and collection or those in
which the only arguments raised by the taxpayer are frivolous
positions.\8\
---------------------------------------------------------------------------
\6\ Secs. 7803(a) (The duties and powers include the power to
administer, manage, conduct, direct, and supervise the execution and
application of the internal revenue laws or related statutes and tax
conventions to which the United States is a party, and to recommend to
the President a candidate for Chief Counsel (and recommend the removal
of the Chief Counsel)); 7804 (The Commissioner is authorized to employ
such persons as the Commissioner deems proper for the administration
and enforcement of the internal revenue laws and is required to issue
all necessary directions, instructions, orders, and rules applicable to
such persons, including determination and designation of posts of
duty); and 7805 (Secretary authority to interpret the Code).
\7\ According to its website, the Office of Appeals and its
predecessors have existed since 1927. https://www.irs.gov/compliance/
appeals/appeals-an-independent-organization.
\8\ See section 6702(c), which requires that the Secretary
periodically review and list positions that have been identified as
frivolous for purposes of the frivolous return penalty.
---------------------------------------------------------------------------
Similarly, if a case has reached a point at which
litigation is initiated, the availability of consideration by
Appeals may be limited. First, authority to settle cases
referred to the Department of Justice for defense or initiation
of litigation rests solely with that Department. such cases are
therefore ineligible for referral to Appeals.\9\ The terms
under which a case pending in the United States Tax Court
(``Tax Court'') may be referred to Appeals are described in
published guidance that centralizes the decision to withhold a
case from Appeals to assure consistent standards are
applied.\10\
---------------------------------------------------------------------------
\9\ Sec. 7122.
\10\ Rev. Proc. 2016-22, 26 C.F.R. sec. 601.106. Exceptions to the
general rule in favor of requiring Appeals consideration include cases
that are withheld in the interests of sound tax administration, among
other reasons.
---------------------------------------------------------------------------
Employees of Appeals are compensated in accordance with the
rules governing Federal employment generally.\11\
---------------------------------------------------------------------------
\11\ Part III of Title 5 of the United States Code prescribes rules
for Federal employment, including employment, retention, and management
and employee issues.
---------------------------------------------------------------------------
Explanation of Provision
The provision codifies the requirement of an independent
administrative appeals function by establishing within the IRS
an office to be known as the Internal Revenue Service
Independent Office of Appeals (``Independent Appeals'') and to
be headed by an official known as the Chief of Appeals, as
described below. The purposes and duties of the office as well
as the taxpayers' general right to seek consideration by that
office, subject to certain limitations, are described below.
Chief of Appeals and staff
The provision grants authority to the Commissioner to
appoint the Chief of Appeals, who is to be compensated at the
same rate as the highest rate of basic pay established for the
Senior Executive Service.\12\ The appointment is not subject to
the rules under Title 5 of the United States Code that govern
competitive service or the Senior Executive Service. The Chief
of Appeals reports directly to the Commissioner of the IRS. The
person appointed to the position is required to have experience
in a broad range of Federal tax law controversies and
management of large service organizations.
---------------------------------------------------------------------------
\12\ 5 U.S.C. sec. 5382.
---------------------------------------------------------------------------
The provision also confirms that the Chief of Appeals and
her employees are to have access to legal assistance and advice
from staff within the Office of Chief Counsel about cases
pending at Independent Appeals. Chief Counsel is responsible
for ensuring that the attorneys are able to provide independent
advice. In doing so, to the extent practicable, staff assigned
to answer inquiries from Independent Appeals should not include
those involved in advising the IRS employees working directly
on the case prior to its referral to Independent Appeals or in
preparation of the case for litigation.
Functions of Independent Appeals
Independent Appeals is intended to perform functions
similar to those of the current Appeals. Independent Appeals is
to resolve tax controversies and review administrative
decisions of the IRS in a fair and impartial manner, for the
purposes of enhancing public confidence, promoting voluntary
compliance, and ensuring consistent application and
interpretation of Federal tax laws. Resolution of tax
controversies in this manner is generally available to all
taxpayers, subject to reasonable exceptions that the Secretary
may provide. Thus, cases of a type that are referred to Appeals
under present law remain eligible for referral to Independent
Appeals.
The provision includes a savings clause that requires
application of rules similar to those in RRA98 to ensure
continuity of the validity of administrative and legal
proceedings, including legal documents related to such
proceedings and existing delegations of authority.
Enhancement of taxpayer access to Independent Appeals
In making access to Independent Appeals generally available
to all taxpayers, the establishment of the new office clarifies
the rights of taxpayers to review administrative case files and
to protest denial of access to Independent Appeals.
Taxpayer access to case files
The provision requires that the administrative case file
referred to Independent Appeals be available to certain
individual and small business taxpayers. The specified
taxpayers that are eligible are (1) individuals with adjusted
gross incomes not exceeding $400,000 and (2) entities with
gross receipts not exceeding $5 million for the taxable year to
which the dispute relates. In determining whether persons are
within the scope of the latter category, rules similar to those
used to determine whether persons should be treated as a single
employer for purposes of cash method accounting are to be
applied.\13\ Eligible taxpayers must be able to review the non-
privileged portions of materials developed by the IRS not later
than 10 days prior to the requested conference with Independent
Appeals. In providing the materials, the IRS need not produce
for the taxpayer the documents that were initially provided to
the IRS by the taxpayer. In addition, the taxpayer may elect to
waive the 10-day period and accept access to the materials on
the date of the scheduled conference.
---------------------------------------------------------------------------
\13\ The aggregation rules are found at section 448(c)(2).
---------------------------------------------------------------------------
Cases not referred to Independent Appeals
In cases in which the IRS has issued a notice of deficiency
to a taxpayer, the Commissioner must prescribe notice and
protest procedures for taxpayers whose request for Independent
Appeals consideration is denied. Such protest procedures will
be available to taxpayers who have received a notice of
deficiency in cases other than those involving only frivolous
positions within the meaning of the Code.\14\ The procedures
must include a requirement that the Commissioner notify a
taxpayer of the denial in a written statement that includes a
statement of the facts underlying the basis for the denial of
the request together with a detailed explanation of the reasons
for denying the request for referral to Independent Appeals. In
addition, the written notice must advise the taxpayer of the
right to protest the denial of the request to the Commissioner
and include information about how to lodge such a protest.
---------------------------------------------------------------------------
\14\ Sec. 6702(c).
---------------------------------------------------------------------------
The Commissioner must provide to Congress an annual written
report detailing the number of denials of access to Independent
Appeals and the reasons for such denials.
Effective Date
The provision is generally effective upon the date of
enactment (July 1, 2019), except with regard to the portion of
the provision allowing taxpayer access to case files, which is
effective for cases in which the conference occurs more than
one year after the date of enactment.
Subtitle B--Improved Service
1. Comprehensive customer service strategy (sec. 1101 of the Act)
Present Law
The Code provides that the Commissioner has such duties and
powers as prescribed by the Secretary.\15\ Unless otherwise
specified by the Secretary, such duties and powers include the
power to administer, manage, conduct, direct, and supervise the
execution and application of the internal revenue laws or
related statutes. In executing these duties, the Commissioner
depends upon strategic plans that prioritize goals and manage
its resources. In the current strategic plan, adding and
enhancing tools and support to improve taxpayers and tax
professionals' interactions with the IRS to meet their tax
obligations is identified as one of the IRS's six strategic
goals.\16\
---------------------------------------------------------------------------
\15\ Sec. 7803(a).
\16\ See Internal Revenue Service Strategic Plan FY2018-2022,
Publication 3744, available at https://www.irs.gov/pub/irs-pdf/
p3744.pdf.
---------------------------------------------------------------------------
Explanation of Provision
The provision requires the Secretary to develop a
comprehensive strategy for customer service and to submit such
plan to Congress not later than the date which is one year
after the date of enactment. The strategy will include: (1) a
plan to determine appropriate levels of online services,
telephone call back services, and training of employees
providing customer services, based on best practices of
businesses and designed to meet reasonable customer
expectations; (2) an assessment of all services that the IRS
can co-locate with other Federal services or offer as self-
service options; (3) proposals for long-term improvements over
the next 10 fiscal years, with appropriate short-term goals
over the current and following fiscal year and mid-term goals
over the next three to five fiscal years; (4) a plan to update
guidance and training materials, including the Internal Revenue
Manual, for customer service employees of the IRS to reflect
such strategy; and (5) metrics for measuring the IRS's progress
in implementing its strategy. Within two years after the date
of enactment, the Secretary or the Secretary's delegate is
required to make public the updated guidance and training
materials in a user-friendly fashion.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
2. Low-income exception for payments otherwise required in connection
with a submission of an offer-in-compromise (sec. 1102 of the
Act and sec. 7122 of the Code)
Present Law
The IRS is authorized to enter into offers-in-compromise
under which the taxpayer and Federal government agree that a
tax liability may be satisfied by payment of less than the full
amount owed.\17\ An offer-in-compromise may be accepted on one
of three grounds: (1) doubt as to liability, available in cases
in which the validity of the actual tax liability is in
question; (2) doubt as to collectability based on lack of
sufficient assets from which the tax, interest, and penalties
can be paid in full; or (3) effective tax administration,
applicable in a case in which collection in full would cause
the taxpayer economic hardship such that compromise rather than
collection would better encourage tax compliance.\18\ If the
unpaid tax liabilities total $50,000 or more, an offer-in-
compromise can be accepted only if a public report is filed,
supported by a written opinion from the IRS Chief Counsel,
stating the reasons for the compromise, the amounts of assessed
tax, penalties and interest, and the amounts actually paid
pursuant to the offer-in-compromise.\19\
---------------------------------------------------------------------------
\17\ Sec. 7122.
\18\ Treas. Reg. sec. 1.7122-1(b). For this purpose, economic
hardship is defined under Treas. Reg.sec. 301.6343-1.
\19\ Sec. 7122(b); Treas. Reg. sec. 1.7122-1(e)(6). The $50,000
threshold was raised from $500 in 1996. Sec. 503 of the Taxpayer Bill
of Rights 2, Pub. L. No. 104-168.
---------------------------------------------------------------------------
Taxpayers making a lump sum offer-in-compromise must
include a nonrefundable payment of 20 percent of the lump sum
with the initial offer (herein, ``upfront partial
payment'').\20\ The IRS waives this upfront partial payment
when an offer is submitted by a low-income taxpayer, defined as
an individual who falls at or below 250 percent of the poverty
guidelines published by the Department of Health and Human
Services, or such other measure that is adopted by the
Secretary (herein, ``low-income taxpayer'').\21\ Taxpayers
seeking an offer-in-compromise involving periodic payments must
provide a nonrefundable payment of the first installment that
would be due if the offer were accepted.\22\
---------------------------------------------------------------------------
\20\ Sec. 7122(c)(1)(A).
\21\ Notice 2006-68, 2006-31 I.R.B. 105, July 31, 2006.
\22\ Sec. 7122(c)(1)(B).
---------------------------------------------------------------------------
In general, a taxpayer is required to provide a user fee
for processing the offer-in-compromise.\23\ However, no fee
will be charged if an offer either is based solely on doubt as
to liability or is made by a low-income taxpayer.\24\
---------------------------------------------------------------------------
\23\ Treas. Reg. sec. 300.3(b). The fee for processing an offer to
compromise submitted before April 27, 2020, is $186. The fee for
processing an offer to compromise submitted on or after April 27, 2020,
is $205.
\24\ Treas. Reg. sec. 300.3(b)(i) and (ii).
---------------------------------------------------------------------------
Explanation of Provision
The provision codifies the current low-income taxpayer
exception with respect to any user fee or upfront partial
payment imposed with respect to any offer-in-compromise. The
provision makes clear that the determination of low-income is
based on the individual's adjusted gross income as determined
for the most recent tax year for which such information is
available.
Effective Date
The provision applies to offers-in-compromise submitted
after the date of enactment (July 1, 2019).
Subtitle C--Sensible Enforcement
1. Internal Revenue Service seizure requirements with respect to
structuring transactions (sec. 1201 of the Act)
Present Law
The Bank Secrecy Act of 1970 (``BSA'') mandates a reporting
and recordkeeping system that assists Federal law enforcement
and regulatory agencies in the detection, monitoring, and
tracing of certain monetary transactions.\25\ The reporting
requirements are imposed on individuals, financial
institutions, and non-financial trades and businesses that act
similar to financial institutions.\26\ The requirements include
reporting currency transactions exceeding $10,000.
---------------------------------------------------------------------------
\25\ The Bank Secrecy Act, 31 U.S.C. secs. 5311-5332.
\26\ 31 U.S.C. sec. 5312(a)(1).
---------------------------------------------------------------------------
To circumvent these reporting requirements, individuals
sometimes structure cash transactions to fall below the $10,000
reporting threshold (referred to as ``structuring''). In other
words, instead of conducting a single transaction in currency
in an amount that would require a report to be filed or record
made by a financial institution, an individual conducts a
series of currency transactions, willfully keeping each
individual transaction at an amount below $10,000 to evade
reporting or recording. Structuring can be used to conceal
illegal cash-generating activities, such as the selling of
narcotics, and to conceal income earned legally in order to
evade the payment of taxes. Structuring (or attempts to
structure) for the purpose of evading the reporting and
recordkeeping requirements \27\ is subject to both civil and
criminal penalties.\28\
---------------------------------------------------------------------------
\27\ 31 U.S.C. sec. 5324(a); 31 U.S.C. sec 5322.
\28\ A person who willfully violates the law is subject to a fine
of not more than $250,000, or imprisonment for not more than five
years, or both. 31 U.S.C. sec. 5324(a); 31 U.S.C. sec. 5322.
---------------------------------------------------------------------------
Present law authorizes forfeiture of property involved in
transactions or attempted transactions \29\ in violation of
these rules in accordance with the procedures governing civil
forfeitures in money laundering cases.\30\
---------------------------------------------------------------------------
\29\ 31 U.S.C. sec. 5317(c)(2).
\30\ See 18 U.S.C. sec. 981.
---------------------------------------------------------------------------
The Secretary has delegated responsibility for implementing
and enforcing the BSA to the Director, Financial Crimes
Enforcement Network (``FinCEN''), who in turn re-delegated
responsibility for civil compliance with the law to various
Federal agencies including the IRS.\31\ The scope of that
delegation of authority was expanded by the USA PATRIOT Act of
2001,\32\ and includes authority to determine and enforce civil
penalties.\33\ The IRS administers its delegated authority
under the BSA through the IRS Small Business/Self-Employed
Division, with assistance from the IRS Criminal Investigation
Division (``IRS-CID'').
---------------------------------------------------------------------------
\31\ Treasury Order 180-01, available at https://www.treasury.gov/
about/role-of-treasury/orders-directives/Pages/to180-01.aspx,
delegating authority to FinCEN. 31 C.F.R. sec. 103.56(b)(8). At the
time of the initial delegation, FinCEN was an entity created by
regulatory action, but has since been explicitly authorized by statute.
31 U.S.C. sec. 310.
\32\ Treasury Order 180-01. For a discussion of the relationship
between FinCEN and the agencies to which it re-delegated authority,
see, Office of Inspector General, ``TERRORIST FINANCING/MONEY
LAUNDERING: Responsibility for Bank Secrecy Act Is Spread Across Many
Organizations,'' OIG-08-030 (April 9, 2008), available at https://
www.treasury.gov/about/organizational-structure/ig/Documents/
oig08030.pdf.
\33\ 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).
---------------------------------------------------------------------------
If a person prevails in a civil forfeiture proceeding
involving seizure of currency, the United States is liable for
reasonable attorney fees and other litigation costs reasonably
incurred by the claimant, post-judgment interest, and interest
actually paid to the United States from the date of seizure or
arrest of the property that resulted from the investment of the
property in an interest-bearing account or instrument as well
as imputed interest for any period for which no interest was
paid.\34\
---------------------------------------------------------------------------
\34\ 28 U.S.C. sec. 2465(b)(1). The imputed interest that may be
paid under that section is the amount that such currency, instruments,
or proceeds would have earned at the rate applicable to the 30-day
Treasury Bill, for any period for which no interest was paid (not
including any period when the property reasonably was in use as
evidence in an official proceeding or in conducting scientific tests
for the purpose of collecting evidence), commencing 15 days after the
property was seized by a Federal law enforcement agency, or was turned
over to a Federal law enforcement agency by a State or local law
enforcement agency.
---------------------------------------------------------------------------
Prior to October 2014, the IRS provided partial relief in
structuring transactions involving a first offense, a
legitimate funding source, and no criminal conviction. The IRS
procedures also required its criminal investigation division to
consider additional mitigating or aggravating factors. On
October 17, 2014, IRS-CID issued guidance on how it will
conduct seizures and forfeitures in its structuring cases.\35\
Pursuant to this guidance, the IRS will not pursue seizure and
forfeiture of funds associated only with so-called ``legal
source'' structuring unless (1) there are exceptional
circumstances justifying the seizure and forfeiture and (2) the
case is approved by the Director of Field Operations.
---------------------------------------------------------------------------
\35\ Memorandum for Special Agents in Charge Criminal
Investigation, October 17, 2014, available at http://ij.org/wp-content/
uploads/2015/07/IJ068495.pdf. Written Testimony of John A. Koskinen and
Richard Weber, House Committee on Ways and Means Subcommittee on
Oversight on Financial Transaction Structuring, May 25, 2016, available
at https://www.irs.gov/uac/newsroom/written-testimony-of-john-a-
koskinen-and-richard-weber-before-the-house-committee-on-ways-and-
means-subcommittee-on-oversight-on-financial-transaction-structuring-
may-25-2016; New IRS Special Procedure to Allow Property Owners to
Request Return of Property, Funds in Specific Structuring Cases, June
16, 2016, available at https://www.irs.gov/uac/newsroom/new-irs-
special-procedure-to-allow-property-owners-to-request-return-of-
property-funds-in-specific-structuring-cases; Letter to Chairman Roskam
and Ranking Member Lewis summarizing planned actions, June 10, 2016,
available at http://waysandmeans.house.gov/wp-content/uploads/2016/06/
6.9-Roskam-Lewis-Response-Letter-and-Enclosure.pdf.
---------------------------------------------------------------------------
Explanation of Provision
The provision provides that in the case of a suspected
structuring violation, the IRS may only pursue seizure or
forfeiture of assets if either the property to be seized was
derived from an illegal source or the transactions were
structured for the purpose of concealing a violation of a
criminal law or regulation other than rules against
structuring.
The provision establishes post-seizure notice and review
procedures for IRS seizures based on suspected structuring
violations. The IRS must, within 30 days, make a good faith
effort to find all persons with an ownership interest in the
property seized and inform him or her of certain post-seizure
hearing rights provided under the provision. This 30-day notice
requirement may be extended an additional 30 days if the IRS
can establish to a court probable cause of an imminent threat
to national security or personal safety. If a notice recipient
requests a court hearing within 30 days of the notice, the
property is required to be returned unless the court finds that
there is probable cause to believe that a structuring violation
occurred involving such property and the property to be seized
was derived from an illegal source or the funds were structured
for the purpose of concealing the violation of a criminal law
or regulation other than the structuring provisions of the BSA.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
2. Exclusion of interest received in action to recover property seized
by the Internal Revenue Service based on structuring
transaction (sec. 1202 of the Act and new sec. 139H of the
Code)
Present Law
Nothing in the BSA or the administrative guidance issued by
the IRS affects the Federal tax treatment of the interest that
may be paid to a successful litigant in civil asset forfeiture
proceedings. The Code provides no specific exclusion from gross
income or deduction from adjusted gross income for interest
received by a successful litigant pursuant to an action to
recover property seized by the IRS pursuant to the BSA.
Accordingly, the interest received is includable in gross
income under the Code.
Explanation of Provision
The provision amends the Code to exclude from gross income
any interest received from the Federal Government in connection
with an action to recover property seized by the IRS pursuant
to a claimed violation of the structuring provisions of the
BSA.
Effective Date
The provision applies to interest received on or after the
date of enactment (July 1, 2019).
3. Clarification of equitable relief from joint liability (sec. 1203 of
the Act and sec. 6015 of the Code)
Present Law
If a married couple elects to file a tax return on which
they report their income jointly, they are generally jointly
and severally liable for the entire tax liability that should
have been reported on the joint return.\36\ A spouse may be
entitled to relief from joint liability, in whole or in part,
under the innocent spouse relief provisions of the Code.
---------------------------------------------------------------------------
\36\ Sec. 6103(d).
---------------------------------------------------------------------------
Grounds for relief from joint liability
There are three types of relief: general innocent spouse
relief; relief for spouses no longer married or legally
separated (separation of liabilities); and equitable relief.
The grounds for relief and its scope differ among these three
types of relief. In addition, the first two types of relief
must be sought no later than two years after the date the IRS
began collection activities against the electing spouse. For
equitable relief, there is no limitations period in the
statute.
General relief from joint liability with respect to an
understatement of tax is available to all joint filers who make
a timely election for such relief and who are able to establish
the following three elements.\37\ First, the electing spouse
must establish that the underpayment is attributable to the
erroneous items of the other spouse. Second, the electing
spouse must show that at the time of signing the return, he or
she neither knew nor had reason to know that there was an
understatement of tax. Finally, relief is granted only if it is
inequitable to hold the electing spouse liable for the
deficiency in tax, based on all facts and circumstances.
---------------------------------------------------------------------------
\37\ Sec. 6015(b).
---------------------------------------------------------------------------
Separation of liabilities relief from joint liability with
respect to a deficiency is available to persons who are no
longer married, are legally separated, or were no longer living
together in the 12 months ending with the date innocent spouse
relief is elected.\38\ The individual electing relief on this
basis must establish the portion of any deficiency that is
appropriately allocable to him or her. Special rules are
provided in the Code for determining allocation of items that
benefit one spouse more than the other, property transfers, and
children's liability. Relief otherwise available is not
permitted with respect to items of which a spouse was aware at
the time the return was signed and which contributed to a
deficiency.
---------------------------------------------------------------------------
\38\ Sec. 6015(c).
---------------------------------------------------------------------------
Equitable relief from joint liability may be available to
those spouses who are ineligible under the provisions for
general relief or separation of liabilities relief.\39\ Such
relief is granted only if, taking into account all facts and
circumstances, it is inequitable to hold the individual liable
for the unpaid portion of tax or for a deficiency with respect
to the joint return.
---------------------------------------------------------------------------
\39\ Sec. 6015(f).
---------------------------------------------------------------------------
Availability and scope of judicial review
If an individual elects to have the general relief
provision or the separation of liabilities relief provision
apply with respect to a deficiency, the individual may petition
the Tax Court to review unfavorable determinations by the IRS
with respect to the claimed relief. The Tax Court has held that
its authority to review such IRS determinations is under a de
novo standard.\40\
---------------------------------------------------------------------------
\40\ Sec. 6015(e)(1).
---------------------------------------------------------------------------
The claim for relief from joint liability must be filed no
later than 90 days after the notice of final determination on
relief from joint liability and no earlier than the earlier of
the mailing of such notice of final determination or the date
which is six months after electing such relief. During the
pendency of the Tax Court proceeding, or during the period in
which a petition may be filed, collection action is restricted.
In contrast to claims under the general relief or
separation of liabilities provisions described above, the
extent to which a denial of a claim for equitable relief from
joint liability is also subject to judicial review by the Tax
Court, the scope of that review, and the standard for any
review have been the subject of conflicting appellate
decisions. An abuse of discretion standard based on court
review of the administrative record was held to be the correct
standard in some instances,\41\ but other courts have permitted
review of information beyond the administrative record while
applying an abuse of discretion standard.\42\ Still others have
applied a de novo standard to both the scope of the review and
the standard of review.\43\
---------------------------------------------------------------------------
\41\ Jonson v. Commissioner, 118 T.C. 106, 125 (2002), aff'd on
other grounds, 353 F.3d 1181 (10th Cir. 2003); Mitchell v.
Commissioner, 292 F.3d 800, 807 (D.C. Cir. 2002); Cheshire v.
Commissioner, 282 F.3d 326, 337-38 (5th Cir. 2002).
\42\ Commissioner v. Neal, 557 F.3d 1262 (11th Cir. 2009).
\43\ Wilson v. Commissioner, 705 F.3d 980 (9th Cir. 2013), acq'd,
I.R.B. 2013-25 (June 17, 2013); Porter v. Commissioner, 132 T.C. 203,
132 T.C. No. 11 (2009).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, Tax Court review of innocent spouse
equitable relief cases is not limited to the administrative
record, but it may consider evidence that is newly discovered
or was previously unavailable. The provision also clarifies
that the Tax Court has jurisdiction to review a denial of
equitable claims for relief from joint liability and that such
review is not limited to a review for abuse of discretion by
the IRS.
The provision allows taxpayers to request equitable relief
with respect to any unpaid liability before the expiration of
the collection period or, if paid, before the expiration of the
applicable limitations period for claiming a refund or credit.
Effective Date
The provision applies to petitions or requests filed or
pending on or after the date of enactment (July 1, 2019).\44\
---------------------------------------------------------------------------
\44\ Commissioner v. Sutherland, 155 T.C. No. 6, Slip Opinion at
pp. 15-16 (September 8, 2020) (holding that the changes to section
6105(e)(7) are effective for petitions filed on or after the date of
enactment and that changes to subsection 6105(f)(7) are effective for
requests pending with the IRS on or after the date of enactment).
---------------------------------------------------------------------------
4. Modification of procedures for issuance of third-party summons (sec.
1204 of the Act and sec. 7609 of the Code)
Present Law
The IRS has broad statutory authority to require production
of information in the course of an examination.\45\ A request
for information in the form of an administrative summons is
enforceable if the IRS establishes its good faith, as evidenced
by the factors enunciated by the Supreme Court in United States
v. Powell.\46\ The U.S. Supreme Court articulated four basic
elements necessary to establish that the government issued a
summons in good faith: (1) the investigation must be conducted
for a legitimate purpose; (2) the information sought is
relevant to and ``may shed light on'' that legitimate purpose;
(3) the requested information is not already in the possession
of the IRS; and (4) the IRS complied with all statutorily
required administrative steps.\47\ Subsequent to United States
v. Powell, the legitimacy of using an administrative summons in
furtherance of an investigation into criminal violations was
validated in United States v. LaSalle National Bank,\48\ in
which the Supreme Court determined that the dual civil and
criminal purpose was legitimate, so long as there had not yet
been a commitment to refer the case for prosecution.
---------------------------------------------------------------------------
\45\ Sec. 7602.
\46\ United States v. Powell, 379 U.S. 48 (1964).
\47\ United States v. Powell, 379 U.S. 48, pp. 57-58 (1964).
\48\ 437 U.S. 298 (1978); codified in section 7609(c).
---------------------------------------------------------------------------
The use of this summons authority to obtain information
from third-parties is subject to certain procedural
safeguards,\49\ but otherwise the same good faith elements are
analyzed to determine whether the summons should be
enforced.\50\ When the existence of a possibly non-compliant
taxpayer is known but not his identity, as in the case of
holders of offshore bank accounts or investors in particular
abusive transactions, the IRS is able to issue a summons
(referred to as a ``John Doe'' summons) to learn the identity
of the taxpayer, but must first meet significantly greater
statutory requirements to guard against fishing expeditions.
---------------------------------------------------------------------------
\49\ Sec. 7609.
\50\ Tiffany Fine Arts, Inc. v. United States, 479 U.S. 310 (1985).
---------------------------------------------------------------------------
An effort to learn the identity of unnamed John Does
requires that the United States seek judicial review in an ex
parte proceeding prior to issuance of the John Doe summons. In
its application and supporting documents,\51\ the United States
must establish that the information sought pertains to an
ascertainable group of persons, that there is a reasonable
basis to believe that taxes have been avoided, and that the
information is not otherwise available.\52\ The reviewing court
does not determine whether the John Doe summons will ultimately
be enforceable. Once a court has determined that the predicate
for issuance of a summons is met, the summons is served, and
the summoned party served may challenge enforcement of the
summons, based on the Powell factors. It is not entitled to
judicial review of the ex parte ruling that permitted issuance
of the summons.\53\ Nevertheless, enforcement of a John Doe
summons is likely to be subject to time-consuming challenges,
possibly warranting an extension of the limitations period.
---------------------------------------------------------------------------
\51\ Sec. 7609(h)(2) provides that the determination will be made
ex parte, solely on the pleadings.
\52\ Sec. 7609(f).
\53\ United States v. Samuels, Kramer & Co., and First Western
Government Securities, Inc., 712 F.2d 1342 (9th Cir. 1983), which
affirmed a lower court determination that the issuance of the John Doe
summons was not subject to review, but reversed and remanded to permit
a limited evidentiary hearing on whether the Powell standard was met.
---------------------------------------------------------------------------
Explanation of Provision
The provision prevents the Secretary from issuing a John
Doe summons unless the information sought to be obtained is
narrowly tailored and pertains to the failure (or potential
failure) of the person or group or class of persons referred to
in the statute to comply with one or more provisions of the
Code which have been identified. The provision is not intended
to change the Powell standard or otherwise affect the IRS's
burden of proof.
Effective Date
The provision applies to summonses served after the date
that is 45 days after the date of enactment (45 days after July
1, 2019).
5. Private debt collection and special compliance personnel program
(sec. 1205 of the Act and sec. 6306 of the Code)
Present Law
Qualified tax collection contracts
The Code permits the IRS to use private debt collection
companies to locate and contact taxpayers owing outstanding tax
liabilities of any type \54\ and to arrange payment of those
taxes by the taxpayers.\55\ For this purpose, the Secretary
enters into qualified tax collection contracts for the
collection of inactive tax receivables. Under these contracts,
if the taxpayer cannot pay in full immediately, the private
debt collection company offers the taxpayer an installment
agreement providing for full payment of the taxes over a period
of as long as five years.
---------------------------------------------------------------------------
\54\ This provision generally applies to any type of tax imposed
under the Internal Revenue Code.
\55\ Sec. 6306.
---------------------------------------------------------------------------
Inactive tax receivables are defined as any tax receivable
(i) removed from the active inventory for lack of resources or
inability to locate the taxpayer, (ii) for which more than 1/3
of the applicable limitations period has lapsed and no IRS
employee has been assigned to collect the receivable, and (iii)
for which a receivable has been assigned for collection but
more than 365 days have passed without interaction with the
taxpayer or a third party for purposes of furthering the
collection. Tax receivables are defined as any outstanding
assessment which the IRS includes in potentially collectible
inventory.
Certain tax receivables are not eligible for collection
under qualified tax collection contracts, if such receivable:
(i) is subject to a pending or active offer-in-compromise or
installment agreement; (ii) is classified as an innocent spouse
case; (iii) involves a taxpayer identified by the Secretary as
being (a) deceased, (b) under the age of 18, (c) in a
designated combat zone, or (d) a victim of tax-related identity
theft; (iv) is currently under examination, litigation,
criminal investigation, or levy; or (v) is currently subject to
a proper exercise of a right of appeal.
Special compliance personnel program
An amount not greater than 25 percent of the amount
collected under any qualified tax collection contract is to be
used to fund a special compliance personnel program. The
Secretary is required to establish an account for the hiring,
training, and employment of special compliance personnel. No
other source of funding for the program is permitted, and funds
deposited in the special account are restricted to use for the
program, including reimbursement of the IRS and other agencies
for the cost of administering the qualified debt collection
program and all costs associated with employment of special
compliance personnel and the retraining and reassignment of
other personnel as special compliance personnel. Special
compliance personnel are individuals employed by the IRS to
serve either as revenue officers performing field collection
functions, or as persons operating the automated collection
system.
Explanation of Provision
The provision makes certain additional tax receivables of
individual taxpayers ineligible for collection under qualified
tax collection contracts. Such receivables involve a taxpayer
(1) substantially all of whose income consists of disability
insurance benefits under section 233 of the Social Security Act
(referred to as Social Security Disability Insurance or SSDI)
or supplemental security income benefits under title XVI of the
Social Security Act (referred to as Supplemental Security
Income or SSI) or (2) whose adjusted gross income, as
determined for the most recent taxable year for which
information is available, does not exceed 200 percent of the
applicable poverty level (as determined by the Secretary).
The provision also modifies the definition of inactive tax
receivable by replacing the condition that more than 1/3 of the
applicable limitations period has lapsed with the requirement
that ``more than two years has passed since assessment.'' The
provision retains the requirement that no IRS employee has been
assigned to collect the receivable.
The provision also modifies the definition of a qualified
tax collection contract to allow the private debt collection
company to offer the taxpayer an installment agreement
providing for full payment of the taxes over a period of as
long as seven years, replacing the current law period of five
years.
The provision clarifies that the IRS may use funds from the
special compliance personnel program account for various
program costs, including the costs of hiring any personnel,
communications, software, technology, and reimbursement of the
IRS or other government agencies for the cost of administering
the qualified tax collection program.
Effective Date
The provision to make certain tax receivables of individual
taxpayers ineligible for collection under qualified tax
collection contracts and the provision to modify the definition
of inactive tax receivables applies to tax receivables
identified by the Secretary (or the Secretary's delegate) after
December 31, 2020.
The provision to modify the definition of a qualified tax
collection contract applies to contracts entered into after the
date of enactment (July 1, 2019).
The provision relating to the use of the special compliance
personnel program account applies to amounts expended from the
account after the date of enactment (July 1, 2019).
6. Reform of notice of contact of third parties (sec. 1206 of the Act
and sec. 7602 of the Code)
Present Law
The IRS may not contact any person other than the taxpayer
with respect to the determination or collection of the tax
liability of the taxpayer without providing reasonable notice
in advance to the taxpayer that the IRS may contact persons
other than the taxpayer. The IRS is required to provide
periodically to the taxpayer a record of persons contacted
during the prior period by the IRS with respect to the
determination or collection of that taxpayer's tax liability.
This record is also required to be provided upon request of the
taxpayer. This notice requirement does not apply to criminal
tax matters, if the collection of the tax liability is in
jeopardy, if the Secretary determines for good cause shown that
disclosure may involve reprisal against any person, or if the
taxpayer authorized the contact.
Explanation of Provision
The provision replaces the requirement that the IRS provide
reasonable notice in advance to the taxpayer with a requirement
that the taxpayer be provided, at least 45 days before the
beginning of the period of contact, notice that contacts with
persons other than the taxpayer are intended. The period of
contact may not be greater than one year. However, notices are
permitted to be issued to the same taxpayer with respect to the
same tax liability with periods specified that, in the
aggregate, exceed one year. The provision requires the notice
to be provided only if there is a present intent at the time
such notice is given for the IRS to make such contacts. This
intent can be met on the basis of the assumption that the
information sought to be obtained will not be obtained by other
means before such contact.
Effective Date
The provision applies to notices provided and contacts made
after the date which is 45 days after the date of enactment (45
days after July 1, 2019).
7. Modification of authority to issue designated summons (sec. 1207 of
the Act and sec. 6503(j) of the Code)
Present Law
During an audit, the IRS may informally request that the
taxpayer provide additional information necessary to arrive at
a fair and accurate audit adjustment, if any adjustment is
warranted. Not all taxpayers cooperate with such requests,
whether by failing to respond or by providing inadequate or
incomplete responses. In such cases, if the necessary
information cannot be developed from other witnesses or
sources, the IRS seeks information by issuing an administrative
summons.\56\ If the taxpayer does not cooperate with the
request in the summons, the IRS may refer the summons to the
Department of Justice to seek and obtain an order for
enforcement in Federal court. If the summons in question was
issued to a third-party rather than the taxpayer, the taxpayer
may petition the court to quash an administrative summons.\57\
---------------------------------------------------------------------------
\56\ Sec. 7602.
\57\ Sec. 7609.
---------------------------------------------------------------------------
In United States v. Powell,\58\ the U.S. Supreme Court
articulated four basic elements necessary to establish that the
government issued a summons in good faith: (1) the
investigation must be conducted for a legitimate purpose; (2)
the information sought is relevant to and ``may shed light on''
that legitimate purpose; (3) the requested information is not
already in the possession of the IRS; and (4) the IRS complied
with all statutorily required administrative steps. All
petitions to enforce an administrative summons must include
allegations and supporting declarations to establish that the
good faith standards are met.\59\ Although the good faith
standards established in United States v. Powell apply to all
administrative summonses, they are not the sole source of
limitations on the IRS's ability to compel production of
information during an examination.\60\
---------------------------------------------------------------------------
\58\ United States v. Powell, 379 U.S. 48, pp. 57-58 (1964).
\59\ Department of Justice, Tax Division, Summons Enforcement
Manual, (updated through July 2011), available at https://
www.justice.gov/sites/default/files/tax/legacy/2011/08/31/
SumEnfMan_July2011.pdf.
\60\ See, e.g., secs. 7602 (summonses in furtherance of a criminal
investigation may be issued, provided that the IRS has not referred the
investigation to the Department of Justice for prosecution of the
taxpayer whose tax liability is the subject of the summons), 7609
(summons issued to a third-party record-keeper), 7611 (examinations of
churches), 7612 (summons for computer software). Summonses to obtain
information responsive to a request for exchange of information under a
tax treaty present special enforcement issues, both procedural and
substantive as well. Mazurek v. United States, 271 F.3d 226 (5th Cir.
2001).
---------------------------------------------------------------------------
Neither service of an administrative summons nor
government-initiated action for judicial enforcement is
sufficient to suspend the limitations period.\61\ As a result,
in the case of an examination of complicated issues of a large
corporation, involving voluminous records, numerous witness
interviews, and possible expert reports, the general three-year
period for assessment may be inadequate to allow for completion
of an examination.\62\ In such cases, the limitations period is
often but not always extended by agreement of the parties. An
uncooperative taxpayer could force a premature conclusion to an
audit by delaying responses and allowing the statute to expire.
To guard against such situations in cases in which the IRS
requires additional information and time to complete its
work,\63\ the Code authorizes issuance of a designated summons
that triggers suspension of the limitations period if judicial
enforcement proceedings are initiated.
---------------------------------------------------------------------------
\61\ In the case of third-party summonses, the limitations period
is suspended if a taxpayer named in the summons initiates a proceeding
to quash the summons, or if compliance with the summons remains
unresolved as of the date which is six months after service of the
summons.
\62\ Sec. 6501 (income taxes are generally required to be assessed
within three years after a taxpayer's return is filed, whether or not
it was timely filed); sec. 6501(c)(there are several circumstances
under which the general three-year limitations period does not begin to
run, including failure to file a return or filing a false or fraudulent
return with the intent to evade tax, extensions by agreement of the
taxpayer and IRS, substantial omissions of income, or failure to
disclose or report a listed transaction as required under section 6011
on any return or statement for a taxable year); sec. 6503 (there are
also circumstances under which the three-year limitations period is
suspended, including the issuance of a designated summons).
\63\ In describing the provision when it was first enacted, the
Conference report for the Omnibus Reconciliation Act of 1990 explained,
``This provision is designed to preserve the ability of the IRS to
conclude the audit and assess any taxes that may be due regardless of
the length of time that it might take to obtain judicial resolution of
the summons enforcement lawsuit.'' H. Rept. 101-964, p. 1073. Omnibus
Budget Reconciliation Act of 1990, Conf. Rept. to Accompany H.R. 5835.
---------------------------------------------------------------------------
A designated summons is an administrative summons that is
issued to a large corporation (or person to whom the
corporation has transferred the requested books and records)
with respect to one or more taxable periods currently under
examination in the Coordinated Industry Case program and meets
three conditions. First, it must be reviewed and approved by
the Division Commissioner and Division Counsel of the relevant
IRS operating division or organization with jurisdiction over
the return. Second, it must be issued at least 60 days before
the expiration of the assessment limitations period (as
extended). Finally, it must clearly state that it is a
``designated summons.'' \64\ No more than one designated
summons may be issued with respect to a return under
examination.
---------------------------------------------------------------------------
\64\ Section 6503(j) refers to the regional officials and the
Coordinated Examination Program or their successors. The Division
Counsel and Commissioner of the relevant office with jurisdiction over
the return have been identified in regulation as the appropriate
successor officials. Treas. Reg. sec. 301.6503(j)-1. In addition, the
Coordinated Industry Case program is the successor to the Coordinated
Examination Program.
---------------------------------------------------------------------------
If a designated summons is issued, and the taxpayer
complies without any judicial enforcement proceeding, no
suspension of the limitations period occurs. If the government
initiates enforcement proceedings, the limitations period is
suspended for the judicial enforcement period of that summons
and any related summonses, i.e., summonses relating to the same
return and issued within 30 days after the issuance of the
designated summons. If the court proceeding results in an order
to comply with the summons, the limitations period is also
suspended for a period of 120 days from the first day after the
close of the judicial enforcement period. In addition, the
limitations period expires no earlier than 60 days after the
close of the judicial enforcement period, if the court does not
order compliance with the summons.
Since enactment of the designated summons provision in
1990, few such summonses have been issued.\65\ The IRS is now
required to submit annual reports to Congress on the number of
designated summonses issued each year.\66\ Since 1995, three
have been issued, most recently in 2014.\67\
---------------------------------------------------------------------------
\65\ The earliest designated summons, involving a request to
require testimony from an officer of Chevron Corporation, was enforced.
United States v. Derr, 968, F.2d 943 (9th Cir. 1992). See also United
States v. Norwest, 116 F.3d 1227 (8th Cir. 1997) (court enforced IRS
request to produce tax preparation software licensed to Norwest) and
United States v. Caltex Petroleum, 12 F. Supp. 2d 545 (N.D. Tex. 1998)
(denied IRS request to produce the software code used to calculate
foreign tax credits).
\66\ Sec. 1002(b) Taxpayers Bill of Rights Act 2, Pub. L. 104-168
(1996).
\67\ United States v. Microsoft, Case No. C15-00102-RSM (W.D. Wash.
May 5, 2017) (in ruling on validity of privileges, the Court ordered
further document production in compliance with the designated summons
and related summonses, pursuant to the earlier opinion enforcing the
designated summons, at United States v. Microsoft, 154 F. Supp. 3d 1134
(W.D. Wash. 2015)).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, issuance of a designated summons must
be preceded by review and written approval of the summons by
the head of the relevant operating division and the Chief
Counsel. The written approval must state facts establishing
that the IRS had previously made reasonable requests for the
information and must be attached to the summons. In subsequent
judicial proceedings concerning the enforceability of the
summons, the IRS must establish that the prior reasonable
requests for information were made.
Effective Date
The provision applies to summonses issued after the date
that is 45 days after the date of enactment (45 days after July
1, 2019); that is, summonses issued after August 15, 2019.\68\
---------------------------------------------------------------------------
\68\ By transmittal dated August 2, 2019, the IRS revised manual
instructions necessary to reflect the changes to Code sec. 6503(j).
See, IRM par. 25.3.3 et seq., applicable to summonses issued after
August 15, 2019, the effective date of the provision.
---------------------------------------------------------------------------
8. Limitation on access of non-Internal Revenue Service employees to
returns and return information (sec. 1208 of the Act and sec.
7602 of the Code)
Present Law
Returns and return information
General rule of confidentiality
As a general rule, returns and return information are
confidential and cannot be disclosed unless authorized by the
Code.\69\ The definition of return information is very broad
and generally includes any information received or collected by
the IRS with respect to liability under the Code of any person
for any tax, penalty, interest or offense. The term ``return
information'' includes, among other items:
---------------------------------------------------------------------------
\69\ Sec. 6103(a).
---------------------------------------------------------------------------
a taxpayer's identity, the nature, source, or amount of
his income, payments, receipts, deductions, exemptions,
credits, assets, liabilities, net worth, tax liability,
tax withheld, deficiencies, overassessments, or tax
payments, whether the taxpayer's return was, is being,
or will be examined or subject to other investigation
or processing, or any other data, received by, recorded
by, prepared by, furnished to, or collected by the
Secretary with respect to a return or with respect to
the determination of the existence, or possible
existence, of liability (or the amount thereof) of any
person under this title for any tax, penalty, interest,
fine, forfeiture, or other imposition, or offense . . .
.\70\
---------------------------------------------------------------------------
\70\ Sec. 6103(b)(2)(A).
---------------------------------------------------------------------------
Disclosure exception for tax administration contracts
(section 6103(n))
There are several exceptions to the general rule of
confidentiality. One exception permits the disclosure of
returns and return information in connection with written
contracts or agreements for the acquisition of property or
services for tax administration purposes (``tax administration
contractor'').\71\
---------------------------------------------------------------------------
\71\ Sec. 6103(n).
---------------------------------------------------------------------------
Summons authority
In general
For the purposes of ascertaining the correctness of any
return, making a return when none has been made, determining
the liability of any person for any internal revenue tax, and
certain other purposes, the Secretary is authorized to examine
any books, records, or other data which may be relevant or
material to such inquiry, and to take such testimony of the
person concerned, under oath, as may be relevant or material to
such inquiry. The Secretary also is authorized to issue
summonses to appear before the Secretary at the time and place
named in the summons to produce books, records and other data
and to give testimony, under oath, as may be relevant or
material to such inquiry.
Summons interview regulations
Under the Treasury regulations, a person authorized to
receive returns and return information as a tax administration
contractor may receive and examine books, papers, records, or
other data produced to comply with the summons, and, in the
presence and under the guidance of an IRS officer or employee,
participate fully in the interview of a witness summoned by the
IRS to provide testimony under oath.\72\
---------------------------------------------------------------------------
\72\ Treas. Reg. sec. 301.7602-1(b)(3).
---------------------------------------------------------------------------
Proposed Treasury regulations would narrow this authority
by excluding non-government attorneys from receiving summoned
books, papers, records, or other data, or from participating in
the interview of a witness summoned by the IRS to provide
testimony under oath.\73\ An exception to this general
exclusion is provided with respect to non-government attorneys
hired for their expertise in an area other than Federal tax
law. The proposed regulations would allow the IRS to hire an
attorney who has specialized knowledge of foreign, state, or
local law, including tax law, or in non-tax substantive law,
such as patent law, property law, or environmental law. It
would not permit the IRS to hire an attorney for non-
substantive specialized knowledge, such as civil litigation
skills. These changes are proposed to be effective for
examinations begun and summonses served by the IRS on or after
March 27, 2018.
---------------------------------------------------------------------------
\73\ Prop. Treas. Reg. sec. 301.7602-1(b)(3), 83 Fed. Reg. 13206
(March 28, 2018).
---------------------------------------------------------------------------
Explanation of Provision
The provision provides that the Secretary shall not, under
the authority of section 6103(n) (relating to tax
administration contracts), provide to a tax administration
contractor any books, papers, records or other data obtained by
summons, except when such person requires such information for
the sole purpose of providing expert evaluation and assistance
to the IRS (including, for example, access to such information
by translators). Further, no person other than an officer or
employee of the IRS or Office of Chief Counsel may on behalf of
the Secretary question a witness under oath whose testimony was
obtained by summons. The provision is not intended to restrict
the Office of Chief Counsel's ability to use court reporters,
translators or interpreters, photocopy services, and other
similar ancillary contractors.
Effective Date
The provision takes effect on the date of enactment (July
1, 2019) and shall not fail to apply to a contract in effect
under section 6103(n) merely because such contract was in
effect before the date of enactment.
Subtitle D--Organizational Modernization
1. Office of the National Taxpayer Advocate (sec. 1301 of the Act and
sec. 7803(c) of the Code)
Present Law
In general
The Office of the Taxpayer Advocate is expected to
represent taxpayer interests independently in disputes with the
IRS. The National Taxpayer Advocate (``NTA'') supervises the
Office of the Taxpayer Advocate. The NTA reports directly to
the Commissioner and is entitled to compensation at the same
rate as the highest rate of basic pay established for the
Senior Executive Service under section 5382 of Title 5 of the
United States Code, or if the Secretary so determines, at a
rate fixed under section 9503 of such title.
The Office of the Taxpayer Advocate has four principal
functions:
1. to assist taxpayers in resolving problems with the
IRS;
2. to identify areas in which taxpayers have problems
in dealing with the IRS;
3. to propose changes in the administrative practices
of the IRS to mitigate problems identified in (2); and
4. to identify potential legislative changes that may
be appropriate to mitigate such problems.
Taxpayer Assistance Orders
A taxpayer can request a Taxpayer Assistance Order
(``TAO'') if the taxpayer is suffering or about to suffer a
``significant hardship'' as a result of the manner in which the
internal revenue laws are being administered by the IRS.\74\ A
TAO may require the IRS within a specified time period, to
release property of the taxpayer that has been levied upon, or
to cease any action, take any action as permitted by law, or
refrain from taking any action with respect to the taxpayer
under specified provisions.\75\
---------------------------------------------------------------------------
\74\ Sec. 7811(a)(1)(A). Significant hardship is deemed to occur if
one of four factors exists: (1) there is an immediate threat of adverse
action; (2) there has been a delay of more than 30 days in resolving
the taxpayer's problems; (3) the taxpayer will have to pay significant
costs (including fees for professional services) if relief is not
granted; or (4) the taxpayer will suffer irreparable injury, or a long
term adverse impact if relief is not granted.Sec. 7811(a)(2). The NTA
may also issue a TAO if the taxpayer meets requirements to be set forth
in regulations. Sec. 7811(a)(1)(B).
\75\ Sec. 7811(b). The provisions specified in 7811(b) are: (1)
chapter 64 (relating to collection), (2) subchapter B of chapter 70
(relating to bankruptcy and receiverships), chapter 78 (relating to
discovery of liability and enforcement of title) or any other provision
of law which is specifically described by the NTA in such order. A TAO
or action taken by the NTA applies to persons performing services under
a qualified tax collection contract to the same extent and to the same
manner as such order applies to the IRS.
---------------------------------------------------------------------------
The Commissioner, or the Deputy Commissioner may rescind a
TAO issued by the NTA, only if a written explanation of the
reasons for the modification or rescission is provided to the
NTA.\76\
---------------------------------------------------------------------------
\76\ Sec. 7811(c). The NTA also may modify or rescind a TAO issued
by the NTA.
---------------------------------------------------------------------------
Taxpayer Assistance Directives
While a TAO is specific to a particular taxpayer, a
Taxpayer Assistance Directive (``TAD'') is systemic, intended
to address groups of taxpayers. Delegation Order 13-3
authorizes the NTA to issue TADs to mandate administrative or
procedural changes to improve the operation of a functional
process or to grant relief to groups of taxpayers (or all
taxpayers) when implementation will protect the rights of
taxpayers, prevent undue burden, ensure equitable treatment or
provide an essential service to taxpayers.\77\ The authority to
modify or rescind a TAD is delegated to Deputy Commissioner for
Operations Support, Deputy Commissioner for Services and
Enforcement, and to the NTA.
---------------------------------------------------------------------------
\77\ Delegation Order 13-3, Internal Revenue Manual 1.2.50.4
(January 17, 2001).
---------------------------------------------------------------------------
Annual Reports
The NTA is required to submit two reports annually to the
House Committee on Ways and Means and to the Senate Finance
Committee.\78\ One report, due June 30 of each year, covers the
Office of the Taxpayer Advocate's objectives for the fiscal
year beginning in that calendar year. Besides statistical
information, the report must contain a full and substantive
analysis of the objectives.
---------------------------------------------------------------------------
\78\ Sec. 7803(c)(2)(B).
---------------------------------------------------------------------------
The other report, due December 31 of each year, concerns
the activities of the Office of the Taxpayer Advocate. The
content of this report is set by statute.\79\ Generally, the
report must cover initiatives taken to improve taxpayer
services and problems encountered, as well as the actions taken
to resolve them and the results. Specifically, the report must
cover the 20 most serious problems experienced by taxpayers.
The report also must identify the 10 most litigated issues for
each category of taxpayer and the areas of the tax law that
impose significant compliance burdens on taxpayers or the IRS.
Recommendations received from individuals with the authority to
issue TAOs, and any TAO not promptly honored by the IRS, must
also be included in the report. The report must also set forth
recommendations for administrative and legislative action to
resolve problems encountered by taxpayers.
---------------------------------------------------------------------------
\79\ Sec.7803(c)(2)(B)(ii)(I) through (XI).
---------------------------------------------------------------------------
The NTA, is required by statute to submit the reports
directly to the Congressional committees without prior review
of the Commissioner, the Secretary, or any officer or employee
of the Treasury, the Oversight Board, or the Office of
Management and Budget (``OMB'').\80\
---------------------------------------------------------------------------
\80\ Sec. 7803(c)(2)(B)(iii).
---------------------------------------------------------------------------
Explanation of Provision
Taxpayer Advocate Directives
In the case of any TAD issued by the NTA pursuant to a
delegation of authority from the Commissioner, the Commissioner
or Deputy Commissioner shall modify, rescind or ensure
compliance with such directive not later than 90 days after
issuance of such directive. If the TAD is modified or rescinded
by a Deputy Commissioner, the NTA may (not later than 90 days
after such modification or rescission) appeal to the
Commissioner and the Commissioner must (not later than 90 days
after such appeal is made) either (1) ensure compliance with
such directive as issued by the NTA, or (2) provide the NTA
with the reasons for any modification or rescission made or
upheld by the Commissioner pursuant to such appeal.
The NTA's annual report is to identify any TAD that is not
honored by the IRS in a timely manner.
Annual Reports to Congress
The provision modifies requirements of the annual report on
NTA activities to require a summary of the 10 most serious
problems encountered by taxpayers. Before beginning any
research or study, the NTA is required to coordinate with the
TIGTA to ensure that the NTA does not duplicate any action that
TIGTA has already undertaken or has a detailed plan to
undertake. The provision requires the IRS provide the NTA, upon
request and to the extent practicable, with statistical support
in connection with the preparation of the annual report on NTA
activities. Such support is to include statistical studies,
compilations and the review of information provided by the NTA
for statistical validity and sound statistical methodology.
With respect to any statistical information included in such
report, the report is to include a statement of whether such
statistical information was reviewed or provided by the IRS,
and if so whether the IRS determined such information to be
statistically valid and based on sound statistical methodology.
The IRS's review and provision of statistical support does not
violate the requirement that the report be submitted directly
without prior review or comment from any officer or employee of
the Department of the Treasury or specified other persons.
Salary of the National Taxpayer Advocate
The provision eliminates the provision relating to the
determination of the NTA's salary under section 9503 of Title 5
of the United States Code. As under present law, the NTA is
entitled to compensation at the same rate as the highest rate
of basic pay established for the Senior Executive Service under
section 5382 of Title 5 of the United States Code.
Effective Date
The provision is generally effective on the date of
enactment (July 1, 2019). The provision as it relates to the
salary of the NTA applies to appointments to the position of
the NTA made after March 31, 2019.
2. Modernization of Internal Revenue Service organizational structure
(sec. 1302 of the Act)
Present Law
RRA98 directed the Commissioner to restructure the IRS by
eliminating or substantially modifying the three-tier
geographic structure (national, regional, and district) in
place at the time and replacing it with an organizational
structure that features operating units serving particular
groups of taxpayers with similar needs.\81\
---------------------------------------------------------------------------
\81\ Pub. L. No. 105-206, sec. 1001(a).
---------------------------------------------------------------------------
Explanation of Provision
The Secretary (or the Secretary's delegate) is required to
submit to Congress by September 30, 2020, a comprehensive
written plan to redesign the organization of the IRS. The
comprehensive plan will: (1) ensure the successful
implementation of the priorities specified by Congress in this
bill; (2) prioritize taxpayer services to ensure that all
taxpayers easily and readily receive the assistance they need;
(3) streamline the structure of the agency including minimizing
the duplication of services and responsibilities; (4) best
position the IRS to combat cybersecurity and other threats to
the IRS; and (5) address whether the Criminal Division of the
IRS should report directly to the Commissioner.
Beginning one year after the date on which a comprehensive
plan to modify the organization of the IRS is submitted to
Congress, the provision removes the RRA98 requirement of an
organizational structure that features operating units serving
particular groups of taxpayers with similar needs.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
Subtitle E--Other Provisions
1. Return preparation programs for applicable taxpayers (sec. 1401 of
the Act and new sec. 7526A of the Code)
Present Law
The Code provides that the Secretary may allocate up to $6
million per year for matching grants to certain qualified low-
income taxpayer clinics.\82\ Eligible clinics are those that
charge no more than a nominal fee to either represent low-
income taxpayers in controversies with the IRS or provide tax
information to individuals for whom English is a second
language. No clinic can receive more than $100,000 per year.
---------------------------------------------------------------------------
\82\ Sec. 7526.
---------------------------------------------------------------------------
A qualified low-income taxpayer clinic includes (1) a
clinical program at an accredited law, business, or accounting
school in which students represent low-income taxpayers, or (2)
an organization exempt from tax under Code section 501(c) that
either represents low-income taxpayers or provides referral to
qualified representatives. A clinic is treated as representing
low-income taxpayers if (i) at least 90 percent of the
taxpayers represented by the clinic have income that does not
exceed 250 percent of the poverty level, as determined in
accordance with criteria established by the Director of the
OMB,\83\ and (ii) the amount in controversy for any taxable
year is $50,000 or less.\84\
---------------------------------------------------------------------------
\83\ For a family of four, the 2019 income limit in the 48
contiguous states, Puerto Rico, and the District of Columbia is
$64,375. The 2020 income limit is $65,500, available at https://
www.irs.gov/advocate/low-income-taxpayer-clinics/low-income-taxpayer-
clinic-income-eligibility-guidelines (last visited October 23, 2020).
\84\ Sec. 7463.
---------------------------------------------------------------------------
While the Code does not provide funding for matching
grants, funding for such grants was provided by the
Consolidated Appropriations Act, 2019.\85\ Congress
appropriated approximately $2.492 billion to the IRS for
taxpayer services, of which not less than $18 million is to be
made available for a Community Volunteer Income Tax Assistance
(``VITA'') matching grants program for tax return preparation
assistance. VITA is a program that was created by the IRS in
1969 that utilizes volunteers to provide tax return preparation
and filing service assistance to certain low-income taxpayers
and members of underserved populations.
---------------------------------------------------------------------------
\85\ Pub. L. No. 116-6, Div. D, Title I (February 15, 2019). In the
Consolidated Appropriations Act, 2020, Congress later appropriated
approximately $2.511 billion to the IRS for taxpayer services, of which
not less than $25 million was to be made available for a VITA matching
grants program for tax return preparation assistance. Pub. L. No. 116-
93, Div. C, Title I (December 20, 2019). In the Continuing
Appropriations Act, 2021 and Other Extensions Act, Congress extended
spending at these levels. Pub. L. No. 116-159 (October 1, 2020).
---------------------------------------------------------------------------
Explanation of Provision
The provision codifies the VITA program and provides that
the Secretary, unless otherwise provided by specific
appropriation, may allocate from otherwise appropriated funds
up to $30 million per year in matching grants to qualified
entities for the development, expansion, or continuation of
qualified tax return preparation programs assisting applicable
taxpayers and members of underserved populations. The Secretary
is authorized to award a multi-year grant not to exceed three
years.
The grant funds may be used for ordinary and necessary
operation costs (including for wages or salaries of persons
coordinating the activities of the program; to develop training
materials, conduct training, and perform quality reviews of the
returns for which assistance has been provided under the
program; for equipment purchases; and for vehicle-related
expenses associated with remote or rural tax preparation
services), outreach and educational activities relating to the
eligibility and availability of income supports available
through the Code, and services related to financial education
and capability, asset development, and the establishment of
savings accounts in connection with tax return preparation.
Matching funds are required to be provided on a dollar-for-
dollar basis for all grants provided. Matching funds may
include: (1) the salary (including fringe benefits) of
individuals performing services for the program; (2) the cost
of equipment used in the program; and (3) other ordinary and
necessary costs that may be associated with the program.
Indirect expenses, including general overhead of any entity
administering the program, are not counted as matching funds.
In awarding grants, priority is given to applications that
(1) demonstrate assistance to certain applicable taxpayers with
an emphasis on outreach, (2) demonstrate taxpayer outreach and
education around available income supports available through
the Code, and (3) demonstrate specific outreach and focus on
one or more underserved populations.
The provision requires the Secretary to establish
procedures for periodic site visits not less than once every
five calendar years (i) to ensure the program is carrying out
the stated purpose and (ii) to determine whether the VITA grant
program meets certain program adherence standards as the
Secretary will require. If any qualified return preparation
program is awarded a grant and is subsequently determined not
to meet the adherence standards or not to be carrying out the
stated purposes, such program will not be eligible for
additional grants unless the program provides sufficient
documentation of corrective measures established to address any
deficiencies determined.
Qualified return preparation program means any program (1)
that provides assistance to individuals, at least 90 percent of
whom are applicable taxpayers, in preparing and filing Federal
income tax returns, (2) that is administered by a qualified
entity, (3) in which all volunteers who assist in the
preparation of Federal income tax returns meet the training
requirements prescribed by the Secretary, and (4) that uses a
quality review process which reviews 100 percent of all
returns. Qualified entity means any entity that (1) is an
eligible organization (as defined), (2) is in compliance with
Federal tax filing and payment requirements, (3) is not
debarred or suspended from Federal contracts, grants, or
cooperative agreements, and (4) agrees to provide documentation
to substantiate any matching funds provided under the VITA
grant program. Eligible organization means (1) an institution
of higher education described in section 102 (other than
subsection (a)(1)(C) thereof) of the Higher Education Act of
1965, as in effect on the date of enactment, and that has not
been disqualified from participating in a program under Title
IV of such Act, (2) an exempt organization described in Code
section 501(c), (3) a local government agency, including a
county or municipal government agency, and an Indian tribe, as
defined in section 4(13) of the Native American Housing
Assistance and Self-Determination Act of 1996 (``Act''),
including any tribally designated housing entity (as defined in
such Act), tribal subsidiary, subdivision, or other wholly
owned tribal entity, or (4) a local, State, regional, or
national coalition (with one lead organization that meets the
eligibility requirements described above acting as the
applicant organization). If no eligible organization is
available to assist the targeted population or community, the
eligible organization includes a State government agency and a
Cooperative Extension Service office.
Applicable taxpayer means a taxpayer who has income for the
taxable year that does not exceed an amount equal to the
completed phaseout amount under section 32(b) for a married
couple filing a joint return with three or more qualifying
children, as determined in a revenue procedure or other
published guidance.\86\ Underserved population includes
populations of persons with disabilities, persons with limited
English proficiency, Native Americans, individuals living in
rural areas, members of the Armed Forces and their spouses, and
the elderly.
---------------------------------------------------------------------------
\86\ For 2019, the amount is $55,952. Rev. Proc. 2018-57, 2018-49
I.R.B. 827, 832, December 3, 2018. For 2020, the amount is $56,844.
Rev. Proc. 2019-44, 2019-47 I.R.B. 1093, 1097, November 18, 2019.
---------------------------------------------------------------------------
The provision allows the IRS to use mass communications and
other means to promote the benefits and encourage the use of
the program. The Secretary can provide taxpayers information
regarding qualified return preparation programs receiving
grants and those programs are encouraged to advise taxpayers of
the availability of, and eligibility requirements for
receiving, advice and assistance from local or regional low-
income taxpayer clinics. The programs are also encouraged to
provide taxpayers information regarding the location and
contact information for the low-income taxpayer clinics.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
2. Provision of information regarding low-income taxpayer clinics (sec.
1402 of the Act and sec. 7526 of the Code)
Present Law
The Code provides that the Secretary is authorized to
provide up to $6 million per year in matching grants to certain
qualified low-income taxpayer clinics.\87\ Eligible clinics are
those that charge no more than a nominal fee to either
represent low-income taxpayers in controversies with the IRS or
provide tax information to individuals for whom English is a
second language. No clinic can receive more than $100,000 per
year.
---------------------------------------------------------------------------
\87\ Sec. 7526.
---------------------------------------------------------------------------
A qualified low-income taxpayer clinic includes (1) a
clinical program at an accredited law, business, or accounting
school, in which students represent low-income taxpayers, or
(2) an organization exempt from tax under Code section 501(c)
that either represents low-income taxpayers or provides
referral to qualified representatives. A low-income taxpayer is
an individual whose income does not exceed 250 percent of the
poverty level, as determined in accordance with criteria
established by the Director of the OMB.
The Department of the Treasury prohibits its officers and
employees from referring taxpayers to qualified low-income
taxpayer clinics for advice and assistance.\88\
---------------------------------------------------------------------------
\88\ 5 C.F.R. sec. 3101.106(a).
---------------------------------------------------------------------------
Explanation of Provision
The provision allows officers and employees of the
Department of the Treasury to advise taxpayers of the
availability of, and eligibility requirements for receiving,
advice and assistance from qualified low-income taxpayer
clinics that receive funding under the Code, and to provide
location and contact information for such clinics.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
3. Notice from IRS regarding closure of Taxpayer Assistance Centers
(sec. 1403 of the Act)
Present Law
The IRS operates Taxpayer Assistance Centers around the
country to provide face-to-face assistance with preparing tax
returns and understanding tax laws.
The IRS is not currently required to publish information to
the public or give notice to Congress before closing a Taxpayer
Assistance Center.
Explanation of Provision
The provision requires the IRS to publish (including by
non-electronic means such as local press and other media), 90
days in advance, a notice containing information identifying
the Taxpayer Assistance Center proposed for closure, the date
of the proposed closure, and the relevant alternative sources
of assistance that may be utilized by affected taxpayers. The
provision also requires the IRS to provide, 90 days in advance,
a report to Congress containing the information in the notice,
the reasons for a proposed closure of the Taxpayer Assistance
Center, and other information as the Secretary may find
appropriate.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
4. Rules for seizure and sale of perishable goods restricted to only
perishable goods (sec. 1404 of the Act and sec. 6336 of the
Code)
Present Law
Under the Code, if it is determined that any tangible
property seized to satisfy unpaid taxes (1) is liable to
perish, (2) is liable to become greatly reduced in price or
value by keeping, or (3) cannot be kept without great expense,
the property may be sold after it has been appraised and the
owner has been given an opportunity to pay the appraised value
or furnish bond for payment.\89\ The general procedures
governing the sale of seized property that are set forth in the
Code (e.g., requiring 10-day notice before sale and the
determination of a minimum bid) are not applicable to sales of
perishables.\90\ Instead, the streamlined procedures referred
to above apply to the sale of perishable goods.\91\
---------------------------------------------------------------------------
\89\ Sec. 6336.
\90\ Sec. 6335.
\91\ Sec. 6336; Treas. Reg. sec. 301.6336-1.
---------------------------------------------------------------------------
Explanation of Provision
The provision limits the property that may be sold pursuant
to the streamlined procedures to property that is liable to
perish.
Effective Date
The provision applies to property seized after the date of
enactment (July 1, 2019).
5. Whistleblower reforms (sec. 1405 of the Act and secs. 6103 and 7623
of the Code)
Present Law
In general
Under section 7623, individuals who submit information
leading to detection of underpayment of tax or to detection,
trial, and punishment of persons guilty of violating internal
revenue laws, may file a claim for an award of 15 to 30 percent
of recovered funds resulting from such action.
Disclosure rules for whistleblowers
Section 6103 provides a general rule of confidentiality for
returns and return information: ``returns and return
information shall be confidential and except as authorized by
this Title . . . [none of the specified recipients] shall
disclose any return or return information obtained by him.''
\92\ One of the exceptions to the general rule of
confidentiality permits the IRS to make investigative
disclosures of return information to third parties. The
disclosures, subject to the conditions provided in regulations,
are to be made to the extent necessary to obtain information,
which is not otherwise reasonably available, with respect to
the correct determination of tax, liability for tax, the amount
to be collected, or with respect to the enforcement of any
provision of Title 26.\93\ The third party recipient of the
return information furnished during an investigative disclosure
is not subject to the general rule of confidentiality provided
by section 6103.
---------------------------------------------------------------------------
\92\ Sec. 6103(a).
\93\ Treas. Reg. sec. 301.6103(k)(6)-1.
---------------------------------------------------------------------------
There is no provision of section 6103 to provide
whistleblowers with status updates regarding what the IRS has
done with the information provided by the whistleblower. Such
status information would be the return information of the
taxpayer being audited/investigated for additional tax
liability.
A taxpayer can file or sue for civil damages for the
unauthorized disclosure and/or inspection of returns and return
information.\94\ In addition, criminal penalties apply for the
willful unauthorized disclosure or inspection of returns and
return information.\95\
---------------------------------------------------------------------------
\94\ Sec. 7431.
\95\ Secs. 7213 and 7213A.
---------------------------------------------------------------------------
Protection against retaliation
Though other statutes such as the False Claims Act \96\
currently protect some individuals from employer retaliation,
those who file claims under the Code are not explicitly
afforded these same protections.
---------------------------------------------------------------------------
\96\ 31 U.S.C. sec. 3730(h)(2).
---------------------------------------------------------------------------
Explanation of Provision
This provision amends section 6103 to: (1) allow the IRS to
exchange information with whistleblowers to the extent
disclosure is necessary in obtaining information, which is not
otherwise reasonably available, with respect to the correct
determination of tax liability or the amount to be collected
with respect to the enforcement of any other provision of the
Code; and (2) require the Secretary to notify the whistleblower
as to the status of their case not later than 60 days after:
(i) the case has been referred for an audit or examination; and
(ii) the taxpayer makes a payment of tax with respect to the
tax liability to which the information provided by the
whistleblower relates. Subject to such requirements and
conditions prescribed by the Secretary, upon written request by
the whistleblower and so long as the disclosure would not
seriously impair Federal tax administration, the Secretary is
to provide information on the status and stage of any
investigation, and in the case of a determination of the amount
of any award, the reasons for such determination. To ensure
taxpayer information is protected, whistleblowers receiving
information under this provision are subject to the general
rule of confidentiality and criminal penalties for unauthorized
disclosure of taxpayer information.
The provision adds to section 7623, anti-retaliation
whistleblower protections for employees. A person who alleges
discharge or other reprisal by any person in violation of these
protections may file a complaint with the Secretary of Labor
(within 180 days after the date on which the violation occurs),
and if the Secretary of Labor has not issued a final decision
on such complaint within 180 days (and the delay is not due to
the bad faith of the claimant), an action may be brought in the
appropriate district court. The remedies provided are
consistent with those currently available under the False
Claims Act, including compensatory damages of reinstatement,
200 percent of back pay and all lost benefits, with interest,
and compensation for other special damages including litigation
costs, expert witness fees, and reasonable attorney fees.
Effective Date
The modifications made to the disclosure rules apply to
disclosures made after the date of enactment (July 1, 2019).
The protections from retaliation take effect on the date of
enactment.
6. Customer service information (sec. 1406 of the Act)
Present Law
The Code provides that the Commissioner has such duties and
powers as prescribed by the Secretary.\97\ Unless otherwise
specified by the Secretary, such duties and powers include the
power to administer, manage, conduct, direct, and supervise the
execution and application of the internal revenue laws or
related statutes. In executing these duties, the Commissioner
depends upon strategic plans that prioritize goals and manage
IRS's resources. In the current strategic plan, empowering and
enabling all taxpayers to meet their tax obligations is
identified as one of the IRS's six strategic goals.\98\
---------------------------------------------------------------------------
\97\ Sec. 7803(a).
\98\ See Internal Revenue Service Strategic Plan FY2018--2022,
Publication 3744, available at https://www.irs.gov/pub/irs-pdf/
p3744.pdf.
---------------------------------------------------------------------------
Explanation of Provision
The provision requires the IRS to provide the following
information over the telephone, while taxpayers are on hold
with the IRS's call center: information about common tax scams,
direction to the taxpayer on where and how to report such
activity, and tips on how to protect against identity theft and
tax scams.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
7. Misdirected tax refund deposits (sec. 1407 of the Act and sec. 6402
of the Code)
Present Law
The Internal Revenue Manual (``IRM'') defines an erroneous
refund as the receipt of any money from the IRS to which the
recipient is not entitled. The IRM provides procedures for IRS
employees to identify and recover such erroneous refunds.\99\
In addition, the IRS website provides information to taxpayers
who wish to return an erroneous refund that was issued to them,
either by paper check or direct deposit.\100\
---------------------------------------------------------------------------
\99\ Internal Revenue Service, Internal Revenue Manual, Erroneous
Refunds, Ch. 21.4, sec. 21.4.5.2 (October 9, 2015).
\100\ Internal Revenue Service, Topic Number 161--Returning an
Erroneous Refund--Paper Check or Direct Deposit, last updated January
28, 2019, available at https://www.irs.gov/taxtopics/tc161.
---------------------------------------------------------------------------
The Code provides that any tax refunds which are
erroneously made may be recovered by civil action brought in
the name of the United States.\101\ Recovery of an erroneous
refund by civil action is allowed if the action is begun within
two years after the refund is made, or five years if it appears
that any part of the refund was induced by fraud or
misrepresentation.\102\
---------------------------------------------------------------------------
\101\ Sec. 7405.
\102\ Sec. 6532(b).
---------------------------------------------------------------------------
Explanation of Provision
The provision requires the Secretary to prescribe
regulations within six months of the date of enactment of this
Act to establish procedures to allow taxpayers to report
instances in which a refund made by the Secretary by electronic
funds transfer was not transferred to the account of the
taxpayer, to coordinate with financial institutions to identify
and recover these payments, and to deliver refunds to the
correct accounts of taxpayers.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
TITLE II--21ST CENTURY IRS
Subtitle A--Cybersecurity and Identity Protection
1. Public-private partnership to address identity theft tax refund
fraud (sec. 2001 of the Act)
Present Law
The Security Summit, formed in 2015, is a partnership of
the IRS, State tax agencies, and the private-sector tax
industry to address tax refund fraud caused by identity theft.
In 2016, the Security Summit group members identified and
agreed to share more than 20 data components relating to
Federal and State returns to improve fraud detection and
prevention. For example, group members are sharing computer
device identification data tied to the return's origin, as well
as the improper or repetitive use of the numbers that identify
the internet address from where the return originates.\103\ Tax
software providers agreed to enhance identity requirements and
strengthen validation procedures for new and returning
customers to protect their accounts from theft. Along with the
IRS, 40 State departments of revenue, and 21 tax industry
members have signed onto a Memorandum of Understanding
regarding roles, responsibilities and information sharing
pathways among the IRS, States and industry.\104\ In 2017, the
IRS reported there was a 40 percent decline in the number of
taxpayers reporting to the IRS that they are victims of
identity theft, attributing the decline to the initiatives of
the Security Summit.\105\
---------------------------------------------------------------------------
\103\ Internal Revenue Service, 2016 Security Summit: Protecting
Taxpayers from Identity Theft Tax Refund Fraud (June 2016) p. 3,
available at https://www.irs.gov/pub/newsroom/
6_2016_security_summit_report.pdf.
\104\ Ibid.
\105\ Internal Revenue Service, IR-2018-21, Key IRS Identity Theft
Indicators Continue Dramatic Decline in 2017; Security Summit Marks
2017 Progress Against Identity Theft (February 8, 2018).
---------------------------------------------------------------------------
Explanation of Provision
The provision requires the Secretary (or the Secretary's
delegate) to work collaboratively with the public and private
sectors to protect taxpayers from identity theft tax refund
fraud.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
2. Recommendations of Electronic Tax Administration Advisory Committee
regarding identity theft refund fraud (sec. 2002 of the Act)
Present Law
RRA98 authorized the Electronic Tax Administration Advisory
Committee (``ETAAC''). ETAAC was intended to provide input to
the IRS on electronic tax administration. ETAAC's
responsibilities involve researching, analyzing, and making
recommendations on a variety of electronic tax administration
issues. Pursuant to RRA98, ETAAC reports to Congress annually
concerning:
IRS's progress on reaching its goal to
electronically receive 80 percent of tax and
information returns;
Legislative changes assisting the IRS in
meeting the 80 percent goal;
Status of the IRS's strategic plan for
electronic tax administration; and
Effects of e-filing tax and information
returns on small businesses and the self-employed.
ETAAC members come from State departments of revenue, large
tax preparation companies, solo tax practitioners, tax software
companies, financial services industry and low income and
consumer advocacy groups.\106\
---------------------------------------------------------------------------
\106\ Electronic Tax Administration Advisory Committee, Publication
3415, Annual Report to Congress (June 2018), Appendix B, available at
https://www.irs.gov/pub/irs-pdf/p3415.pdf.
---------------------------------------------------------------------------
Explanation of Provision
In addition to the requirements under present law, the
provision requires ETAAC to study (including through organized
public forums) and make recommendations to the Secretary
regarding methods to prevent identity theft and refund fraud.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
3. Information sharing and analysis center (sec. 2003 of the Act and
sec. 6103 of the Code)
Present Law
Information Sharing and Analysis Center
The Security Summit, formed in 2015, is a partnership of
the IRS, State tax agencies, and the private-sector tax
industry to address tax refund fraud caused by identity theft.
In 2016, the Security Summit created an Identity Theft Tax
Refund Fraud Information Sharing and Analysis Center
(``ISAC'').\107\ The ISAC is a secure, web-based venue for
States, industry and the IRS to share and exchange information.
The ISAC enables the IRS and the States to work together with
external third parties to serve as an early warning system for
tax refund fraud, identity theft schemes, and cybersecurity
issues. A third-party contractor hosts, maintains, and
facilitates the web-based leads reporting and information
sharing process for the ISAC.
---------------------------------------------------------------------------
\107\ Internal Revenue Service, 2016 Security Summit: Protecting
Taxpayers from Identity Theft Tax Refund Fraud (June 2016), available
at https://www.irs.gov/pub/newsroom/
6_2016_security_summit_report.pdf.sec.
---------------------------------------------------------------------------
Confidentiality and disclosure of return information
As a general rule, returns and return information are
confidential and cannot be disclosed unless authorized by the
Code.\108\ The definition of return information is very broad
and generally includes any information received or collected by
the IRS with respect to liability under the Code of any person
for any tax, penalty, interest or offense. The term ``return
information'' includes, among other items:
---------------------------------------------------------------------------
\108\ Sec. 6103(a).
---------------------------------------------------------------------------
a taxpayer's identity, the nature, source, or amount of
his income, payments, receipts, deductions, exemptions,
credits, assets, liabilities, net worth, tax liability,
tax withheld, deficiencies, overassessments, or tax
payments, whether the taxpayer's return was, is being,
or will be examined or subject to other investigation
or processing, or any other data, received by, recorded
by, prepared by, furnished to, or collected by the
Secretary with respect to a return or with respect to
the determination of the existence, or possible
existence, of liability (or the amount thereof) of any
person under this title for any tax, penalty, interest,
fine, forfeiture, or other imposition, or offense. . .
.\109\
---------------------------------------------------------------------------
\109\ Sec. 6103(b)(2)(A).
---------------------------------------------------------------------------
There are several exceptions to the general rule of
confidentiality. Such exceptions include provisions to permit
disclosures to State tax administration officials, for IRS
employees and officers to make investigative disclosures, and
rules to allow one authorized party to disclose to another
authorized party with the permission of the Commissioner.\110\
---------------------------------------------------------------------------
\110\ Sec. 6103(d) (disclosures to States), 6103(k)(6)
(investigative disclosures) and the Treasury regulations under sec.
6103(p)(2)(B).
---------------------------------------------------------------------------
The IRS exchanges confidential information with State tax
agencies under the authority of section 6103(d). The
disclosures are made pursuant to written request from the head
of the State tax agency, which designates the State tax
officials who can receive the information. The information can
only be used for State tax purposes, not for general State
civil or criminal law enforcement. The State officials can
redisclose the information to other officers and employees of
the State tax agency, the agency's legal representative, or the
agency's contractors (but only for State tax administration
purposes). The IRS uses this authority to alert State tax
administration officials to tax refund fraud schemes.
IRS officers and employees may disclose return information
to the extent that such disclosure is necessary in obtaining
information, which is not otherwise reasonably available, with
respect to the correct determination of tax, liability for tax,
or the amount to be collected, or with respect to the
enforcement of any other provision of Title 26. Such
disclosures are to be made only in such situations and under
such conditions as the Secretary may prescribe by
regulation.\111\ This provision generally cannot be used to
provide confidential return information on an industry-wide
basis to alert return preparers to potential fraud schemes.
---------------------------------------------------------------------------
\111\ Sec. 6103(k)(6); Treas. Reg. sec. 301.6103(k)(6)-1.
---------------------------------------------------------------------------
Under the Treasury regulations, returns or return
information that have been obtained by a Federal, State, or
local agency, or its agents or contractors, in accordance with
section 6103 (the first recipient) may be disclosed by the
first recipient to another recipient authorized to receive such
returns or return information under section 6103 (the second
recipient).\112\ The disclosure must be approved by the
Commissioner. The second recipient may receive only such
returns or return information as authorized by the provision of
section 6103 applicable to such recipient and only for a
purpose authorized by and subject to any conditions imposed by
section 6103, including applicable safeguards.
---------------------------------------------------------------------------
\112\ Treas. Reg. sec. 301.6103(p)(2)(B)-1.
---------------------------------------------------------------------------
Preparer disclosure penalties
The Code provides for a civil penalty for a tax return
preparer who (i) discloses any information furnished to the
preparer for, or in connection with, the preparation of such
return or (ii) uses such information for any purpose other than
to prepare or assist in preparing any such return.\113\ There
is a corresponding criminal penalty under section 7216 of the
Code for knowing or reckless conduct. The same exceptions from
the imposition of the criminal penalty apply for purposes of
the civil penalty. In general, the penalty does not apply for
disclosures permitted by the Code or pursuant to an order of a
court. Further, the penalty does not apply to the use of
information in the preparation of, or in connection with the
preparation of State and local tax returns and declarations of
estimated tax of the person to whom the information relates.
The Code also permits the Secretary to provide additional
exceptions through regulations. The Secretary has prescribed by
regulation the circumstances not involving tax preparation in
which disclosure and use of a taxpayer's information by a tax
return preparer is permitted.\114\
---------------------------------------------------------------------------
\113\ Sec. 6713.
\114\ Treas. Reg. secs. 301.7216-1, 301.7216-2 and 301.7216-3.
---------------------------------------------------------------------------
Penalties for the unauthorized disclosure or inspection of return
information
The unauthorized disclosure of a return or return
information is a felony punishable by fine of up to $5,000,
five years imprisonment or both. Unauthorized inspection is a
misdemeanor, punishable by a fine of up to $1,000, one year
imprisonment, or both.
Explanation of Provision
ISAC participation and performance metrics
The provision provides that the Secretary (or the
Secretary's delegate) may participate in an information sharing
and analysis center. The purpose of such participation is to
centralize, standardize and enhance data compilation and
analysis to facilitate sharing actionable data and information
with respect to identity theft tax refund fraud. The provision
requires the Secretary (or the Secretary's delegate) to develop
metrics for measuring the success of such center in detecting
and preventing identity theft tax refund fraud.
Disclosure of return information to certain ISAC participants
In general
The provision authorizes the disclosure of specified return
information to ISAC participants who have entered into a
written information sharing agreement with the Secretary. Under
such procedures and subject to such conditions as the Secretary
may prescribe, the Secretary may disclose specified return
information to specified ISAC participants if such disclosure
is in furtherance of effective Federal tax administration
relating to the following: (1) the detection or prevention of
identity theft tax refund fraud; (2) validation of taxpayer
identity; (3) authentication of taxpayer returns; or (4) the
detection or prevention of cybersecurity threats to the IRS.
Terminology
Specified ISAC participant
The term ``specified ISAC participant'' means any person
designated by the Secretary as having primary responsibility
for a function performed by the ISAC and any return preparer
(or other person) subject to section 7216 and who is a
participant in the ISAC. A person is only a specified ISAC
participant if such person has entered into a written
information sharing agreement with the Secretary. The
information sharing agreement must set forth the terms and
conditions for the disclosure of information to such person,
including the requirements imposed on such person for the
protection and safeguarding of such information. The
information sharing agreement must require that recipients of
return information under the provision are required to
affirmatively report to TIGTA any unauthorized access or
disclosure of information and any breaches of any system
holding the information.
Specified return information
For purposes of the provision, the term ``specified return
information'' means, in the case of a return filed
electronically, which is in connection with a case of potential
identity theft tax refund fraud, return information related to
the electronic filing characteristics of such return. Such
characteristics include: internet protocol address, device
identification, email domain name, speed of completion, method
of authentication, refund method, and such other return
information relating to the electronic filing characteristics
of such return as the Secretary may identify. In addition, with
respect to a return prepared by a tax return preparer in
connection with a case of potential identity theft refund
fraud, ``specified return information'' also includes
identifying information with respect to such tax return
preparer, including the preparer taxpayer identification number
(``PTIN'') and electronic filer identification number
(``EFIN'') of such preparer.
With respect to a return for which identity theft refund
fraud has been confirmed by the Secretary (pursuant to such
procedures as the Secretary may provide), ``specified return
information'' also includes the name and taxpayer
identification number of the taxpayer as it appears on the
return, and any bank account and routing information provided
for making a refund in connection with such return.
Finally, in the case of any cybersecurity threat to the
IRS, information similar to that associated with cases of
potential identity theft refund fraud (e.g., electronic
characteristics and preparer identifying information) are
considered specified return information with respect to such
threat.
Restriction on use of disclosed information
Any return information received by a specified ISAC
participant under the provision is to be used only for the
purposes of and to the extent necessary in (1) performing the
function the person is designated to perform with respect to
the ISAC, (2) facilitating authorized disclosures to return
preparers who are specified ISAC participants, and (3)
facilitating disclosures authorized under section 6103(d) to
State tax authorities who are participants in the ISAC. Return
information received by specified ISAC participants who are
return preparers is treated for purposes of section 7216 as
information furnished to such person for, or in connection
with, the preparation of a return of tax.
Data protection, safeguards, penalties
As noted above, to be a specified ISAC participant, the
person must enter into an information sharing agreement that
includes, among other responsibilities, requirements for the
protection and safeguarding of information received under the
provision. The return information disclosed under the provision
is subject to such protections and safeguards as the Secretary
may require by regulations, other guidance, or written
information sharing agreement. Recipients of return information
under the provision are subject to civil and criminal penalties
for the unauthorized disclosure or inspection of returns or
return information.
Effective Date
The provision is generally effective on the date of
enactment (July 1, 2019). The disclosure provisions are
effective for disclosures made on or after the date of
enactment.
4. Compliance by contractors with confidentiality safeguards (sec. 2004
of the Act and sec. 6103 of the Code)
Present Law
Section 6103 permits the disclosure of returns and return
information to State agencies, as well as to other Federal
agencies for specified purposes. Section 6103(p)(4) requires,
as a condition of receiving returns and return information,
that State agencies (and others) provide safeguards as
prescribed by the Secretary of the Treasury by regulation that
are necessary or appropriate to protect the confidentiality of
returns or return information.\115\ It also requires that a
report be furnished to the Secretary at such time and
containing such information as prescribed by the Secretary
regarding the procedures established and utilized for ensuring
the confidentiality of returns and return information.\116\
After an administrative review, the Secretary may take such
actions as are necessary to ensure these requirements are met,
including the refusal to disclose returns and return
information.\117\
---------------------------------------------------------------------------
\115\ Sec. 6103(p)(4)(D).
\116\ Sec. 6103(p)(4)(E).
\117\ Sec. 6103(p)(4) (flush language) and (7); Treas. Reg. sec.
301.6103(p)(7)-1.
---------------------------------------------------------------------------
Under present law, employees of a State tax agency may
disclose returns and return information to contractors for tax
administration purposes.\118\ These disclosures can be made
only to the extent necessary to procure contractually
equipment, other property, or services, related to tax
administration.\119\ The contractors can make redisclosures of
returns and return information to their employees as necessary
to accomplish the tax administration purposes of the contract,
but only to contractor personnel whose duties require
disclosure.\120\ Treasury regulations prohibit redisclosure to
anyone other than contractor personnel without the written
approval of the IRS.\121\
---------------------------------------------------------------------------
\118\ Sec. 6103(n) and Treas. Reg. sec. 301.6103(n)-1(a). ``Tax
administration'' includes ``the administration, management, conduct,
direction, and supervision of the execution and application of internal
revenue laws or related statutes (or equivalent laws and statutes of a
State).'' Sec. 6103(b)(4).
\119\ Treas. Reg. sec. 301.6013(n)-1(a). Such services include the
processing, storage, transmission or reproduction of such returns or
return information, the programming, maintenance, repair, or testing of
equipment or other property, or the providing of other services for
purposes of tax administration.
\120\ Treas. Reg. sec. 301.6103(n)-1(a) and (b). A disclosure is
necessary if such procurement or the performance of such services
cannot otherwise be reasonably, properly, or economically accomplished
without such disclosure. Treas. Reg. sec. 301.6103(n)-1(b). The
regulations limit the quantity of information to that needed to perform
the contract.
\121\ Treas. Reg. sec. 301.6103(n)-1(a).
---------------------------------------------------------------------------
By regulation, all contracts must provide that the
contractor will comply with all applicable restrictions and
conditions for protecting confidentiality prescribed by
regulation, published rules or procedures, or written
communication to the contractor.\122\ Failure to comply with
such restrictions or conditions may cause the IRS to terminate
or suspend the duties under the contract or the disclosures of
returns and return information to the contractor.\123\ In
addition, the IRS can suspend disclosures to the State tax
agency until the IRS determines that the conditions are or will
be satisfied.\124\ The IRS may take such other actions as are
deemed necessary to ensure that such conditions or requirements
are or will be satisfied.\ 125\
---------------------------------------------------------------------------
\122\ Treas. Reg. sec. 301.6103(n)-1(e)(3).
\123\ Treas. Reg. sec. 301.6103(n)-1(e)(4).
\124\ Ibid.
\125\ Ibid.
---------------------------------------------------------------------------
Explanation of Provision
The provision requires that a State, local, or Federal
agency conduct on-site reviews every three years of all its
contractors or other agents receiving Federal returns and
return information. If the duration of the contract or
agreement is less than three years, a review is required at the
mid-point of the contract. The purpose of the review is to
assess the contractor's efforts to safeguard Federal returns
and return information. This review is intended to cover secure
storage, restricting access, computer security, and other
safeguards deemed appropriate by the Secretary. Under the
provision, the State, local, or Federal agency is required to
submit a report of its findings to the IRS and certify annually
that such contractors and other agents are in compliance with
the requirements to safeguard the confidentiality of Federal
returns and return information. The certification is required
to include the name and address of each contractor or other
agent with the agency, the duration of the contract, and a
description of the contract or agreement with the State, local,
or Federal agency.
The provision does not apply to contracts for purposes of
Federal tax administration. The provision does not alter or
affect in any way the right of the IRS to conduct safeguard
reviews of State, local, or Federal agency contractors or other
agents. It also does not affect the right of the IRS to
initially approve the safeguard language in the contract or
agreement and the safeguards in place prior to any disclosures
made in connection with such contracts or agreements.
Effective Date
The provision is effective for disclosures made after
December 31, 2022.
5. Identity protection personal identification numbers (sec. 2005 of
the Act)
Present Law
In 2011, the IRS launched a pilot program to test the
Identity Protection Personal Identification Number (``IP
PIN''). The IP PIN is a unique six-digit identifier that
authenticates a return filer as the legitimate taxpayer at the
time the return is filed. The IP PIN allows taxpayers affected
by identity theft to avoid delays in filing returns and
receiving refunds. The IRS verifies the presence of the IP PIN
at the time of filing, and rejects returns associated with a
taxpayer's account where an IP PIN has been assigned but is
missing. For the 2018 filing season, the IRS issued IP PINs to
almost 3.5 million taxpayers who had identity theft markers on
their tax accounts.\126\
---------------------------------------------------------------------------
\126\ Inspector General for Tax Administration, Department of the
Treasury, Results of the 2018 Filing Season (TIGTA 2019-40-013),
December 19, 2018, available at https://www.treasury.gov/tigta/
auditreports/2019reports/201940013fr.pdf (last visited October 23,
2020).
---------------------------------------------------------------------------
In January 2014, the IRS also started a limited pilot
program under which taxpayers who obtained an electronic filing
PIN through an IRS authentication website and live in the
District of Columbia, Florida, or Georgia were provided an
opportunity to obtain an IP PIN.\127\ These locations were
selected because they had the highest per capita rate of tax-
related identity theft when the initiative was piloted.
Residents in these places do not need to be identity theft
victims to participate. Recently, the IRS expanded the program
to allow taxpayer who filed their federal tax return last year
as a resident of Michigan, California, Maryland, Nevada,
Delaware, Illinois, or Rhode Island to be eligible for an IP
PIN.\128\
---------------------------------------------------------------------------
\127\ Internal Revenue Service, FAQs about the Identity Protection
Personal Identification Number (IP PIN), available at https://
www.irs.gov/identity-theft-fraud-scams/frequently-asked-questions-
about-the-identity-protection-personal-identification-number-ip-pin#q2
(last visited October 23, 2020).
\128\ In 2020, the IRS further expanded the IP PIN program to 10
additional States (Arizona, Colorado, Connecticut, New Jersey, New
Mexico, New York, North Carolina, Pennsylvania, Texas, and Washington).
In 2020, 49,296 individual taxpayers obtained an IP PIN through the
opt-in program which enables taxpayers who are concerned about becoming
a victim of identity theft to proactively request an IP PIN. Inspector
General for Tax Administration, Department of the Treasury, Taxpayer
First Act: Implementation of Identity Theft Victim Assistance
Provisions (TIGTA 2020-45-070), September 10, 2020, available at
https://www.oversight.gov/sites/default/files/oig-reports/
202045070fr.pdf (last visited October 23, 2020).
---------------------------------------------------------------------------
Explanation of Provision
Within five years of the date of enactment, the Secretary
or the Secretary's delegate is required to establish a program
to issue an IP PIN to any individual residing in the United
States who requests one to assist the Secretary in verifying
the individual's true identity. For each calendar year
beginning after the date of enactment, the Secretary is
required to expand the issuance of IP PINs to individuals
residing in such States as the Secretary deems appropriate,
provided that the total number of States served by the program
continues to increase.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
6. Single point of contact for tax-related identity theft victims (sec.
2006 of the Act)
Present Law
Tax-related identity theft generally takes one of two
forms: refund fraud or employment fraud. In refund fraud, a
perpetrator may obtain a taxpayer's identifying information,
submit an individual income tax return using a falsified Form
W-2, Wage and Tax Statement, and fraudulently claim a refund.
In employment fraud, the stolen identifying information is used
in order to obtain employment. The returns then filed using the
stolen identity may be based on the actual wages and
withholding of the identity thief. Victims of the employment
fraud include the individuals whose identifying information was
stolen as well as the businesses whose systems may have been
breached to obtain that personal information.
The IRS describes its procedures for addressing both types
of fraud in the Internal Revenue Manual.\129\ The IRS initially
established the Identity Protection Specialized Unit (``IPSU'')
to assist victims of identity theft, but taxpayers were also
referred to other operating units of the IRS to deal with
various aspects of their cases.\130\ Subsequently reorganized
and renamed the Identity Theft Victim Assistance (``IDTVA'')
organization, the unit is staffed with specially trained
employees who are able to assess each case, identify issues,
and assist the taxpayer in getting the correct return filed,
refunds issued, etc.\131\ The IDTVA organization's work is
coordinated by the IRS's Identity Protection Program through
the auspices of an oversight office within the Wage and
Investment Operating Division.\132\
---------------------------------------------------------------------------
\129\ Internal Revenue Service, Internal Revenue Manual, Identity
Protection and Victim Assistance, Ch. 23, sec. 25.23.1 et seq. (October
2018).
\130\ Inspector General for Tax Administration, Department of the
Treasury, Most Taxpayers Whose Identities Have Been Stolen to Commit
Refund Fraud Do Not Receive Quality Customer Service (TIGTA 2012-40-
050), May 2012.
\131\ A description of the services provided by the IDTVA
organization is available at https://www.irs.gov/uac/Newsroom/IRS-
Identity-Theft-Victim-Assistance-How-It-Works (last visited October 23,
2020).
\132\ Internal Revenue Service, Internal Revenue Manual, Identity
Protection and Victim Assistance, Ch. 23, sec. 25.23.1 et seq. (October
2018).
---------------------------------------------------------------------------
If a victim thinks he or she is not being properly served
by the IRS or the IDTVA organization, the victim may be
eligible for assistance from the TAS. In such instances, the
TAS will assign a case advocate to the taxpayer's account.
Explanation of Provision
The provision requires the Secretary to establish
procedures to implement a single point of contact for taxpayers
adversely affected by identity theft. The single point of
contact consists of a team of specially trained employees who
can work across functions within the IRS to resolve problems
for the victim and who are accountable for handling the case to
completion. The makeup of the team may change as required to
meet IRS's needs, but the procedures must ensure continuity of
records and case history and may require notice to the taxpayer
in appropriate instances.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
7. Notification of suspected identity theft (sec. 2007 of Act and new
sec. 7529 of the Code)
Present Law
Section 6103 provides that returns and return information
are confidential and may not be disclosed by the IRS, other
Federal employees, State employees, and certain others having
access to the information except as provided in the Code.\133\
The definition of ``return information'' is very broad and
includes any information gathered by the IRS with respect to a
person's liability or possible liability under the Code for any
tax, penalty, interest, fine, forfeiture, or other imposition
or offense.\134\ Thus, information gathered by the IRS in
connection with an investigation of a person for a Title 26
offense, such as fraud, is the return information of the person
being investigated and is subject to the confidentiality
restrictions of section 6103.
---------------------------------------------------------------------------
\133\ Sec. 6103(a).
\134\ Sec. 6103(b)(2).
---------------------------------------------------------------------------
As an exception to section 6103's general rule of
confidentiality, the Code permits a taxpayer to receive his or
her own tax return, and also can receive his or her return
information if the Secretary determines that such disclosure
would not seriously impair Federal tax administration.\135\
With respect to fraudulent tax returns, if the victim's name
and Social Security number (``SSN'') are listed as either the
primary or secondary taxpayer on a fraudulent return, a victim
of identity theft, or a person authorized to obtain the
identity theft victim's tax information, may request a redacted
copy (one with some information blacked-out) of a fraudulent
return that was filed and accepted by the IRS using the
identity theft victim's name and SSN.\136\
---------------------------------------------------------------------------
\135\ Sec. 6103(e)(1) and (7). The Code also permits the disclosure
of returns and return information to such persons or persons the
taxpayer may designate, if the request meets the requirements of the
Treasury regulations and if it is determined that such disclosure would
not seriously impair Federal tax administration. Sec. 6103(c).
\136\ See Internal Revenue Service, Instructions for Requesting
Copy of Fraudulent Returns (March 18, 2019), available at https://
www.irs.gov/individuals/instructions-for-requesting-copy- of-
fraudulent-returns.
---------------------------------------------------------------------------
In cases not involving violations of Title 26, under a
Privacy Act Notice, TIGTA is allowed to disclose information to
complainants, victims, or their representatives (defined to be
a complainant's or victim's legal counsel or a Senator or
Representative whose assistance the complainant or victim has
solicited) concerning the status and/or results of an
investigation or case arising from the matters of which they
complained and/or of which they were a victim, including, once
the investigative subject has exhausted all reasonable appeals,
any action taken. Information concerning the status of the
investigation or case is limited strictly to whether the
investigation or case is open or closed. Information concerning
the results of the investigation or case is limited strictly to
whether the allegations made in the complaint were
substantiated or were not substantiated and, if the subject has
exhausted all reasonable appeals, any action taken.\137\
---------------------------------------------------------------------------
\137\ See 75 Fed. Reg. 20715 (April 20, 2010) (relating to TIGTA
Office of Investigation files).
---------------------------------------------------------------------------
Explanation of Provision
If the Secretary determines that there has been or may have
been an unauthorized use of the identity of any individual, the
provision requires the Secretary to, without jeopardizing an
investigation relating to tax administration, as soon as
practicable, notify the individual of such determination, and:
(1) provide instructions to the individual about filing a
report with law enforcement; (2) identify any steps to be taken
by the individual to allow investigating law enforcement
officials to access the taxpayer's personal information; (3)
provide information regarding actions the individual may take
to protect themselves from harm relating to the unauthorized
use; and (4) offer identity protection measures to the
individual, such as the use of an identity protection personal
identification number.
At the time this information is provided (or, if not
available at such time, as soon as practicable thereafter), the
Secretary shall issue additional notifications to such
individual (or such individual's designee) regarding: (1)
whether an investigation has been initiated in regards to such
unauthorized use; (2) whether the investigation substantiated
an unauthorized use of the taxpayer's identity; and (3) whether
any action has been taken with respect to the individual who
committed the substantiated violation, including whether any
referral has been made for criminal prosecution of such
individual, and, to the extent such information is available,
whether such person has been criminally charged by indictment
or information.
For purposes of this provision, the unauthorized use of the
identity of an individual includes the unauthorized use of the
identity of the individual to obtain employment (herein
``employment-related identity theft''). In making a
determination as to whether there may have been an unauthorized
use of the identity of an individual to obtain employment, the
Secretary shall review certain information returns, as well as
information provided to the IRS by the SSA, which indicates
that the SSN used does not correspond with either the name on
the information return or the name on the tax return reporting
the income. This provision requires the Secretary to examine
the statements, information returns, and tax returns described
in the provision for any evidence of employment-related
identity theft, regardless of whether such statements or
returns are submitted electronically or on paper. The provision
amends the Social Security Act to require the Commissioner of
Social Security to request information described in the
provision not less than annually. The provision also requires
that the IRS establish procedures to ensure that income
reported in connection with the unauthorized use of a
taxpayer's identity is not taken into account in determining
any penalty for underreporting of income by the victim of
identity theft.
Effective Date
The provision applies to determinations made after the date
that is six months after the date of enactment (July 1, 2019)
of this Act.
8. Guidelines for stolen identity theft refund fraud cases (sec. 2008
of the Act)
Present Law
Disparate elements in the tax laws and administration are
implicated in identity theft. The tax aspects of identity theft
can generally occur in one of two ways. In refund fraud, a
perpetrator obtains someone else's identifying information and
submits an individual income tax return using the name and
Social Security number of the victim, with a falsified Form W-
2, Wage and Tax Statement, and fraudulently claims a refund. In
other cases, the stolen identifying information is used in
order to obtain employment; the returns then filed by the
persons employed using the stolen identity may be based on the
actual wages and withholding. Victims of the fraud include the
individuals whose identifying information was stolen as well as
the businesses whose systems may have been breached to obtain
that personal information.
The IRS describes its procedures for addressing both types
of fraud in its manual. Its work is coordinated by the IRS's
Identity Protection Program through the auspices of an
oversight office.\138\
---------------------------------------------------------------------------
\138\ Internal Revenue Service, Internal Revenue Manual, Identity
Protection and Victim Assistance, Ch. 23, sec. 25.23.1 et seq. (October
2018).
---------------------------------------------------------------------------
In the 2014 Annual Report to Congress, the NTA included a
review of fraudulent refund claims that included the theft of a
taxpayer's identity.\139\ The review found that such cases
involved multiple issues requiring coordination among several
business units of the IRS and took approximately six months to
resolve. Identity theft victims were required to deal with
multiple persons within the IRS to resolve the issues, either
because a case involved multiple business units or was
transferred among multiple employees within a business unit.
---------------------------------------------------------------------------
\139\ National Taxpayer Advocate, ``Identity Theft Case Review
Report: A Statistical Analysis of Identity Theft Cases Closed in June
2014,'' 2014 Annual Report to Congress, available at http://
www.taxpayeradvocate.irs.gov/reports-to-congress/2014-annual-report-to-
congress/research-studies.
---------------------------------------------------------------------------
Explanation of Provision
The provision requires the Secretary (or the Secretary's
delegate), in consultation with the NTA, to develop and
implemet publicly available casework guidelines for the
handling of refund fraud cases that would have the effect of
reducing the administrative burdens on victims of identity
theft. The guidelines may address both procedures and metrics
for determining whether the procedures are successfully
implemented. Among the issues to be considered are the
standards for opening, assigning, reassigning or closing a
case; the average length of time in which a case with an
identity theft issue should be resolved; the average length of
time a victim entitled to a tax refund may have to wait to
receive such refund; and the number of IRS offices and
employees with whom a victim should interact to resolve a case.
Effective Date
The provision is effective on the date of enactment (July
1, 2019), with guidelines to be implemented within one year of
the date of enactment.
9. Increased penalty for improper disclosure or use of information by
preparers of returns (sec. 2009 of the Act and sec. 6713 of the
Code)
Present Law
The Code provides both civil and criminal penalties for a
tax return preparer who discloses any information furnished to
the preparer for, or in connection with, the preparation of
such return or uses such information for any purpose other than
to prepare or assist in preparing, any such return. The civil
penalty is $250 for each unauthorized disclosure or use up to
$10,000 per calendar year.\140\ The corresponding criminal
penalty under section 7216 provides that knowing or reckless
conduct is a misdemeanor, subject to a fine up to $1,000, one
year of imprisonment, or both, together with the costs of
prosecution.
---------------------------------------------------------------------------
\140\ Sec. 6713.
---------------------------------------------------------------------------
Section 6103(b)(6) defines ``taxpayer identity'' as the
name of the person with respect to whom a return is filed, his
mailing address, his taxpayer identifying number or a
combination thereof.
Explanation of Provision
The provision increases the civil penalty on the
unauthorized disclosure or use of information by tax return
preparers from $250 to $1,000 for cases in which the disclosure
or use is made in connection with a crime relating to the
misappropriation of another person's taxpayer identity
(``taxpayer identity theft''). The provision also increases the
calendar year limitation from $10,000 to $50,000. The calendar
year limitation is applied separately with respect to
disclosures or uses made in connection with taxpayer identity
theft.
The provision also increases the criminal penalty for
knowing or reckless conduct to $100,000 in the case of
disclosures or uses in connection with taxpayer identity theft.
Effective Date
The provision applies to disclosures or uses on or after
the date of enactment (July 1, 2019).
Subtitle B--Development of Information Technology
1. Management of IRS information technology (sec. 2101 of the Act and
sec. 7803 of the Code)
Present Law
The Code describes duties and responsibilities for the
Commissioner, the Chief Counsel, and the OTA of the IRS.\141\
It does not presently enumerate duties and responsibilities of
an IRS Chief Information Officer (``IRS CIO'').
---------------------------------------------------------------------------
\141\ Sec. 7803.
---------------------------------------------------------------------------
Also, the Code does not explicitly provide for development
and implementation of a multiyear strategic plan for the
information technology needs of the IRS, and does not require
verification and validation of major acquisitions of
information technology by the IRS, including the Customer
Account Data Engine 2 (``CADE 2'') and the Enterprise Case
Management System (``ECM'').
Explanation of Provision
Under the provision, the Commissioner is required to
appoint an IRS CIO. The Commissioner and the Secretary will act
through the IRS CIO with respect to the development,
implementation, and maintenance of information technology for
the IRS. The IRS CIO will be responsible for the development,
implementation, and maintenance of information technology for
the IRS, for ensuring that the information technology of the
IRS is secure and integrated, for maintaining operational
control of all information technology for the IRS, for acting
as the principal advocate for the information technology needs
of the IRS, and for consulting with the Chief Procurement
Officer of the IRS to ensure that the information technology
acquired for the IRS is consistent with the strategic plan,
described below.
The IRS CIO will also be responsible for developing and
implementing a multiyear strategic plan for the information
technology needs of the IRS. This plan should include
performance measures of such technology and its implementation,
and a plan for an integrated enterprise architecture of the
information technology of the IRS. It should take into account
the resources needed to accomplish such a plan, as well as
planned major acquisitions of information technology by the
IRS. The plan should also align with the needs and strategic
plan of the IRS. The IRS CIO will review and update this plan
at least once a year, taking into account the development of
new information technology and the needs of the IRS.
Under the provision, the Commissioner will develop plans
for each phase of CADE 2, except phase one, and enter into a
contract with an independent reviewer to verify and validate
implementation plans developed for each phase, except phase
one, and for the ECM. Furthermore, the Chief Procurement
Officer of the IRS is directed to regularly consult with the
IRS CIO and to identify all significant IRS information
technology acquisitions in excess of $1,000,000, providing
written notification to the IRS CIO of each such acquisition in
advance of acquisition.
The verification and validation of phase two of CADE 2 and
the ECM are to be completed within one year after the date of
enactment. The development of plans for all subsequent phases
of CADE 2 should be completed within one year after the date of
enactment and the verification and validation of each phase
should be completed within one year after the date on which the
plan for such phase is completed.
Effective Date
The provision is generally effective on the date of
enactment (July 1, 2019).
2. Internet platform for Form 1099 filings (sec. 2102 of the Act)
Present Law
The Code does not presently require the IRS to make
available an internet platform for the preparation or filing of
information returns, such as the Form 1099 series.
Explanation of Provision
The provision requires the Secretary of the Treasury (or
his or her delegate) to make available, by January 1, 2023, an
internet website or other electronic medium (the ``website''),
with a user interface and functionality similar to the Business
Services Online Suite of Services provided by the Social
Security Administration.\142\ The website will allow persons,
with access to resources and guidance provided by the IRS, to
prepare, file, and distribute Forms 1099, and maintain a record
of completed, filed, and distributed Forms 1099. The Secretary
is required to ensure that the services provided on the website
are not a replacement for services currently provided by the
IRS and that the website comply with applicable security
standards.
---------------------------------------------------------------------------
\142\ Available at http://www.ssa.gov/bso/bsowelcome.htm (last
visited October 23, 2020).
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
3. Streamlined critical pay authority for information technology
positions (sec. 2103 of the Act and new sec. 7812 of the Code)
Present Law
The IRS is currently subject to the personnel rules and
procedures set forth in Title 5 of the United States Code.
Under these rules, IRS employees generally are classified under
the General Schedule or the Senior Executive Service.
The RRA98 provided the IRS with certain personnel
flexibilities, one of which was the streamlined critical pay
authority.\143\ This authority was originally provided for 10
years; it was extended on two occasions and ultimately expired
on September 30, 2013.\144\
---------------------------------------------------------------------------
\143\ Pub. L. No. 105-206, 112 Stat. 712 (1998).
\144\ In December 2007, the Consolidated Appropriations Act, 2008,
Pub. L. No. 110-161, 121 Stat. 1844, (2008), extended the original
deadline to July 23, 2013. Subsequently, the Consolidated and Further
Continuing Appropriations Act 2013, Pub. L. No. 113-6, 127 Stat. 198
(2013), extended the deadline to September 30, 2013.
---------------------------------------------------------------------------
Under RRA98, the Secretary of the Treasury, or his
delegate, was authorized to fix the compensation of, and
appoint up to 40 individuals to, designated critical technical
and professional positions, provided that: (1) the positions
require expertise of an extremely high level in a technical or
professional field and are critical to the IRS; (2) exercise of
the authority is necessary to recruit or retain an individual
exceptionally well qualified for the position; (3) designation
of such positions is approved by the Secretary; (4) the terms
of such appointments are limited to no more than four years;
(5) appointees to such positions are not IRS employees
immediately prior to such appointment; and (6) the total annual
compensation for any position (including performance bonuses)
does not exceed the rate of pay of the Vice President of the
United States.
These appointments would not be subject to the otherwise
applicable requirements under Title 5. All such appointments
would be excluded from the collective bargaining unit and the
appointments would not be subject to approval of the OMB or the
Office of Personnel Management.
Also, OMB was authorized to approve increases in the pay
level for certain critical pay positions requested by the
Secretary. These critical pay positions would be critical,
technical and professional positions other than those
designated under the streamlined authority described above. OMB
was authorized to approve requests for critical position pay up
to the highest total compensation that does not exceed the rate
of pay of the Vice President of the United States.
According to TIGTA, during the years in which it had
streamlined critical pay authority, the IRS exercised that
authority to fill 168 positions, the majority of which were in
the Information Technology function of the IRS.\145\
---------------------------------------------------------------------------
\145\ TIGTA, The Internal Revenue Service's Use of its Streamlined
Critical Pay Authority,'' Ref. No. 2015-IE-R001 (December 5, 2014),
available at https://www.treasury.gov/tigta/iereports/2015reports/
2015ier001fr.pdf.
---------------------------------------------------------------------------
Explanation of Provision
The provision reinstates streamlined critical pay authority
at IRS for positions in its information technology operations
that are necessary to ensure the functionality of such
operations. Such authority is reinstated during the period
beginning on the date of the enactment of section 7812 of the
Code, and ending on September 30, 2025, for appointees to such
positions who were not IRS employees prior to the date of
enactment of this Act.
The provision reinstates the ability to provide payment for
recruitment, retention, relocation incentives, and relocation
expenses for positions in information technology operations at
the IRS. Such authority is reinstated during the period
beginning on the date of the enactment of section 7812 of the
Code and ending on September 30, 2025.
The provision also reinstates the ability to pay
performance bonuses for senior executives who have program
management responsibility over the information technology
operations at the IRS. Such authority is reinstated during the
period beginning on the date of the enactment of section 7812
of the Code and ending on September 30, 2025.
Effective Date
The provision is effective for payments made on or after
the date of enactment (July 1, 2019).
Subtitle C--Modernization of Consent-Based Income Verification System
1. Disclosure of taxpayer information for third-party income
verification (sec. 2201 of the Act and sec. 6103 of the Code)
Present Law
Disclosure of return information with consent of the taxpayer
As a general rule, returns and return information are
confidential and cannot be disclosed unless authorized by Title
26.\146\ Under section 6103(c), the IRS may disclose the return
or return information of a taxpayer to a third party designated
by the taxpayer in a request for or consent to such disclosure.
Treasury regulations set forth the requirements for such
consent.\147\ A request for consent to disclosure in written
form must be a separate written document pertaining solely to
the authorized disclosure. At the time the consent is signed
and dated by the taxpayer, the written document must indicate:
(1) the taxpayer's taxpayer identity information; (2) the
identity of the person(s) to whom disclosure is to be made; (3)
the type of return (or specified portion of the return) or
return information (and the particular data) that is to be
disclosed; and (4) the taxable year(s) covered by the return or
return information. The regulations also require that the
consent be submitted within 120 days of the date signed and
dated by the taxpayer.
---------------------------------------------------------------------------
\146\ Sec. 6103(a).
\147\ Treas. Reg. sec. 301.6103(c)-1. The regulations also specify
the requirements for a nonwritten request for information or consent to
disclosure to allow a third party to provide information or assistance
relating to the taxpayer's return or to a transaction or other contact
between the taxpayer and the IRS.
---------------------------------------------------------------------------
Income Verification Express Service (IVES)
Mortgage lenders and others in the financial community use
the IRS's Income Verification Express Service (``IVES'') to
confirm the income of a borrower during the processing of a
loan application.\148\ Customers of IVES fax to a specified IRS
office a signed Form 4506-T (``Request for Transcript of Tax
Return'') or Form 4506T-EZ (``Short Form Request for Individual
Tax Return Transcript''). The IRS provides three types of
transcript information as part of the IVES program: (1) a
return transcript; (2) Form W-2 (``Wage and Tax Statement'')
transcript information; and (3) Form 1099 \149\ transcript
information.
---------------------------------------------------------------------------
\148\ Internal Revenue Service, Income Verification Express
Service, https://www.irs.gov/individuals/international-taxpayers/
income-verification-express-service (January 31, 2019).
\149\ There are various Forms 1099: Form 1099-B, Proceeds From
Broker or Barter Exchange Transactions; Form 1099-DIV, Dividends and
Distributions; 1099-INT, Interest Income; 1099-MISC, Miscellaneous
Income; 1099-OID, Original Issue Discount; or 1099-R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc.
---------------------------------------------------------------------------
The IRS imposes a $2.00 fee for each transcript requested.
The requested transcript information is delivered to a secure
mailbox on the IRS's e-Services electronic platform, generally
within two to three business days.
To participate in the IVES program, companies must register
and identify employees to act as agents to receive transcripts
on the company's behalf.\150\ According to the Form 13803
(``Application to Participate in the Income Verification
Express Services (IVES) Program''), the IRS conducts a
suitability check on the applicant and all the principals
listed on the application to determine the applicant's
suitability to be an IVES participant. After an applicant
passes the suitability check and the IRS completes processing
the application, the IRS notifies the applicant of acceptance
to participate in the program.
---------------------------------------------------------------------------
\150\ Applicants also must choose one or more of the reasons listed
on the form as the basis for using the IVES program: mortgage services,
background check, credit check, banking service, licensing requirement,
or other (must be specified).
---------------------------------------------------------------------------
Explanation of Provision
As noted above, the current IVES program requires that
transcript information requests be submitted to the IRS by fax
and then the transcripts are furnished electronically to a
secure mailbox. After a specified time period, the provision
requires the Secretary (or his delegate) to implement a
qualified disclosure program that is fully automated,
accomplished through the Internet, and through which
disclosures are accomplished in as close to real-time as is
practicable. The program is to comply with applicable security
standards and guidelines. The term ``qualified disclosure''
means a disclosure made pursuant to section 6103(c) to a person
seeking to verify the income of a taxpayer who is a borrower in
the process of a loan application. ``Qualified disclosure'' is
intended as a reference to the types of disclosures made under
the current IVES program. The provision is not intended to
exclude current uses of the IVES program.
To cover the costs of implementing such a program, for a
two-year period beginning six months after the date of
enactment, the Secretary is authorized to assess and collect a
fee for qualified disclosures at such rates as the Secretary
determines are sufficient to cover the costs related to
implementing the program, including the costs of any necessary
infrastructure or technology. Such fees are in addition to any
other fee assessed and collected for such disclosures. The
amounts received from the fees assessed and collected are to be
deposited in and credited to an account solely for the purpose
of carrying out the activities associated with implementing the
qualified disclosure program. Not later than one year after the
close of the two-year period, the Secretary is required to
implement the program.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
2. Limit redisclosures and uses of consent-based disclosures of tax
return information (sec. 2202 of the Act and sec. 6103 of the
Code)
Present Law
In general
As a general rule, returns and return information are
confidential and cannot be disclosed unless authorized by Title
26.\151\ Under section 6103(c), a taxpayer may designate in a
request or consent to the disclosure by the IRS of his or her
return or return information to a third party. Treasury
regulations set forth the requirements for such consent.\152\
The request or consent may be in written or non-written form.
The Treasury regulations require that the taxpayer sign and
date a written consent. At the time the consent is signed and
dated by the taxpayer, the written document must indicate (1)
the taxpayer's identity information; (2) the identity of the
person to whom disclosure is to be made; (3) the type of return
(or specified portion of the return) or return information (and
the particular data) that is to be disclosed; and (4) the
taxable year covered by the return or return information. The
regulations also require that the consent be submitted within
120 days of the date signed and dated by the taxpayer. Present
law does not require that a recipient receiving returns or
return information by consent maintain the confidentiality of
the information received. Under present law, the recipient is
also free to use the information for purposes other than for
which the information was solicited from the taxpayer.
---------------------------------------------------------------------------
\151\ Sec. 6103(a).
\152\ Treas. Reg. sec. 301.6103(c)-1.
---------------------------------------------------------------------------
Criminal penalties
Under section 7206, it is a felony to willfully make and
subscribe any document that contains or is verified by a
written declaration that it is made under penalties of perjury
and which such person does not believe to be true and correct
as to every material matter.\153\ Upon conviction, such person
may be fined up to $100,000 ($500,000 in the case of a
corporation) or imprisoned up to three years, or both, together
with the costs of prosecution.
---------------------------------------------------------------------------
\153\ Sec. 7206(1).
---------------------------------------------------------------------------
Under section 7213, criminal penalties apply to: (1)
willful unauthorized disclosures of returns and return
information by Federal and State employees and other persons;
(2) the offering of any item of material value in exchange for
a return or return information and the receipt of such
information pursuant to such an offer; and (3) the unauthorized
disclosure of return information received by certain
shareholders under the material interest provision of section
6103. Under section 7213, a court can impose a fine up to
$5,000, up to five years imprisonment, or both, together with
the costs of prosecution. If the offense is committed by a
Federal employee or officer, the employee or officer will be
discharged from office upon conviction.
Under section 7213A, the willful and unauthorized
inspection of returns and return information can subject
Federal and State employees and others to a maximum fine of
$1,000, up to a year in prison, or both, in addition to the
costs of prosecution. If the offense is committed by a Federal
employee or officer, the employee or officer will be discharged
from office upon conviction.
Civil damage remedies for unauthorized disclosure or inspection
If a Federal employee makes an unauthorized disclosure or
inspection, a taxpayer can bring suit against the United States
in Federal district court. If a person other than a Federal
employee makes an unauthorized disclosure or inspection, suit
may be brought directly against such person. No liability
results from a disclosure based on a good faith, but erroneous,
interpretation of section 6103. A disclosure or inspection made
at the request of the taxpayer will also relieve liability.
Upon a finding of liability, a taxpayer can recover the
greater of $1,000 per act of unauthorized disclosure (or
inspection), or the sum of actual damages plus, in the case of
an inspection or disclosure that was willful or the result of
gross negligence, punitive damages. The taxpayer may also
recover the costs of the action and, if found to be a
prevailing party, reasonable attorney fees.
The taxpayer has two years from the date of the discovery
of the unauthorized inspection or disclosure to bring suit. The
IRS is required to notify a taxpayer of an unauthorized
inspection or disclosure as soon as practicable after any
person is criminally charged by indictment or information for
unlawful inspection or disclosure.
Explanation of Provision
Under the provision, persons designated by the taxpayer to
receive return information shall not use the information for
any purpose other than the express purpose for which consent
was granted and shall not disclose return information to any
other person without the express permission of, or request by,
the taxpayer.
Effective Date
The provision is effective for disclosures made six months
after the date of enactment (July 1, 2019).
Subtitle D--Expanded Use of Electronic Systems
1. Electronic filing of returns (sec. 2301 of the Act and sec. 6011 of
the Code)
Present Law
RRA98 states a Congressional policy to promote the
paperless filing of Federal tax returns. Section 2001(a) of
RRA98 set a goal for the IRS to have at least 80 percent of all
Federal tax and information returns filed electronically by
2007.\154\ Section 2001(b) of RRA98 requires the IRS to
establish a 10-year strategic plan to eliminate barriers to
electronic filing.
---------------------------------------------------------------------------
\154\ The Electronic Tax Administration Advisory Committee, the
body charged with oversight of IRS progress in reaching that goal,
projected an overall e-filing rate of 80.1 percent in the 2017 filing
season based on all Federal returns. See Electronic Tax Administration
Advisory Committee, Annual Report to Congress, June 2017, IRS Pub.
3415, page 5.
---------------------------------------------------------------------------
Present law requires the Secretary to issue regulations
regarding electronic filing and specifies certain limitations
on the rules that may be included in such regulations.\155\ The
statute requires that Federal income tax returns prepared by
specified tax return preparers be filed electronically,\156\
and further requires that all partnerships with more than 100
partners be required to file electronically. For taxpayers
other than partnerships, the statute prohibits any requirement
that persons who file fewer than 250 returns during a calendar
year file electronically. With respect to individuals, estates,
and trusts, the Secretary may permit, but generally cannot
require, electronic filing of income tax returns. In crafting
any of these required regulations, the Secretary must take into
account the ability of taxpayers to comply at a reasonable
cost.
---------------------------------------------------------------------------
\155\ Sec. 6011(e). Sec. 6011(e) uses the term ``magnetic media''
and Treasury regulation section 301.6011-2 defines this term to include
electronic filing.
\156\ Section 6011(e)(3)(B) defines a ``specified tax return
preparer'' as any return preparer who reasonably expects to file more
than 10 individual income tax returns during a calendar year.
---------------------------------------------------------------------------
The regulations require corporations that have assets of
$10 million or more and file at least 250 returns during a
calendar year to file electronically their Form 1120/1120S
income tax returns (U.S. Corporation Income Tax Return/U.S.
Income Tax Return for an S Corporation) and Form 990
information returns (Return of Organization Exempt from Income
Tax) for tax years ending on or after December 31, 2006.\157\
In determining whether the 250 returns threshold is met, income
tax, excise tax, employment tax and information returns filed
within one calendar year are counted.
---------------------------------------------------------------------------
\157\ Treas. Reg. secs. 301.6011-5 and 301.6033-4.
---------------------------------------------------------------------------
The Code provides that failure to comply with information
reporting requirements is subject to a failure to file correct
information return penalty but provides a de minimis exception
for failures that are attributable solely to noncompliance with
the electronic filing requirements. Under the de minimis
exception, failure to satisfy the electronic filing
requirements results in imposition of a failure to file
penalty\ 158\ if a failure arises with respect to: (1) more
than 250 information returns; (2) more than 100 information
returns in the case of a partnership having more than 100
partners; or (3) a return described in Section 6011(e)(4).\159\
Accordingly, there is a penalty waiver on the electronic filing
requirements on the first 250 information returns or in the
case of the first 100 information returns in partnerships with
more than 100 partners.
---------------------------------------------------------------------------
\158\ Sec. 6721.
\159\ Sec. 6724.
---------------------------------------------------------------------------
Explanation of Provision
The provision relaxes the current restrictions on the
authority of the Secretary to mandate electronic filing based
on the number of returns required to be filed by a taxpayer in
a given taxable period. First, it phases in a reduction in the
threshold requirement that taxpayers have an obligation to file
a specified number of returns and statements during a calendar
year in order to be subject to a regulatory mandate. That
threshold is reduced from 250 to 100 in the case of calendar
year 2021, and from 100 to 10 in the case of calendar years
after 2021. Notwithstanding these thresholds, in the case of a
partnership the applicable number is 200 in the case of
calendar year 2018, 150 in the case of calendar year 2019, 100
in the case of calendar year 2020, and 50 in the case of
calendar year 2021.\160\
---------------------------------------------------------------------------
\160\ There is no change to the requirement that partnerships
having more than 100 partners must file electronic returns
notwithstanding these thresholds.
---------------------------------------------------------------------------
The provision authorizes the Secretary to waive the
requirement that a Federal income tax return prepared by a
specified tax return preparer be filed electronically if a tax
return preparer applies for a waiver and demonstrates that the
inability to file electronically is due to lack of internet
availability (other than dial-up or satellite service) in the
geographic location in which the return preparation business is
operated.
The provision modifies the special rule for failure to meet
magnetic media requirements to conform to the changes made
above.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
2. Uniform standards for the use of electronic signatures for
disclosure authorizations to, and other authorizations of,
practitioners (sec. 2302 of the Act and sec. 6061 of the Code)
Present Law
Disclosure of return information by consent of the taxpayer
As a general rule, returns and return information are
confidential and cannot be disclosed unless authorized by the
Code.\161\ Under section 6103(c), the IRS may disclose the
return or return information of a taxpayer to a third party
designated by the taxpayer in a request for or consent to such
disclosure. Treasury regulations set forth the requirements for
such consent.\162\ A request for consent to disclosure in
written form must be a separate written document pertaining
solely to the authorized disclosure. At the time the consent is
signed and dated by the taxpayer, the written document must
indicate (1) the taxpayer's taxpayer identity information; (2)
the identity of the person(s) to whom disclosure is to be made;
and (3) sufficient facts underlying the request for information
or assistance to enable the IRS to determine the nature and
extent of the information or assistance requested and the
return or return information to be disclosed in order to comply
with the taxpayer's request. The regulations also require that
the consent be submitted within 120 days of the date signed and
dated by the taxpayer.
---------------------------------------------------------------------------
\161\ Sec. 6103(a).
\162\ Treas. Reg. sec. 301.6103(c)-1.
---------------------------------------------------------------------------
Electronic signatures
The Secretary is required to develop procedures for the
acceptance of signatures in digital and other electronic
form.\163\ Until such time as such procedures are in place, the
Secretary may waive the requirement of a signature for, or
provide for alternative methods of signing or subscribing, a
particular type or class of return, declaration, statement or
other document required or permitted to be made or written
under the internal revenue laws and regulations. The Secretary
is required to publish guidance as appropriate to define and
implement any waiver of the signature requirements or
alternative method of signing or subscribing. The IRS currently
accepts electronic signatures for some applications, such as
the Income Verification Express Services (``IVES'')
program.\164\
---------------------------------------------------------------------------
\163\ Sec. 6061.
\164\ Internal Revenue Service, Income Verification Express
Services (IVES) Electronic Signature Requirements (August 2, 2018),
available at https://www.irs.gov/individuals/international-taxpayers/
income-verification-express-services-ives-electronic-signature-
requirements.
---------------------------------------------------------------------------
Section 12.101 of the Federal Acquisition Regulations
require all Federal agencies to consider commercially available
items in the acquisition process.\165\
---------------------------------------------------------------------------
\ 165\ Specifically, section 12.101 of the Federal Acquisition
Regulations provides that agencies: (1) conduct market research to
determine whether commercial items or nondevelopmental items are
available that could meet the agency's requirements; (2) acquire
commercial items or nondevelopmental items when they are available to
meet the needs of the agency; and (3) require prime contractors and
subcontractors at all tiers to incorporate, to the maximum extent
practicable, commercial items or nondevelopmental items as components
of items supplied to the agency.
---------------------------------------------------------------------------
IRS Forms
Form 2848 (Power of Attorney and Declaration of
Representative) is used to authorize an individual to represent
the taxpayer before the IRS. The individual must be eligible to
practice before the IRS.
Form 8821 (Tax Information Authorization) authorizes an
individual or organization to request and inspect a taxpayer's
confidential tax return information. Form 4506-T (Request for
Transcript of Tax Return) authorizes an individual or
organization to request and inspect transcripts of a taxpayer's
confidential return information. These forms do not authorize
an individual to represent the taxpayer before the IRS.
Explanation of Provision
For a request under section 6103(c) for disclosure of a
taxpayer's return or return information to a practitioner, or
for any power of attorney granted by a taxpayer to a
practitioner, the provision requires the Secretary to publish
guidance to establish uniform standards and procedures for the
acceptance of taxpayers' signatures appearing in electronic
form with respect to such requests or power of attorney. Such
guidance must be published within six months of the date of
enactment. For purposes of the provision, a ``practitioner''
means an individual in good standing who is regulated under 31
U.S.C. sec. 330 (relating to practice before the Department of
the Treasury).
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
3. Payment of taxes by debit and credit cards (sec. 2303 of the Act and
sec. 6311 of the Code)
Present Law
The Code generally permits the payment of taxes by
commercially acceptable means such as credit cards.\166\ The
Secretary may not pay any fee or provide any other
consideration in connection with the use of credit, debit, or
charge cards for the payment of income taxes.\167\
---------------------------------------------------------------------------
\166\ Sec. 6311.
\167\ Sec. 6311(d)(2).
---------------------------------------------------------------------------
Explanation of Provision
The provision removes the prohibition on paying any fees or
providing any other consideration in connection with the use of
credit, debit, or charge cards for the payment of income taxes
to the extent taxpayers paying in this manner are fully
responsible for any fees or consideration incurred. The
provision requires the Secretary to seek to minimize the amount
of any fee or other consideration that the Secretary pays under
any contract.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
4. Authentication of users of electronic services accounts (sec. 2304
of the Act)
Present Law
The IRS has developed a suite of web-based products, called
e-Services Online Tools for Tax Professionals, which provides
multiple electronic products and services to tax professionals.
Explanation of Provision
The provision requires the IRS to verify the identity of
any individual opening an e-Services account before such
individual is able to use such services.
Effective Date
The provision is effective not later than 180 days after
the date of enactment (July 1, 2019).
Subtitle E--Other Provisions
1. Repeal of provision regarding certain tax compliance procedures and
reports (sec. 2401 of the Act)
Present Law
Under present law, taxpayers generally are required to
calculate their own tax liabilities and submit returns showing
their calculations.\168\ Section 2004 of RRA98 requires the
Secretary of the Treasury or his delegate (``Secretary'') to
study the feasibility of, and develop procedures for, the
implementation of a return-free tax system for appropriate
individuals for taxable years beginning after 2007.\169\ The
Secretary is required annually to report to the tax-writing
committees on the progress of the development of such system.
The Secretary was required to make the first report on the
development of the return-free filing system to the tax-writing
committees by June 30, 2000.
---------------------------------------------------------------------------
\168\ Sec. 6012.
\169\ Pub. L. No. 105-206, sec. 2004.
---------------------------------------------------------------------------
Explanation of Provision
The provision repeals section 2004 of RRA98.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
2. Comprehensive training strategy (sec. 2402 of the Act)
Present Law
The Code provides that the Commissioner has such duties and
powers as prescribed by the Secretary.\170\ Unless otherwise
specified by the Secretary, such duties and powers include the
power to administer, manage, conduct, direct, and supervise the
execution and application of the internal revenue laws or
related statutes. In executing these duties, the Commissioner
depends upon strategic plans that prioritize goals and manage
its resources. In the current strategic plan, cultivating a
well-equipped, diverse, flexible and engaged workforce is
identified as one of the IRS's six strategic goals.\171\
---------------------------------------------------------------------------
\170\ Sec. 7803(a).
\171\ See Internal Revenue Service Strategic Plan FY2018-2022,
Publication 3744, available at https://www.irs.gov/pub/irs-pdf/
p3744.pdf.
---------------------------------------------------------------------------
Within the IRS, the OTA is expected to represent taxpayer
interests independently in disputes with the IRS. The OTA has
four principal functions: (1) to assist taxpayers in resolving
problems with the IRS; (2) to identify areas in which taxpayers
have problems in dealing with the IRS; (3) to propose changes
in the administrative practices of the IRS to mitigate problems
in areas in which taxpayers have issues in dealing with the
IRS; and (4) to identify potential legislative changes which
may be appropriate to mitigate such problems.\172\ The NTA
supervises the OTA. The NTA reports directly to the
Commissioner.
---------------------------------------------------------------------------
\172\ Sec. 7803(c).
---------------------------------------------------------------------------
Explanation of Provision
The provision requires that the Commissioner submit to
Congress a written report providing a comprehensive training
strategy for employees of the IRS. The report is to be
submitted not later than one year after the date of enactment
of this Act, and is to include: a plan to streamline current
training processes, including an assessment of the utility of
further consolidating internal training programs, technology,
and funding; a plan to develop annual training regarding
taxpayer rights, including the role of the OTA, for employees
that interface with taxpayers and the direct managers of such
employees; a plan to improve technology-based training;
proposals to focus employee training on early, fair, and
efficient resolution of taxpayer disputes for employees that
interface with taxpayers and the direct managers of such
employees, as well as ensure consistency of skill development
and employee evaluation throughout the IRS; and a thorough
assessment of the funding necessary to implement such a
strategy.
Effective Date
The provision is effective on the date of enactment (July
1, 2019).
TITLE III--MISCELLANEOUS PROVISIONS
Subtitle A--Reform of Laws Governing Internal Revenue Service Employees
1. Prohibition on rehiring any employee of the Internal Revenue Service
who was involuntarily separated from service for misconduct
(sec. 3001 of the Act and sec. 7804 of the Code)
Present Law
Employees of the IRS are subject to rules governing Federal
employment generally, as well as rules of conduct specific to
Department of the Treasury and the IRS.\173\ Standards of
Ethical Conduct for Employees of the Executive Branch are
supplemented by additional rules applicable to employees of the
Department of the Treasury.\174\
---------------------------------------------------------------------------
\173\ Part III of Title 5 of the United States Code prescribes
rules for Federal employment, including employment, retention, and
management and employee issues.
\174\ Standards of Ethical Conduct for Employees of the Executive
Branch, 5 CFR Part 2635; Supplemental Standards of Ethical Conduct for
Employees of the Department of the Treasury, 5 CFR Part 3101;
Department of the Treasury Employee Rules of Conduct, 31 CFR Part 0.
---------------------------------------------------------------------------
The Code provides that the Commissioner has such duties and
powers as prescribed by the Secretary.\175\ Unless otherwise
specified by the Secretary, such duties and powers include the
power to administer, manage, conduct, direct, and supervise the
execution and application of the internal revenue laws or
related statutes and tax conventions to which the United States
is a party, and to recommend to the President a candidate for
Chief Counsel (and recommend any removal of the Chief Counsel).
Unless otherwise specified by the Secretary, the Commissioner
is authorized to employ such persons as the Commissioner deems
proper for the administration and enforcement of the internal
revenue laws and is required to issue all necessary directions,
instructions, orders, and rules applicable to such
persons,\176\ including determination and designation of posts
of duty.
---------------------------------------------------------------------------
\175\ Sec. 7803(a).
\176\ Sec. 7804.
---------------------------------------------------------------------------
RRA98 requires the IRS to terminate an employee for certain
proven violations committed by the employee in connection with
the performance of official duties.\177\ The violations
include: (1) willful failure to obtain the required approval
signatures on documents authorizing the seizure of a taxpayer's
home, personal belongings, or business assets; (2) providing a
false statement under oath material to a matter involving a
taxpayer; (3) with respect to a taxpayer, taxpayer
representative, or other IRS employee, the violation of any
right under the U.S. Constitution, or any civil right
established under Titles VI or VII of the Civil Rights Act of
1964, Title IX of the Educational Amendments of 1972, the Age
Discrimination in Employment Act of 1967, the Age
Discrimination Act of 1975, sections 501 or 504 of the
Rehabilitation Act of 1973 and Title I of the Americans with
Disabilities Act of 1990; (4) falsifying or destroying
documents to conceal mistakes made by any employee with respect
to a matter involving a taxpayer or a taxpayer representative;
(5) assault or battery on a taxpayer or other IRS employee, but
only if there is a criminal conviction or a final judgment by a
court in a civil case, with respect to the assault or battery;
(6) violations of the Code, Treasury Regulations, or policies
of the IRS (including the Internal Revenue Manual) for the
purpose of retaliating or harassing a taxpayer or other IRS
employee; (7) willful misuse of section 6103 for the purpose of
concealing data from a Congressional inquiry; (8) willful
failure to file any tax return required under the Code on or
before the due date (including extensions) unless failure is
due to reasonable cause; (9) willful understatement of Federal
tax liability, unless such understatement is due to reasonable
cause; and (10) threatening to audit a taxpayer for the purpose
of extracting personal gain or benefit.
---------------------------------------------------------------------------
\177\ Pub. L. No. 105-206, sec. 1203(b), July 22, 1998.
---------------------------------------------------------------------------
RRA98 provides non-delegable authority to the Commissioner
to determine that mitigating factors exist, that, in the
Commissioner's sole discretion, mitigate against terminating
the employee. The Act also provides that the Commissioner, in
his sole discretion, may establish a procedure to determine
whether an individual should be referred for such a
determination by the Commissioner. TIGTA is required to track
employee terminations and terminations that would have occurred
had the Commissioner not determined that there were mitigation
factors and include such information in TIGTA's annual report
to Congress.
Explanation of Provision
Under the provision, a former employee of the IRS who was
involuntarily separated due to misconduct under subchapter A of
Chapter 80 of the Code, under chapters 43 or 75 of Title 5 of
the United States Code, or whose employment was terminated
under section 1203 of RRA98, cannot be reemployed by the IRS.
Effective Date
The provision is effective with respect to the hiring of
employees after the date of enactment (July 1, 2019).
2. Notification of unauthorized inspection or disclosure of returns and
return information (sec. 3002 of the Act and sec. 7431 of the
Code)
Present Law
Section 7431 provides for civil damages resulting from an
unauthorized disclosure of inspection of return information. If
a Federal employee makes an unauthorized disclosure or
inspection, a taxpayer can bring suit against the United States
in Federal district court. If a person other than a Federal
employee makes an unauthorized disclosure or inspection, suit
may be brought directly against such person. No liability
results from a disclosure based on a good faith, but erroneous,
interpretation of section 6103. A disclosure or inspection made
at the request of the taxpayer will also relieve liability.
Upon a finding of liability, a taxpayer can recover the
greater of $1,000 per act of unauthorized disclosure (or
inspection), or the sum of actual damages plus, in the case of
an inspection or disclosure that was willful or the result of
gross negligence, punitive damages. The taxpayer may also
recover the costs of the action and, if found to be a
prevailing party, reasonable attorney fees.
The taxpayer has two years from the date of the discovery
of the unauthorized inspection or disclosure to bring suit. The
IRS is required to notify a taxpayer of an unauthorized
inspection or disclosure as soon as practicable after any
person is criminally charged by indictment or information for
unlawful inspection or disclosure.
Explanation of Provision
The provision requires the Secretary to notify a taxpayer
if the IRS or a Federal or State agency (upon notice to the
Secretary by such Federal or State agency) proposes an
administrative determination as to disciplinary or adverse
action against an employee arising from the employee's
unauthorized inspection or disclosure of the taxpayer's return
or return information. The provision requires the notice to
include the date of the unauthorized inspection or disclosure
and the rights of the taxpayer as a result of such
administrative determination.
Effective Date
The provision is effective for determinations proposed
after 180 days after the date of enactment (180 days after July
1, 2019).
Subtitle B--Provisions Relating to Exempt Organizations
1. Mandatory e-filing by exempt organizations (sec. 3101 of the Act and
secs. 6033 and 6104 of the Code)
Present Law
In general
RRA98 states a Congressional policy to promote the
paperless filing of Federal tax returns. Section 2001(a) of
RRA98 set a goal for the IRS to have at least 80 percent of all
Federal tax and information returns filed electronically by
2007.\178\ Section 2001(b) of RRA98 requires the IRS to
establish a 10-year strategic plan to eliminate barriers to
electronic filing.
---------------------------------------------------------------------------
\178\ The Electronic Tax Administration Advisory Committee, the
body charged with oversight of IRS progress in reaching that goal
projected an overall e-filing rate of 80.1 percent in the 2017 filing
season based on all Federal returns. See Electronic Tax Administration
Advisory Committee, Annual Report to Congress, June 2017, IRS Pub.
3415, page 5.
---------------------------------------------------------------------------
Present law requires the Secretary to issue regulations
regarding electronic filing and specifies certain limitations
on the rules that may be included in such regulations.\179\ The
statute requires that Federal income tax returns prepared by
specified tax return preparers be filed electronically,\180\
and that all partnerships with more than 100 partners file
electronically. For taxpayers other than partnerships, the
statute prohibits any requirement that persons who file fewer
than 250 returns during a calendar year file electronically.
With respect to individuals, estates, and trusts, the Secretary
may permit, but generally cannot require, electronic filing of
income tax returns. In crafting any of these required
regulations, the Secretary must take into account the ability
of taxpayers to comply at reasonable cost.
---------------------------------------------------------------------------
\179\ Sec. 6011(e). Section 6011(e) uses the term ``magnetic
media,'' which the Treasury regulation section 301.6011-2 defines to
include electronic filing.
\180\ Section 6011(e)(3)(B) defines a ``specified tax return
preparer'' as any return preparer who reasonably expects to file more
than 10 individual income tax returns during a calendar year.
---------------------------------------------------------------------------
The regulations require corporations that have assets of
$10 million or more and file at least 250 returns during a
calendar year to file electronically their Form 1120/1120S
income tax returns and Form 990 information returns for tax
years ending on or after December 31, 2006.\181\ In determining
whether the 250 return threshold is met, income tax,
information, excise tax, and employment tax returns filed
within one calendar year are counted.
---------------------------------------------------------------------------
\181\ Treas. Reg. secs. 301.6011-5 and 301.6033-4.
---------------------------------------------------------------------------
Tax-exempt organizations
Most tax-exempt organizations are required to file an
annual information return or notice in the Form 990 series.
Since 2007, the smallest organizations--generally, those with
gross receipts of less than $50,000--may provide an abbreviated
notice on Form 990-N, sometimes referred to as an ``e-
postcard.'' Which form to file depends on the annual receipts,
value of assets, and types of activities of the exempt
organization. The public can view electronic images of Forms
990, 990-EZ, and 990-PF online, or purchase hard or soft copies
from the IRS.\182\
---------------------------------------------------------------------------
\182\ See https://www.irs.gov/charities-non-profits/copies-of-eo-
returns-available, last updated September 23, 2020.
---------------------------------------------------------------------------
In general, only the largest and smallest tax-exempt
organizations are required to electronically file their annual
information returns. First, as indicated above, tax-exempt
corporations that have assets of $10 million or more and that
file at least 250 returns during a calendar year must
electronically file their Form 990 information returns. Private
foundations and charitable trusts, regardless of asset size,
that file at least 250 returns during a calendar year are
required to file electronically their Form 990-PF information
returns.\183\ Finally, organizations that file Form 990-N (the
e-postcard) also must electronically file.\184\
---------------------------------------------------------------------------
\183\ Taxpayers can request waivers of the electronic filing
requirement if they cannot meet that requirement due to technological
constraints, or if compliance with the requirement would result in
undue financial burden on the taxpayer. Treas. Sec. 301.60330-4.
\184\ See Form 990-N, ``Electronic Notice for Tax-exempt
Organizations Not Required to File a Form 990 or 990-EZ.''
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the requirement to e-file to all tax-
exempt organizations required to file statements or returns in
the Form 990 series (including Form 990-T (``Exempt
Organization Business Income Tax Return'')) or Form 8872
(``Political Organization Report of Contributions and
Expenditures''). The provision also requires that the IRS make
the information provided on the forms available to the public
(consistent with the disclosure rules of section 6104 of the
Code) in a machine-readable format as soon as practicable.
Effective Date
The provision generally is effective for taxable years
beginning after the date of enactment (July 1, 2019).
Transition relief is provided for certain organizations. First,
for certain small organizations or other organizations for
which the Secretary determines that application of the e-filing
requirement would constitute an undue hardship in the absence
of additional transitional time, the requirement to file
electronically must be implemented not later than taxable years
beginning two years following the date of enactment. For this
purpose, small organization means any organization: (1) the
gross receipts of which for the taxable year are less than
$200,000; and (2) the aggregate gross assets of which at the
end of the taxable year are less than $500,000. In addition,
the provision grants IRS the discretion to delay the effective
date not later than taxable years beginning two years after the
date of enactment for the filing of Form 990-T (for reports of
unrelated business taxable income or the payment of proxy tax
under section 6033(e)).
2. Notice required before revocation of tax-exempt status for failure
to file return (sec. 3102 of the Act and sec. 6033(j) of the
Code)
Present Law
Applications for tax exemption
Section 501(c)(3) organizations
Section 501(c)(3) organizations (with certain exceptions)
are required to seek formal recognition of tax-exempt status by
filing an application with the IRS (Form 1023 (Application for
Recognition of Exemption under Section 501(c)(3) of the
Internal Revenue Code) or Form 1023-EZ (Streamlined Application
for Recognition of Exemption under Section 501(c)(3) of the
Internal Revenue Code)).\185\ In response to the application,
the IRS issues a determination letter or ruling either
recognizing the applicant as tax-exempt or not. Certain
organizations are not required to apply for recognition of tax-
exempt status in order to qualify as tax-exempt under section
501(c)(3) but may do so. These organizations include churches,
certain church-related organizations, organizations (other than
private foundations) the gross receipts of which in each
taxable year are normally not more than $5,000, and
organizations (other than private foundations) subordinate to
another tax-exempt organization that are covered by a group
exemption letter.
---------------------------------------------------------------------------
\185\ See sec. 508(a).
---------------------------------------------------------------------------
A favorable determination by the IRS on an application for
recognition of tax-exempt status generally will be retroactive
to the date that the section 501(c)(3) organization was created
if it files a completed Form 1023 within 15 months of the end
of the month in which it was formed.\186\ If the organization
does not file Form 1023 or files a late application, it will
not be treated as tax-exempt under section 501(c)(3) for any
period prior to the filing of an application for recognition of
tax exemption.\187\ Contributions to section 501(c)(3)
organizations that are subject to the requirement that the
organization apply for recognition of tax-exempt status
generally are not deductible from income, gift, or estate tax
until the organization receives a determination letter from the
IRS.\188\
---------------------------------------------------------------------------
\186\ Pursuant to Treas. Reg. sec. 301.9100-2(a)(2)(iv),
organizations are allowed an automatic 12-month extension as long as
the application for recognition of tax exemption is filed within the
extended, i.e., 27-month, period. The IRS also may grant an extension
beyond the 27-month period if the organization is able to establish
that it acted reasonably and in good faith and that granting relief
will not prejudice the interests of the government. Treas. Reg. secs.
301.9100-1 and 301.9100-3.
\187\ Treas. Reg. sec. 1.508-1(a)(1).
\188\ Sec. 508(d)(2)(B). Contributions made prior to receipt of a
favorable determination letter may be deductible prior to the
organizations receipt of such favorable determination letter if the
organization has timely filed its application to be recognized as tax-
exempt. Treas. Reg. secs. 1.508-1(a) and 1.508-2(b)(1)(i)(b).
---------------------------------------------------------------------------
Other section 501(c) organizations
Most other types of section 501(c) organizations--including
organizations described within sections 501(c)(4) (social
welfare organizations, etc.), 501(c)(5) (labor organizations,
etc.), or 501(c)(6) (business leagues, etc.)--are not required
to apply for recognition of tax-exempt status. Rather,
organizations are exempt under these subsections if they
satisfy the requirements applicable to such organizations.
However, an organization that intends to operate as a section
501(c)(4) organization must notify the Secretary no later than
60 days after its formation that it is operating as such by
filing form 8976 (Notice of Intent to Operate Under Section
501(c)(4)). In addition, in order to obtain certain benefits
such as public recognition of tax-exempt status, exemption from
certain State taxes, and nonprofit mailing privileges, such
organizations voluntarily may request a formal recognition of
exempt status by filing a Form 1024 (Application for
Recognition of Exemption under Section 501(a)) or Form 1024-A
(Application for Recognition of Exemption under Section
501(c)(4) of the Internal Revenue Code).
Annual information returns
Exempt organizations are required to file an annual
information return, Form 990 (Return of Organization Exempt
From Income Tax), stating specifically the items of gross
income, receipts, disbursements, and such other information as
the Secretary may prescribe.\189\ Exempt from the requirement
are churches, their integrated auxiliaries, and conventions or
associations of churches; the exclusively religious activities
of any religious order; certain institutions whose income is
excluded from gross income under section 115; an interchurch
organization of local units of a church; certain mission
societies; certain church-affiliated elementary and high
schools; and certain other organizations, including some that
the IRS has relieved from the filing requirement pursuant to
its statutory discretionary authority.\190\
---------------------------------------------------------------------------
\189\ Sec. 6033(a). An organization that has not received a
determination of its tax-exempt status, but that claims tax-exempt
status under section 501(a), is subject to the same annual reporting
requirements and exceptions as organizations that have received a tax-
exemption determination.
\190\ Sec. 6033(a)(3); Treas. Reg. secs. 1.6033-2(a)(2)(i) and
(g)(1).
---------------------------------------------------------------------------
An organization that is required to file an information
return, but that has gross receipts of less than $200,000
during its taxable year, and total assets of less than $500,000
at the end of its taxable year, may file Form 990-EZ. If an
organization normally has gross receipts of $50,000 or less, it
must file Form 990-N (``e-postcard''), if it chooses not to
file Form 990 or Form 990-EZ. Private foundations are required
to file Form 990-PF rather than Form 990.
Revocation of exempt status
In general
An organization that has received a favorable tax-exemption
determination from the IRS generally may continue to rely on
the determination as long as ``there are no substantial changes
in the organization's character, purposes, or methods of
operation.'' \191\ A ruling or determination letter concluding
that an organization is exempt from tax may, however, be
revoked or modified: (1) by notice from the IRS to the
organization to which the ruling or determination letter was
originally issued; (2) by enactment of legislation or
ratification of a tax treaty; (3) by a decision of the United
States Supreme Court; (4) by issuance of temporary or final
Regulations by the Treasury Department; (5) by issuance of a
revenue ruling, a revenue procedure, or other statement in the
Internal Revenue Bulletin; or (6) automatically, in the event
the organization fails to file a required annual return or
notice for three consecutive years (discussed in greater detail
below).\192\ A revocation or modification of a determination
letter or ruling may be retroactive if, for example, there has
been a change in the applicable law, the organization omitted
or misstated a material fact, or the organization has operated
in a manner materially different from that originally
represented.\193\ Upon revocation of tax-exemption or change in
the classification of an organization (e.g., from public
charity to private foundation status), the IRS publishes an
announcement of such revocation or change in the Internal
Revenue Bulletin.
---------------------------------------------------------------------------
\191\ Treas. Reg. sec. 1.501(a)-1(a)(2).
\192\ Rev. Proc. 2019-5, sec. 12, 2019-1 I.R.B. 230, at p. 257
(January 2, 2019).
\193\ Ibid. at p. 258.
---------------------------------------------------------------------------
Automatic revocation for failure to file information
returns
If an organization fails to file a required Form 990-series
return or notice for three consecutive years, the
organization's tax-exempt status is automatically revoked.\194\
A revocation for failure to file is effective from the date
that the Secretary determines was the last day the organization
could have timely filed the third required information return
or notice. To again be recognized as tax-exempt, the
organization must apply to the Secretary for recognition of
tax-exemption, irrespective of whether the organization was
required to make an application for recognition of tax-
exemption in order to gain tax exemption originally.\195\
---------------------------------------------------------------------------
\194\ Sec. 6033(j)(1).
\195\ Sec. 6033(j)(2).
---------------------------------------------------------------------------
If, upon application for tax-exempt status after an
automatic revocation for failure to file an information return
or notice, the organization shows to the satisfaction of the
Secretary reasonable cause for failing to file the required
returns or notices, the organization's tax-exempt status may,
at the discretion of the Secretary, be reinstated retroactive
to the date of revocation.\196\ An organization may not
challenge under the Code's declaratory judgment procedures
(section 7428) a revocation of tax exemption made for failure
to file annual information returns.
---------------------------------------------------------------------------
\196\ Sec. 6033(j)(3); Rev. Proc. 2014-11, 2014-3 I.R.B. 411
(January 13, 2014).
---------------------------------------------------------------------------
The Secretary is authorized to publish a list of
organizations whose exempt status is automatically revoked.
Explanation of Provision
The provision requires that the IRS provide notice to an
organization that fails to file a Form 990-series return or
notice for two consecutive years. The notice must state that
the IRS has no record of having received such a return or
notice from the organization for two consecutive years and
inform the organization about the revocation of the
organization's tax-exempt status that will occur if the
organization fails to file such a return or notice by the due
date for the next such return or notice. The notice must also
contain information about how to comply with the annual
information return and notice requirements under sections
6033(a)(1) and 6033(i).
Effective Date
The provision applies to failures to file returns or
notices for two consecutive years if the return or notice for
the second year is required to be filed after December 31,
2019.
Subtitle C--Revenue Provision
1. Increase in penalty for failure to file (sec. 3201 of the Act and
sec. 6651(a) of the Code)
Present Law
The Federal tax system is one of ``self-assessment,'' i.e.,
taxpayers are required to declare their income, expenses, and
ultimate tax due, while the IRS has the ability to propose
subsequent changes. This voluntary system requires that
taxpayers comply with deadlines and adhere to the filing
requirements. While taxpayers may obtain extensions of time in
which to file their returns, the Federal tax system consists of
specific due dates of returns. In order to foster compliance in
meeting these deadlines, Congress has enacted a penalty for the
failure to timely file tax returns.\197\
---------------------------------------------------------------------------
\197\ See United States v. Boyle, 469 U.S. 241, 245 (1985).
---------------------------------------------------------------------------
A taxpayer who fails to file a tax return on or before its
due date is subject to a penalty equal to five percent of the
net amount of tax due for each month that the return is not
filed, up to a maximum of 25 percent of the net amount.\198\ If
the failure to file a return is fraudulent, the taxpayer is
subject to a penalty equal to 15 percent of the net amount of
tax due for each month the return is not filed, up to a maximum
of 75 percent of the net amount.\199\ The net amount of tax due
is the amount of tax required to be shown on the return reduced
by the amount of any part of the tax that is paid on or before
the date prescribed for payment of the tax and by the amount of
any credits against tax that may be claimed on the return.\200\
The penalty will not apply if it is shown that the failure to
file was due to reasonable cause and not willful neglect.\201\
---------------------------------------------------------------------------
\198\ Sec. 6651(a)(1).
\199\ Sec. 6651(f).
\200\ Sec. 6651(b)(1).
\201\ Sec. 6651(a)(1).
---------------------------------------------------------------------------
If a return is filed more than 60 days after its due date,
and unless it is shown that such failure is due to reasonable
cause, then the failure to file penalty may not be less than
the lesser of $205 \202\ or 100 percent of the amount required
to be shown as tax on the return.\203\ If a penalty for failure
to file and a penalty for failure to pay tax shown on a return
both apply for the same month, the amount of the penalty for
failure to file for such month is reduced by the amount of the
penalty for failure to pay tax shown on a return.\204\ If a
return is filed more than 60 days after its due date, then the
penalty for failure to pay tax shown on a return may not reduce
the penalty for failure to file below the lesser of $205 or 100
percent of the amount required to be shown on the return.\205\
---------------------------------------------------------------------------
\202\ The $205 amount is adjusted for inflation.
\203\ Sec. 6651(a)(1) (flush language). For this minimum penalty
to apply, the Tax Court has held, and the IRS has acquiesced, that
there must be an underpayment of tax. See Patronik-Holder v.
Commissioner, 100 T.C. 374 (1993) (citing the Conference Report to the
Tax Equity and Fiscal Responsibility Act of 1982), AOD 1994-03, 1993-2
C.B. 1.
\204\ Sec. 6651(c)(1).
\205\ Ibid.
---------------------------------------------------------------------------
The failure to file penalty applies to all returns required
to be filed under subchapter A of Chapter 61 (relating to
income tax returns of an individual, fiduciary of an estate or
trust, or corporation; self-employment tax returns; and estate
and gift tax returns), subchapter A of chapter 51 (relating to
distilled spirits, wines, and beer), subchapter A of chapter 52
(relating to tobacco, cigars, cigarettes, and cigarette papers
and tubes), and subchapter A of chapter 53 (relating to machine
guns and certain other firearms).\206\ The failure to file
penalty is adjusted annually to account for inflation. The
failure to file penalty does not apply to any failure to pay
estimated tax required to be paid by sections 6654 or
6655.\207\
---------------------------------------------------------------------------
\206\ Sec. 6651(a)(1)
\207\ Sec. 6651(e).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, if a return is filed more than 60 days
after its due date, then the failure to file penalty may not be
less than the lesser of $330 (adjusted for inflation) or 100
percent of the amount required to be shown as tax on the
return.
Effective Date
The provision applies to returns with filing due dates
(including extensions) after December 31, 2019.
PART TWO: FOSTERING UNDERGRADUATE TALENT
BY UNLOCKING RESOURCES FOR EDUCATION (``FUTURE'') ACT (PUBLIC LAW 116-
91) \208\
---------------------------------------------------------------------------
\208\ H.R. 5363. The bill was introduced in the House of
Representatives on December 9, 2019, and was passed by the House on
December 10, 2019. The Senate passed the bill without amendment by
voice vote the same day. The President signed the bill on December 19,
2019.
---------------------------------------------------------------------------
1. Secure disclosure of tax-return information to carry out the Higher
Education Act of 1965 (sec. 3 of the Act and section
6103(l)(13) of the Code)
Present Law
Disclosures of return information to carry out income contingent
repayment of student loans
Present law prohibits the disclosure of returns and return
information, except to the extent specifically authorized by
the Code.\209\ Under prior law section 6103(l)(13), an
exception was provided for disclosure to the Department of
Education (but not to contractors thereof) of a taxpayer's
filing status, adjusted gross income and identity information
(i.e., name, mailing address, taxpayer identifying number) to
establish an appropriate repayment amount for an applicable
student loan. This disclosure authority for officers and
employees of the Department of Education expired after December
31, 2007.
---------------------------------------------------------------------------
\209\ Sec. 6103(a).
---------------------------------------------------------------------------
The Department of Education uses contractors to carry out
its income contingent loan program. As noted above, prior law
did not permit disclosure of return information to the
Department's contractors. The IRS subsequently developed the
IRS Data Retrieval Tool, which is currently used by taxpayers
to access their own tax information for purposes of completing
the Department of Education's income-driven repayment (``IDR'')
plan applications and the Free Application for Federal Student
Aid (``FAFSA'').\210\
---------------------------------------------------------------------------
\210\ IRS Offers Help to Students, Families to Get Tax Information
for Student Financial Aid Applications https://www.irs.gov/individuals/
irs-offers-help-to-students-families-to-get-tax-information-for-
student-financial-aid-applications (September 23, 2020). Section
6103(e) authorizes the IRS to allow taxpayers to access their own
returns and return information and there are no restrictions on the
information once received under this authority. Thus, by using the IRS
Data Retrieval Tool, the disclosure is first to the taxpayer rather
than directly to the contractors of the Department of Education.
---------------------------------------------------------------------------
Accountings and Safeguards
Accountings
Unless specifically listed in the statute as excluded from
the accounting requirement, section 6103(p)(3) requires the IRS
to maintain a permanent system of standardized records or
accountings of all requests for inspection or disclosure of
returns and return information (including the reasons for and
dates of such requests) and of returns and return information
inspected or disclosed under section 6103 (and section
6104(c)).
Safeguards
Section 6103(p)(4) requires, as a condition of receiving
returns and return information, that Federal and State agencies
and specified other recipients provide safeguards to the
satisfaction of the Secretary of the Treasury as necessary or
appropriate to protect the confidentiality of returns or return
information. It also requires that a report be furnished to the
Secretary at such time and containing such information as
prescribed by the Secretary, regarding the procedures
established and utilized for ensuring the confidentiality of
returns and return information. The Secretary, after an
administrative review, may take such actions as are necessary
to ensure these requirements are met, including the refusal to
disclose returns and return information.
Explanation of Provision
The Fostering Undergraduate Talent by Unlocking Resources
for Education (``FUTURE'') Act \211\ amended and rewrote
section 6103(l)(13) to authorize the disclosure of certain
return information for purposes of administering student
financial aid and loan programs.
---------------------------------------------------------------------------
\211\ Pub. L. No. 116-91, December 19, 2019.
---------------------------------------------------------------------------
The provision requires the IRS to disclose certain return
information to the Department of Education and others for the
purpose of administering financial aid and loan programs. Upon
receiving a written request from the Secretary of
Education,\212\ the IRS must disclose specified return
information to authorized persons for the purposes of (1)
determining eligibility for, and repayment obligations under,
income-contingent or income-based repayment plans; (2)
monitoring and reinstating loans that were discharged based on
a total and permanent disability; and (3) determining the
eligibility for, and the amount of, awards of Federal student
financial aid.
---------------------------------------------------------------------------
\212\ The Secretary of Education can make a request for disclosure
under section 6103(l)(13) with respect to an individual only if the
Secretary of Education has obtained approval from the individual for
such disclosure.
---------------------------------------------------------------------------
Authorized persons may only use the disclosed information
for the purposes above and for three additional purposes
related to the programs. These additional purposes are (1)
reducing the net cost of improper payments under such plans,
relating to such awards, or relating to such discharges; (2)
oversight activities by the Office of Inspector General of the
Department of Education as authorized by the Inspector General
Act of 1978; and (3) conducting analyses and forecasts for
estimating costs related to such plans, discharges, or awards.
The additional purposes do not include conducting criminal
investigations or prosecutions.
An ``authorized person'' is any person who is an officer,
employee, or contractor of the Department of Education, and is
specifically authorized and designated by the Secretary of
Education for purposes of the specific disclosure authority
programs (income-contingent or income-based repayment plans,
loans discharged based on a total and permanent disability,
awards of Federal student financial aid (the designation is
applied separately with respect to each program)). The
provision requires the Secretary of Education to designate the
Inspector General of the Department of Education as an
authorized person.
With the consent of the taxpayer, authorized persons may
redisclose the return information received from the IRS to
certain institutions of higher education, State higher
education agencies, and scholarship organizations solely for
use in financial aid programs.
The IRS is required to account for all disclosures made
under section 6103(l)(13), including those made to the
Department of Education and its contractors, as well as
redisclosures made by authorized persons to institutions of
higher education, State higher education agencies, and
scholarship organizations. The Secretary of Education is
required to annually submit a written report to the Secretary
of the Treasury regarding: (1) redisclosures of return
information to institutions of higher education, State higher
education agencies, and scholarship organizations, including
the number of such redisclosures; and (2) any unauthorized use,
access, or disclosure of the return information under section
6103(l)(13).
All agencies and other persons described in section
6103(l)(13) as authorized to receive confidential return
information (i.e., the Department of Education, its
contractors, certain institutions of higher education, State
higher education agencies, and scholarship organizations) are
required to safeguard such information to the satisfaction of
the Secretary.
Annually, the Secretary of the Treasury (or his designee)
is to report to Congress a written report regarding disclosures
using the authority of section 6103(l)(13), to include the
information above that is reported by the Secretary of
Education to the Secretary of the Treasury.
Effective Date
The provision is effective for disclosures after December
19, 2019.
PART THREE: FURTHER CONSOLIDATED APPROPRIATIONS ACT, 2020 (PUBLIC LAW
116-94) \213\
---------------------------------------------------------------------------
\213\ H.R. 1865. The bill was introduced in the House of
Representatives on March 25, 2019 and was passed by the House on
October 28, 2019. The Senate passed the bill with an amendment by
unanimous consent on November 12, 2019. The House agreed to the Senate
amendment with an amendment on December 17, 2019, and the Senate agreed
to the House amendment on December 19, 2019. The President signed the
bill the next day.
---------------------------------------------------------------------------
DIVISION M--BIPARTISAN AMERICAN MINERS ACT OF 2019
1. Transfers to 1974 UMWA pension plan and inclusion in multiemployer
health benefit plan (secs. 102 and 103 of the Act and sec. 402
of the Surface Mining Control and Reclamation Act of 1977)
Present Law
United Mineworkers of America (``UMWA'') retiree health benefits
In general
Three multiemployer plans provide retiree health benefits
for employees in the coal industry (and their beneficiaries):
the UMWA Combined Benefit Fund (``Combined Fund''), the UMWA
1992 Benefit Plan (``1992 Benefit Plan''), and the UMWA 1993
Benefit Plan (``1993 Benefit Plan''). In addition, retiree
health benefits are provided to some retirees through plans
maintained by their particular employers (``individual employer
plans''). Moreover, pension benefits are provided by the UMWA
1974 Pension Plan (the ``Pension Plan'').\214\
---------------------------------------------------------------------------
\214\ Another plan, the UMWA 1950 Pension Plan, generally covering
employees who retired before 1976, was merged into the Pension Plan on
June 30, 2007. Section 9701(a)(3) refers to the Pension Plan as the
``1974 UMWA Pension Plan'' and describes participation in the Pension
Plan as being substantially limited to individuals who retired in 1976
and thereafter.
---------------------------------------------------------------------------
The Combined Fund and the 1992 Benefit Plan were
established under the Coal Industry Retiree Health Benefit Act
of 1992 (the ``Coal Act'').\215\ The Combined Fund provides
health benefits with respect to retirees (and related
beneficiaries) who, on July 20, 1992, were receiving health
benefits under previous UMWA plans.\216\ The 1992 Benefit Plan
provides benefits with respect to participants (and related
beneficiaries) who were eligible for health benefits under
previous UMWA plans based on age and service earned as of
February 1, 1993, or to whom coverage was required to be
provided by an individual employer plan but who does not
receive coverage,\217\ provided that the participant retired
from the coal industry by September 30, 1994.
---------------------------------------------------------------------------
\215\ Pub. L. No. 102-486, October 24, 1992, which enacted Chapter
99 of the Code (secs. 9701-9722). Section 9702 provides for the
establishment of the Combined Fund, and section 9712 provides for the
establishment of the 1992 Plan. Chapter 99 also contains provisions
relating to benefits under the plans and funding of the plans.
\216\ The previous plans were the UMWA 1950 Benefit Plan and the
UMWA 1974 Benefit Plan.
\217\ Section 9711 requires coverage under individual employer
plans to be provided to participants (and related beneficiaries)
receiving benefits as of February 1, 1993, or with respect to whom the
age and service requirements for eligibility were met as of that date
and who retired by September 30, 1994.
---------------------------------------------------------------------------
The 1993 Benefit Plan was established under the National
Bituminous Coal Wage Agreement of 1993. Generally, the 1993
Benefit Plan provides health benefits to certain retired and
disabled mine workers who are not eligible for benefits under
the Combined Fund or the 1992 Benefit Plan and would have been
eligible for benefits under the previous UMWA plans, but for
enactment of the Coal Act. The UMWA 1993 Benefit Plan also
provides benefits to certain retirees under the Pension Plan
whose last employer contributed to the 1993 Benefit Plan and
whose retiree health benefits would end because, inter alia,
the employer is no longer engaged in mining operations, is
financially unable to provide the benefits, and has no related
entity that is financially able to provide the benefits.
Retiree health plan funding
The Combined Fund and the 1992 Benefit Plan are funded in
part by premiums required under the Code to be paid by coal
mining operators.\218\ The 1993 Benefit Plan is funded in part
by contributions by employers that are bargaining agreement
signatories. The three plans (collectively, the ``UMWA Health
Plans'') are funded also in part by transfers under the Surface
Mining Control and Reclamation Act of 1977 (``SMCRA'').\219\
---------------------------------------------------------------------------
\218\ Secs. 9704 and 9712(d). Failure to pay the required premiums
under section 9704 may result in the imposition of a penalty under
section 9707. In addition, under section 9721, a civil action may be
brought by a plan fiduciary, employer, or plan participant or
beneficiary with respect to an obligation to pay the required premiums,
in the same manner as a claim arising from an employer's obligation to
pay withdrawal liability under section 4301 of the Employee Retirement
Income Security Act of 1974 (``ERISA'').
\219\ Sec. 402 of Pub. L. No. 95-87; 30 U.S.C. sec. 1232.
---------------------------------------------------------------------------
Under SMCRA, coal mining operators are required to pay
certain fees to the Secretary of the Interior, which are
deposited in the Abandoned Mine Reclamation Fund (commonly
referred to as the ``Abandoned Mine Land Fund'' or the ``AML
Fund''). In addition to transfers to States and Indian tribes
relating to mining reclamation, the Secretary of the Treasury
(``Secretary'') is authorized to transfer interest earned on
the AML Fund to the UMWA Health Plans for financial assistance.
To the extent interest transferred from the AML Fund is not
sufficient to provide benefits under the UMWA Health Plans, the
Secretary is authorized under SMCRA to make supplemental
payments on an annual basis from the General Fund of the U.S.
Treasury. The supplemental payments to the UMWA Health Plans,
together with payments from the General Fund for certain States
and Indian Tribes, are subject to a combined annual limit of
$490 million.\220\
---------------------------------------------------------------------------
\220\ Sec. 402(i)(3) of SMCRA; 30 U.S.C. sec. 1232(i)(3). Amounts
to be transferred to the recipients are adjusted as needed to come
within this limit.
---------------------------------------------------------------------------
In the case of transfers of interest from the AML Fund to
the 1993 Benefit Plan,\221\ the benefits due under the plan are
determined by taking into account those retirees (and related
beneficiaries) who were actually enrolled in the plan as of
December 31, 2006, and who are eligible for benefits on the
first day of the calendar year for which the transfer is made,
even though those benefits were provided to the individual
pursuant to a settlement agreement approved by order of a
bankruptcy court entered on or before September 30, 2004; in
other words, those individuals are considered to be actually
enrolled in the Plan and receive benefits under the Plan
beginning on December 31, 2006.
---------------------------------------------------------------------------
\221\ Under SMCRA, the 1993 Benefit Plan is referred to as the
``Multiemployer Health Benefit Plan.''
---------------------------------------------------------------------------
In 2016 \222\, SMCRA was amended to authorize the transfer
of federal funds to the 1993 Benefit Plan through April 30,
2017, for an expanded group, including (1) retirees (and
related beneficiaries) actually enrolled in the 1993 Benefit
Plan as of the date of enactment of the Continued Health
Benefits for Miners Act (the ``2016 Act''), and who are
eligible for benefits on the first day of the calendar year for
which the transfer is made,\223\ and (2) retirees (and related
beneficiaries) whose health benefits would be denied or reduced
as a result of a bankruptcy proceeding commenced in 2012 or
2015.\224\ In 2017 \225\, SMCRA was further amended to
permanently authorize the annual transfer of funds to the 1993
Plan for those retirees.
---------------------------------------------------------------------------
\222\ See Further Continuing and Security Assistance Appropriations
Act, 2017, Pub. L. No. 114-254, December 10, 2016.
\223\ However, this group does not include individuals (and related
beneficiaries) enrolled in the 1993 Benefit Plan under the terms of a
participation agreement with the current or former employer of the
individuals.
\224\ The Act further provides that individuals described in (2)
are to be treated as eligible to receive health benefits under the 1993
Benefit Plan for the plan year that includes April 1, 2017.
\225\ See Health Benefits for Miners Act of 2017, Pub. L. No. 115-
31, May 5, 2017.
---------------------------------------------------------------------------
The 2016 Act also contains additional rules with respect to
a voluntary employees' beneficiary association (``VEBA'') \226\
established as a result of a bankruptcy proceeding described in
(2). The administrator of the VEBA is directed to transfer to
the 1993 Benefit Plan any amounts received as a result of the
bankruptcy proceeding, reduced by the amount of the VEBA's
administrative costs. Further, the amount that would otherwise
be transferred by the Secretary to the 1993 Benefit Plan under
SMCRA, as amended by the 2016 Act, is reduced by any amount
transferred to the 1993 Benefit Plan by the VEBA
---------------------------------------------------------------------------
\226\ A VEBA is an organization exempt from tax under section
501(c)(9).
---------------------------------------------------------------------------
UMWA 1974 Pension Plan
The Pension Plan is a multiemployer defined benefit plan
established by the National Bituminous Coal Wage Agreement of
1974 between the United Mine Workers of America (``UMWA'') and
the Bituminous Coal Operators Association (``BCOA''), effective
December 6, 1974.\227\ The Pension Plan provides retirement,
disability, and survivors' benefits to employees in the coal
industry and their beneficiaries in accordance with plan terms.
SMCRA does not provide for funds to be transferred to the
Pension Plan.
---------------------------------------------------------------------------
\227\ In a multiemployer defined benefit pension, participants
typically receive a monthly payment in retirement that is based on a
formula that uses the participant's length of service and a benefit
rate.
---------------------------------------------------------------------------
Like other pension plans, the Pension Plan is subject to
various annual reporting and notice requirements under the Code
and ERISA.\228\ Some of these reporting requirements are met by
the filing of Form 5500, Annual Return/Report of Employee
Benefit Plan. Additional requirements apply in the case of an
underfunded multiemployer defined benefit plan in endangered or
critical status, including with respect to a funding
improvement or rehabilitation plan.\229\
---------------------------------------------------------------------------
\228\ See, for example, secs. 6057-6059 and ERISA secs. 101(f), 103
and 104.
\229\ For a discussion of the rules relating to plans in endangered
or critical status, see Part I.D.3 of Joint Committee on Taxation,
Present Law, Data, and Selected Proposals Relating to Multiemployer
Defined Benefit Plans (JCX-9-16), February 26, 2016, available at
www.jct.gov.
---------------------------------------------------------------------------
Explanation of Provisions
Multiemployer health plan benefits and increase in cap
Expanded coverage of bankruptcies
Under the provision, transfers from the General Fund to the
1993 Benefit Plan are expanded to cover beneficiaries who are
enrolled in the plan as of the date of enactment of the Act
(December 20, 2019),\230\ as well as beneficiaries whose health
benefits, which are payable following death or retirement or
upon a finding of disability directly by an employer in the
bituminous coal industry under a coal wage agreement,\231\ or a
related coal wage agreement, would otherwise be denied or
reduced as a result of a coal industry bankruptcy in 2018 or
2019.
---------------------------------------------------------------------------
\230\ These beneficiaries must also be eligible to receive health
benefits under the 1993 Benefit Plan on the first day of the calendar
year for which the transfer is made, other than those beneficiaries
enrolled in the plan under the terms of a participation agreement with
the current or former employer of such beneficiaries.
\231\ Defined in sec. 9701(b)(1).
---------------------------------------------------------------------------
Determination of the amount of the excess.
In determining the amount of the excess that may be
transferred to the multiemployer health benefit plan, the costs
of administering the dispute resolution process (as of December
31, 2019) by the Trustees of the plan are to be taken into
account. In addition, a related coal wage agreement taken into
account in determining such excess is defined as an agreement
between the UMWA and an employer in the bituminous coal
industry that (1) is a signatory operator, or (2) is, or was, a
debtor in a bankruptcy proceeding that was consolidated,
administratively or otherwise, with the bankruptcy proceeding
of a signatory operator or a related person to a signatory
operator.
Increase in cap
The combined annual limit on supplemental payments to the
UMWA Health Plans, together with payments from the General Fund
for certain States and Indian Tribes is increased from $490
million to $750 million under the provision.
Transfers to the UMWA 1974 Pension Plan
If amounts available for transfer under the revised $750
million annual limit exceed the amounts required to be
transferred for other purposes (including to the UMWA Health
Plans), the provision directs the Secretary to transfer the
excess to the Pension Plan to pay plan benefits.\232\ Transfers
are to end as of the first fiscal year beginning after the
first plan year for which the Pension Plan's funded percentage
(as defined under the Code's funding rules) \233\ is at least
100 percent. Until that time, the Pension Plan will be treated
as if it is in critical status \234\ and will maintain and
comply with its rehabilitation plan (including any
updates).\235\
---------------------------------------------------------------------------
\232\ The provision describes the Pension Plan as the 1974 UMWA
Pension Plan under section 9701(a)(3), but without regard to the
limitation on participation to individuals who retired in 1976 and
thereafter, thereby reflecting the merger of the UMWA 1950 Pension Plan
into the Pension Plan.
\233\ See sec. 432(j)(2).
\234\ For purposes of secs. 412(b)(3), 432(e)(3) and 4971(g) and
secs. 302(b)(3) and 305(e)(3) of ERISA.
\235\ However, the provisions of section 432(c) and (d) and section
305(c) and (d) of ERISA will not apply.
---------------------------------------------------------------------------
During any fiscal year in which the Pension Plan receives a
transfer, no plan amendment may be adopted that increases plan
liabilities by reason of a benefit increase, a change in the
accrual of benefits, or a change in the rate at which benefits
vest under the plan unless the amendment is required as a
condition for qualified retirement plan status under the Code.
In addition, a transfer is not to be made for a fiscal year
unless the persons obligated to contribute to the Pension Plan
on the date of the transfer are obligated to make contributions
at rates that are not less than those in effect on the date 30
days before the date of enactment of the provision (December
20, 2019). Any amounts transferred to the Pension Plan are
disregarded in determining the unfunded vested benefits of the
Pension Plan and the allocation of unfunded vested benefits to
an employer for withdrawal liability purposes.
The provision applies additional reporting requirements to
the Pension Plan. Not later than the 90th day of each plan year
beginning after the date of enactment, the Pension Plan
trustees must file with the Secretary \236\ and the Pension
Benefit Guaranty Corporation (``PBGC'') a report (including
appropriate documentation and actuarial certifications from the
plan actuary, as required by the Secretary) that provides--
---------------------------------------------------------------------------
\236\ References in this description to ``Secretary'' include the
Secretary's delegate, for this purpose, the Internal Revenue Service.
---------------------------------------------------------------------------
Whether the Pension Plan is in endangered or
critical status;
The Pension Plan's funded percentage as of
the first day of the plan year and the underlying
actuarial value of assets and liabilities taken into
account in determining the funded percentage;
The market value of plan assets as of the
last day of the preceding plan year;
The total of all plan contributions made
during the preceding plan year;
The total benefits paid during the preceding
plan year;
Cash flow projections for the plan year and
either the six or 10 succeeding plan years, at the
election of the trustees, and the assumptions relied on
in making the projections;
Funding standard account projections for the
plan year and the nine succeeding plan years, and the
assumptions relied on in making the projections;
The total investment gains or losses during
the preceding plan year;
Any significant reduction in the number of
active participants during the preceding plan year and
the reason for the reduction;
A list of employers that withdrew from the
Pension Plan in the preceding plan year and the
resulting reduction in contributions;
A list of employers that paid withdrawal
liability to the Pension Plan during the preceding plan
year and, for each employer, a total assessment of the
withdrawal liability paid, the annual payment amount,
and the number of years remaining in the payment
schedule with respect to the withdrawal liability;
Any material changes to benefits, accrual
rates, or contribution rates during the preceding plan
year;
Any scheduled benefit increase or decrease
in the preceding plan year having a material effect on
plan liabilities;
Details of any funding improvement plan or
rehabilitation plan and updates;
The number of participants and beneficiaries
during the preceding plan year who are active
participants, the number of participants and
beneficiaries in pay status, and the number of
terminated vested participants and beneficiaries;
The information contained in the Pension
Plan's most recent annual funding notice;
The information contained in the Pension
Plan's most recent Form 5500; and
Copies of the plan document and amendments,
other retirement benefit or ancillary benefit plans
relating to the Pension Plan and contribution
obligations under those plans, a breakdown of the
Pension Plan's administrative expenses, participant
census data and distribution of benefits, the most
recent actuarial valuation report as of the plan year,
copies of collective bargaining agreements, and
financial reports, and such other information as the
Secretary may require, in consultation with the
Secretary of Labor and the Director of the PBGC.
This report must be submitted electronically, and the
Secretary is directed to share the information in the report
with the Secretary of Labor. A failure to file the report on or
before the date required results in a tax reporting penalty of
$100 per day while the failure continues unless the Secretary
determines that reasonable diligence was exercised by the plan
sponsor in attempting to timely file the report.
Effective Date
The provision generally applies to fiscal years beginning
after September 30, 2016. The reporting requirements relating
to the Pension Plan apply to plan years beginning after the
date of enactment.
The provisions relating to the expanded coverage of
bankruptcies and the changes to the determination of the excess
that may be transferred to the multiemployer health benefit
plan are effective upon the date of enactment.
2. Reduction in minimum age for allowable in-service distributions
(sec. 104 of the Act and secs. 401 and 457 of the Code)
Present Law
Overview
There are three basic types of funded tax-favored employer-
sponsored defined contribution retirement plans: qualified
employer plans, section 403(b) plans, and governmental section
457(b) plans. Under these plans, most contributions, earnings
on contributions, and benefits are not included in gross income
until amounts are distributed, even if the arrangement is
funded and benefits are vested. Additionally, many
distributions can be rolled over to another plan for further
deferral of income inclusion. Defined contribution plans may
provide for nonelective contributions and matching
contributions by employers and elective deferrals or after-tax
contributions by employees. Elective deferrals are
contributions made pursuant to an election by an employee
between cash compensation and a contribution to the plan.
Elective deferrals under a qualified plan may only be made
under a section 401(k) plan. A section 401(k) plan is a profit-
sharing or stock bonus plan that contains a qualified cash or
deferred arrangement.\237\ Thus, such arrangements are subject
to the rules generally applicable to qualified defined
contribution plans. In addition, special rules apply to such
arrangements. One requirement is that no distributions prior to
severance from employment generally may be made for amounts
attributable to elective deferrals unless the employee has
attained age 59\1/2\.
---------------------------------------------------------------------------
\237\ Certain pre-ERISA money purchase plans and rural cooperative
plans may also include a qualified cash or deferred arrangement. Except
for certain grandfathered plans, a State or local governmental employer
may not maintain a section 401(k) plan.
---------------------------------------------------------------------------
Section 403(b) plans are another form of tax-favored
employer-sponsored plan that provide tax benefits similar to
qualified retirement plans. Section 403(b) plans may be
maintained only by (1) charitable organizations that are tax-
exempt under section 501(c)(3), and (2) educational
institutions of State or local governments (i.e., public
schools, including colleges and universities). Elective
deferrals are also permitted under section 403(b) plans and are
subject to the same requirement that, generally, no
distributions are permitted prior to severance from employment
unless the employee has attained age 59\1/2\.
Governmental section 457(b) plans
In the case of a State or local government employer, a
section 457(b) plan is generally limited to elective deferrals
and provides tax benefits similar to a section 401(k) or 403(b)
plan in that deferrals are contributed to a trust or custodial
account for the exclusive benefit of participants, but are not
included in income until distributed (and may be rolled over to
another tax-favored plan).\238\ However distributions from a
governmental section 457(b) plan prior to severance from
employment are generally not permitted until the employee
attains age 70\1/2\.
---------------------------------------------------------------------------
\238\ In the case of a tax-exempt employer, section 457(b) and
457(f) limit the amount of unfunded nonqualified deferred compensation
that can be provided on a tax-deferred basis.
---------------------------------------------------------------------------
Distributions from a pension plan prior to a severance in employment
For purposes of the qualification requirements applicable
to pension plans, stock bonus plans, and profit-sharing plans
under the Code, a pension plan is a plan established and
maintained primarily to provide systematically for the payment
of definitely determinable benefits to employees over a period
of years, usually for life, after retirement.\239\ However, a
pension plan does not fail to be a qualified retirement plan
solely because the plan provides that a distribution may be
made to an employee who has attained age 62 and who is not
separated from employment at the time of the distribution.\240\
---------------------------------------------------------------------------
\239\ Treas. Reg. sec. 1.401-1(b)(1)(i).
\240\ Sec. 401(a)(36).
---------------------------------------------------------------------------
Explanation of Provision
In the case of a section 457(b) plan maintained by a State
or local government, the provision changes the age at which
distributions are permitted prior to severance from employment
to age 59\1/2\ to be consistent with the rules for section
401(k) plans and section 403(b) plans.
The provision also modifies the age at which a distribution
may be made from a pension plan to an employee who has not
separated from employment at the time of the distribution by
reducing it from age 62 to age 59\1/2\.
Effective Date
The provision is effective for plan years beginning after
December 31, 2019.
DIVISION N--HEALTH AND HUMAN SERVICES EXTENDERS
TITLE I--HEALTH AND HUMAN SERVICES EXTENDERS
Subtitle A--Medicare Provisions
1. Extension of appropriations to the Patient-Centered Outcomes
Research Trust Fund; extension of certain health insurance fees
(sec. 104 of Div. N of the Act and secs. 4375, 4376, and 9511
of the Code)
Present Law
Patient-Centered Outcomes Research Trust Fund
The Patient Centered Outcomes Research Trust Fund
(``PCORTF'') is a trust fund established by statute in the U.S.
Treasury \241\ to carry out the provisions of the Patient
Protection and Affordable Care Act \242\ relating to
comparative effectiveness research. The PCORTF is funded in
part from fees imposed on health plans.\243\
---------------------------------------------------------------------------
\241\ Sec. 9511.
\242\ Pub. L. No 111-148, March 23, 2010.
\243\ Secs. 4375-4377.
---------------------------------------------------------------------------
Fee on insured and self-insured health plans
Insured plans
A fee is imposed on each specified health insurance policy
equal to $2.00 ($1.00 in the case of policy years ending during
fiscal year 2013) multiplied by the average number of lives
covered under the policy.\244\ For any policy year beginning
after September 30, 2014, the dollar amount is increased based
on increases in health care spending. Specifically, the
adjusted applicable dollar amount is equal to the sum of: (1)
the dollar amount for policy years ending in the preceding
fiscal year, plus (2) an amount equal to the product of (A) the
dollar amount for policy years ending in the preceding fiscal
year, multiplied by (B) the percentage increase in the
projected per capita amount of National Health Expenditures, as
most recently published by the Secretary before the beginning
of the fiscal year.\245\ The issuer of the policy is liable for
payment of the fee. A specified health insurance policy
includes any accident or health insurance policy \246\ issued
with respect to individuals residing in the United States.\247\
An arrangement under which fixed payments of premiums are
received as consideration for a person's agreement to provide,
or to arrange for the provision of, accident or health coverage
to residents of the United States, regardless of how such
coverage is provided or arranged to be provided, is treated as
a specified health insurance policy. The person agreeing to
provide or arrange for the provision of coverage is treated as
the issuer.
---------------------------------------------------------------------------
\244\ Sec. 4375.
\245\ The dollar amount for policy years that end on or after
October 1, 2019, and before October 1, 2020, is $2.54. Notice 2020-44,
2020-26 I.R.B. 1989, June 22, 2020. For policy years that end on or
after October 1, 2020, and before October 1, 2021, the dollar amount is
$2.66. Notice 2020-84, 2020-51 I.R.B. 1645, December 14, 2020.
\246\ A specified health insurance policy does not include
insurance if substantially all of the coverage provided under such
policy consists of excepted benefits described in section 9832(c).
Examples of excepted benefits described in section 9832(c) are coverage
for only accident, or disability insurance, or any combination thereof;
liability insurance, including general liability insurance and
automobile liability insurance; workers' compensation or similar
insurance; automobile medical payment insurance; coverage for on-site
medical clinics; limited scope dental or vision benefits; benefits for
long term care, nursing home care, community based care, or any
combination thereof; coverage only for a specified disease or illness;
hospital indemnity or other fixed indemnity insurance; and Medicare
supplemental coverage.
\247\ Under the provision, the United States includes any
possession of the United States.
---------------------------------------------------------------------------
Self-insured plans
In the case of an applicable self-insured health plan, a
fee is imposed equal to $2.00 ($1.00 in the case of policy
years ending during fiscal year 2013) multiplied by the average
number of lives covered under the plan.\248\ For any policy
year beginning after September 30, 2014, the dollar amount is
increased based on increases in health care spending.
Specifically, the adjusted applicable dollar amount is equal to
the sum of: (1) the dollar amount for policy years ending in
the preceding fiscal year, plus (2) an amount equal to the
product of (A) the dollar amount for policy years ending in the
preceding fiscal year, multiplied by (B) the percentage
increase in the projected per capita amount of National Health
Expenditures, as most recently published by the Secretary
before the beginning of the fiscal year.\249\ The plan sponsor
is liable for payment of the fee. For purposes of the
provision, the plan sponsor is the employer in the case of a
plan established or maintained by a single employer or the
employee organization in the case of a plan established or
maintained by an employee organization. In the case of: (1) a
plan established or maintained by two or more employers or
jointly by one or more employers and one or more employee
organizations, (2) a multiple employer welfare arrangement, or
(3) a voluntary employees' beneficiary association
(``VEBA''),\250\ the plan sponsor is the association,
committee, joint board of trustees, or other similar group of
representatives of the parties who establish or maintain the
plan. In the case of a rural electric cooperative or a rural
telephone cooperative, the plan sponsor is the cooperative or
association.
---------------------------------------------------------------------------
\248\ Sec. 4376.
\249\ The dollar amount for plan years that end on or after October
1, 2019, and before October 1, 2020, is $2.54. Notice 2020-44, 2020-26
I.R.B. 1989, June 22, 2020. For plan years that end on or after October
1, 2020, and before October 1, 2021, the dollar amount is $2.66. Notice
2020-84, 2020-51 I.R.B. 1645, December 14, 2020.
\250\ VEBAs are described in sec. 501(c)(9).
---------------------------------------------------------------------------
Under the provision, an applicable self-insured health plan
is any plan providing accident or health coverage if any
portion of such coverage is provided other than through an
insurance policy and such plan is established or maintained:
(1) by one or more employers for the benefit of their employees
or former employees, (2) by one or more employee organizations
for the benefit of their members or former members, (3) jointly
by one or more employers and one or more employee organizations
for the benefit of employees or former employees, (4) by a
VEBA, (5) by any organization described in section 501(c)(6) of
the Code, or (6) in the case of a plan not previously
described, by a multiple employer welfare arrangement,\251\ a
rural electric cooperative,\252\ or a rural telephone
cooperative association.\253\
---------------------------------------------------------------------------
\251\ Defined in sec. 3(40) of ERISA.
\252\ Defined in sec. 3(40)(B)(iv) of ERISA.
\253\ Defined in sec. 3(40)(B)(v) of ERISA.
---------------------------------------------------------------------------
Other special rules
Governmental entities are generally not exempt from the
fees imposed under the provision. There is an exception for
exempt governmental programs, including Medicare, Medicaid,
SCHIP, and any program established by Federal law for providing
medical care (other than through insurance policies) to members
of the Armed Forces, veterans, or members of Indian tribes.
No amount collected from the fee on health insurance and
self-insured plans is covered over to any possession of the
United States. For purposes of the Code's procedure and
administration rules, the fee imposed under the provision is
treated as a tax.
Termination
The fees do not apply to plan years ending after September
31, 2019.
Explanation of Provision
The provision extends the time period during which fees are
imposed on specified health insurance policies and self-insured
health plans by 10 years by providing that the fees do not
apply to policy and plan years ending after September 30, 2029.
The fee applies to policy and plan years ending on or before
September 30, 2029, including policy and plan years ending
after September 30, 2019 but before the date of enactment of
this provision (December 20, 2019).\254\
---------------------------------------------------------------------------
\254\ The IRS provided guidance on the extension of the fees in
Notice 2020-44, 2020-26 I.R.B. 1989, June 22, 2020.
---------------------------------------------------------------------------
The provision makes corresponding changes to the rules
under which PCORTF was established and is funded.\255\
---------------------------------------------------------------------------
\255\ See sec. 104(a) of Division N of Pub. L. No. 116-94.
---------------------------------------------------------------------------
Effective Date
The fee on specified health insurance policies and self-
insured health plans applies to policy and plan years ending
after September 30, 2019.
Subtitle E--Revenue Provisions
1. Repeal of medical device excise tax (sec. 501 of Div. N of the Act
and sec. 4191 of the Code)
Present Law
Medical device excise tax
An excise 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.\256\ As
enacted in 2010, the excise tax applied to sales after December
31, 2012.\257\ A taxable medical device is any device, as
defined in section 201(h) of the Federal Food, Drug, and
Cosmetic Act,\258\ 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.\259\
---------------------------------------------------------------------------
\256\ Sec. 4191.
\257\ Pub. L. No. 111-152, sec. 1405 (2010). See below for a
description of subsequently enacted moratoriums on the excise tax.
\258\ 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.''
\259\ 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.
---------------------------------------------------------------------------
The excise tax does not apply to sales of 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.\260\ Additionally, the regulations provide
certain safe harbors for devices eligible for the retail
exemption.\261\
---------------------------------------------------------------------------
\260\ Treas. Reg. sec. 48.4191-2(b)(2).
\261\ 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.
---------------------------------------------------------------------------
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).\262\ 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.\263\ In general, the exemption does not apply
unless the manufacturer, the first purchaser, and the second
purchaser are registered with the Secretary. Foreign purchasers
of articles sold or resold for export are exempt from the
registration requirement.
---------------------------------------------------------------------------
\262\ 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.
\263\ Sec. 4221(b).
---------------------------------------------------------------------------
The lease of a medical device is generally considered to be
a sale of such device.\264\ 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.\265\
---------------------------------------------------------------------------
\264\ Sec. 4217(a).
\265\ Sec. 4218.
---------------------------------------------------------------------------
There are also rules for determining the price of a medical
device on which the excise tax is imposed.\266\ 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.
---------------------------------------------------------------------------
\266\ Sec. 4216.
---------------------------------------------------------------------------
Temporary suspension
In 2015, the medical device excise tax was suspended for a
period of two years, for sales on or after January 1, 2016 and
before January 1, 2018.\267\ This moratorium was extended for
an additional period of two years, to include sales after
December 31, 2017, and before January 1, 2020.\268\
---------------------------------------------------------------------------
\267\ Pub. L. 114-113, Div. Q, sec. 174 (2015).
\268\ Pub. L. 115-120, Div. D, sec. 4001 (2018).
---------------------------------------------------------------------------
Explanation of Provision
The provision repeals the medical device excise tax for
sales after December 31, 2019.
Effective Date
The provision applies to medical device sales after
December 31, 2019.
2. Repeal of annual fee on health insurance providers (sec. 502 of Div.
N of the Act)
Present Law
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'').\269\ 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. For calendar years after 2018, the applicable amount is
indexed to the rate of premium growth. However, a one-year
moratorium applies to the annual fee on health insurance
providers for calendar years 2017 and 2019.
---------------------------------------------------------------------------
\269\ Sec. 9010 of the Patient Protection and Affordable Care Act.
---------------------------------------------------------------------------
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 repeals the annual fee on health insurance
providers for calendar years beginning after December 31, 2020.
Effective Date
The provision is effective for calendar years beginning
after December 31, 2020.
3. Repeal of excise tax on high cost employer-sponsored health coverage
(sec. 503 of Div. N 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 was 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 was 40
percent of the amount by which the aggregate cost exceeds the
threshold amount (the ``excess benefit'').
The annual threshold amount for 2018 was $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.\270\ This threshold was then adjusted annually by
an age and gender adjusted excess premium amount. The age and
gender adjusted excess premium amount was 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.
---------------------------------------------------------------------------
\270\ 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.
---------------------------------------------------------------------------
The excise tax was 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.\271\ 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.
---------------------------------------------------------------------------
\271\ Section 106 provides an exclusion for employer-provided
coverage.
---------------------------------------------------------------------------
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'').\272\ 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.\273\
---------------------------------------------------------------------------
\272\ 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.
\ 273\ Section 162(l) allows a deduction to a self-employed
individual for the cost of health insurance.
---------------------------------------------------------------------------
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,\274\ 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'').
---------------------------------------------------------------------------
\274\ Sec. 4980B(f)(4).
---------------------------------------------------------------------------
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.\275\
---------------------------------------------------------------------------
\275\ 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.
---------------------------------------------------------------------------
The excise tax was imposed on the coverage provider.\276\
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 administered the
plan benefits (``plan administrator'') was generally liable for
the excise tax. However, in the case of employer contributions
to an HSA or an Archer MSA, the employer was liable for the
excise tax.
---------------------------------------------------------------------------
\276\ 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.
---------------------------------------------------------------------------
The employer was 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 was responsible for the
calculation and notification.\277\
---------------------------------------------------------------------------
\277\ 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.
---------------------------------------------------------------------------
The provision implementing the excise tax on high cost
employer-sponsored health coverage was delayed until taxable
years beginning after December 31, 2021.
Explanation of Provision
Under the provision, implementation of the excise tax on
high cost employer-sponsored health coverage is repealed.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2019.
DIVISION O--SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT
OF 2019
TITLE I--EXPANDING AND PRESERVING RETIREMENT SAVINGS
1. Multiple employer plans; pooled employer plans (sec. 101 of the Act,
secs. 3, 103, and 104 of ERISA, and sec. 413 of the Code)
Present Law
Retirement savings under the Code and ERISA
Tax-favored arrangements
The Internal Revenue Code (``Code'') provides two general
vehicles for tax-favored retirement savings: employer-sponsored
plans and individual retirement arrangements (``IRAs''). Code
provisions are generally within the jurisdiction of the
Secretary of the Treasury (``Secretary''), through his or her
delegate, the Internal Revenue Service (``IRS'').
The most common type of tax-favored employer-sponsored
retirement plan is a qualified retirement plan,\278\ which may
be a defined contribution plan or a defined benefit plan. Under
a defined contribution plan, separate individual accounts are
maintained for participants, to which accumulated
contributions, earnings, and losses are allocated, and
participants' benefits are based on the value of their
accounts.\279\ Defined contribution plans commonly allow
participants to direct the investment of their accounts,
usually by choosing among investment options offered under the
plan. Under a defined benefit plan, benefits are determined
under a plan formula and paid from general plan assets, rather
than individual accounts.\280\ Besides qualified retirement
plans, certain tax-exempt employers and public schools may
maintain tax-deferred annuity plans.\281\
---------------------------------------------------------------------------
\278\ Sec. 401(a). A qualified annuity plan under section 403(a) is
similar to and subject to requirements similar to those applicable to
qualified retirement plans. Unless otherwise stated, all section
references are to the Internal Revenue Code of 1986, as amended (the
``Code'').
\279\ Sec. 414(i). Defined contribution plans generally provide for
contributions by employers and may include a qualified cash or deferred
arrangement under a section 401(k) plan, under which employees may
elect to contribute to the plan.
\280\ Sec. 414(j).
\281\ Sec. 403(b). Private and governmental employers that are
exempt from tax under section 501(c)(3), including tax-exempt private
schools, may maintain tax-deferred annuity plans. State and local
governmental employers may maintain another type of tax-favored
retirement plan, an eligible deferred compensation plan under section
457(b).
---------------------------------------------------------------------------
An IRA is generally established by the individual for whom
the IRA is maintained.\282\ However, in some cases, an employer
may establish IRAs on behalf of employees and provide
retirement contributions to the IRAs.\283\ In addition, IRA
treatment may apply to accounts maintained for employees under
a trust created by an employer (or an employee association) for
the exclusive benefit of employees or their beneficiaries,
provided that the trust complies with the relevant IRA
requirements and separate accounting is maintained for the
interest of each employee or beneficiary (referred to herein as
an ``IRA trust'').\284\ In that case, the assets of the trust
may be held in a common fund for the account of all individuals
who have an interest in the trust.
---------------------------------------------------------------------------
\282\ Sections 219, 408, and 408A provide rules for IRAs. Under
section 408(a)(2) and (n), only certain entities are permitted to be
the trustee of an IRA. The trustee of an IRA generally must be a bank,
an insured credit union, or a corporation subject to supervision and
examination by the Commissioner of Banking or other officer in charge
of the administration of the banking laws of the State in which it is
incorporated. Alternatively, an IRA trustee may be another person who
demonstrates to the satisfaction of the Secretary that the manner in
which the person will administer the IRA will be consistent with the
IRA requirements.
\283\ Simplified employee pension (``SEP'') plans under section
408(k) and SIMPLE IRA plans under section 408(p) are employer-sponsored
retirement plans funded using IRAs for employees.
\284\ Sec. 408(c).
---------------------------------------------------------------------------
ERISA
Retirement plans of private employers, including qualified
retirement plans and tax-deferred annuity plans, are generally
subject to requirements under the Employee Retirement Income
Security Act of 1974 (``ERISA'').\285\ A plan covering only
business owners (or business owners and their spouses)--that
is, it covers no other employees--is exempt from ERISA.\286\
Thus, a plan covering only self-employed individuals is exempt
from ERISA. Tax-deferred annuity plans that provide solely for
salary reduction contributions by employees may be exempt from
ERISA.\287\ IRAs are generally exempt from ERISA.
---------------------------------------------------------------------------
\285\ ERISA applies to employee welfare benefit plans, such as
health plans, of private employers, as well as to employer-sponsored
retirement (or pension) plans. Employer-sponsored welfare and pension
plans are both referred to under ERISA as employee benefit plans. Under
ERISA section 4(b)(1) and (2), governmental plans and church plans are
generally exempt from ERISA.
\286\ 29 C.F.R. 2510.3-3(b)-(c).
\287\ 29 C.F.R %10.3-2(f).
---------------------------------------------------------------------------
The provisions of Title I of ERISA are under the
jurisdiction of the Secretary of Labor.\288\ Many of the
requirements under Title I of ERISA parallel Code requirements
for qualified retirement plans. Under ERISA, in carrying out
provisions relating to the same subject matter, the Secretary
(of the Treasury) and the Secretary of Labor are required to
consult with each other and develop rules, regulations,
practices, and forms that, to the extent appropriate for
efficient administration, are designed to reduce duplication of
effort, duplication of reporting, conflicting or overlapping
requirements, and the burden of compliance by plan
administrators, employers, and participants and
beneficiaries.\289\ In addition, interpretive jurisdiction over
parallel Code and ERISA provisions relating to retirement plans
is divided between the two Secretaries by Executive Order,
referred to as the Reorganization Plan No. 4 of 1978.\290\
---------------------------------------------------------------------------
\288\ The provisions of Titleof ERISA are codified at 29 U.S.C.
1001-734. Under Title of ERISA, defined benefit plans of private
employers are generally covered by the Pension Benefit Guaranty
Corporation's pension insurance program.
\289\ ERISA sec. 3004.
\290\ 43 Fed. Reg. 47713 (October 17, 1978), codified at 92 Stat.
3790, 5 U.S.C. app.
---------------------------------------------------------------------------
Multiple employer plans under the Code
In general
Qualified retirement plans, either defined contribution or
defined benefit plans, are categorized as single employer plans
or multiple employer plans. A single employer plan is a plan
maintained by one employer. For this purpose, businesses and
organizations that are members of a controlled group of
corporations, a group under common control, or an affiliated
service group are treated as one employer (referred to as
``aggregation'').\291\
---------------------------------------------------------------------------
\291\ Secs. 414(b), (c), (m) and (o).
---------------------------------------------------------------------------
A multiple employer plan generally is a single plan
maintained by two or more unrelated employers (that is,
employers that are not treated as a single employer under the
aggregation rules).\292\ Multiple employer plans (``MEPs'') are
commonly maintained by employers in the same industry and are
used also by professional employer organizations (``PEOs'') to
provide qualified retirement plan benefits to employees working
for PEO clients.\293\
---------------------------------------------------------------------------
\292\ Sec. 413(c). Multiple employer plan status does not apply if
the plan is a multiemployer plan. Multiemployer plans are different
from single employer plans and multiple employer plans. A multiemployer
plan is defined under section 414(f) as a plan maintained pursuant to
one or more collective bargaining agreements with two or more unrelated
employers and to which the employers are required to contribute under
the collective bargaining agreement(s). Multiemployer plans are also
known as Taft-Hartley plans.
\293\ Rev. Proc. 03-86, 2003-2 C.B. 1211, and Rev. Proc. 2002-21,
2002-1 C.B. 911, address the application of the multiple employer plan
rules to qualified defined contribution plans maintained by PEOs.
---------------------------------------------------------------------------
Application of Code requirements to multiple employer plans
and EPCRS
Some requirements are applied to a multiple employer plan
on a plan-wide basis.\294\ For example, all employees covered
by the plan are treated as employees of all employers
participating in the plan for purposes of the exclusive benefit
rule. Similarly, an employee's service with all participating
employers is taken into account in applying the minimum
participation and vesting requirements. In applying the limits
on contributions and benefits, compensation, contributions, and
benefits attributable to all employers are taken into
account.\295\ Other requirements are applied separately,
including the minimum coverage requirements, nondiscrimination
requirements (both the general requirements and the special
tests for section 401(k) plans), and the top-heavy rules.\296\
However, the qualified status of the plan as a whole is
determined with respect to all employers maintaining the plan,
and the failure by one employer (or by the plan itself) to
satisfy an applicable qualification requirement may result in
disqualification of the plan with respect to all employers
(sometimes referred to as the ``one bad apple'' rule).\297\
---------------------------------------------------------------------------
\294\ Sec. 413(c).
\295\ Treas. Reg. sec. 1.415(a)-1(e).
\296\ Treas. Reg. secs. 1.413-2(a)(3)(ii)-(iii) and 1.416-1, G-2.
\297\ Treas. Reg. secs. 1.413-2(a)(3)(iv) and 1.416-1, G-2.
---------------------------------------------------------------------------
Because of the complexity of the requirements for qualified
retirement plans, errors in plan documents, as well as plan
operation and administration, commonly occur. Under a strict
application of these requirements, such an error would cause a
plan to lose its tax-favored status, which would fall most
heavily on plan participants because of the resulting current
income inclusion of vested amounts under the plan. As a
practical matter, therefore, the IRS rarely disqualifies a
plan. Instead, the IRS has established the Employee Plans
Compliance Resolution System (``EPCRS''), a formal program
under which employers and other plan sponsors can correct
compliance failures and continue to provide their employees
with retirement benefits on a tax-favored basis.\298\
---------------------------------------------------------------------------
\298\ Rev.oc. 2019-19, 2019-19 I.R.B. 1086, May 6, 2019.
---------------------------------------------------------------------------
EPCRS has three components, providing for self-correction,
voluntary correction with IRS approval, and correction on
audit. The Self-Correction Program (``SCP'') generally permits
a plan sponsor that has established compliance practices and
procedures to correct certain insignificant failures at any
time (including during an audit), and certain significant
failures generally within a two-year period, without payment of
any fee or sanction. The Voluntary Correction Program (``VCP'')
permits an employer, at any time before an audit, to pay a
limited fee and receive IRS approval of a correction. For a
failure that is discovered on audit and corrected, the Audit
Closing Agreement Program (``Audit CAP'') provides for a
sanction that bears a reasonable relationship to the nature,
extent, and severity of the failure and that takes into account
the extent to which correction occurred before audit.
Multiple employer plans are eligible for EPCRS, and certain
special procedures apply.\299\ A VCP request with respect to a
MEP must be submitted to the IRS by the plan administrator,
rather than an employer maintaining the plan, and must be made
with respect to the entire plan, rather than a portion of the
plan affecting any particular employer. In addition, if a
failure applies to fewer than all of the employers under the
plan, the plan administrator may choose to have a VCP
compliance fee or audit CAP sanction calculated separately for
each employer based on the participants attributable to that
employer, rather than having the compliance fee calculated
based on the participants of the entire plan. For example, the
plan administrator may choose this option when the failure is
attributable to the failure of an employer to provide the plan
administrator with full and complete information.
---------------------------------------------------------------------------
\299\ Sec. 10.11 of Rev.oc. 2019-19.
---------------------------------------------------------------------------
Executive Order 13847\300\ (issued on August 31, 2018)
directed the Secretary to consider proposing amendments to
regulations or other guidance regarding the circumstances under
which a MEP may satisfy the tax qualification requirements,
including the consequences if one or more employers that
sponsored or adopted the plan fails to take one or more actions
necessary to meet those requirements.
---------------------------------------------------------------------------
\300\ 83 FR 45321, September 6, 2018.
---------------------------------------------------------------------------
IRS issued proposed regulations\301\ that would provide an
exception to the ``one bad apple'' rule where the following
conditions are satisfied: (1) the MEP satisfies certain
eligibility requirements (including having established
practices and procedures (formal or informal) reasonably
designed to promote compliance and a requirement to adopt
relevant plan language); (2) the section 413(c) plan
administrator provides (up to three separate) notice(s) and an
opportunity for the unresponsive participating employer to take
remedial action with respect to the failure of the
participating employer; (3) if the unresponsive participating
employer fails to take appropriate remedial action or initiate
a spinoff with respect to the failure, the section 413(c) plan
administrator implements a spinoff of the plan assets and
account balances held on behalf of employees of the
unresponsive participating employer that are attributable to
their employment with that employer to a separate plan,
followed by a termination of that plan; and (4) the section
413(c) plan administrator complies with any information request
that the IRS or a representative of the spun-off plan makes in
connection with an IRS examination of the spun-off plan,
including any information request related to the participation
of the unresponsive participating employer in the MEP for years
prior to the spinoff. If the MEP is under examination at the
time the first notice is provided to an unresponsive
participating employer, the MEP is not eligible for the
exception. These proposed regulations have not been finalized.
---------------------------------------------------------------------------
\301\ 84 FR 31777, July 3, 2019.
---------------------------------------------------------------------------
ERISA
Fiduciary and bonding requirements
Among other requirements, ERISA requires a plan to be
established and maintained pursuant to a written instrument
(that is, a plan document) that contains certain terms.\302\
The terms of the plan must provide for one or more named
fiduciaries that jointly or severally have authority to control
and manage the operation and administration of the plan.\303\
Among other required plan terms are a procedure for the
allocation of responsibilities for the operation and
administration of the plan and a procedure for amending the
plan and for identifying the persons who have authority to
amend the plan. Among other permitted terms, a plan may provide
that any person or group of persons may serve in more than one
fiduciary capacity with respect to the plan (including service
both as trustee and administrator) and that a person who is a
named fiduciary with respect to the control or management of
plan assets may appoint an investment manager or managers to
manage plan assets.
---------------------------------------------------------------------------
\302\ ERISA sec. 402.
\303\ Fiduciary is defined in ERISA section 3(21), and named
fiduciary is defined in ERISA section 402(a)(2).
---------------------------------------------------------------------------
In general, a plan fiduciary is responsible for the
investment of plan assets. However, ERISA section 404(c)
provides a special rule in the case of a defined contribution
plan that permits participants to direct the investment of
their individual accounts.\304\ Under the special rule, if
various requirements are met, a participant is not deemed to be
a fiduciary by reason of directing the investment of the
participant's account and no person who is otherwise a
fiduciary is liable for any loss, or by reason of any breach,
that results from the participant's investments. Defined
contribution plans that provide for participant-directed
investments commonly offer a set of investment options among
which participants may choose. The selection of investment
options to be offered under a plan is subject to ERISA
fiduciary requirements.
---------------------------------------------------------------------------
\304\ ERISA sec. 404(c). Under ERISA, a defined contribution plan
is also referred to as an individual account plan.
---------------------------------------------------------------------------
Under ERISA, any plan fiduciary or person that handles plan
assets is required to be bonded, generally for an amount not to
exceed $500,000.\305\ In some cases, the maximum bond amount is
$1 million, rather than $500,000.
---------------------------------------------------------------------------
\305\ ERISA sec. 412.
---------------------------------------------------------------------------
Multiple employer plan status under ERISA
Like the Code, ERISA contains rules for multiple employer
retirement plans.\306\ However, a different concept of multiple
employer plan applies under ERISA.
---------------------------------------------------------------------------
\306\ ERISA sec. 201(a).
---------------------------------------------------------------------------
Under ERISA, an employee benefit plan (whether a pension
plan or a welfare plan) must be sponsored by an employer, by an
employee organization, or by both.\307\ The definition of
employer is any person acting directly as an employer, or
indirectly in the interest of an employer, in relation to an
employee benefit plan, and includes a group or association of
employers acting for an employer in such capacity.\308\
---------------------------------------------------------------------------
\307\ ERISA secs. 3(1) and (2).
\308\ ERISA sec. 3(5).
---------------------------------------------------------------------------
Historically, these definitional provisions of ERISA have
been interpreted as only permitting a multiple employer plan to
be established or maintained by a cognizable, bona fide group
or association of employers, acting in the interests of its
employer members to provide benefits to their employees.\309\
This approach is based on the premise that the person or group
that maintains the plan is tied to the employers and employees
that participate in the plan by some common economic or
representational interest or genuine organizational
relationship unrelated to the provision of benefits. Based on
the facts and circumstances, the employers that participate in
the benefit program must, either directly or indirectly,
exercise control over that program, both in form and in
substance, in order to act as a bona fide employer group or
association with respect to the program, or the plan is
sponsored by one or more employers as defined in section 3(5)
of ERISA.\310\ However, an employer association does not exist
where several unrelated employers merely execute participation
agreements or similar documents as a means to fund benefits, in
the absence of any genuine organizational relationship between
the employers. In that case, each participating employer
establishes and maintains a separate employee benefit plan for
the benefit of its own employees, rather than a multiple
employer plan.
---------------------------------------------------------------------------
\309\ See, e.g., Department of Labor Advisory Opinions 2012-04A,
2003-17A, 2001-04A, and 1994-07A, and other authorities cited therein.
\310\ See, e.g., Department of Labor Advisory Opinion 2017-02AC.
---------------------------------------------------------------------------
On July 31, 2019, the Department of Labor (``DOL'') issued
final regulations\311\ pursuant to Executive Order 13847\312\
which had directed the DOL to consider within 180 days whether
to issue a notice of proposed rulemaking, other guidance, or
both, that would clarify when a group or association of
employers or other appropriate business or organization could
be an ``employer'' within the meaning of ERISA section 3(5).
The final regulation focuses its scope on MEPs sponsored by
either a group or association of employers or by a PEO and is
limited to defined contribution plans as defined in section
3(34) of ERISA. The final regulation does not deal with pooled
employer plans.
---------------------------------------------------------------------------
\311\ 84 FR 37504, July 31, 2019. The DOL noted in the preamble to
the final regulations that these final regulations differ significantly
from the legislative proposals introduced in Congress, including H.R.
1994, ``Setting Every Community Up for Retirement Enhancement Act of
2019 (``SECURE Act'')'' which was passed unanimously by the House of
Representatives on May 23, 2019 (and which subsequently was enacted
into law as part of Pub. L. No. 116-94, Further Consolidated
Appropriations Act, 2020 on December 20, 2019) which ``makes
comprehensive changes to ERISA and the Code to facilitate open MEPs.''
DOL indicates that the final rule is significantly more limited in
scope because it relies solely on the Department's authority to
promulgate regulations administering title I of ERISA, and unlike
Congress, DOL does not have the authority to make statutory changes to
ERISA and other areas of law that govern retirement savings such as the
Code.
\312\ See footnote 23, supra. The Executive Order was issued on
August 31, 2018.
---------------------------------------------------------------------------
The final regulation recognizes that a bona fide group or
association of employers may establish a MEP if such group or
association meets the following requirements: (1) the primary
purpose of the group or association may be to provide MEP
coverage to its employer members and their employees, but there
must also be at least one substantial business purpose
unrelated to offering and providing MEP coverage or other
employee benefits to the employer members and their employees;
(2) each employer member of the group or association is a
person acting directly as an employer of at least one employee
who is a participant covered under the plan; (3) the group or
association has a formal organizational structure with a
governing body and has by-laws or other similar indications of
formality; (4) the functions and activities of the group or
association are controlled by its employer members, and the
group's or association's employer members that participate in
the plan control (in form and in substance) the plan; (5) the
employer members have a commonality of interest; (6) plan
participation is only permitted to employees and former
employees of employer members, and their beneficiaries; and (7)
the group or association is not a bank or trust company,
insurance issuer, broker-dealer or other similar financial
services firm. Under the final regulation, a bona fide PEO may
establish a MEP. Certain ``working owners'' may also establish
a MEP.
Form 5500 reporting
Under the Code, an employer maintaining a qualified
retirement plan generally is required to file an annual return
containing information required under regulations with respect
to the qualification, financial condition, and operation of the
plan.\313\ ERISA requires the plan administrator of certain
pension and welfare benefit plans to file annual reports
disclosing certain information to the DOL.\314\ These filing
requirements are met by filing a completed Form 5500, Annual
Return/Report of Employee Benefit Plan. Forms 5500 are filed
with DOL, and information from Forms 5500 is shared with the
IRS.\315\ In the case of a multiple employer plan, the annual
report must include a list of participating employers and a
good faith estimate of the percentage of total contributions
made by the participating employers during the plan year.
Certain small plans, that is, plans covering fewer than 100
participants, are eligible for simplified reporting
requirements, which are met by filing Form 5500-SF, Short Form
Annual Return/Report of Small Employee Benefit Plan.\316\
---------------------------------------------------------------------------
\313\ Sec. 6058. In addition, under section 6059, the plan
administrator of a defined benefit plan subject to the minimum funding
requirements is required to file an annual actuarial report. Under
section 414(g) and ERISA section 3(16), plan administrator generally
means the person specifically so designated by the terms of the plan
document. In the absence of a designation, the plan administrator
generally is (1) in the case of a plan maintained by a single employer,
the employer, (2) in the case of a plan maintained by an employee
organization, the employee organization, or (3) in the case of a plan
maintained by two or more employers or jointly by one or more employers
and one or more employee organizations, the association, committee,
joint board of trustees, or other similar group of representatives of
the parties that maintain the plan. Under ERISA, the party described in
(1), (2), or (3) is referred to as the ``plan sponsor.''
\314\ ERISA secs. 103 and 104. Under ERISA section 4065, the plan
administrator of certain defined benefit plans must provide information
to the PBGC.
\315\ Information is shared also with the PBGC, as applicable. Form
5500 filings are also publicly released in accordance with section
6104(b) and Treas. Reg. sec. 301.6104(b)-1 and ERISA sections 104(a)(1)
and 106(a).
\316\ ERISA sec. 104(b).
---------------------------------------------------------------------------
Explanation of Provision
In general
The provision amends the Code rules relating to multiple
employer plans to provide relief from the ``one-bad-apple''
rule for certain plans (referred to herein as ``covered
multiple employer plans''). A covered multiple employer plan is
a multiple employer qualified defined contribution plan \317\
or a plan that consists of IRAs (referred to herein as an ``IRA
plan''), including under an IRA trust,\318\ that either (1) is
maintained by employers which have a common interest other than
having adopted the plan, or (2) in the case of a plan not
described in (1), has a pooled plan provider (referred to
herein as a ``pooled provider plan''), and which meets certain
other requirements as described below.
---------------------------------------------------------------------------
\317\ To which section 413(c) applies.
\318\ Under the provision, in applying the exclusive benefit
requirement under section 408(c) to an IRA plan with an IRA trust
covering employees of unrelated employers, all employees covered by the
plan are treated as employees of all employers participating in the
plan.
---------------------------------------------------------------------------
The provision outlines various requirements that apply to a
pooled provider plan under the Code. It also outlines various
requirements that apply under ERISA to a qualified defined
contribution plan that is established or maintained for the
purpose of providing benefits to the employees of two or more
employers and that meets certain requirements to be a ``pooled
employer plan,'' and provides that a pooled employer plan is
treated for purposes of ERISA as a single plan that is a
multiple employer plan.\319\
---------------------------------------------------------------------------
\319\ With respect to plans described under section 413(e)(1)(A),
other than providing relief from the ``one-bad-apple'' rule if certain
requirements are met and adding certain reporting requirements, the
provision generally does not change present law and related guidance
applicable to such multiple employer plans under the Code or ERISA.
---------------------------------------------------------------------------
Tax-favored status under the Code
In general
The provision provides relief from disqualification (or
other loss of tax-favored status) of the entire plan merely
because one or more participating employers fail to take
actions required with respect to the plan (that is, relief from
the ``one-bad-apple'' rule).
Such relief under the provision does not apply to a plan
unless the terms of the plan provide that, in the case of any
employer in the plan failing to take required actions (referred
to herein as a ``noncompliant employer''):
Plan assets attributable to employees of the
noncompliant employer (or beneficiaries of such
employees) will be transferred to a plan maintained
only by that employer (or its successor), to a tax-
favored retirement plan for each individual whose
account is transferred,\320\ or to any other
arrangement that the Secretary determines is
appropriate, unless the Secretary determines it is in
the best interests of the employees of the noncompliant
employer (and beneficiaries of such employees) to
retain the assets in the plan, and
---------------------------------------------------------------------------
\320\ For this purpose, a tax-favored retirement plan means an
eligible retirement plan as defined in section 402(c)(8)(B), that is,
an IRA, a qualified retirement plan, a tax-deferred annuity plan under
section 403(b), or an eligible deferred compensation plan of a State or
local governmental employer under section 457(b).
---------------------------------------------------------------------------
The noncompliant employer (and not the plan
with respect to which the failure occurred or any other
employer in the plan) is, except to the extent provided
by the Secretary, liable for any plan liabilities
attributable to employees of the noncompliant employer
(or beneficiaries of such employees).
In addition, in the case of a pooled provider plan, if the
pooled plan provider does not perform substantially all the
administrative duties required of the provider (as described
below) for any plan year, the Secretary may provide that the
determination as to whether the plan meets the Code
requirements for tax-favored treatment will be made in the same
manner as would be made without regard to the relief under the
provision.
Pooled plan provider
Under the provision, ``pooled plan provider'' with respect
to a plan means a person who:
Is designated by the terms of the plan as a
named fiduciary under ERISA,\321\ as the plan
administrator, and as the person responsible to perform
all administrative duties (including conducting proper
testing with respect to the plan and the employees of
each employer in the plan) that are reasonably
necessary to ensure that the plan meets the Code
requirements for tax-favored treatment and the
requirements of ERISA and to ensure that each employer
in the plan takes actions as the Secretary or the
pooled plan provider determines necessary for the plan
to meet Code and ERISA requirements, including
providing to the pooled plan provider any disclosures
or other information that the Secretary may require or
that the pooled plan provider otherwise determines are
necessary to administer the plan or to allow the plan
to meet Code and ERISA requirements,
---------------------------------------------------------------------------
\321\ Within the meaning of ERISA section 402(a)(2).
---------------------------------------------------------------------------
Registers with the Secretary as a pooled
plan provider and provides any other information that
the Secretary may require, before beginning operations
as a pooled plan provider,
Acknowledges in writing its status as a
named fiduciary under ERISA and as the plan
administrator, and
Is responsible for ensuring that all persons
who handle plan assets or are plan fiduciaries are
bonded in accordance with ERISA requirements.
The provision specifies that the Secretary may perform
audits, examinations, and investigations of pooled plan
providers as may be necessary to enforce and carry out the
purposes of the provision.
In addition, the provision provides that in determining
whether a person meets the requirements to be a pooled plan
provider with respect to any plan, all persons who perform
services for the plan and who are treated as a single employer
\322\ are treated as one person.
---------------------------------------------------------------------------
\322\ Under subsection (b), (c), (m), or (o) of section 414.
---------------------------------------------------------------------------
Plan sponsor
The provision also provides that, except with respect to
the administrative duties (as a named fiduciary, as the plan
administrator, and as the person responsible for the
performance of all administrative duties) for which the pooled
plan provider is responsible as described above, each employer
in a plan which has a pooled plan provider will be treated as
the plan sponsor with respect to the portion of the plan
attributable to that employer's employees (or beneficiaries of
such employees).
Guidance
The provision directs the Secretary to issue guidance that
the Secretary determines appropriate to carry out the
provision, including guidance (1) to identify the
administrative duties and other actions required to be
performed by a pooled plan provider, (2) that describes the
procedures to be taken to terminate a plan that fails to meet
the requirements to be a covered multiple employer plan,
including the proper treatment of, and actions needed to be
taken by, any employer in the plan and plan assets and
liabilities attributable to employees of that employer (or
beneficiaries of such employees), and (3) to identify
appropriate cases in which corrective action will apply with
respect to noncompliant employers. For purposes of (3), the
Secretary is to take into account whether the failure of an
employer or pooled plan provider to provide any disclosures or
other information, or to take any other action, necessary to
administer a plan or to allow a plan to meet the Code
requirements for tax-favored treatment, has continued over a
period of time that demonstrates a lack of commitment to
compliance. An employer or pooled plan provider is not treated
as failing to meet a requirement of guidance issued by the
Secretary if, before the issuance of such guidance, the
employer or pooled plan provider complies in good faith with a
reasonable interpretation of the provisions to which the
guidance relates.
The provision also directs the Secretary to publish model
plan language that meets the Code and ERISA requirements under
the provision and that may be adopted in order to be treated as
a pooled employer plan under ERISA.
Pooled employer plans under ERISA
In general
As described above, under the provision, a pooled employer
plan is treated for purposes of ERISA as a single plan that is
a multiple employer plan. A ``pooled employer plan'' is defined
as a plan (1) that is an individual account plan established or
maintained for the purpose of providing benefits to the
employees of two or more employers, (2) that is a qualified
retirement plan or an IRA plan, and (3) the terms of which meet
the requirements described below. A pooled employer plan does
not include a plan maintained by employers that have a common
interest other than having adopted the plan.
In order for a plan to be a pooled employer plan, the plan
terms must:
Designate a pooled plan provider and provide
that the pooled plan provider is a named fiduciary of
the plan,
Designate one or more trustees (other than
an employer in the plan) \323\ to be responsible for
collecting contributions to, and holding the assets of,
the plan, and require the trustees to implement written
contribution collection procedures that are reasonable,
diligent, and systematic,
---------------------------------------------------------------------------
\323\ Any trustee must meet the requirements under the Code to be
an IRA trustee.
---------------------------------------------------------------------------
Provide that each employer in the plan
retains fiduciary responsibility for the selection and
monitoring, in accordance with ERISA fiduciary
requirements, of the person designated as the pooled
plan provider and any other person who is also
designated as a named fiduciary of the plan, and, to
the extent not otherwise delegated to another fiduciary
by the pooled plan provider (and subject to the ERISA
rules relating to self-directed investments), the
investment and management of the portion of the plan's
assets attributable to the employees of that employer
(or beneficiaries of such employees) in the plan,
Provide that employers in the plan, and
participants and beneficiaries, are not subject to
unreasonable restrictions, fees, or penalties with
regard to ceasing participation, receipt of
distributions, or otherwise transferring assets of the
plan in accordance with applicable rules for plan
mergers and transfers,
Require the pooled plan provider to provide
to employers in the plan any disclosures or other
information that the Secretary of Labor may require,
including any disclosures or other information to
facilitate the selection or any monitoring of the
pooled plan provider by employers in the plan, and
require each employer in the plan to take any actions
that the Secretary of Labor or pooled plan provider
determines are necessary to administer the plan or to
allow for the plan to meet the ERISA and Code
requirements applicable to the plan, including
providing any disclosures or other information that the
Secretary of Labor may require or that the pooled plan
provider otherwise determines are necessary to
administer the plan or to allow the plan to meet such
ERISA and Code requirements, and
Provide that any disclosure or other
information required to be provided as described above
may be provided in electronic form \324\ and will be
designed to ensure only reasonable costs are imposed on
pooled plan providers and employers in the plan.
---------------------------------------------------------------------------
\324\ The provision does not change existing law and guidance with
respect to furnishing documents through electronic media to
participants and beneficiaries.
---------------------------------------------------------------------------
In the case of a fiduciary of a pooled employer plan or a
person handling assets of a pooled employer plan, the maximum
bond amount under ERISA is $1 million.
The term ``pooled employer plan'' does not include a
multiemployer plan. Such term also does not include a plan
established before the date of enactment of the SECURE Act
unless the plan administrator elects to have the plan treated
as a pooled employer plan and the plan meets the ERISA
requirements applicable to a pooled employer plan established
on or after such date.
Pooled plan provider
The definition of pooled plan provider for ERISA purposes
is generally similar to the definition under the Code portion
of the provision, described above.\325\ The ERISA definition
requires a person to register as a pooled plan provider with
the Secretary of Labor and provide any other information that
the Secretary of Labor may require before beginning operations
as a pooled plan provider.
---------------------------------------------------------------------------
\325\ In determining whether a person meets the requirements to be
a pooled plan provider with respect to a plan, all persons who perform
services for the plan and who are treated as a single employer under
subsection (b), (c), (m), or (o) of section 414 are treated as one
person.
---------------------------------------------------------------------------
The provision specifies that the Secretary of Labor may
perform audits, examinations, and investigations of pooled plan
providers as may be necessary to enforce and carry out the
purposes of the provision.
Plan sponsor
The provision also provides that except with respect to the
administrative duties (as a named fiduciary, as the plan
administrator, and as the person responsible for the
performance of all administrative duties) for which the pooled
plan provider is responsible as described above, each employer
in a pooled employer plan will be treated as the plan sponsor
with respect to the portion of the plan attributable to that
employer's employees (or beneficiaries of such employees).
Guidance
The provision directs the Secretary of Labor to issue
guidance that such Secretary determines appropriate to carry
out the provision, including guidance (1) to identify the
administrative duties and other actions required to be
performed by a pooled plan provider, and (2) that requires, in
appropriate cases of a noncompliant employer, plan assets
attributable to employees of the noncompliant employer (or
beneficiaries of such employees) to be transferred to a plan
maintained only by that employer (or its successor), to a tax-
favored retirement plan for each individual whose account is
transferred, or to any other arrangement that the Secretary of
Labor determines in the guidance is appropriate,\326\ and the
noncompliant employer (and not the plan with respect to which
the failure occurred or any other employer in the plan) to be
liable for any plan liabilities attributable to employees of
the noncompliant employer (or beneficiaries of such employees),
except to the extent provided in the guidance. For purposes of
(2), the Secretary of Labor is to take into account whether the
failure of an employer or pooled plan provider to provide any
disclosures or other information, or to take any other action,
necessary to administer a plan or to allow a plan to meet the
requirements of ERISA and the Code requirements for tax-favored
treatment, has continued over a period of time that
demonstrates a lack of commitment to compliance. An employer or
pooled plan provider is not treated as failing to meet a
requirement of guidance issued by the Secretary if, before the
issuance of such guidance, the employer or pooled plan provider
complies in good faith with a reasonable interpretation of the
provisions to which the guidance relates.
---------------------------------------------------------------------------
\326\ The Secretary of Labor may waive the requirement to transfer
assets to another plan or arrangement in appropriate circumstances if
the Secretary of Labor determines it is in the best interests of the
employees of the noncompliant employer (and the beneficiaries of such
employees) to retain the assets in the pooled employer plan.
---------------------------------------------------------------------------
Form 5500 reporting
Under the provision, the Form 5500 filing for a multiple
employer plan (including a pooled employer plan) must include a
list of the employers in the plan, a good faith estimate of the
percentage of total contributions made by such employers during
the plan year, and the aggregate account balances attributable
to each employer in the plan (determined as the sum of the
account balances of the employees of each employer (and the
beneficiaries of such employees)); and with respect to a pooled
employer plan, the identifying information for the person
designated under the terms of the plan as the pooled plan
provider. In addition, the provision adds to the list of
pension plans to which simplified reporting may be prescribed
by the Secretary of Labor, a multiple employer plan that covers
fewer than 1,000 participants, but only if no single employer
in the plan has 100 or more participants covered by the plan.
Effective Date
The provision applies to plan years beginning after
December 31, 2020, including reporting for purposes of Forms
5500 for plan years beginning after December 31, 2020.
Nothing in the Code amendments made by the provision is to
be construed as limiting the authority of the Secretary (or the
Secretary's delegate) to provide for the proper treatment of a
failure to meet any Code requirement with respect to any
employer (and its employees) in a multiple employer plan.
2. Increase in 10 percent cap for automatic enrollment safe harbor
after first plan year (sec. 102 of the Act and sec. 401(k) of
the Code)
Present Law
Section 401(k) plans
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'').\327\ The maximum annual amount of elective deferrals
that can be made by an employee for a year is $19,000 (for
2019) \328\ or, if less, the employee's compensation.\329\ For
an employee who attains age 50 by the end of the year, the
dollar limit on elective deferrals is increased by $6,000 (for
2019) \330\ (called catch-up contributions).\331\ An employee's
elective deferrals must be fully vested. A section 401(k) plan
may also provide for employer matching and nonelective
contributions.
---------------------------------------------------------------------------
\327\ Elective deferrals generally are made on a pretax basis and
distributions attributable to elective deferrals are includible in
income. However, a section 401(k) plan is permitted to include a
``qualified Roth contribution program'' that permits a participant to
elect to have all or a portion of the participant's elective deferrals
under the plan treated as after-tax Roth contributions. Certain
distributions from a designated Roth account are excluded from income,
even though they include earnings not previously taxed.
\328\ For 2020 and 2021, this amount is $19,500.
\329\ Sec. 402(g).
\330\ For 2020 and 2021, this amount is $6,500.
\331\ Sec. 414(v).
---------------------------------------------------------------------------
Automatic enrollment
A section 401(k) plan must provide each eligible employee
with an effective opportunity to make or change an election to
make elective deferrals at least once each plan year.\332\
Whether an employee has an effective opportunity is determined
based on all the relevant facts and circumstances, including
the adequacy of notice of the availability of the election, the
period of time during which an election may be made, and any
other conditions on elections.
---------------------------------------------------------------------------
\332\ Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
---------------------------------------------------------------------------
Section 401(k) plans are generally designed so that an
employee will receive cash compensation unless the employee
affirmatively elects to make elective deferrals to the section
401(k) plan. Alternatively, a plan may provide that elective
deferrals are made at a specified rate (referred to as a
``default rate'') when an employee becomes eligible to
participate unless the employee elects otherwise (that is,
affirmatively elects not to make contributions or to make
contributions at a different rate). This plan design is
referred to as automatic enrollment.
Nondiscrimination test and automatic enrollment safe harbor
An annual nondiscrimination test, called the actual
deferral percentage test (the ``ADP'' test) applies to elective
deferrals under a section 401(k) plan.\333\ The ADP test
generally compares the average rate of deferral for highly
compensated employees to the average rate of deferral for
nonhighly compensated employees and requires that the average
deferral rate for highly compensated employees not exceed the
average rate for nonhighly compensated employees by more than
specified amounts. If a plan fails to satisfy the ADP test for
a plan year based on the deferral elections of highly
compensated employees, the plan is permitted to distribute
deferrals to highly compensated employees (``excess
deferrals'') in a sufficient amount to correct the failure. The
distribution of the excess deferrals must be made by the close
of the following plan year.\334\
---------------------------------------------------------------------------
\333\ Sec. 401(k)(3).
\334\ Sec. 401(k)(8).
---------------------------------------------------------------------------
The ADP test is deemed to be satisfied if a section 401(k)
plan includes certain minimum matching or nonelective
contributions under either of two plan designs (a ``401(k) safe
harbor plan''), as well as certain required rights and features
and satisfies a notice requirement.\335\ One type of 401(k)
safe harbor includes automatic enrollment.
---------------------------------------------------------------------------
\335\ Sec. 401(k)(12) and (13). If certain additional requirements
are met, matching contributions under a section 401(k) safe harbor plan
may also satisfy a nondiscrimination test applicable under section
401(m).
---------------------------------------------------------------------------
An automatic enrollment safe harbor plan must provide that,
unless an employee elects otherwise, the employee is treated as
electing to make elective deferrals at a default rate equal to
a percentage of compensation as stated in the plan and at least
(1) three percent of compensation through the end of the first
plan year that begins after the first deemed election applies
to the participant, (2) four percent during the second plan
year, (3) five percent during the third plan year, and (4) six
percent during the fourth plan year and thereafter. Although an
automatic enrollment safe harbor plan generally may provide for
default rates higher than these minimum rates, the default rate
cannot exceed 10 percent for any year.
Explanation of Provision
Under the provision, the 10-percent limitation on the
default rates under an automatic enrollment safe harbor plan is
increased to 15 percent after the first plan year that begins
after an employee's deemed election applies.
Effective Date
The provision applies to plan years beginning after
December 31, 2019.
3. Rules relating to election of safe harbor 401(k) status (sec. 103 of
the Act and sec. 401(k) of the Code)
Present Law
Section 401(k) plans
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'').\336\ The maximum annual amount of elective deferrals
that can be made by an employee for a year is $19,000 (for
2019) \337\ or, if less, the employee's compensation.\338\ For
an employee who attains age 50 by the end of the year, the
dollar limit on elective deferrals is increased by $6,000 (for
2019) \339\ (called catch-up contributions).\340\ An employee's
elective deferrals must be fully vested. A section 401(k) plan
may also provide for employer matching and nonelective
contributions.
---------------------------------------------------------------------------
\336\ Elective deferrals generally are made on a pretax basis and
distributions attributable to elective deferrals are includible in
income. However, a section 401(k) plan is permitted to include a
``qualified Roth contribution program'' that permits a participant to
elect to have all or a portion of the participant's elective deferrals
under the plan treated as after-tax Roth contributions. Certain
distributions from a designated Roth account are excluded from income,
even though they include earnings not previously taxed.
\337\ For 2020 and 2021, this amount is $19,500.
\338\ Sec. 402(g).
\339\ For 2020 and 2021, this amount is $6,500.
\340\ Sec. 414(v).
---------------------------------------------------------------------------
Automatic enrollment
A section 401(k) plan must provide each eligible employee
with an effective opportunity to make or change an election to
make elective deferrals at least once each plan year.\341\
Whether an employee has an effective opportunity is determined
based on all the relevant facts and circumstances, including
the adequacy of notice of the availability of the election, the
period of time during which an election may be made, and any
other conditions on elections.
---------------------------------------------------------------------------
\341\ Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
---------------------------------------------------------------------------
Section 401(k) plans are generally designed so that an
employee will receive cash compensation unless the employee
affirmatively elects to make elective deferrals to the section
401(k) plan. Alternatively, a plan may provide that elective
deferrals are made at a specified rate when an employee becomes
eligible to participate unless the employee elects otherwise
(that is, affirmatively elects not to make contributions or to
make contributions at a different rate). This plan design is
referred to as automatic enrollment.
Nondiscrimination test
General rule and design-based safe harbors
An annual nondiscrimination test, called the actual
deferral percentage test (the ``ADP'' test) applies to elective
deferrals under a section 401(k) plan.\342\ The ADP test
generally compares the average rate of deferral for highly
compensated employees to the average rate of deferral for
nonhighly compensated employees and requires that the average
deferral rate for highly compensated employees not exceed the
average rate for nonhighly compensated employees by more than
certain specified amounts. If a plan fails to satisfy the ADP
test for a plan year based on the deferral elections of highly
compensated employees, the plan is permitted to distribute
deferrals to highly compensated employees (``excess
deferrals'') in a sufficient amount to correct the failure. The
distribution of the excess deferrals must be made by the close
of the following plan year.\343\
---------------------------------------------------------------------------
\342\ Sec. 401(k)(3).
\343\ Sec. 401(k)(8).
---------------------------------------------------------------------------
The ADP test is deemed to be satisfied if a section 401(k)
plan includes certain minimum matching or nonelective
contributions under either of two plan designs (``401(k) safe
harbor plan''), described below, as well as certain required
rights and features and satisfies a notice requirement.\344\
---------------------------------------------------------------------------
\344\ Sec. 401(k)(12) and (13). If certain additional requirements
are met, matching contributions under 401(k) safe harbor plan may also
satisfy a nondiscrimination test applicable under section 401(m).
---------------------------------------------------------------------------
Safe harbor contributions
Under one type of 401(k) safe harbor plan (``basic 401(k)
safe harbor plan''), the plan either (1) satisfies a matching
contribution requirement (``matching contribution basic 401(k)
safe harbor plan'') or (2) provides for a nonelective
contribution to a defined contribution plan of at least three
percent of an employee's compensation on behalf of each
nonhighly compensated employee who is eligible to participate
in the plan (``nonelective basic 401(k) safe harbor plan'').
The matching contribution requirement under the matching
contribution basic 401(k) safe harbor requires a matching
contribution equal to at least 100 percent of elective
contributions of the employee for contributions not in excess
of three percent of compensation, and 50 percent of elective
contributions for contributions that exceed three percent of
compensation but do not exceed five percent, for a total
matching contribution of up to four percent of compensation.
The required matching contributions and the three percent
nonelective contribution under the basic 401(k) safe harbor
must be immediately nonforfeitable (that is, 100 percent
vested) when made.
Another safe harbor applies for a section 401(k) plan that
includes automatic enrollment (``automatic enrollment 401(k)
safe harbor''). Under an automatic enrollment 401(k) safe
harbor, unless an employee elects otherwise, the employee is
treated as electing to make elective deferrals equal to a
percentage of compensation as stated in the plan, not in excess
of 10 percent and at least (1) three percent of compensation
for the first year the deemed election applies to the
participant, (2) four percent during the second year, (3) five
percent during the third year, and (4) six percent during the
fourth year and thereafter.\345\ Under the automatic enrollment
401(k) safe harbor, the matching contribution requirement is
100 percent of elective contributions of the employee for
contributions not in excess of one percent of compensation, and
50 percent of elective contributions for contributions that
exceed one percent of compensation but do not exceed six
percent, for a total matching contribution of up to 3.5 percent
of compensation (``matching contribution automatic enrollment
401(k) safe harbor''). The rate of nonelective contribution
under the automatic enrollment 401(k) safe harbor plan is three
percent, as under the basic 401(k) safe harbor (``nonelective
contribution automatic enrollment 401(k) safe harbor'').
However, under the automatic enrollment 401(k) safe harbors,
the matching and nonelective contributions are allowed to
become 100 percent vested only after two years of service
(rather than being required to be immediately vested when
made).
---------------------------------------------------------------------------
\345\ These automatic increases in default contribution rates are
required for plans using the safe harbor. Rev. Rul. 2009-30, 2009-39
I.R.B. 391, provides guidance for including automatic increases in
other plans using automatic enrollment, including under a plan that
includes an eligible automatic contribution arrangement.
---------------------------------------------------------------------------
Safe harbor notice
The notice requirement for a 401(k) safe harbor plan is
satisfied if each employee eligible to participate is given,
within a reasonable period before any year, written notice of
the employee's rights and obligations under the arrangement and
the notice meets certain content and timing requirements
(``safe harbor notice''). To meet the content requirements, a
safe harbor notice must be sufficiently accurate and
comprehensive to inform an employee of the employee's rights
and obligations under the plan, and be written in a manner
calculated to be understood by the average employee eligible to
participate in the plan. A safe harbor notice must provide
certain information, including the plan's safe harbor
contributions, any other plan contributions, the type and
amount of compensation that may be deferred under the plan, how
to make cash or deferred elections, the plan's withdrawal and
vesting provisions, and specified contact information. In
addition, a safe harbor notice for an automatic enrollment
401(k) safe harbor must describe certain additional
information, including the deemed deferral elections under the
plan if the employee does not make an affirmative election and
how contributions will be invested.
Delay in adopting nonelective 401(k) safe harbor
Generally, the plan provisions for the requirements that
must be satisfied to be a 401(k) safe harbor plan must be
adopted before the first day of the plan year and remain in
effect for an entire 12-month plan year. However, in the case
of a nonelective 401(k) safe harbor plan (but not the matching
contribution 401(k) safe harbor), a plan may be amended after
the first day of the plan year but no later than 30 days before
the end of the plan year to adopt the safe harbor plan
provisions including providing the 3 percent of compensation
nonelective contribution. The plan must also provide a
contingent and follow-up notice. The contingent notice must be
provided before the beginning of the plan year and must specify
that the plan may be amended to include the safe harbor
nonelective contribution and that, if it is so amended, a
follow-up notice will be provided. If the plan is amended, the
follow-up notice must be provided no later than 30 days before
the end of the plan year stating that the safe harbor
nonelective contribution will be provided.
Explanation of Provision
In general
The provision makes a number of changes to the rules for
the nonelective contribution 401(k) safe harbor.
Elimination of notice requirement
The provision eliminates the safe harbor notice requirement
with respect to nonelective 401(k) safe harbor plans. However,
the general rule under present law requiring a section 401(k)
plan to provide each eligible employee with an effective
opportunity to make or change an election to make elective
deferrals at least once each plan year still applies. As
described above, relevant factors used in determining if this
requirement is satisfied include the adequacy of notice of the
availability of the election and the period of time during
which an election may be made.
Delay in adopting provisions for nonelective 401(k) safe harbor
Under the provision, a plan can be amended to become a
nonelective 401(k) safe harbor plan for a plan year (that is,
amended to provide the required nonelective contributions and
thereby satisfy the safe harbor requirements) at any time
before the 30th day before the close of the plan year.
Further, the provision allows a plan to be amended after
the 30th day before the close of the plan year to become a
nonelective contribution 401(k) safe harbor plan for the plan
year if (1) the plan is amended to provide for a nonelective
contribution of at least four percent of compensation (rather
than at least three percent) for all eligible employees for
that plan year and (2) the plan is amended no later than the
last day for distributing excess contributions for the plan
year (generally, by the close of following plan year).
Effective Date
The provision applies to plan years beginning after
December 31, 2019.
4. Increase in credit limitation for small employer pension plan
startup costs (sec. 104 of the Act and sec. 45E of the Code)
Present Law
A nonrefundable income tax credit is available for
qualified startup costs of an eligible small employer that
adopts a new qualified retirement plan, SIMPLE IRA plan, or SEP
(referred to as an ``eligible employer plan''), provided that
the plan covers at least one nonhighly compensated
employee.\346\ Qualified startup costs are expenses connected
with the establishment or administration of the plan or
retirement-related education for employees with respect to the
plan. The credit is the lesser of (1) a flat dollar amount of
$500 per year or (2) 50 percent of the qualified startup costs.
The credit applies for up to three years beginning with the
year the plan is first effective, or, at the election of the
employer, with the year preceding the first plan year.
---------------------------------------------------------------------------
\346\ A nonhighly compensated employee is an employee who is not a
highly compensated employee as defined under section 414(q).
---------------------------------------------------------------------------
An eligible employer is an employer that, for the preceding
year, had no more than 100 employees, each with compensation of
$5,000 or more. In addition, the employer must not have had a
plan covering substantially the same employees as the new plan
during the three years preceding the first year for which the
credit would apply. Members of controlled groups and affiliated
service groups are treated as a single employer for purposes of
these requirements.\347\ All eligible employer plans of an
employer are treated as a single plan.
---------------------------------------------------------------------------
\347\ Secs. 52(a) or (b) and 414(m) or (o).
---------------------------------------------------------------------------
No deduction is allowed for the portion of qualified
startup costs paid or incurred for the taxable year equal to
the amount of the credit.
Explanation of Provision
The provision changes the calculation of the flat dollar
amount limit on the credit. The flat dollar amount for a
taxable year is the greater of (1) $500 or (2) the lesser of
(a) $250 multiplied by the number of nonhighly compensated
employees of the eligible employer who are eligible to
participate in the plan or (b) $5,000. As under present law,
the credit applies for up to three years.
Effective Date
The provision applies to taxable years beginning after
December 31, 2019.
5. Small employer automatic enrollment credit (sec. 105 of the Act and
new sec. 45T of the Code)
Present Law
Small employer startup credit
A nonrefundable income tax credit is available for
qualified startup costs of an eligible small employer that
adopts a new qualified retirement plan, SIMPLE IRA plan or SEP
(referred to as an eligible employer plan), provided that the
plan covers at least one nonhighly compensated employee.\348\
Qualified startup costs are expenses connected with the
establishment or administration of the plan or retirement-
related education for employees with respect to the plan. The
credit is the lesser of (1) a flat dollar amount of $500 per
year or (2) 50 percent of the qualified startup costs. The
credit applies for up to three years beginning with the year
the plan is first effective, or, at the election of the
employer, with the year preceding the first plan year.
---------------------------------------------------------------------------
\348\ Sec. 45E. A nonhighly compensated employee is an employee who
is not a highly compensated employee as defined under section 414(q).
---------------------------------------------------------------------------
An eligible employer is an employer that, for the preceding
year, had no more than 100 employees with compensation of
$5,000 or more. In addition, the employer must not have had a
plan covering substantially the same employees as the new plan
during the three years preceding the first year for which the
credit would apply. Members of controlled groups and affiliated
service groups are treated as a single employer for purposes of
these requirements.\349\ All eligible employer plans of an
employer are treated as a single plan.
---------------------------------------------------------------------------
\349\ Secs. 52(a) or (b) and 414(m) or (o).
---------------------------------------------------------------------------
No deduction is allowed for the portion of qualified
startup costs paid or incurred for the taxable year equal to
the amount of the credit.
Automatic enrollment
A qualified defined contribution plan may include a
qualified cash or deferred arrangement under which employees
may elect to have plan contributions (``elective deferrals'')
made rather than receive cash compensation (commonly called a
``section 401(k) plan''). A SIMPLE IRA plan is an employer-
sponsored retirement plan funded with individual retirement
arrangements (``IRAs'') that also allows employees to make
elective deferrals.\350\ Section 401(k) plans and SIMPLE IRA
plans may be designed so that the employee will receive cash
compensation unless the employee affirmatively elects to make
elective deferrals to the plan. Alternatively, a plan may
provide that elective deferrals are made at a specified rate
(when the employee becomes eligible to participate) unless the
employee elects otherwise (i.e., affirmatively elects not to
make contributions or to make contributions at a different
rate). This alternative plan design is referred to as automatic
enrollment.
---------------------------------------------------------------------------
\350\ Sec. 408(p).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, an eligible employer is allowed a
credit of $500 per year for up to three years for startup costs
for new section 401(k) plans and SIMPLE IRA plans that include
automatic enrollment, in addition to the plan startup credit
allowed under present law. An eligible employer is also allowed
a credit of $500 per year for up to three years if it converts
an existing plan to an automatic enrollment design.
Effective Date
The provision applies to taxable years beginning after
December 31, 2019.
6. Certain taxable non-tuition fellowship and stipend payments treated
as compensation for IRA purposes (sec. 106 of the Act and sec.
219 of the Code)
Present Law
There are two general types of individual retirement
arrangements (``IRAs''): traditional IRAs and Roth IRAs.\351\
The total amount that an individual may contribute to one or
more IRAs for a year is generally limited to the lesser of: (1)
a dollar amount ($6,000 for 2019) \352\; and (2) the amount of
the individual's compensation that is includible in gross
income for the year.\353\ In the case of an individual who has
attained age 50 by the end of the year, the dollar amount is
increased by $1,000. In the case of a married couple,
contributions can be made up to the dollar limit for each
spouse if the combined compensation of the spouses that is
includible in gross income is at least equal to the contributed
amount. An individual may make contributions to a traditional
IRA (up to the contribution limit) without regard to his or her
adjusted gross income.
---------------------------------------------------------------------------
\351\ Secs. 408 and 408A.
\352\ The limit in 2020 and 2021 is also $6,000.
\353\ Sec. 219(b)(2) and (5), as referenced in secs. 408(a)(1) and
(b)(2)(B) and 408A(c)(2). Under section 4973, IRA contributions in
excess of the applicable limit are generally subject to an excise tax
of six percent per year until withdrawn.
---------------------------------------------------------------------------
An individual may deduct his or her contributions to a
traditional IRA if neither the individual nor the individual's
spouse is an active participant in an employer-sponsored
retirement plan. If an individual or the individual's spouse is
an active participant in an employer-sponsored retirement plan,
the deduction is phased out for taxpayers with adjusted gross
income over certain levels.\354\
---------------------------------------------------------------------------
\354\ Sec. 219(g).
---------------------------------------------------------------------------
Individuals with adjusted gross income below certain levels
may make contributions to a Roth IRA (up to the contribution
limit).\355\ Contributions to a Roth IRA are not deductible.
---------------------------------------------------------------------------
\355\ Sec. 408A(c)(3).
---------------------------------------------------------------------------
As described above, an individual's IRA contributions
generally cannot exceed the amount of his or her compensation
that is includible in gross income. Subject to the rule for
spouses, described above, an individual who has no includible
compensation income generally is not eligible to make IRA
contributions, even if the individual has other income that is
includible in gross income.\356\
---------------------------------------------------------------------------
\356\ Under a special rule in section 219(f)(1), alimony that is
includible in gross income under section 71 is treated as compensation
for IRA contribution purposes.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, an amount includible in an
individual's income and paid to the individual to aid the
individual in the pursuit of graduate or postdoctoral study or
research (such as a fellowship, stipend, or similar amount) is
treated as compensation for purposes of IRA contributions.
Effective Date
The provision applies to taxable years beginning after
December 31, 2019.
7. Repeal of maximum age for traditional IRA contributions (sec. 107 of
the Act and sec. 219 of the Code)
Present Law
IRA rules
An individual may make deductible contributions to a
traditional IRA up to the IRA contribution limit if neither the
individual nor the individual's spouse is an active participant
in an employer-sponsored retirement plan.\357\ If an individual
(or the individual's spouse) is an active participant in an
employer-sponsored retirement plan, the deduction is phased out
for taxpayers with adjusted gross income (``AGI'') for the
taxable year over certain indexed levels.\358\ To the extent an
individual cannot or does not make deductible contributions to
a traditional IRA, the individual may make nondeductible
contributions to a traditional IRA (without regard to AGI
limits). Alternatively, subject to AGI limits, an individual
may make nondeductible contributions to a Roth IRA.\359\
---------------------------------------------------------------------------
\357\ Sec. 219.
\358\ Sec. 219(g).
\359\ Sec. 408(o). The annual contribution limit for IRAs is
coordinated so that the maximum amount that can be contributed to all
of an individual's IRAs (both traditional and Roth) for a taxable year
is the lesser of a certain dollar amount ($6,000 for 2019, 2020, and
2021) or the individual's compensation.
---------------------------------------------------------------------------
An individual who has attained age 70\1/2\ by the close of
a year is not permitted to make contributions to a traditional
IRA.\360\ This restriction does not apply to contributions to a
Roth IRA.\361\ In addition, employees over age 70\1/2\ are not
precluded from contributing to employer-sponsored plans.
---------------------------------------------------------------------------
\360\ Sec. 219(d)(1).
\361\ Sec. 408A(c)(4).
---------------------------------------------------------------------------
Qualified charitable distributions
Otherwise taxable IRA distributions from a traditional or
Roth IRA are excluded from gross income to the extent they are
qualified charitable distributions.\362\ The exclusion may not
exceed $100,000 per taxpayer per taxable year. Special rules
apply in determining the amount of an IRA distribution that is
otherwise taxable. The otherwise applicable rules regarding
taxation of IRA distributions and the deduction of charitable
contributions continue to apply to distributions from an IRA
that are not qualified charitable distributions.
---------------------------------------------------------------------------
\362\ Sec. 408(d)(8). The exclusion does not apply to distributions
from employer-sponsored retirement plans, including SIMPLE IRAs and
simplified employee pensions (``SEPs'').
---------------------------------------------------------------------------
A qualified charitable distribution is any distribution
from an IRA directly by the IRA trustee to an organization
described in section 170(b)(1)(A) (generally, public charities)
other than a supporting organization \363\ or a donor advised
fund.\364\ Distributions are eligible for the exclusion only if
made on or after the date the owner attains age 70\1/2\ and
only to the extent the distribution would be includible in
gross income (without regard to this provision).
---------------------------------------------------------------------------
\363\ Supporting organizations are described in sec. 509(a)(3).
\364\ Defined in section 4966(d)(2).
---------------------------------------------------------------------------
The exclusion applies only if a charitable contribution
deduction for the entire distribution otherwise would be
allowable (under present law), determined without regard to the
generally applicable percentage limitations. Distributions that
are excluded from gross income by reason of the qualified
charitable distribution provision are not taken into account in
determining the deduction for charitable contributions under
section 170.
Explanation of Provision
The provision repeals the prohibition on contributions to a
traditional IRA by an individual who has attained age 70\1/2\.
The provision also amends the rules relating to qualified
charitable distributions to coordinate with this repeal so that
an individual who receives a deduction for a contribution to a
traditional IRA for years ending on or after age 70\1/2\ is not
eligible to exclude such amount from income as a qualified
charitable distribution. Thus, under the provision, the amount
of qualified charitable distributions otherwise excludable from
an individual's gross income for a taxable year is reduced (but
not below zero) by the excess of (i) the aggregate amount of
deductions allowed to the taxpayer for contributions to a
traditional IRA for taxable years ending on or after the
individual attains age 70\1/2\, over (ii) the aggregate amount
of reductions for all taxable years preceding the current year.
Effective Date
The repeal of the prohibition on contributions to a
traditional IRA by an individual who has attained age 70\1/2\
applies to contributions made for taxable years beginning after
December 31, 2019. The coordinating provision related to
qualified charitable distributions is effective for
distributions made for taxable years beginning after December
31, 2019.
8. Qualified employer plans prohibited from making loans through credit
cards and other similar arrangements (sec. 108 of the Act and
sec. 72(p) of the Code)
Present Law
Employer-sponsored retirement plans may provide loans to
participants. Unless a retirement plan loan satisfies certain
requirements in both form and operation, the amount of the loan
is a deemed distribution from the retirement plan. There are
certain requirements that the loan must satisfy for a
retirement plan to be able to make a loan to a participant.
First, the loan amount must not exceed the lesser of 50 percent
of the participant's account balance or $50,000 (generally
taking into account outstanding balances of previous
loans).\365\ Second, the loan's terms must provide for a
repayment period of not more than five years (except for a loan
specifically designated to purchase a home). Third, level
amortization of loan payments must be made not less frequently
than quarterly.\366\ 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 a 10-percent early distribution 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 precludes any additional loan that would cause the limit
to be exceeded, the rules relating to loans do not limit the
number of loans an employee may obtain from a plan. Some
arrangements have developed under which an employee can access
plan loans through the use of a credit card or similar
mechanism.
---------------------------------------------------------------------------
\365\ There are certain exceptions to this rule for loans, for
example, individuals eligible to receive a coronavirus-related
distribution under section 2202 of the CARES Act (Pub. L. No. 116-136)
may take a loan during a specified period of time equal to the lesser
of the present value of the nonforfeitable accrued benefit of the
employee under the plan or $100,000 (and certain other rules apply to
such loans). Special rules for loans also apply for certain individuals
impacted by specified disasters. See, e.g., section 302 of the Taxpayer
Certainty and Disaster Tax Relief Act of 2020 (Division EE of Pub. L.
No. 116-260).
\366\ Sec. 72(p).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, a plan loan that is made through the
use of a credit card or similar arrangement does not meet the
requirements for loan treatment applicable to qualified
retirement plans and is therefore a deemed distribution.
Effective Date
The provision applies to loans made after the date of
enactment.
9. Portability of lifetime income options (sec. 109 of the Act and
secs. 401(a), 401(k), 403(b), and 457(d) of the Code)
Present Law
Distribution restrictions for accounts under employer-sponsored plans
Types of plans and contributions
Tax-favored employer-sponsored retirement plans under which
individual accounts are maintained for employees include
qualified defined contribution plans, tax-deferred annuity
plans (referred to as ``section 403(b)'' plans), and eligible
deferred compensation plans of State and local government
employers (referred to as ``governmental section 457(b)''
plans).\367\
---------------------------------------------------------------------------
\367\ Secs. 401(a), 403(a) and (b), and 457(b) and (e)(1)(A).
---------------------------------------------------------------------------
Contributions to a qualified defined contribution plan or
section 403(b) plan may include some or all of the following
types of contributions:
Pretax elective deferrals (that is, pretax
contributions made at the election of an employee in
lieu of receiving cash compensation),
After-tax designated Roth contributions
(that is, elective deferrals made on an after-tax basis
to a Roth account under the plan),
After-tax employee contributions (other than
designated Roth contributions),
Pretax employer matching contributions (that
is, employer contributions made as a result of an
employee's elective deferrals, designated Roth
contributions, or after-tax contributions), and
Pretax employer nonelective contributions
(that is, employer contributions made without regard to
whether an employee makes elective deferrals,
designated Roth contributions, or after-tax
contributions).
Contributions to a governmental section 457(b) plan
generally consist of pretax elective deferrals and, if provided
for under the plan, designated Roth contributions.
Restrictions on in-service distributions
The terms of an employer-sponsored retirement plan
generally determine when distributions are permitted. However,
in some cases, statutory restrictions on distributions may
apply.
Elective deferrals under a qualified defined contribution
plan are subject to statutory restrictions on distribution
before severance from employment, referred to as ``in-service''
distributions.\368\ In-service distributions of elective
deferrals (and related earnings) generally are permitted only
after attainment of age 59\1/2\ or termination of the plan. In-
service distributions of elective deferrals (but not related
earnings) are also permitted in the case of hardship.\369\
---------------------------------------------------------------------------
\368\ Sec. 401(k)(2)(B). Similar restrictions apply to certain
other contributions, such as employer matching or nonelective
contributions required under the nondiscrimination safe harbors under
section 401(k).
\369\ The Bipartisan Budget Act of 2018, Pub. L. No. 115-123
(``BBA''), amends certain hardship distribution rules applicable to
401(k) plans, effective for plan years beginning after December 31,
2018. One such amendment under BBA section 41114 permits earnings on
elective deferrals under a section 401(k) plan, as well as qualified
nonelective contributions and qualified matching contributions (and
attributable earnings), to be distributed on account of hardship.
---------------------------------------------------------------------------
Other distribution restrictions may apply to contributions
under certain types of qualified defined contribution plans. A
profit-sharing plan generally may allow an in-service
distribution of an amount contributed to the plan only after a
fixed number of years (not less than two).\370\ A money
purchase pension plan generally may not allow an in-service
distribution before attainment of age 59\1/2\ (or attainment of
normal retirement age under the plan if earlier) or termination
of the plan.\371\
---------------------------------------------------------------------------
\370\ Rev. Rul. 71-295, 1971-2 C.B. 184, and Treas. Reg. sec.
1.401-1(b)(1)(ii). Similar rules apply to a stock bonus plan. Treas.
Reg. sec. 1.401-1(b)(1)(iii).
\371\ Sec. 401(a)(36) as modified by sec. 104(b) of the Bipartisan
American Miners Act of 2019 (Division M of Pub. L. No. 116-94).
---------------------------------------------------------------------------
Elective deferrals under a section 403(b) plan are subject
to in-service distribution restrictions similar to those
applicable to elective deferrals under a qualified defined
contribution plan, and, in some cases, other contributions to a
section 403(b) plan are subject to similar restrictions.\372\
Deferrals under a section 457(b) plan are subject to in-service
distribution restrictions similar to those applicable to
elective deferrals under a qualified defined contribution plan.
In-service distribution restrictions apply under a section
457(b) plan until age 70\1/2\, except that, in the case of a
governmental section 457(b) plan, in-service distribution
restrictions apply until attainment of age 59\1/2\).\373\
---------------------------------------------------------------------------
\372\ Sec. 403(b)(7)(A)(ii) and (11).
\373\ Sec. 457(d)(1)(A) as modified by sec. 104(a) of Division M,
``Bipartisan American Miners,'' of Pub. L. No. 116-94, Further
Consolidated Appropriations Act, 2020, December 20, 2019.
---------------------------------------------------------------------------
Distributions and rollovers
A distribution from an employer-sponsored retirement plan
is generally includible in income except for any portion
attributable to after-tax contributions, which result in
basis.\374\ Unless an exception applies, in the case of a
distribution before age 59\1/2\ from a qualified retirement
plan or a section 403(b) plan, any amount included in income is
subject to an additional 10-percent tax, referred to as the
``early withdrawal'' tax.\375\
---------------------------------------------------------------------------
\374\ Secs. 402(a), 403(b)(1), and 457(a)(1). Under section
402A(d), a qualified distribution from a designated Roth account under
an employer-sponsored plan is not includible in income.
\375\ Sec. 72(t).
---------------------------------------------------------------------------
A distribution from an employer-sponsored retirement plan
generally may be rolled over on a nontaxable basis to another
such plan or to an individual retirement arrangement (``IRA''),
either by a direct transfer to the recipient plan or IRA or by
contributing the distribution to the recipient plan or IRA
within 60 days of receiving the distribution.\376\ If the
distribution from an employer-sponsored retirement plan
consists of property, the rollover is accomplished by a
transfer or contribution of the property to the recipient plan
or IRA.
---------------------------------------------------------------------------
\376\ Secs. 402(c), 402A(c)(3), 403(b)(8), and 457(e)(16).
---------------------------------------------------------------------------
Investment of accounts under employer-sponsored plans
Qualified defined contribution plans, section 403(b) plans,
and governmental section 457(b) plans commonly allow employees
to direct the manner in which their accounts are invested.
Employees may be given a choice among specified investments,
such as a choice of specified mutual funds, and, in some cases,
may be able to direct the investment of their accounts in any
product, instrument, or investment offered in the market.
The investment options under a particular employer-
sponsored retirement plan may change at times.\377\ Similarly,
a plan that allows employees to direct the investment of their
accounts in any product, instrument, or investment offered in
the market may be amended to limit the investments that can be
held in the plan. In these cases, employees may be required to
change the investments held within their accounts.
---------------------------------------------------------------------------
\377\ In the case of a plan subject to ERISA, a participant's
exercise of control over the investment of the assets in his or her
account by choosing among the investment options offered under the plan
does not relieve a plan fiduciary from the duty to prudently select and
monitor the investment options offered to participants. 29 C.F.R. sec.
2550.404c-1(d)(2)(iv); Tibble v. Edison International, No. 13-550, 135
S. Ct. 1823 (2015). The exercise of the duty to monitor investment
options may result in a change in the options offered.
---------------------------------------------------------------------------
The terms of some investments impose a charge or fee when
the investment is liquidated, particularly if the investment is
liquidated within a particular period after acquisition. For
example, a lifetime income product, such as an annuity
contract, may impose a surrender charge if the investment is
discontinued.
If an employee must liquidate an investment held in an
employer-sponsored retirement plan because of a change in
investment options or a limit on investments held in the plan,
the employee may be subject to a charge or fee as described
above. In addition, restrictions on in-service distributions
may prevent the employee from preserving the investment through
a rollover.
Explanation of Provision
Under the provision, if a lifetime income investment is no
longer authorized to be held as an investment option under a
qualified defined contribution plan (including a section 401(k)
plan), a section 403(b) plan, or a governmental section 457(b)
plan, except as otherwise provided in guidance, the plan does
not fail to satisfy the Code requirements applicable to the
plan solely by reason of allowing (1) qualified distributions
of a lifetime income investment, or (2) distributions of a
lifetime income investment in the form of a qualified plan
distribution annuity contract. Such a distribution must be made
within the 90-day period ending on the date when the lifetime
income investment is no longer authorized to be held as an
investment option under the plan.
For purposes of the provision, a qualified distribution is
a direct trustee-to-trustee transfer to another employer-
sponsored retirement plan or IRA.\378\ A lifetime income
investment is an investment option designed to provide an
employee with election rights (1) that are not uniformly
available with respect to other investment options under the
plan, and (2) that are rights to a lifetime income feature
available through a contract or other arrangement offered under
the plan (or under another employer-sponsored retirement plan
or IRA through a direct trustee-to-trustee transfer). A
lifetime income feature is (1) a feature that guarantees a
minimum level of income annually (or more frequently) for at
least the remainder of the life of the employee or the joint
lives of the employee and the employee's designated
beneficiary, or (2) an annuity payable on behalf of the
employee under which payments are made in substantially equal
periodic payments (not less frequently than annually) over the
life of the employee or the joint lives of the employee and the
employee's designated beneficiary. Finally, a qualified plan
distribution annuity contract is an annuity contract purchased
for a participant and distributed to the participant by an
employer-sponsored retirement plan or an employer-sponsored
retirement plan contract.\379\
---------------------------------------------------------------------------
\378\ For this purpose, an employer-sponsored retirement plan or
IRA means such a plan or IRA that is an eligible retirement plan under
section 402(c)(8)(B).
\379\ For this purpose, an employer-sponsored retirement plan
contract is an annuity contract distributed from an eligible retirement
plan described in section 402(c)(8)(B) other than an IRA or individual
retirement annuity.
---------------------------------------------------------------------------
Effective Date
The provision applies to plan years beginning after
December 31, 2019.
10. Treatment of custodial accounts on termination of section 403(b)
plans (sec. 110 of the Act and sec. 403(b) of the Code)
Present Law
Tax-sheltered annuities (section 403(b) plans)
Section 403(b) plans are a form of tax-favored employer-
sponsored plan that provide tax benefits similar to qualified
retirement plans. Section 403(b) plans may be maintained only
by (1) charitable tax-exempt organizations, and (2) educational
institutions of State or local governments (that is, public
schools, including colleges and universities). Many of the
rules that apply to section 403(b) plans are similar to the
rules applicable to qualified retirement plans, including
section 401(k) plans. Employers may make nonelective or
matching contributions to such plans on behalf of their
employees, and the plans may provide for employees to make
pretax elective deferrals, designated Roth contributions (held
in designated Roth accounts),\380\ or other after-tax
contributions. Generally, section 403(b) plans provide for
contributions toward the purchase of annuity contracts or
provide for contributions to be held in custodial accounts for
each employee. In the case of contributions to custodial
accounts under a section 403(b) plan, the amounts must be
invested only in regulated investment company stock.\381\
Contributions to a custodial account are not permitted to be
distributed before the employee dies, attains age 59\1/2\, has
a severance from employment, or, in the case of elective
deferrals, encounters financial hardship.
---------------------------------------------------------------------------
\380\ Sec. 402A.
\381\ Sec. 403(b)(7).
---------------------------------------------------------------------------
A section 403(b) plan is permitted to contain provisions
that provide for plan termination and that allow accumulated
benefits to be distributed on termination.\382\ In order for a
plan termination to be effectuated, however, all plan assets
must be distributed to participants.
---------------------------------------------------------------------------
\382\ Treas. Reg. sec. 1.403(b)-10(a).
---------------------------------------------------------------------------
Rollovers
A distribution from a section 403(b) plan that is an
eligible rollover distribution may be rolled over to an
eligible retirement plan (which include another 403(b) plan, a
qualified retirement plan, and an IRA).\383\ The rollover
generally can be achieved by direct rollover (direct payment
from the distributing plan to the recipient plan) or by
contributing the distribution to the eligible retirement plan
within 60 days of receiving the distribution (``60-day
rollover'').\384\
---------------------------------------------------------------------------
\383\ Sec. 403(b)(8). Similar rules apply to distributions from
qualified retirement plans and governmental section 457(b) plans.
\384\ Under section 402(c)(11), any distribution to a beneficiary
other than the participant's surviving spouse is only permitted to be
rolled over to an IRA using a direct rollover; 60-day rollovers are not
available to nonspouse beneficiaries.
---------------------------------------------------------------------------
Amounts that are rolled over are usually not included in
gross income. Generally, a distribution of any portion of the
balance to the credit of a participant is an eligible rollover
distribution with exceptions, for example, certain periodic
payments, required minimum distributions, and hardship
distributions are not eligible rollover distributions.\385\
---------------------------------------------------------------------------
\385\ Sec. 402(c)(4). Treas. Reg. sec. 1.402(c)-1 identifies
certain other payments that are not eligible for rollover, including,
for example, certain corrective distributions, loans that are treated
as deemed distributions under section 72(p), and dividends on employer
securities as described in section 404(k).
---------------------------------------------------------------------------
Roth conversions
Distributions from section 403(b) plans may be rolled over
into a Roth IRA.\386\ Distributions from these plans that are
rolled over into a Roth IRA and that are not distributions from
a designated Roth account must be included in gross income.
Further, a section 403(b) plan that allows employees to make
designated Roth contributions may allow employees to elect to
transfer amounts held in accounts that are not designated Roth
accounts into designated Roth accounts, but the amount
transferred must be included in income as though it were
distributed.\387\
---------------------------------------------------------------------------
\386\ Sec. 408A(d)(3). Similar rules apply to qualified retirement
plans and governmental section 457(b) plans.
\387\ Sec. 402A(d)(4). Similar rules apply to qualified retirement
plans and governmental section 457(b) plans.
---------------------------------------------------------------------------
Approved nonbank trustees required for IRAs
An IRA can be a trust, a custodial account, or an annuity
contract. The Code requires that the trustee or custodian of an
IRA be a bank (which is generally subject to Federal or State
supervision) or an IRS-approved nonbank trustee, that an
annuity contract be issued by an insurance company (which is
subject to State supervision), and that an IRA trust or
custodial account be created and organized in the United
States.
In order for a trustee or custodian that is not a bank to
be an IRA trustee or custodian, the entity must apply to the
IRS for approval. Treasury Regulations list a number of factors
that are taken into account in approving an applicant to be a
nonbank trustee.\388\ The applicant must demonstrate fiduciary
ability (ability to act within accepted rules of fiduciary
conduct including continuity and diversity of ownership),
capacity to account (experience and competence with respect to
accounting for the interests of a large number of individuals),
fitness to handle funds (experience and competence with respect
to other activities normally associated with handling of
retirement funds), and ability to satisfy other rules of
fiduciary conduct, which includes a net worth requirement.
Because it is an objective requirement that may be difficult
for some applicants to satisfy, the net worth requirement may
be the most significant of the requirements for nonbank
trustees.
---------------------------------------------------------------------------
\388\ Treas. Reg. sec. 1.408-2(e).
---------------------------------------------------------------------------
To be approved, the entity must have a net worth of at
least $250,000 at the time of the application. There is a
maintenance rule that varies depending on whether the trustee
is an active trustee or a passive trustee and that includes
minimum dollar amounts and minimum amounts as a percentage of
assets held in fiduciary accounts. A special rule is provided
for nonbank trustees that are members of the Security Investor
Protection Corporation (``SIPC'').
Explanation of Provision
Under the provision, the Secretary of the Treasury is
directed to issue guidance within six months after the date of
enactment to provide that, if an employer terminates a section
403(b) plan under which amounts are contributed to custodial
accounts, the plan administrator or custodian may distribute an
individual custodial account in kind to a participant or
beneficiary of the plan, and the distributed custodial account
must be maintained by the custodian on a tax-deferred basis as
a section 403(b)(7) custodial account, similar to the treatment
of fully-paid individual annuity contracts under Revenue Ruling
2011-7,\389\ until amounts are actually paid to the participant
or beneficiary. In addition, such guidance must provide that
(1) the section 403(b)(7) status of the distributed custodial
account is generally maintained if such account thereafter
adheres to the requirements of section 403(b) in effect at the
time of the account's distribution, and (2) a custodial account
is not considered distributed to the participant or beneficiary
if the employer has any material retained rights under the
account (the employer, however, is not treated as retaining
material rights simply because the custodial account was
originally opened under a group contract).
---------------------------------------------------------------------------
\389\ 2011-10 I.R.B. 534, March 7, 2011.
---------------------------------------------------------------------------
The provision directs such guidance to apply retroactively
for taxable years beginning after December 31, 2008.
Effective Date
The provision is effective upon date of enactment.
11. Clarification of retirement income account rules relating to
church-controlled organizations (sec. 111 of the Act and sec.
403(b)(9) of the Code)
Present Law
A plan sponsor or administrator generally must invest
assets of a tax-sheltered annuity plan (a ``section 403(b)''
plan) in annuity contracts or mutual funds.\390\ However, the
restrictions on investments do not apply to a retirement income
account, which is a defined contribution program established or
maintained by a church, or a convention or association of
churches, to provide benefits under the plan to employees of a
religious, charitable or similar tax-exempt organization.\391\
---------------------------------------------------------------------------
\390\ Sec. 403(b)(1)(A) and (7).
\391\ Sec. 403(b)(9)(B), referring to organizations exempt from tax
under section 501(c)(3). For this purpose, a church or a convention or
association of churches includes an organization described in section
414(e)(3)(A), that is, an organization, the principal purpose or
function of which is the administration or funding of a plan or program
for the provision of retirement benefits or welfare benefits; or both,
for the employees of a church or a convention or association of
churches, provided that the organization is controlled by or associated
with a church or a convention or association of churches.
---------------------------------------------------------------------------
Certain rules prohibiting discrimination in favor of highly
compensated employees, which apply to section 403(b) plans
generally, do not apply to a plan maintained by a church or
qualified church-controlled organization.\392\ For this
purpose, the term ``church'' includes a church, a convention or
association of churches, or an elementary or secondary school
that is controlled, operated, or principally supported by a
church or by a convention or association of churches, and
includes a qualified church-controlled organization (``QCCO'').
A QCCO is any church-controlled tax-exempt organization other
than an organization that: (1) offers goods, services, or
facilities for sale, other than on an incidental basis, to the
general public, other than goods, services, or facilities that
are sold at a nominal charge substantially less than the cost
of providing the goods, services, or facilities; and (2)
normally receives more than 25 percent of its support from
either governmental sources, or receipts from admissions, sales
of merchandise, performance of services, or furnishing of
facilities, in activities that are not unrelated trades or
businesses, or from both. Church-controlled organizations that
are not QCCOs are generally referred to as ``non-QCCOs.''
---------------------------------------------------------------------------
\392\ Sec. 403(b)(1)(D) and (12).
---------------------------------------------------------------------------
In recent years, a question has arisen as to whether
employees of non-QCCOs may be covered under a section 403(b)
plan that consists of a retirement income account.
Explanation of Provision
The provision clarifies that a retirement income account
may cover (1) a duly ordained, commissioned, or licensed
minister of a church in the exercise of his or her ministry,
regardless of the source of his or her compensation; (2) an
employee of an organization, whether a civil law corporation or
otherwise, that is exempt from tax under section 501 and is
controlled by or associated with a church or a convention or
association of churches; and (3) an employee who is included in
a church plan under certain circumstances after separation from
the service of a church, a convention or association of
churches, or an organization described above.\393\
---------------------------------------------------------------------------
\393\ These individuals are described in section 414(e)(3)(B) and
(E).
---------------------------------------------------------------------------
Effective Date
The provision applies to years beginning before, on, or
after the date of enactment.
12. Qualified cash or deferred arrangements must allow long-term
employees working more than 500 but less than 1,000 hours per
year to participate (sec. 112 of the Act and secs. 401(k) and
410 of the Code)
Present Law
Qualified retirement plans
Qualified retirement plans are of two general types:
defined benefit plans, under which benefits are determined
under a plan formula and paid from general plan assets, rather
than individual accounts; and defined contribution plans which
include section 401(k) plans, under which benefits are based on
a separate account for each participant, to which are allocated
contributions, earnings, and losses.
A section 401(k) plan is a profit-sharing or stock bonus
plan \394\ that contains a qualified cash or deferred
arrangement under which employees may make elective
deferrals.\395\ Section 401(k) plans may be designed so that
elective deferrals are made only if the employee affirmatively
elects them. Alternatively, a section 401(k) plan may provide
for ``automatic enrollment,'' under which elective deferrals
are made at a specified rate (referred to as a ``default
rate'') when an employee becomes eligible to participate unless
the employee affirmatively elects not to make contributions or
to make contributions at a different rate. Other special rules
apply to such arrangements. The maximum annual amount of
elective deferrals that can be made by an employee to a section
401(k) plan for a year is $19,000 (for 2019) \396\ plus $6,000
\397\ for employees age 50 or older (catch-up contribution
amount) or, if less, the employee's compensation.\398\ Section
401(k) plans may provide for matching contributions, which are
made on account of elective deferrals,\399\ and may provide for
employer nonelective contributions.
---------------------------------------------------------------------------
\394\ Defined contribution plans include money purchase pension
plans, profit-sharing plans, and stock bonus plans. Certain pre-ERISA
money purchase plans and rural cooperative plans may also include a
qualified cash or deferred arrangement. Except for certain
grandfathered plans, a State or local governmental employer may not
maintain a section 401(k) plan.
\395\ Elective deferrals are generally made on a pretax basis,
excludable from the participant's gross income when contributed but
includable with attributable earnings when distributed. However, under
section 402A, a section 401(k) plan is permitted to include a
``qualified Roth contribution program'' that permits a participant to
elect to have all or a portion of the participant's elective deferrals
under the plan treated as designated Roth contributions. Designated
Roth contributions are not excludable from the participant's gross
income when contributed, but qualified distributions of designated Roth
contributions and attributable earnings are excluded from gross income
(even though the earnings are not previously taxed). A qualified
distribution is a distribution made after the end of a specified period
(generally five years after the participant's first designated Roth
contribution) and that is (1) made on or after the date on which the
participant attains age 59\1/2\, (2) made to a beneficiary (or to the
estate of the participant) on or after the death of the participant, or
(3) attributable to the participant's being disabled.
\396\ For 2020 and 2021, this amount is $19,500.
\397\ For 2020 and 2021, this amount is $6,500.
\398\ Secs. 402(g) and 414(v).
\399\ Sec. 401(m). Matching contributions can also be made on
account of after-tax employee contributions.
---------------------------------------------------------------------------
Participation requirement
A qualified retirement plan generally can delay
participation in the plan based on attainment of age or
completion of years of service but not beyond the later of
completion of one year of service (that is, a 12-month period
with at least 1,000 hours of service) or attainment of age
21.\400\ A plan also cannot exclude an employee from
participation (on the basis of age) when that employee has
attained a specified age.\401\ Employees can be excluded from
plan participation on other bases, such as job classification,
as long as the other basis is not an indirect age or service
requirement. A plan can provide that an employee is not
entitled to an allocation of employer nonelective or matching
contributions for a plan year unless the employee completes
either 1,000 hours of service during the plan year or is
employed on the last day of the year even if the employee
previously completed 1,000 hours of service in a prior year.
However, once an employee has completed 1,000 hours of service
during a plan year, an employee cannot be precluded from making
elective deferrals based on a service requirement.\402\
---------------------------------------------------------------------------
\400\ Secs. 401(a)(3) and 410(a)(1). Parallel requirements
generally apply to plans of private employers under section 202 of the
Employee Retirement Income Security Act of 1974 (``ERISA'').
Governmental plans under section 414(d) and church plans under section
414(e) are generally exempt from these Code requirements and from
ERISA.
\401\ Sec. 410(a)(2).
\402\ Sec. 401(k)(2)(D).
---------------------------------------------------------------------------
Vesting
Qualified retirement plans are subject to requirements as
to the period of service after which a participant's right to
his or her accrued benefit must be nonforfeitable (that is,
``vested'').\403\ Generally, a year of vesting service is only
required to be credited if an employee completes 1,000 hours of
service during the year.
---------------------------------------------------------------------------
\403\ Secs. 401(a)(7) and 411. Governmental plans and church plans
are generally exempt from these Code requirements. Parallel
requirements generally apply to plans of private employers under
sections 203-204 of ERISA.
---------------------------------------------------------------------------
In the case of a defined contribution plan, a participant's
accrued benefit is the balance of his or her account under the
plan. The portion of an employee's account balance attributable
to employee after-tax contributions and elective deferrals must
be nonforfeitable at all times.\404\ Generally, the portion of
an employee's account balance attributable to nonelective or
matching contributions must become nonforfeitable after the
completion of a specified number of years of service in
accordance with one of two minimum vesting schedules.\405\
Under the first vesting schedule, the participant's accrued
benefit derived from employer contributions must become 100
percent vested upon completion of no more than three years of
service (often referred to as ``three year cliff vesting'').
Under the second vesting schedule (referred to as ``graduated
vesting''), the participant's accrued benefit derived from
employer contributions must become vested ratably at least over
the period from two to six years of service.
---------------------------------------------------------------------------
\404\ Secs. 411(a)(1) and 401(k)(2)(C). Certain nonelective
contributions under a section 401(k) plan and employer matching
contributions with respect to elective deferrals must also be
nonforfeitable at all times.
\405\ Sec. 411(a)(2)(B). Section 411(a)(3) provides certain
permitted forfeitures for accrued benefits that are otherwise 100
percent vested, including, for example, forfeiture upon the
participant's death or withdrawal of mandatory employee contributions
and suspension of benefits upon reemployment.
---------------------------------------------------------------------------
Minimum coverage and nondiscrimination requirements
In general
A qualified retirement plan is prohibited from
discriminating in favor of highly compensated employees,
referred to as the nondiscrimination requirements. These
requirements are intended to ensure that a qualified retirement
plan provides meaningful benefits to an employer's rank-and-
file employees, so that qualified retirement plans achieve the
goal of retirement security for both lower-paid and higher-paid
employees. The nondiscrimination requirements consist of a
minimum coverage requirement and general nondiscrimination
requirements.\406\ For purposes of these requirements, an
employee generally is treated as highly compensated if the
employee (1) was a five-percent owner of the employer at any
time during the year or the preceding year, or (2) had
compensation for the preceding year in excess of $125,000 (for
2019).\407\
---------------------------------------------------------------------------
\406\ Sections 401(a)(3) and 410(b) deal with the minimum coverage
requirement; section 401(a)(4) deals with the general nondiscrimination
requirements, with related rules in section 401(a)(5). Detailed
regulations implement the statutory requirements. Governmental plans
are generally exempt from these requirements.
\407\ Sec. 414(q). For 2020 and 2021, this amount is $130,000. At
the election of the employer, employees who are highly compensated
based on compensation may be limited to the top 20 percent highest paid
employees. A nonhighly compensated employee is an employee other than a
highly compensated employee.
---------------------------------------------------------------------------
The minimum coverage and general nondiscrimination
requirements apply annually on the basis of the plan year. In
applying these requirements, employees of all members of a
controlled group or affiliated service group are treated as
employed by a single employer. Employees who have not satisfied
minimum age and service conditions under the plan, certain
nonresident aliens, and employees covered by a collective
bargaining agreement are generally disregarded.\408\ However, a
plan that covers employees with less than a year of service or
who are under age 21 must generally include those employees in
any nondiscrimination test for the year but can test the plan
for nondiscrimination in two parts: (1) by separately testing
the portion of the plan covering employees who have not
completed a year of service or are under age 21 and treating
all of the employer's employees with less than a year of
service or under age 21 as the only employees of the employer;
and (2) then testing the rest of the plan taking into account
the rest of the employees of the employer and excluding those
employees. If a plan does not satisfy the nondiscrimination
requirements on its own, it may in some circumstances be
aggregated with another plan, and the two plans tested together
as a single plan.
---------------------------------------------------------------------------
\408\ A plan or portion of a plan covering collectively bargained
employees is generally deemed to satisfy the nondiscrimination
requirements.
---------------------------------------------------------------------------
Minimum coverage requirement
Under the minimum coverage requirement, the plan's coverage
of employees must be nondiscriminatory. This is determined by
calculating the plan's ratio percentage, that is, the ratio of
the percentage of nonhighly compensated employees (of all
nonhighly compensated employees in the workforce) covered under
the plan to the percentage of highly compensated employees
covered. In the case of a section 401(k) plan, the right to
make elective deferrals, the right to receive matching
contributions, and the allocation of nonelective contributions
are each tested separately for nondiscriminatory coverage as
though provided under separate plans.
If the plan's ratio percentage is 70 percent or greater,
the plan satisfies the minimum coverage requirement. If the
plan's ratio percentage is less than 70 percent, a multi-part
test applies. First, the plan must cover a group (or
``classification'') of employees that is reasonable and
established under objective business criteria, such as hourly
or salaried employees (referred to as a reasonable
classification), and the plan's ratio percentage must be at or
above a specific level specified in the regulations. In
addition, the average benefit percentage test must be
satisfied. Under the average benefit percentage test, the
average rate of contributions or benefit accruals for all
nonhighly compensated employees in the workforce (taking into
account all plans of the employer) must be at least 70 percent
of the average contribution or accrual rate of all highly
compensated employees.
General nondiscrimination requirements
Nondiscrimination in the amount of contributions or
benefits
There are two general approaches to testing the amount of
contributions or benefits under a qualified retirement plan:
\409\ (1) design-based safe harbors under which the benefit
formula under a defined benefit plan, or the formula for
allocating employer nonelective contributions under a defined
contribution plan to participants' accounts, satisfies certain
uniformity standards; and (2) a mechanical general test under
which the distribution of the rates of benefit among highly
compensated and nonhighly compensated employees within a plan
is tested for nondiscrimination by applying a modified version
of the minimum coverage requirement.\410\ The safe harbors and
general test may include cross-testing of equivalent accruals
or allocations.\411\ A plan is not discriminatory merely
because benefit accruals or allocations for highly compensated
and nonhighly compensated employees are provided as a
percentage of compensation (up to $280,000 for 2019).\412\
Thus, the various testing approaches are generally applied to
the amount of contributions or benefits provided as a
percentage of compensation (expressed as allocation or accrual
rates).
---------------------------------------------------------------------------
\409\ Treas. Reg. sec. 1.401(a)(4)-1. With respect to the amount of
contributions, employee elective deferrals under a section 401(k) plan
and employer matching contributions and after-tax employee
contributions to a defined contribution plan are subject to special
testing rules, rather than being included in applying the general
nondiscrimination requirements. In addition, the amount of employer
contributions to an ESOP is tested separately from other employer
contributions. Rules applicable to benefits, rights and features and
the timing of plan amendments are provided in Treas. Reg. secs. 1.
401(a)(4)-4 and -5 respectively.
\410\ These approaches are explained in Treas. Reg. secs.
1.401(a)(4)-2, -3, and -8. Sections 401(a)(5)(C)-(D) and 401(l) and
Treas. Reg. secs. 1.401(a)(4)-7 and 1.401(l)-1 through -6 provide rules
under which nondiscrimination testing may take into account the
employer-paid portion of social security taxes or benefits, referred to
as permitted disparity.
\411\ Treas. Reg. sec. 1.401(a)(4)-8.
\412\ Sec. 401(a)(5)(B); sec. 401(a)(17). The limit on compensation
that may be taken into account is $285,000 for 2020, and $290,000 for
2021.
---------------------------------------------------------------------------
Special nondiscrimination tests for section 401(k) plans
A special annual nondiscrimination test, called the actual
deferral percentage test (the ``ADP'' test) applies to test the
amount of elective deferrals under a section 401(k) plan.\413\
The ADP test generally compares the average rate of deferral
for highly compensated employees to the average rate of
deferral for nonhighly compensated employees. The ADP test
allows the average deferral rate for highly compensated
employees to exceed that for nonhighly compensated employees
within limits: (1) the average deferral rate for highly
compensated employees can be up to 125 percent of the average
deferral rate for nonhighly compensated employees; or (2) the
average deferral rate for highly compensated employees can be
two percentage points greater than the average deferral rate
for nonhighly compensated employees or, if less, twice the
average deferral rate for nonhighly compensated employees.
Employer matching contributions and after-tax employee
contributions are subject to a similar special
nondiscrimination test (the actual contribution percentage test
or ``ACP test'') which compares the average rate of matching
and after-tax contributions to the plan of the two groups.\414\
---------------------------------------------------------------------------
\413\ Sec. 401(k)(3).
\414\ Sec. 401(m)(2).
---------------------------------------------------------------------------
If the ADP test is not satisfied, end-of-year correction
mechanisms are available for the employer to make immediately
vested additional contributions for nonhighly compensated
employees (and certain other corrections) or to distribute
deferrals of highly compensated employees to such employees, so
that the ADP test is satisfied. Similar correction mechanisms
are available for purposes of satisfying the ACP test.
There are also designed-based safe harbor methods of
satisfying the ADP and ACP tests. These safe harbors are based
on the premise that, for a 401(k) plan with certain design
features with respect to contributions (elective, matching, and
nonelective) and enrollment (with or without automatic
enrollment), satisfaction of the minimum coverage requirement
is a sufficient test of whether the elective deferrals and
matching contributions are nondiscriminatory.\415\
---------------------------------------------------------------------------
\415\ The safe harbors that only require certain matching
contributions potentially allow satisfaction of the nondiscrimination
requirement with respect to elective and matching contributions under a
401(k) plan for a year even though no contributions are ultimately
provided to nonhighly compensated employees under the plan for the year
due to a lack of voluntary participation.
---------------------------------------------------------------------------
Top heavy rules
Top-heavy rules apply to limit the extent to which
accumulated benefits or account balances under a qualified
retirement plan can be concentrated with key employees.\416\
Whereas the general nondiscrimination requirements are designed
to test annual contributions or benefits for highly compensated
employees, compared to those of nonhighly compensated
employees, the top-heavy rules test the portion of the total
plan contributions or benefits that have accumulated for the
benefit of key employees as a group. If a plan is determined to
be top-heavy, minimum contributions or benefits are required
for participants who are non-key employees, and, in some cases,
faster vesting is required. Non-key employees who have become
participants in a defined contribution plan, but who
subsequently fail to complete 1,000 hours of service (or the
equivalent) for an accrual computation period must receive the
top-heavy defined contribution minimum.
---------------------------------------------------------------------------
\416\ Secs. 401(a)(10)(B) and 416. The nature of the top-heavy test
is such that a plan of a large business with many employees is unlikely
to be top-heavy. The top-heavy requirements are therefore viewed as
primarily affecting plans of smaller employers in which the owners
participate.
---------------------------------------------------------------------------
For this purpose, a key employee is an officer with annual
compensation greater than $180,000 (for 2019),\417\ a five-
percent owner, or a one-percent owner with compensation in
excess of $150,000. A defined benefit plan generally is top-
heavy if the present value of cumulative accrued benefits for
key employees exceeds 60 percent of the cumulative accrued
benefits for all employees. A defined contribution plan is top-
heavy if the aggregate of accounts for key employees exceeds 60
percent of the aggregate accounts for all employees.
---------------------------------------------------------------------------
\417\ For 2020 and 2021, this amount is $185,000.
---------------------------------------------------------------------------
Section 403(b) and governmental 457(b) plans
Tax-deferred annuity plans (referred to as section 403(b)
plans) are generally similar to qualified defined contribution
plans, but may be maintained only by (1) tax-exempt charitable
organizations,\418\ and (2) educational institutions of State
or local governments (that is, public schools, including
colleges and universities).\419\ Section 403(b) plans may
provide for employees to make elective deferrals (in pretax or
designated Roth form), including catch-up contributions, or
other after-tax employee contributions, and employers may make
nonelective or matching contributions on behalf of employees.
Contributions to a section 403(b) plan are generally subject to
the same contribution limits applicable to qualified defined
contribution plans, including the limits on elective deferrals.
---------------------------------------------------------------------------
\418\ These are organizations exempt from tax under section
501(c)(3). Section 403(b) plans of private, tax-exempt employers may be
subject to ERISA as well as the requirements of section 403(b).
\419\ Sec. 403(b).
---------------------------------------------------------------------------
Contributions to a section 403(b) plan must be fully
vested. The minimum coverage and general nondiscrimination
requirements applicable to a qualified retirement plan
generally apply to a section 403(b) plan and to employer
matching and nonelective contributions and after-tax employee
contributions to the plan.\420\ If a section 403(b) plan
provides for elective deferrals, the plan is subject to a
``universal availability'' requirement under which all
employees must be given the opportunity to make deferrals of
more than $200. In applying this requirement, nonresident
aliens, students, and employees who normally work less than 20
hours per week may be excluded.\421\
---------------------------------------------------------------------------
\420\ These requirements do not apply to a governmental section
403(b) plan or a section 403(b) plan maintained by a church or a
qualified church-controlled organization as defined in section 3121(w).
\421\ For this purpose, nonresident has the meaning in section
410(b)(3)(C), and student has the meaning in section 3121(b)(10). The
universal availability requirement does not apply to a section 403(b)
plan maintained by a church or a qualified church-controlled
organization.
---------------------------------------------------------------------------
An eligible deferred compensation plan of a governmental
employer (referred to as a governmental section 457(b) plan) is
generally similar to a qualified cash or deferred arrangement
under a section 401(k) plan in that it consists of elective
deferrals, that is, contributions (in pretax or designated Roth
form) made at the election of an employee, including catch-up
contributions. Deferrals under a governmental section 457(b)
plan are generally subject to the same limits as elective
deferrals under a section 401(k) plan or a section 403(b) plan.
Explanation of Provision
The provision requires a section 401(k) plan to permit an
employee to make elective deferrals if the employee has worked
at least 500 hours per year with the employer for at least
three consecutive years and has met the age requirement (age
21) by the end of the three consecutive year period (for this
provision, an employee is referred to as a ``long-term part-
time employee'' after having completed this period of service).
Thus, a long-term part-time employee could not be excluded from
the plan because the employee has not completed a year of
service as defined under the participation requirements
described above (a 12-month period with at least 1,000 hours of
service). Once a long-term part-time employee meets the age and
service requirements, such employee must be able to commence
participation no later than the earlier of (1) the first day of
the first plan year beginning after the date on which the
employee satisfied the age and service requirements or (2) the
date 6 months after the date on which the individual satisfied
those requirements. Employers may, but are not required to,
allow long-term part-time employees to participate in the
design based safe harbors (including the automatic enrollment
safe harbor). If an employer does permit a long-term part-time
employee to participate in such an automatic enrollment 401(k)
plan, that employee would have elective deferrals automatically
made at the default rate unless the employee affirmatively
elects not to make contributions or to make contributions at a
different rate.
The provision does not require a long-term part-time
employee to be otherwise eligible to participate in the plan.
Thus, the plan can continue to treat a long-term part-time
employee as ineligible under the plan for employer nonelective
and matching contributions based on not having completed a year
of service. However, for a plan that does provide employer
contributions for long-term part-time employees, the provision
requires a plan to credit, for each year in which such an
employee worked at least 500 hours, a year of service for
purposes of vesting in any employer contributions. If a long-
term part-time employee under such a plan becomes a full-time
employee (meaning that the employee completes a 12-month period
with at least 1,000 hours of service), the plan must continue
to determine the employee's years of service using the special
rule for long-term part-time employees.
With respect to long-term part-time employees, employers
would receive nondiscrimination testing relief (similar to the
present-law rules for plans covering otherwise excludable
employees), including permission to exclude these employees
from top-heavy vesting and top-heavy benefit requirements.
However, the relief from the nondiscrimination rules ceases to
apply to any employee who becomes a full-time employee (as of
the first plan year beginning after the plan year in which the
employee becomes a full-time employee).
This provision does not apply to collectively bargained
employees.
Effective Date
The provision applies to plan years beginning after
December 31, 2020, except that for determining whether the
three consecutive year period has been met, 12-month periods
beginning before January 1, 2021 are not taken into account.
13. Penalty-free withdrawals from retirement plans for individuals in
case of birth of child or adoption (sec. 113 of the Act and
secs. 72(t), 401-403, 408, 457, and 3405 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 IRA
generally is included in income for the year distributed.\422\
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.\423\
---------------------------------------------------------------------------
\422\ 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.
\423\ Sec. 72(t). Under present law, the 10-percent early
withdrawal tax does not apply to distributions from a governmental
section 457(b) plan.
---------------------------------------------------------------------------
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 IRS 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 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.
Explanation of Provision
In general
Under the provision, an exception to the 10-percent early
withdrawal tax applies in the case of a qualified birth or
adoption distribution from an applicable eligible retirement
plan (as defined). In addition, qualified birth or adoption
distributions may be recontributed to an individual's
applicable eligible retirement plans, subject to certain
requirements.
Distributions from applicable eligible retirement plans
A qualified birth or adoption distribution is a permissible
distribution from an applicable eligible retirement plan which,
for this purpose, encompasses eligible retirement plans other
than defined benefit plans, including qualified retirement
plans, section 403(b) plans, governmental section 457(b) plans,
and IRAs.\424\
---------------------------------------------------------------------------
\424\ A qualified birth or adoption distribution is subject to
income tax withholding unless the recipient elects otherwise. Mandatory
20-percent withholding does not apply.
---------------------------------------------------------------------------
A qualified birth or adoption distribution is a
distribution from an applicable eligible retirement plan to an
individual if made during the one-year period beginning on the
date on which a child of the individual is born or on which the
legal adoption by the individual of an eligible adoptee is
finalized. An eligible adoptee means any individual (other than
a child of the taxpayer's spouse) who has not attained age 18
or is physically or mentally incapable of self-support. The
provision requires the name, age, and taxpayer identification
number of the child or eligible adoptee to which any qualified
birth or adoption distribution relates to be provided on the
tax return of the individual taxpayer for the taxable year.
The maximum aggregate amount which may be treated as
qualified birth or adoption distributions by any individual
with respect to a birth or adoption is $5,000. The maximum
aggregate amount applies on an individual basis. Therefore,
each spouse separately may receive a maximum aggregate amount
of $5,000 of qualified birth or adoption distributions (with
respect to a birth or adoption) from applicable eligible
retirement plans in which each spouse participates or holds
accounts.
An employer plan is not treated as violating any Code
requirement merely because it treats a distribution (that would
otherwise be a qualified birth or adoption distribution) to an
individual as a qualified birth or adoption distribution,
provided that the aggregate amount of such distributions to
that individual from plans maintained by the employer and
members of the employer's controlled group \425\ does not
exceed $5,000. Thus, under such circumstances an employer plan
is not treated as violating any Code requirement merely because
an individual might receive total distributions in excess of
$5,000 as a result of distributions from plans of other
employers or IRAs.
---------------------------------------------------------------------------
\425\ The term ``controlled group'' means any group treated as a
single employer under subsection (b), (c), (m), or (o) of section 414.
---------------------------------------------------------------------------
Recontributions to applicable eligible retirement plans
Generally, any portion of a qualified birth or adoption
distribution may, at any time after the date on which the
distribution was received, be recontributed to an applicable
eligible retirement plan to which a rollover can be made. Such
a recontribution is treated as a rollover and thus is not
includible in income. If an employer adds the ability for plan
participants to receive qualified birth or adoption
distributions from a plan, the plan must permit an employee who
has received qualified birth or adoption distributions from
that plan to recontribute only up to the amount that was
distributed from that plan to that employee, provided the
employee otherwise is eligible to make contributions (other
than recontributions of qualified birth or adoption
distributions) to that plan. Any portion of a qualified birth
or adoption distribution from an individual's applicable
eligible retirement plans (whether employer plans or IRAs) may
be recontributed to an IRA held by such an individual which is
an applicable eligible retirement plan to which a rollover can
be made.
Effective Date
The provision applies to distributions made after December
31, 2019.
14. Increase in age for required beginning date for mandatory
distributions (sec. 114 of the Act and sec. 401(a)(9) of the
Code)
Present Law
Required minimum distributions
Employer-provided qualified retirement plans, traditional
IRAs, and individual retirement annuities are subject to
required minimum distribution rules. A qualified retirement
plan for this purpose means a tax-qualified plan described in
section 401(a) (such as a defined benefit pension plan or a
section 401(k) plan), an employee retirement annuity described
in section 403(a), a tax-sheltered annuity described in section
403(b), and a plan described in section 457(b) that is
maintained by a governmental employer.\426\ An employer-
provided qualified retirement plan that is a defined
contribution plan is a plan which provides (1) an individual
account for each participant and (2) for benefits based on the
amount contributed to the participant's account and any income,
expenses, gains, losses, and forfeitures of accounts of other
participants which may be allocated to such participant's
account.\427\
---------------------------------------------------------------------------
\426\ The required minimum distribution rules also apply to section
457(b) plans maintained by tax-exempt employers other than governmental
employers.
\427\ Sec. 414(i).
---------------------------------------------------------------------------
Required minimum distributions generally must begin by
April 1 of the calendar year following the calendar year in
which the individual (employee or IRA owner) reaches age 70\1/
2\. However, in the case of an employer-provided qualified
retirement plan, the required minimum distribution date for an
individual who is not a five-percent owner of the employer
maintaining the plan may be delayed to April 1 of the year
following the year in which the individual retires if the plan
provides for this later distribution date. For all subsequent
years, including the year in which the individual was paid the
first required minimum distribution by April 1, the individual
must take the required minimum distribution by December 31 of
the year.
For IRAs and defined contributions plans, the required
minimum distribution for each year generally is determined by
dividing the account balance as of the end of the prior year by
the number of years in the distribution period.\428\ The
distribution period is generally derived from the Uniform
Lifetime Table.\429\ This table is based on the joint life
expectancies of the individual and a hypothetical beneficiary
10 years younger than the individual. For an individual with a
spouse as designated beneficiary who is more than 10 years
younger, the joint life expectancy of the couple is used
(because the couple's remaining joint life expectancy is longer
than the length provided in the Uniform Lifetime Table). There
are special rules in the case of annuity payments from an
insurance contract.
---------------------------------------------------------------------------
\428\ Treas. Reg. sec. 1.401(a)(9)-5.
\429\ Treas. Reg. sec. 1.401(a)(9)-9.
---------------------------------------------------------------------------
If an individual dies on or after the individual's required
beginning date, the required minimum distribution is also
determined by dividing the account balance as of the end of the
prior year by a distribution period. The distribution period is
equal to the remaining years of the beneficiary's life
expectancy or, if there is no designated beneficiary, a
distribution period equal to the remaining years of the
deceased individual's single life expectancy, using the age of
the deceased individual in the year of death.\430\
---------------------------------------------------------------------------
\430\ Treas. Reg. sec. 1.401(a)(9)-5, A-5(a).
---------------------------------------------------------------------------
In the case of an individual who dies before the
individual's required beginning date, there are two methods for
satisfying the after death required minimum distribution rules,
the life-expectancy rule or the five-year rule. Under the life-
expectancy rule, annual required minimum distributions must
begin no later than December 31 of the calendar year
immediately following the calendar year in which the individual
died. This rule is only available if the designated beneficiary
is an individual (e.g., not the individual's estate or a
charity). If the designated beneficiary is the individual's
spouse, commencement of distributions can be delayed until
December 31 of the calendar year in which the deceased
individual would have attained age 70\1/2\. The required
minimum distribution for each year is also determined by
dividing the account balance as of the end of the prior year by
a distribution period, which is determined by reference to the
beneficiary's life expectancy.\431\ Under the five-year rule,
the individual's entire account must be distributed no later
than December 31 of the calendar year containing the fifth
anniversary of the individual's death.\432\
---------------------------------------------------------------------------
\431\ Treas. Reg. sec. 1.401(a)(9)-5, A-5(b).
\432\ Treas. Reg. sec. 1.401(a)(9)-3, Q&As 1, 2.
---------------------------------------------------------------------------
A special after-death rule applies for an IRA if the
beneficiary of the IRA is the surviving spouse. The surviving
spouse is permitted to choose to calculate required minimum
distributions both while the surviving spouse is alive and
after death as though the surviving spouse is the IRA owner,
rather than a beneficiary.\433\
---------------------------------------------------------------------------
\433\ Treas. Reg. sec. 1.408-8, Q&A 5.
---------------------------------------------------------------------------
Roth IRAs are not subject to the minimum distribution rules
during the IRA owner's lifetime. However, Roth IRAs are subject
to the post-death minimum distribution rules that apply to
traditional IRAs. For Roth IRAs, the IRA owner is treated as
having died before the individual's required beginning date.
Thus, only the life-expectancy rule and the five-year rule
apply.
Failure to make a required minimum distribution triggers a
50-percent excise tax, payable by the individual or the
individual's beneficiary. The tax is imposed during the taxable
year that begins with or within the calendar year during which
the distribution was required.\434\ The tax may be waived if
the distribution did not occur because of reasonable error and
reasonable steps are taken to remedy the violation.\435\
---------------------------------------------------------------------------
\434\ Sec. 4974(a).
\435\ Sec. 4974(d).
---------------------------------------------------------------------------
Eligible rollover distributions
With certain exceptions, distributions from an employer-
provided qualified retirement plan are eligible to be rolled
over tax free into another employer-provided qualified
retirement plan or an IRA. This can be achieved by contributing
the amount of the distribution to the other plan or IRA within
60 days of the distribution, or by a direct payment by the plan
to the other plan or IRA (referred to as a ``direct
rollover''). Distributions that are not eligible for rollover
include (i) any distribution that is one of a series of
periodic payments generally for a period of 10 years or more
(or a shorter period for distributions made for certain life
expectancies) and (ii) any distribution to the extent that the
distribution is a required minimum distribution.\436\
---------------------------------------------------------------------------
\436\ Sec. 402(c)(4). Distributions that are not eligible rollover
distributions also include distributions made upon hardship of the
employee.
---------------------------------------------------------------------------
For any distribution that is eligible for rollover, an
employer-provided qualified retirement plan must offer the
distributee the right to have the distribution made in a direct
rollover.\437\ Before making the distribution, the plan
administrator must provide the distributee with a written
explanation of the direct rollover right and related tax
consequences.\438\ Unless a distributee elects to have the
distribution made in a direct rollover, the distribution is
generally subject to mandatory 20-percent income tax
withholding.\439\
---------------------------------------------------------------------------
\437\ Sec. 401(a)(31).
\438\ Sec. 402(f).
\439\ Sec. 3405(c). This mandatory withholding does not apply to a
distributee that is a beneficiary other than a surviving spouse of an
employee.
---------------------------------------------------------------------------
Explanation of Provision
The provision changes the age on which the required
beginning date for required minimum distributions is based. The
required beginning date is changed from April 1 following the
calendar year in which the employee or IRA owner attains 70\1/
2\ years to April 1 following the calendar year in which the
employee or IRA owner attains 72 years.\440\ Under the
provision, present law continues to apply to employees and IRA
owners who attain age 70\1/2\ prior to January 1, 2020.
---------------------------------------------------------------------------
\440\ For an employee who is not a 5-percent owner of the employer
maintaining a plan, the required beginning date is no earlier than
April 1 of the calendar year following the calendar year in which the
employee retires.
---------------------------------------------------------------------------
In addition, the present law requirement to actuarially
adjust an employee's accrued benefit for an employee who
retires in a calendar year after the year the employee attains
age 70\1/2\, to take into account the period after age 70\1/2\
in which the employee was not receiving any benefits under the
plan, is not changed.
Effective Date
The provision is effective for distributions required to be
made after December 31, 2019, for employees and IRA owners who
attain age 70 1 2 after December 31, 2019.
15. Special rules for minimum funding standards for community newspaper
plans (sec. 115 of the Act, sec. 303 of ERISA, and sec. 430 of
the Code)
Present Law
The Code and the Employee Retirement Income Security Act of
1974 (``ERISA'') apply minimum funding requirements \441\ to
defined benefit retirement plans maintained by private-sector
employers for their employees (referred to as ``single
employer'' plans), for purposes of which employers that are
members of a controlled group are considered a single employer.
---------------------------------------------------------------------------
\441\ Secs. 412 and 430-433 and ERISA secs. 301-306. Unless a
funding waiver is obtained, an employer may be subject to a two-tier
excise tax under section 4971 if the funding requirements are not met.
Special funding rules may apply to certain categories of single
employer plans. For example, special rules apply to certain plans
maintained by commercial passenger airlines, under section 402 of the
Pension Protection Act of 2006 (``PPA''), Pub. L. No. 109-280. If an
election is made by a commercial passenger airline described in section
402(a)(1) of PPA, then in determining the plan's minimum required
contribution under section 430, the airline may use an interest rate of
8.85% to amortize the unfunded liability of the plan in equal
installments over the remaining part of the 17-year amortization
period. See Treas. Reg. sec. 1.430(a)-1(b)(4)(ii).
---------------------------------------------------------------------------
Under these rules, a minimum contribution is required for a
plan year if the value of the plan's assets is less than the
plan's ``funding target,'' that is, the present value,
determined actuarially, of all benefits earned as of the
beginning of the year. If the value of plan assets is less than
the plan's funding target, such that the plan has a funding
shortfall, the shortfall is generally required to be funded by
contributions, with interest, over seven years, taking into
account the remaining installments attributable to shortfalls
from preceding years. In addition,\442\ the required
contribution must include the amount of the plan's ``target
normal cost,'' that is, the present value, determined
actuarially, of any benefits expected to be earned for the year
plus the plan-related expenses expected to be paid from plan
assets during the plan year.. In the case of a plan funded
below a certain level, referred to as an ``at-risk'' plan,
specified assumptions must be used in determining the plan's
funding target and target normal cost.\443\
---------------------------------------------------------------------------
\442\ In some cases, a plan may be ``frozen'' as to service and/or
compensation. When a plan is frozen with respect to both service and
compensation, participants are entitled to previously earned benefits
but do not accrue or earn additional benefits.
\443\ For an at-risk plan, the specified assumptions generally are
as follows: All employees who are not otherwise assumed to retire as of
the valuation date but who will be eligible to elect benefits during
the plan year and the next 10 plan years must be assumed to retire at
the earliest retirement date under the plan but not before the end of
the plan year for which the ``at-risk funding target'' and ``at-risk
normal cost'' are being determined. Also, all employees must be assumed
to elect the retirement benefit available under the plan at the assumed
retirement age (determined as above) that would result in the highest
present value of benefits. The at-risk funding target is the present
value of all benefits accrued or earned under the plan as of the
beginning of the plan year using the actuarial assumptions set forth in
the Code and regulations for single employer plans, with the addition
of a loading factor which arises when the plan has been in at-risk
status for at least two of the four preceding plan years. This loading
factor is equal to the sum of (1) $700 multiplied by the number of
participants in the plan and (2) four percent of the funding target
(determined without regard to the definition of at-risk funding
target). The at-risk normal cost for a plan year generally represents
the excess of the sum of (1) the present value of all benefits which
are expected to accrue or to be earned under the plan during the plan
year using the at-risk assumptions described above plus (2) the amount
of plan related expenses expected to be paid from plan assets during
the plan year, over (3) the amount of mandatory employee contributions
expected to be made during the plan year. In addition, where the plan
has been in at-risk status for at least two of the four preceding plan
years, a loading factor is added, which is equal to four percent of the
target normal cost (the excess of the sum of (1) the present value of
all benefits which are expected to accrue or to be earned under the
plan during the plan year plus (2) the amount of plan-related expenses
expected to be aid from plan assets during the plan year, over (3) the
amount of mandatory employee contributions expected to be made during
the plan year) with respect to the plan for the plan year.
---------------------------------------------------------------------------
The minimum funding rules enacted in the Pension Protection
Act of 2006 (``PPA'') \444\ specify the interest rates used to
determine a plan's funding target and target normal cost for a
year, consisting of three ``segment'' rates, each of which
applies to benefit payments expected to be made from the plan
during a certain period.\445\ The first segment rate applies to
benefits reasonably determined to be payable during the five-
year period beginning on the first day of the year; the second
segment rate applies to benefits reasonably determined to be
payable during the 15-year period following the initial five-
year period; and the third segment rate applies to benefits
reasonably determined to be payable at the end of the 15-year
period. The first, second, and third segment rates are based on
the corresponding portion of a corporate bond yield curve with
certain adjustments.
---------------------------------------------------------------------------
\444\ Pub. L. No. 109-280.
\445\ Each segment rate is a single interest rate determined
monthly by the Secretary of the Treasury, on the basis of a corporate
bond yield curve, taking into account only the portion of the yield
curve based on corporate bonds maturing during the particular segment
rate period. The corporate bond yield curve used for this purpose
reflects the average, for the 24-month period ending with the preceding
month, of yields on investment grade corporate bonds with varying
maturities and that are in the top three quality levels available.
Solely for purposes of determining minimum required contributions, in
lieu of the segment rates, an employer may elect to use interest rates
on a yield curve based on the yields on investment grade corporate
bonds for the month preceding the month in which the plan year begins
(that is, without regard to the 24-month averaging described above)
(``monthly yield curve''). If an election to use a monthly yield curve
is made, it cannot be revoked without Internal Revenue Service
approval.
---------------------------------------------------------------------------
Under the Moving Ahead for Progress in the 21st Century
Act,\446\ for plan years beginning after December 31, 2011, a
segment rate determined under the PPA rules is adjusted if it
falls outside a specified percentage range of the average
segment rates for a preceding period. In particular, if a
segment rate determined under the PPA rules is less than the
applicable minimum percentage in the specified range, the
segment rate is adjusted upward to match the minimum
percentage. If a segment rate determined under the PPA rules is
more than the applicable maximum percentage in the specified
range, the segment rate is adjusted downward to match the
maximum percentage.
---------------------------------------------------------------------------
\446\ Pub. L. No. 112-141. The Highway Transportation and Funding
Act of 2014, Pub. L. No. 113-159, made changes to the applicable
minimum and maximum percentage ranges for determining whether a segment
rate must be adjusted upward or downward, as well as the periods for
determining such segment rates.
---------------------------------------------------------------------------
The specified percentage range (that is, the range from the
applicable minimum percentage to the applicable maximum
percentage of average segment rates), as most recently modified
in the Bipartisan Budget Act of 2015,\447\ for determining
whether a segment rate must be adjusted upward or downward for
a plan year is determined by reference to the calendar year in
which the plan year begins as follows:
---------------------------------------------------------------------------
\447\ Pub. L. No. 114-74.
---------------------------------------------------------------------------
90 percent to 110 percent for 2012 through
2020,
85 percent to 115 percent for 2021,
80 percent to 120 percent for 2022,
75 percent to 125 percent for 2023, and
70 percent to 130 percent for 2024 or later.
For March 2019, the first, second, and third segment rates
after adjustment are 2.86 percent, 4.00 percent, and 4.42
percent, respectively.\448\
---------------------------------------------------------------------------
\448\ Notice 2019-29, 2019-19 I.R.B. These rates are determined and
published monthly by the Internal Revenue Service by notice and on its
website. See https://www.irs.gov/retirement-plans/minimum-present-
value-segment-rates.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, an employer maintaining a ``community
newspaper plan'' (as defined below) under which no participant
has had the participant's accrued benefit increased (whether
because of service or compensation) after December 31, 2017,
may elect to apply certain alternative funding rules to the
plan and any other plan sponsored by any member of the
controlled group (determined as of the date of enactment).\449\
An election under the provision to apply the alternative
funding rules is to be made at such time and in such manner as
prescribed by the Secretary of the Treasury, and once made with
respect to a plan year, applies to all subsequent years unless
revoked with the consent of the Secretary of the Treasury.
---------------------------------------------------------------------------
\449\ For this purpose, the controlled group means all persons
treated as a single employer under subsection (b), (c), (m), or (o) of
section 414 as of the date of enactment.
---------------------------------------------------------------------------
Under the alternative funding rules, an interest rate of
eight percent is used to determine a plan's funding target and
target normal cost, rather than the first, second, and third
segment rates. However, if new benefits are accrued or earned
under a plan for a plan year in which the election is in
effect, the present value of such benefits must be determined
on the basis of the U.S. Treasury obligation yield curve for
the day that is the valuation date of such plan for such plan
year. In addition, if the value of plan assets is less than the
plan's funding target, such that the plan has a funding
shortfall, the shortfall is required to be funded by
contributions, with interest, over 30 years, rather than over
seven years. The shortfall amortization bases determined \450\
for all plan years preceding the first plan year to which the
election applies (and all related shortfall amortization
installments) are reduced to zero. Further, the assumptions
applicable to an ``at-risk'' plan do not apply.
---------------------------------------------------------------------------
\450\ Under section 430(c)(3).
---------------------------------------------------------------------------
Under the provision, a ``community newspaper plan'' is a
plan to which the new provision applies, which is maintained by
an employer that, as of December 31, 2017:
Publishes and distributes daily, either
electronically or in printed form, one or more
community newspapers (as defined below) in a single
State,
Is not a company the stock of which is
publicly traded on a stock exchange or in an over-the-
counter market, and is not controlled, directly or
indirectly, by such a company,
Is controlled, directly or indirectly (a) by
one or more persons residing primarily in the State in
which the community newspaper is published; (b) for at
least 30 years by individuals who are members of the
same family; (c) by a trust created or organized in the
State in which the community newspaper is published,
the sole trustees of which are persons described in (a)
or (b); (d) by an entity described in section 501(c)(3)
and exempt from tax under section 501(a) that is
organized and operated in the State in which the
community newspaper is published, and the primary
purpose of which is to benefit communities in the
State; or (e) by a combination of persons described in
(a), (c), or (d), and
Does not control, directly or indirectly,
any newspaper in any other State.
A ``community newspaper'' means a newspaper that primarily
serves a metropolitan statistical area, as determined by the
Office of Management and Budget, with a population of not less
than 100,000. For purposes of the provision, a person (the
``first'' person) is treated as controlled by another person if
the other person possesses, directly or indirectly, the power
to direct or cause the direction and management of the first
person (including the power to elect a majority of the members
of the board of directors of the first person) through the
ownership of voting securities.
The provision makes the above-described amendments to both
the Code and ERISA.\451\
---------------------------------------------------------------------------
\451\ The provision adds a new subsection (m) to section 430, and a
new subsection (m) to section 303 of ERISA. However, the term community
newspaper plan for ERISA purposes includes one that publishes and
distributes daily, either electronically or in printed form, either a
community newspaper or one or more community newspapers in the same
State. Additionally, in the case of a plan to which the election has
been made, the provision does not change the basis for calculating
underfunding for purposes of Pension Benefit Guaranty Corporation
variable rate premiums.
---------------------------------------------------------------------------
Effective Date
The provision applies the amendments to plan years ending
after December 31, 2017.
16. Treating excluded difficulty of care payments as compensation for
determining retirement contribution limitations (sec. 116 of
the Act and secs. 408 and 415 of the Code)
Present Law
Difficulty of care payments
Gross income does not include amounts received by a foster
care provider during the taxable year as qualified foster care
payments.\452\ Qualified foster care payments include any
payment made pursuant to a foster care program of a State or
political subdivision which is paid by (1) a State or political
subdivision thereof or (2) a qualified foster care placement
agency, and which is either (1) paid to the foster care
provider for caring for a qualified foster individual in the
foster care provider's home, or (2) a ``difficulty of care''
payment.\453\ A ``qualified foster individual'' is any
individual who is living in a foster family home in which the
individual was placed by either an agency of a State (or a
political subdivision thereof) or a qualified foster care
placement agency.\454\ A qualified foster care placement agency
is any placement agency which is licensed or certified by a
State (or political subdivision thereof) or an entity
designated by a State (or political subdivision thereof).\455\
---------------------------------------------------------------------------
\452\ Sec. 131(a)
\453\ Sec. 131(b)(1).
\454\ Sec. 131(b)(2).
\455\ Sec. 131(b)(3).
---------------------------------------------------------------------------
A ``difficulty of care'' payment is compensation for
providing the additional care needed for certain qualified
foster individuals. Such payments are provided when a qualified
foster individual has a physical, mental or emotional
disability for which the State has determined that (1) there is
a need for additional compensation to care for the individual,
(2) the care is provided in the home of the foster care
provider, and (3) the payments are designated by the payor as
compensation for such purpose.\456\ An applicant must request
an assessment of need from the State agency administering the
program and submit a medical evaluation which is reassessed
every year.
---------------------------------------------------------------------------
\456\ Pursuant to section 131(c)(2), in the case of any foster
home, difficulty of care payments for any period to which such payments
relate are not excludable from gross income to the extent such payments
are made for more than 10 qualified foster individuals who have not
attained age 19 and five qualified foster individuals who have attained
age 19.
---------------------------------------------------------------------------
In the case of a tax-qualified defined contribution plan,
such a plan will not satisfy the tax qualification requirements
unless contributions made by a participant to the plan (as well
as other additions such as employer contributions and
forfeitures) do not exceed the lesser of (1) $40,000 or (2) 100
percent of the participant's compensation.\457\ A participant's
compensation is defined generally as the compensation of the
participant from the employer for the year.\458\ A special rule
applies for self-employed individuals providing that a
participant's compensation is the participant's earned
income.\459\ Similar rules apply for contributions made to an
individual retirement account.\460\
---------------------------------------------------------------------------
\457\ Sec. 415(c)(1).
\458\ Sec. 415(c)(3)(A).
\459\ Sec. 415(c)(3)(B).
\460\ See secs. 219, 408, and 408A.
---------------------------------------------------------------------------
Since ``difficulty of care'' payments are excluded from
gross income, home healthcare workers receiving only such
payments are unable to participate in tax-qualified retirement
plans or individual retirement accounts because ``difficulty of
care'' payments are not considered compensation or earnings
upon which contributions to such plans or accounts may be made.
Explanation of Provision
The provision amends sections 415(c)(3) and 408(o) to
increase the contribution limit to qualified retirement plans
and individual retirement accounts to include ``difficulty of
care'' payments.
Effective Date
With respect to defined contribution plans, the provision
applies to plan years beginning after December 31, 2015, and
with respect to individual retirement accounts, the provision
applies to contributions after the date of enactment.
TITLE II--ADMINISTRATIVE IMPROVEMENTS
1. Plan adopted by filing due date for year may be treated as in effect
as of close of year (sec. 201 of the Act and sec. 401(b) of the
Code)
Present Law
In order for a qualified retirement plan to be treated as
maintained for a taxable year, the plan must be adopted by the
last day of the taxable year.\461\ However, the trust under the
plan will not fail to be treated as in existence due to lack of
corpus merely because it holds no assets on the last day of the
taxable year.\462\ Contributions made by the due date (plus
extensions) of the tax return for the employer maintaining the
plan for a taxable year are treated as contributed on account
of that taxable year.\463\ Thus, a plan can be established on
the last day of a taxable year even though the first
contribution is not made until the due date of the employer's
return of tax for the taxable year. Further, if the terms of a
plan adopted during an employer's taxable year fail to satisfy
the qualification requirements that apply to the plan for the
year, the plan may also be amended retroactively by the due
date (including extensions) of the employer's return, provided
that the amendment is made retroactively effective.\464\
However, this provision does not allow a plan to be adopted
after the end of a taxable year and made retroactively
effective, for qualification purposes, for the taxable year
prior to the taxable year in which the plan was adopted by the
employer.\465\
---------------------------------------------------------------------------
\461\ Rev. Rul. 76-28, 1976-1 C.B. 106.
\462\ Rev. Rul. 81-114, 1981-1 C.B. 207.
\463\ Sec. 404(a)(6).
\464\ Sec. 401(b).
\465\ Treas. Reg. sec. 1.401(b)-1(a).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, if an employer adopts a qualified
retirement plan after the close of a taxable year but before
the time prescribed by law for filing the return of tax of the
employer for the taxable year (including extensions thereof),
the employer may elect to treat the plan as having been adopted
as of the last day of the taxable year.
The provision does not override rules requiring certain
plan provisions to be in effect during a plan year, such as the
provision for elective deferrals under a qualified cash or
deferral arrangement (generally referred to as a ``401(k)
plan'').\466\
---------------------------------------------------------------------------
\466\ Treas. Reg. sec. 1.401(k)-1(e)(2)(ii).
---------------------------------------------------------------------------
Effective Date
The provision applies to plans adopted for taxable years
beginning after December 31, 2019.
2. Combined annual report for group of plans (sec. 202 of the Act, sec.
104 of ERISA, and sec. 6058 of the Code)
Present Law
An employer maintaining a qualified retirement plan
generally is required to file an annual return containing
information required under regulations with respect to the
qualification, financial condition, and operation of the
plan.\467\ ERISA requires the plan administrator of certain
pension and welfare benefit plans to file annual reports
disclosing specified information to the Department of Labor
(``DOL'').\468\ These filing requirements are met by filing a
completed Form 5500, Annual Return/Report of Employee Benefit
Plan.\469\ Forms 5500 are filed with DOL, and information from
Forms 5500 is shared with the IRS.\470\ A separate Form 5500 is
required for each plan.\471\
---------------------------------------------------------------------------
\467\ Sec. 6058. In addition, under section 6059, the plan
administrator of a defined benefit plan subject to the minimum funding
requirements is required to file an annual actuarial report. Under
section 414(g) and ERISA section 3(16), ``plan administrator''
generally means the person specifically so designated by the terms of
the plan document. In the absence of a designation, the plan
administrator generally is (1) in the case of a plan maintained by a
single employer, the employer; (2) in the case of a plan maintained by
an employee organization, the employee organization; or (3) in the case
of a plan maintained by two or more employers or jointly by one or more
employers and one or more employee organizations, the association,
committee, joint board of trustees, or other similar group of
representatives of the parties that maintain the plan. Under ERISA, the
party described in (1), (2) or (3) is referred to as the ``plan
sponsor.''
\468\ ERISA secs. 103 and 104. Under ERISA section 4065, the plan
administrator of certain defined benefit plans must provide information
to the Pension Benefit Guaranty Corporation (``PBGC'').
\469\ Small plans meeting certain requirements (generally plans
with less than 100 employees) must file a Form 5500 SF. The Form 5500-
EZ is generally used by ``one participant plans'' (plans in which the
only participants are an individual and spouse who together own the
business (whether or not incorporated) for which the plan is
established) or certain foreign plans that are not subject to the
requirements of section 104(a) of ERISA.
\470\ Information is shared also with the PBGC, as applicable. Form
5500 filings are also publicly released in accordance with section
6104(b); Treas. Reg. sec. 301.6104(b)-1; and ERISA secs. 104(a)(1) and
106(a).
\471\ Under section 6011(a) and (e), the IRS is required to provide
standards for electronically filed returns, but may not require a
person to file a return electronically unless the person is required to
file at least 250 returns during the calendar year (``250 return
threshold for electronic filing''). Under Treas. Reg. sec. 301.6058-2,
Form 5500 for a plan year must be filed electronically if the filer is
required to file at least 250 tax returns (including information
returns) during the calendar year that includes the first day of the
plan year.
---------------------------------------------------------------------------
Explanation of Provision
The provision directs the IRS and DOL to work together to
modify Form 5500 so that all members of a group of plans
described below may file a single consolidated Form 5500. In
developing the consolidated Form 5500, the IRS and DOL may
require members to include sufficient information for each plan
in the group as the IRS and DOL determine is necessary or
appropriate for the enforcement and administration of the Code
and ERISA.\472\
---------------------------------------------------------------------------
\472\ Under the provision, for purposes of applying the 250-return
threshold for electronic filing to Forms 5500 for plan years beginning
after December 31, 2019, information regarding each plan for which
information is provided on the Form 5500 is treated as a separate
return.
---------------------------------------------------------------------------
For purposes of the provision, a group of plans is eligible
for a consolidated Form 5500 if all the plans in the group (1)
are defined contribution plans; (2) have the same trustee, the
same named fiduciary (or named fiduciaries) under ERISA, and
the same administrator and plan administrator; (3) use the same
plan year; and (4) provide the same investments or investment
options to participants and beneficiaries. A plan not subject
to ERISA may be included in the group if the same person that
performs each of the previous functions, as applicable, for all
the other plans in the group performs each of the functions for
the plan not subject to ERISA.
Effective Date
The consolidated Form 5500 is to be implemented not later
than January 1, 2022 and shall be effective for returns and
reports for plan years beginning after December 31, 2021.
3. Disclosure regarding lifetime income (sec. 203 of the Act and sec.
105 of ERISA)
Present Law
ERISA requires the administrator of a defined contribution
plan to provide benefit statements to participants.\473\ In the
case of a participant who has the right to direct the
investment of the assets in his or her account, a benefit
statement must be provided at least quarterly. Benefit
statements must be provided at least annually to other
participants.
---------------------------------------------------------------------------
\473\ ERISA sec. 105. Benefit statements are required also with
respect to defined benefit plans. A civil penalty may apply for a
failure to provide a required benefit statement.
---------------------------------------------------------------------------
Among other items, a benefit statement provided with
respect to a defined contribution plan generally must include
(1) the participant's total benefits accrued, that is, the
participant's account balance; (2) the vested portion of the
account balance or the earliest date on which the account
balance will become vested; and (3) the value of each
investment to which assets in the participant's account are
allocated. A quarterly benefit statement provided to a
participant who has the right to direct investments must
provide additional information, including information relating
to investment principles.
In May 2013, the Department of Labor issued an advance
notice of proposed rulemaking providing rules under which a
benefit provided to a defined contribution plan participant
would include an estimated lifetime income stream of payments
based on the participant's account balance.\474\ However,
information about lifetime income that might be provided by
funds in a defined contribution plan is not currently required
to be included in a benefit statement.
---------------------------------------------------------------------------
\474\ 78 Fed. Reg. 26727, May 8, 2013.
---------------------------------------------------------------------------
Explanation of Provision
The provision requires a benefit statement provided to a
defined contribution plan participant to include a lifetime
income disclosure as described in the provision. However, the
lifetime income disclosure is required to be included in only
one benefit statement during any 12-month period.
A lifetime income disclosure is required to set forth the
lifetime income stream equivalent of the participant's total
account balance under the plan. The lifetime income stream
equivalent to the account balance is the amount of monthly
payments the participant or beneficiary would receive if the
total account balance were used to provide lifetime income
streams, based on assumptions specified in guidance prescribed
by the Secretary of Labor (referred to as the ``Secretary'' in
this explanation). The required lifetime income streams are (1)
a qualified joint and survivor annuity for the participant and
the participant's surviving spouse (or beneficiary and the
beneficiary's surviving spouse), based on assumptions specified
in guidance, including the assumption that the participant (or
beneficiary) has a spouse of equal age; and (2) a single life
annuity. The lifetime income streams may have a term certain or
other features to the extent permitted under guidance.
The Secretary is directed to issue, not later than a year
after the provision is enacted, a model lifetime income
disclosure, written in a manner to be understood by the average
plan participant. The model must include provisions to (1)
explain that the lifetime income stream equivalent is only
provided as an illustration, (2) explain that the actual
payments under the lifetime income stream that may be purchased
with the account balance will depend on numerous factors and
may vary substantially from the lifetime income stream
equivalent in the disclosure, (3) explain the assumptions on
which the lifetime income stream equivalent is determined, and
(4) provide other similar explanations as the Secretary
considers appropriate.
In addition, the Secretary is directed, not later than a
year after the provision is enacted, (1) to prescribe
assumptions that defined contribution plan administrators may
use in converting account balances into lifetime income stream
equivalents, and (2) to issue interim final rules under the
provision. In prescribing assumptions, the Secretary may
prescribe a single set of specific assumptions (in which case
the Secretary may issue tables or factors that facilitate
conversions of account balances) or ranges of permissible
assumptions. To the extent that an account balance is or may be
invested in a lifetime income stream, the prescribed
assumptions are to allow, to the extent appropriate, plan
administrators to use the amounts payable under the lifetime
income stream as a lifetime income stream equivalent.
Under the provision, no plan fiduciary, plan sponsor, or
other person has any liability under ERISA solely by reason of
the provision of lifetime income stream equivalents that are
derived in accordance with the assumptions and guidance under
the provision and that include the explanations contained in
model disclosure. This protection applies without regard to
whether the lifetime income stream equivalent is required to be
provided.
Effective Date
The requirement to provide a lifetime income disclosure
applies with respect to benefit statements furnished more than
12 months after the latest of the issuance by the Secretary of
(1) interim final rules, (2) the model disclosure, or (3)
prescribed assumptions.
4. Fiduciary safe harbor for selection of lifetime income provider
(sec. 204 of the Act and sec. 404 of ERISA)
Present Law
ERISA imposes certain standards of care with respect to the
actions of a plan fiduciary. Specifically, a fiduciary is
required to discharge its duties with respect to the plan
solely in the interest of the participants and beneficiaries;
for the exclusive purpose of providing benefits to participants
and beneficiaries and defraying reasonable administration
expenses of the plan, with the care, skill, prudence, and
diligence under the circumstances then prevailing that a
prudent man acting in a like capacity and familiar with
relevant matters would use in the conduct of an enterprise of a
like character and with like aims (the ``prudent man''
requirement); by diversifying plan investments so as to
minimize the risk of large losses unless, under the
circumstances, it is clearly prudent not to do so; and in
accordance with plan documents and governing instruments
insofar as the documents and instruments are consistent with
ERISA.
Department of Labor regulations provide a safe harbor for a
fiduciary to satisfy the prudent man requirement in selecting
an annuity provider and a contract for benefit distributions
from a defined contribution plan.\475\
---------------------------------------------------------------------------
\475\ 29 C.F.R. sec. 2550.404a-4.
---------------------------------------------------------------------------
Explanation of Provision
The provision specifies measures that a plan fiduciary may
take with respect to the selection of an insurer for a
guaranteed retirement income contract to assure that the
fiduciary meets the prudent man requirement. The measures under
the provision are an optional means by which a fiduciary will
be considered to satisfy the prudent man requirement with
respect to the selection of insurers for guaranteed retirement
income contracts and do not establish minimum requirements or
the exclusive means for satisfying the prudent man requirement.
The provision applies to the selection of the insurance company
for purposes of determining if the insurer is financially
capable of satisfying its obligations under the guaranteed
retirement income contract. The provision does not extend to
the underlying insurance contract, and therefore the fiduciary
must conduct a separate fiduciary analysis of the prudence and
terms and conditions of the guaranteed retirement income
contract based on present law and guidance.
For purposes of the provision, an insurer is an insurance
company, insurance service or insurance organization qualified
to do business in a State and includes affiliates of those
entities to the extent the affiliate is licensed to offer
guaranteed retirement income contracts. A guaranteed retirement
income contract is an annuity contract for a fixed term or a
contract (or provision or feature thereof) designed to provide
a participant guaranteed benefits annually (or more frequently)
for at least the remainder of the life of the participant or
joint lives of the participant and the participant's designated
beneficiary as part of a defined contribution plan.
With respect to the selection of an insurer for a
guaranteed retirement income contract (as defined below), the
prudent man requirement will be deemed met if a fiduciary:
Engages in an objective, thorough, and
analytical search for the purpose of identifying
insurers from which to purchase guaranteed retirement
income contracts,
With respect to each insurer identified
through the search, considers the financial capability
of the insurer to satisfy its obligations under the
guaranteed retirement income contract and considers the
cost (including fees and commissions) of the guaranteed
retirement income contract offered by the insurer in
relation to the benefits and product features of the
contract and administrative services to be provided
under the contract, and
On the basis of the foregoing, concludes
that, at the time of the selection (as described
below), the insurer is financially capable of
satisfying its obligations under the guaranteed
retirement income contract and that the cost (including
fees and commissions) of the selected guaranteed
retirement income contract is reasonable in relation to
the benefits and product features of the contract and
the administrative services to be provided under the
contract.
A fiduciary will be deemed to satisfy the requirements
above with respect to the financial capability of the insurer
if:
The fiduciary obtains written
representations from the insurer that it is licensed to
offer guaranteed retirement income contracts; that the
insurer, at the time of selection and for each of the
immediately preceding seven years operates under a
certificate of authority from the Insurance
Commissioner of its domiciliary State that has not been
revoked or suspended, has filed audited financial
statements in accordance with the laws of its
domiciliary State under applicable statutory accounting
principles, maintains (and has maintained) reserves
that satisfy all the statutory requirements of all
States where the insurer does business, and is not
operating under an order of supervision,
rehabilitation, or liquidation; and that the insurer
undergoes, at least every five years, a financial
examination (within the meaning of the law of its
domiciliary State) by the Insurance Commissioner of the
domiciliary State (or representative, designee, or
other party approved thereby),
In the case that, following the issuance of
the insurer representations described above, there is
any change in circumstances that would preclude the
insurer from making the same representations at the
time of issuance of the guaranteed retirement income
contract, the insurer is required to notify the
fiduciary, in advance of the issuance of any guaranteed
retirement income contract, that the fiduciary can no
longer rely on one or more of the representations, and
The fiduciary has not received such a
notification and has no other facts that would cause it
to question the insurer representations.
The provision specifies that nothing in these requirements
is to be construed to require a fiduciary to select the lowest
cost contract. Accordingly, a fiduciary may consider the value,
including features and benefits of the contract and attributes
of the insurer in conjunction with the contract's cost. For
this purpose, attributes of the insurer that may be considered
include, without limitation, the issuer's financial strength.
For purposes of the provision, the time of selection may be
either the time that the insurer for the contract is selected
for distribution of benefits to a specific participant or
beneficiary or the time that the insurer for the contract is
selected to provide benefits at future dates to participants or
beneficiaries, provided that the selecting fiduciary
periodically reviews the continuing appropriateness of its
conclusions with respect to the insurer's financial capability
and cost, taking into account the considerations described
above.\476\ A fiduciary will be deemed to have conducted a
periodic review of the financial capability of the insurer if
the fiduciary obtains the written representations described
above on an annual basis unless, in the interim, the fiduciary
has received notification from the insurer that representations
cannot be relied on or the fiduciary otherwise becomes aware of
facts that would cause it to question the representations.
---------------------------------------------------------------------------
\476\ However, a fiduciary is not required to review the
appropriateness of its conclusions following the purchase of any
contract or contracts for specific participants or beneficiaries.
---------------------------------------------------------------------------
A fiduciary that satisfies the requirements of the
provision is not liable following the distribution of any
benefit, or the investment by or on behalf of a participant or
beneficiary pursuant to the selected guaranteed retirement
income contract, for any losses that may result to the
participant or beneficiary due to an insurer's inability to
satisfy its financial obligations under the terms of the
contract.
Effective Date
The provision is effective on the date of enactment.
5. Modification of nondiscrimination rules to protect older, longer
service participants (sec. 205 of the Act and sec. 401 of the
Code)
Present Law
In general
Qualified retirement plans are subject to nondiscrimination
requirements, under which the group of employees covered by a
plan (``plan coverage'') and the contributions or benefits
provided to employees, including benefits, rights, and features
under the plan, must not discriminate in favor of highly
compensated employees.\477\ The timing of plan amendments must
also not have the effect of discriminating significantly in
favor of highly compensated employees. In addition, in the case
of a defined benefit plan, the plan must benefit at least the
lesser of (1) 50 employees of the employer, or (2) the greater
of (a) 40 percent of all employees of the employer or (b) two
employees (or one employee if there is only one employee),
referred to as the ``minimum participation'' requirements.\478\
These requirements are designed to help ensure that qualified
retirement plans achieve the goal of retirement security for
both lower and higher paid employees.
---------------------------------------------------------------------------
\477\ Secs. 401(a)(3)-(5) and 410(b). Detailed rules are provided
in Treas. Reg. secs. 1.401(a)(4)-1 through -13 and secs 1.410(b)-92
through -10. In applying the nondiscrimination requirements, certain
employees, such as those under age 21 or with less than a year of
service, generally may be disregarded. In addition, employees of
controlled groups and affiliated service groups under the aggregation
rules of section 414(b), (c), (m) and (o) are treated as employed by a
single employer.
\478\ Sec. 401(a)(26).
---------------------------------------------------------------------------
For nondiscrimination purposes, an employee generally is
treated as highly compensated if the employee (1) was a five-
percent owner of the employer at any time during the year or
the preceding year, or (2) had compensation for the preceding
year in excess of $125,000 (for 2019).\479\ Employees who are
not highly compensated are referred to as nonhighly compensated
employees.
---------------------------------------------------------------------------
\479\ Sec.A4(q). At the election of the employer, employees who are
highly compensated based on the amount of their compensation may be
limited to employees who were among the top 20 percent of employees
based on compensation.
---------------------------------------------------------------------------
Nondiscriminatory plan coverage
Whether plan coverage of employees is nondiscriminatory is
determined by calculating a plan's ratio percentage, that is,
the ratio of the percentage of nonhighly compensated employees
covered under the plan to the percentage of highly compensated
employees covered. For this purpose, certain portions of a
defined contribution plan are treated as separate plans to
which the plan coverage requirements are applied separately,
referred to as mandatory disaggregation. Specifically, the
following, if provided under a plan, are treated as separate
plans: the portion of a plan consisting of employee elective
deferrals, the portion consisting of employer matching
contributions, the portion consisting of employer nonelective
contributions, and the portion consisting of an employee stock
ownership plan (``ESOP'').\480\ Subject to mandatory
disaggregation, different qualified retirement plans may
otherwise be aggregated and tested together as a single plan,
provided they use the same plan year. The plan determined under
these rules for plan coverage purposes generally is also
treated as the plan for purposes of applying the other
nondiscrimination requirements.
---------------------------------------------------------------------------
\480\ Elective deferrals are contributions that an employee elects
to have made to a defined contribution plan that includes a qualified
cash or deferred arrangement (a section 401(k) plan) rather than
receive the same amount as current compensation. Employer matching
contributions are contributions made by an employer only if an employee
makes elective deferrals or after-tax employee contributions. Employer
nonelective contributions are contributions made by an employer
regardless of whether an employee makes elective deferrals or after-tax
employee contributions. Under section 4975(e)(7), an ESOP is a defined
contribution plan, or portion of a defined contribution plan, that is
designated as an ESOP and is designed to invest primarily in employer
stock.
---------------------------------------------------------------------------
A plan's coverage is nondiscriminatory if the ratio
percentage, as determined above, is 70 percent or greater. If a
plan's ratio percentage is less than 70 percent, a multi-part
test applies, referred to as the average benefit test. First,
the plan must meet a ``nondiscriminatory classification
requirement,'' that is, it must cover a group of employees that
is reasonable and established under objective business criteria
and the plan's ratio percentage must be at or above a level
specified in the regulations, which varies depending on the
percentage of nonhighly compensated employees in the employer's
workforce. In addition, the average benefit percentage test
must be satisfied.
Under the average benefit percentage test, in general, the
average rate of employer-provided contributions or benefit
accruals for all nonhighly compensated employees under all
plans of the employer must be at least 70 percent of the
average contribution or accrual rate of all highly compensated
employees.\481\ In applying the average benefit percentage
test, elective deferrals made by employees, as well as employer
matching and nonelective contributions, are taken into account.
Generally, all plans maintained by the employer are taken into
account, including ESOPs, regardless of whether plans use the
same plan year.
---------------------------------------------------------------------------
\481\ Contribution and benefit rates are generally determined under
the rules for nondiscriminatory contributions or benefit accruals,
described below. These rules are generally based on benefit accruals
under a defined benefit plan, other than accruals attributable to
after-tax employee contributions, and contributions allocated to
participants' accounts under a defined contribution plan, other than
allocations attributable to after-tax employee contributions. (Under
these rules, contributions allocated to participants' accounts are
referred to as ``allocations,'' with the related rates referred to as
``allocation rates,'' but "contribution rates" is used herein for
convenience.) However, as discussed below, benefit accruals can be
converted to actuarially equivalent contributions, and contributions
can be converted to actuarially equivalent benefit accruals.
---------------------------------------------------------------------------
Under a transition rule applicable in the case of the
acquisition or disposition of a business, or portion of a
business, or a similar transaction, a plan that satisfied the
plan coverage requirements before the transaction is deemed to
continue to satisfy them for a period after the
transaction,\482\ provided coverage under the plan is not
significantly changed during that period.\483\
---------------------------------------------------------------------------
\482\ It is for the period beginning on date of the transaction and
ending on the last day of the first plan year beginning after the date
of the transaction.
\483\ Sec. 410(b)(6)(C).
---------------------------------------------------------------------------
Nondiscriminatory contributions or benefit accruals
In general
There are three general approaches to testing the amount of
benefits under qualified retirement plans: (1) design-based
safe harbors under which the plan's contribution or benefit
accrual formula satisfies certain uniformity standards; (2) a
general test, described below, and (3) cross-testing of
equivalent contributions or benefit accruals. Employee elective
deferrals and employer matching contributions under defined
contribution plans are subject to special testing rules and
generally are not permitted to be taken into account in
determining whether other contributions or benefits are
nondiscriminatory.\484\
---------------------------------------------------------------------------
\484\ Secs. 401(k) and (m), the latter of which applies also to
after-tax employee contributions under a defined contribution plan.
---------------------------------------------------------------------------
The nondiscrimination rules allow contributions and benefit
accruals to be provided to highly compensated and nonhighly
compensated employees at the same percentage of
compensation.\485\ Thus, the various testing approaches
described below are generally applied to the amount of
contributions or accruals provided as a percentage of
compensation, referred to as a contribution rate or accrual
rate. In addition, under the ``permitted disparity'' rules, in
calculating an employee's contribution or accrual rate, credit
may be given for the employer paid portion of Social Security
taxes or benefits.\486\ The permitted disparity rules do not
apply in testing whether elective deferrals, matching
contributions, or ESOP contributions are nondiscriminatory.
---------------------------------------------------------------------------
\485\ For this purpose, under section 401(a)(17), annual
compensation generally is limited to $280,000 per year (for 2019).
\486\ See sections 401(a)(5)(C) and (D) and 401(l) and Treas. Reg.
sec. 1.401(a)(4)-7 and 1.401(l)-1 through -6 for rules for determining
the amount of contributions or benefits that can be attributed to the
employer-paid portion of Social Security taxes or benefits.
---------------------------------------------------------------------------
The general test is generally satisfied by measuring the
rate of contribution or benefit accrual for each highly
compensated employee to determine if the group of employees
with the same or higher rate (a ``rate'' group) is a
nondiscriminatory group, using the nondiscriminatory plan
coverage standards described above. For this purpose, if the
ratio percentage of a rate group is less than 70 percent, a
simplified standard applies, which includes disregarding the
reasonable classification requirement, but requires
satisfaction of the average benefit percentage test.
Cross-testing
Cross-testing involves the conversion of contributions
under a defined contribution plan or benefit accruals under a
defined benefit plan to actuarially equivalent accruals or
contributions, with the resulting equivalencies tested under
the general test. However, employee elective deferrals and
employer matching contributions under defined contribution
plans are not permitted to be taken into account for this
purpose, and cross-testing of contributions under a defined
contribution plan, or cross-testing of a defined contribution
plan aggregated with a defined benefit plan, is permitted only
if certain threshold requirements are satisfied.
In order for a defined contribution plan to be tested on an
equivalent benefit accrual basis, one of the following three
threshold conditions must be met:
The plan has broadly available allocation
rates, that is, each allocation rate under the plan is
available to a nondiscriminatory group of employees
(disregarding certain permitted additional
contributions provided to employees as a replacement
for benefits under a frozen defined benefit plan, as
discussed below);
The plan provides allocations that meet
prescribed designs under which allocations gradually
increase with age or service or are expected to provide
a target level of annuity benefit; or
The plan satisfies a minimum allocation
gateway, under which each nonhighly compensated
employee has an allocation rate of (a) at least one-
third of the highest rate for any highly compensated
employee, or (b) if less, at least five percent.
In order for an aggregated defined contribution and defined
benefit plan to be tested on an aggregate equivalent benefit
accrual basis, one of the following three threshold conditions
must be met:
The plan must be primarily defined benefit
in character, that is, for more than fifty percent of
the nonhighly compensated employees under the plan,
their accrual rate under the defined benefit plan
exceeds their equivalent accrual rate under the defined
contribution plan;
The plan consists of broadly available
separate defined benefit and defined contribution
plans, that is, the defined benefit plan and the
defined contribution plan would separately satisfy
simplified versions of the minimum coverage and
nondiscriminatory amount requirements; or
The plan satisfies a minimum aggregate
allocation gateway, under which each nonhighly
compensated employee has an aggregate allocation rate
(consisting of allocations under the defined
contribution plan and equivalent allocations under the
defined benefit plan) of (a) at least one-third of the
highest aggregate allocation rate for any nonhighly
compensated employee, or (b) if less, at least five
percent in the case of a highest nonhighly compensated
employee's rate up to 25 percent, increased by one
percentage point for each five-percentage-point
increment (or portion thereof) above 25 percent,
subject to a maximum of 7.5 percent.
Benefits, rights, and features
Each benefit, right, or feature offered under the plan
generally must be available to a group of employees that has a
ratio percentage that satisfies the minimum coverage
requirements, including the reasonable classification
requirement if applicable, except that the average benefit
percentage test does not have to be met, even if the ratio
percentage is less than 70 percent.
Multiple employer and section 403(b) plans
A multiple employer plan generally is a single plan
maintained by two or more unrelated employers, that is,
employers that are not treated as a single employer under the
aggregation rules for related entities.\487\ The plan coverage
and other nondiscrimination requirements are applied separately
to the portions of a multiple employer plan covering employees
of different employers.\488\
---------------------------------------------------------------------------
\487\ Sec. 413(c). Multiple employer plan status does not apply if
the plan is a multiemployer plan, defined under section 414(f) as a
plan maintained pursuant to one or more collective bargaining
agreements with two or more unrelated employers and to which the
employers are required to contribute under the collective bargaining
agreement(s). Multiemployer plans are also known as Taft-Hartley plans.
Section 101 of Pub. L. No. 116-94, Multiple employer plans; pooled
employer plans, describes the modifications to section 413 with respect
to multiple employer plans.
\488\ Treas. Reg. sec. 1.413-2(a)(3)(ii)-(iii).
---------------------------------------------------------------------------
Certain tax-exempt charitable organizations may offer their
employees a tax-deferred annuity plan (``section 403(b)
plan'').\489\ The nondiscrimination requirements, other than
the requirements applicable to elective deferrals, generally
apply to section 403(b) plans of private tax-exempt
organizations. For purposes of applying the nondiscrimination
requirements to a section 403(b) plan, subject to mandatory
disaggregation, a qualified retirement plan may be combined
with the section 403(b) plan and treated as a single plan.\490\
However, a section 403(b) plan and qualified retirement plan
may not be treated as a single plan for purposes of applying
the nondiscrimination requirements to the qualified retirement
plan.
---------------------------------------------------------------------------
\489\ Sec. 403(b). These plans are available to employers that are
tax exempt under section 501(c)(3), as well as to employers that are
educational institutions of State or local governments.
\490\ Treas. Reg. sec. 1.410(b)-7(f).
---------------------------------------------------------------------------
Closed and frozen defined benefit plans
A defined benefit plan may be amended to limit
participation in the plan to individuals to participate in the
plan. Such a plan is sometimes referred to as a ``closed''
defined benefit plan (that is, closed to new entrants). In such
a case, it is common for the employer also to maintain a
defined contribution plan and to provide employer matching or
nonelective contributions only to employees not covered by the
defined benefit plan or at a higher rate to such employees.
Over time, the group of employees continuing to accrue
benefits under the defined benefit plan may come to consist
more heavily of highly compensated employees, for example,
because of greater turnover among nonhighly compensated
employees or because increasing compensation causes nonhighly
compensated employees to become highly compensated. In that
case, the defined benefit plan may have to be combined with the
defined contribution plan and tested on a benefit accrual
basis. However, under the regulations, if none of the threshold
conditions is met, testing on a benefits basis may not be
available. Notwithstanding the regulations, recent IRS guidance
provides relief for a limited period, allowing certain closed
defined benefit plans to be aggregated with a defined
contribution plan and tested on an aggregate equivalent
benefits basis without meeting any of the threshold
conditions.\491\ When the group of employees continuing to
accrue benefits under a closed defined benefit plan consists
more heavily of highly compensated employees, the benefits,
rights, and features provided under the plan may also fail the
tests under the existing nondiscrimination rules.
---------------------------------------------------------------------------
\491\ Notice 2014-5, 2014-2 I.R.B. 276, December 13, 2013, extended
by Notice 2015-28, 2015-14 I.R.B. 848, March 19, 2015; Notice 2016-57,
2016-40 I.R.B. 432, September 19, 2016; Notice 2017-45, 2017-38 I.R.B.
232, August 31, 2017; Notice 2017-45, 2017-38 I.R.B. 232, August 31,
2017; Notice 2018-69, 2018-37 I.R.B. 426, September 10, 2018; and most
recently by Notice 2019-49, 2019-37 I.R.B. 699, September 9, 2019.
Proposed regulations revising the nondiscrimination requirements for
closed plans were also issued in 2016, subject to various conditions.
81 Fed. Reg. 4976, January 29, 2016.
---------------------------------------------------------------------------
In some cases, if a defined benefit plan is amended to
cease future accruals for all participants, referred to as a
``frozen'' defined benefit plan, additional contributions to a
defined contribution plan may be provided for participants, in
particular for older participants, in order to make up in part
for the loss of the benefits they expected to earn under the
defined benefit plan (``make-whole'' contributions). As a
practical matter, testing on a benefit accrual basis may be
required in that case, but may not be available because the
defined contribution plan does not meet any of the threshold
conditions.
Explanation of Provision
Closed or frozen defined benefit plans
In general
The provision provides nondiscrimination relief with
respect to benefits, rights, and features for a closed class of
participants (``closed class''),\492\ and with respect to
benefit accruals for a closed class, under a defined benefit
plan that meets the requirements described below (referred to
herein as an ``applicable'' defined benefit plan). In addition,
the provision treats a closed or frozen applicable defined
benefit plan as meeting the minimum participation requirements
if the plan met the requirements as of the effective date of
the plan amendment by which the plan was closed or frozen.
---------------------------------------------------------------------------
\492\ References under the provision to a closed class of
participants and similar references to a closed class include
arrangements under which one or more classes of participants are
closed, except that one or more classes of participants closed on
different dates are not aggregated for purposes of determining the date
any such class was closed.
---------------------------------------------------------------------------
If a portion of an applicable defined benefit plan eligible
for relief under the provision is spun off to another employer,
and if the spun-off plan continues to satisfy any ongoing
requirements applicable for the relevant relief as described
below, the relevant relief for the spun-off plan will continue
with respect to the other employer.
Benefits, rights, or features for a closed class
Under the provision, an applicable defined benefit plan
that provides benefits, rights, or features to a closed class
does not fail the nondiscrimination requirements by reason of
the composition of the closed class, or the benefits, rights,
or features provided to the closed class, if (1) for the plan
year as of which the class closes and the two succeeding plan
years, the benefits, rights, and features satisfy the
nondiscrimination requirements without regard to the relief
under the provision, but taking into account the special
testing rules described below; \493\ and (2) after the date as
of which the class was closed, any plan amendment modifying the
closed class or the benefits, rights, and features provided to
the closed class does not discriminate significantly in favor
of highly compensated employees.
---------------------------------------------------------------------------
\493\ Other testing options available under present law are also
available for this purpose.
---------------------------------------------------------------------------
For purposes of requirement (1) above, the following
special testing rules apply:
In applying the plan coverage transition
rule for business acquisitions, dispositions, and
similar transactions, the closing of the class of
participants is not treated as a significant change in
coverage;
Two or more plans do not fail to be eligible
to be treated as a single plan solely by reason of
having different plan years; \494\ and
---------------------------------------------------------------------------
\494\ This rule applies also for purposes of applying the plan
coverage and other nondiscrimination requirements to an applicable
defined benefit plan and one or more defined contributions that, under
the provision, may be treated as a single plan as described below.
---------------------------------------------------------------------------
Changes in employee population are
disregarded to the extent attributable to individuals
who become employees or cease to be employees, after
the date the class is closed, by reason of a merger,
acquisition, divestiture, or similar event.
Benefit accruals for a closed class
Under the provision, an applicable defined benefit plan
that provides benefits to a closed class may be aggregated,
that is, treated as a single plan, and tested on a benefit
accrual basis with one or more defined contribution plans
(without having to satisfy the threshold conditions under
present law) if (1) for the plan year as of which the class
closes and the two succeeding plan years, the plan satisfies
the plan coverage and nondiscrimination requirements without
regard to the relief under the provision, but taking into
account the special testing rules described above,\495\ and (2)
after the date as of which the class was closed, any plan
amendment modifying the closed class or the benefits provided
to the closed class does not discriminate significantly in
favor of highly compensated employees.
---------------------------------------------------------------------------
\495\ Other testing options available under present law are also
available for this purpose.
---------------------------------------------------------------------------
Under the provision, defined contribution plans that may be
aggregated with an applicable defined benefit plan and treated
as a single plan include the portion of one or more defined
contribution plans consisting of matching contributions, an
ESOP, or matching or nonelective contributions under a section
403(b) plan. If an applicable defined benefit plan is
aggregated with the portion of a defined contribution plan
consisting of matching contributions, any portion of the
defined contribution plan consisting of elective deferrals must
also be aggregated. In addition, the matching contributions are
treated in the same manner as nonelective contributions,
including for purposes of permitted disparity.
Applicable defined benefit plan
An applicable defined benefit plan to which relief under
the provision applies is a defined benefit plan under which the
class was closed (or the plan frozen) before April 5, 2017, or
that meets the following alternative conditions: (1) taking
into account any predecessor plan, the plan has been in effect
for at least five years as of the date the class is closed (or
the plan is frozen); and (2) under the plan, during the five-
year period preceding that date, (a) for purposes of the relief
provided with respect to benefits, rights, and features for a
closed class, there has not been a substantial increase in the
coverage or value of the benefits, rights, or features, or (b)
for purposes of the relief provided with respect to benefit
accruals for a closed class or the minimum participation
requirements, there has not been a substantial increase in the
coverage or benefits under the plan.
For purposes of (2)(a) above, a plan is treated as having a
substantial increase in coverage or value of benefits, rights,
or features only if, during the applicable five-year period,
either the number of participants covered by the benefits,
rights, or features on the date the period ends is more than 50
percent greater than the number on the first day of the plan
year in which the period began, or the benefits, rights, and
features have been modified by one or more plan amendments in
such a way that, as of the date the class is closed, the value
of the benefits, rights, and features to the closed class as a
whole is substantially greater than the value as of the first
day of the five-year period, solely as a result of the
amendments.
For purposes of (2)(b) above, a plan is treated as having
had a substantial increase in coverage or benefits only if,
during the applicable five-year period, either the number of
participants benefiting under the plan on the date the period
ends is more than 50 percent greater than the number of
participants on the first day of the plan year in which the
period began, or the average benefit provided to participants
on the date the period ends is more than 50 percent greater
than the average benefit provided on the first day of the plan
year in which the period began. In applying this requirement,
the average benefit provided to participants under the plan is
treated as having remained the same between the two relevant
dates if the benefit formula applicable to the participants has
not changed between the dates and, if the benefit formula has
changed, the average benefit under the plan is considered to
have increased by more than 50 percent only if the target
normal cost for all participants benefiting under the plan for
the plan year in which the five-year period ends exceeds the
target normal cost for all such participants for that plan year
if determined using the benefit formula in effect for the
participants for the first plan year in the five-year period by
more than 50 percent.\496\ In applying these rules, a multiple
employer plan is treated as a single plan, rather than as
separate plans separately covering the employees of each
participating employer.
---------------------------------------------------------------------------
\496\ Under the funding requirements applicable to defined benefit
plans, target normal cost for a plan year (defined in section
430(b)(1)(A)) is generally the sum of the present value of the benefits
expected to be earned under the plan during the plan year plus the
amount of plan-related expenses to be paid from plan assets during the
plan year. Under the provision, in applying this average benefit rule
to certain defined benefit plans maintained by cooperative
organizations and charities, referred to as CSEC plans (defined in
section 414(y)), which are subject to different funding requirements,
the CSEC plan's normal cost under section 433(j)(1)(B) is used instead
of target normal cost.
---------------------------------------------------------------------------
In applying these standards, any increase in coverage or
value, or in coverage or benefits, whichever is applicable, is
generally disregarded if it is attributable to coverage and
value, or coverage and benefits, provided to employees who (1)
became participants as a result of a merger, acquisition, or
similar event that occurred during the 7-year period preceding
the date the class was closed; or (2) became participants by
reason of a merger of the plan with another plan that had been
in effect for at least five years as of the date of the merger
and, in the case of benefits, rights, or features for a closed
class, under the merger, the benefits, rights, or features
under one plan were conformed to the benefits, rights, or
features under the other plan prospectively.
Make-whole contributions under a defined contribution plan
Under the provision, a defined contribution plan is
permitted to be tested on an equivalent benefit accrual basis
(without having to satisfy the threshold conditions under
present law) if the following requirements are met:
The plan provides make-whole contributions
to a closed class of participants whose accruals under
a defined benefit plan have been reduced or ended
(``make-whole class'');
For the plan year of the defined
contribution plan as of which the make-whole class
closes and the two succeeding plan years, the make-
whole class satisfies the nondiscriminatory
classification requirement under the plan coverage
rules, taking into account the special testing rules
described above;
After the date as of which the class was
closed, any amendment to the defined contribution plan
modifying the make-whole class or the allocations,
benefits, rights, and features provided to the make-
whole class does not discriminate significantly in
favor of highly compensated employees; and
Either the class was closed before April 5,
2017, or the defined benefit plan is an applicable
defined benefit plan under the alternative conditions
applicable for purposes of the relief provided with
respect to benefit accruals for a closed class.
With respect to one or more defined contribution plans
meeting the requirements above, in applying the plan coverage
and nondiscrimination requirements, the portion of the plan
providing make-whole or other nonelective contributions may
also be aggregated and tested on an equivalent benefit accrual
basis with the portion of one or more other defined
contribution plans consisting of matching contributions, an
ESOP, or matching or nonelective contributions under a section
403(b) plan. If the plan is aggregated with the portion of a
defined contribution plan consisting of matching contributions,
any portion of the defined contribution plan consisting of
elective deferrals must also be aggregated. In addition, the
matching contributions are treated in the same manner as
nonelective contributions, including for purposes of permitted
disparity.
Under the provision, ``make-whole contributions'' generally
means nonelective contributions for each employee in the make-
whole class that are reasonably calculated, in a consistent
manner, to replace some or all of the retirement benefits that
the employee would have received under the defined benefit plan
and any other plan or qualified cash or deferred arrangement
under a section 401(k) plan if no change had been made to the
defined benefit plan and other plan or arrangement.\ 497\
However, under a special rule, in the case of a defined
contribution plan that provides benefits, rights, or features
to a closed class of participants whose accruals under a
defined benefit plan have been reduced or eliminated, the plan
will not fail to satisfy the nondiscrimination requirements
solely by reason of the composition of the closed class, or the
benefits, rights, or features provided to the closed class, if
the defined contribution plan and defined benefit plan
otherwise meet the requirements described above but for the
fact
---------------------------------------------------------------------------
\497\ For this purpose, consistency is not required with respect to
employees who were subject to different benefit formulas under the
defined benefit plan that the make-whole contributions under the
defined contribution plan are made in whole or in part through matching
contributions.
---------------------------------------------------------------------------
If a portion of a defined contribution plan eligible for
relief under the provision is spun off to another employer, and
if the spun-off plan continues to satisfy any ongoing
requirements applicable for the relevant relief as described
above, the relevant relief for the spun-off plan will continue
with respect to the other employer.
Effective Date
The provision is generally effective on the date of
enactment, without regard to whether any plan modifications
referred to in the provision are adopted or effective before,
on, or after the date of enactment.
However, at the election of a plan sponsor, the provision
will apply to plan years beginning after December 31, 2013. For
purposes of the provision, a closed class of participants under
a defined benefit plan is treated as being closed before April
5, 2017 if the plan sponsor's intention to create the closed
class is reflected in formal written documents and communicated
to participants before that date. In addition, a plan does not
fail to be eligible for the relief under the provision solely
because (1) in the case of benefits, rights, or features for a
closed class under a defined benefit plan, the plan was amended
before the date of enactment to eliminate one or more benefits,
rights, or features and is further amended after the date of
enactment to provide the previously eliminated benefits,
rights, or features to a closed class of participants; or (2)
in the case of benefit accruals for a closed class under a
defined benefit plan or application of the minimum benefit
requirements to a closed or frozen defined benefit plan, the
plan was amended before the date of the enactment to cease all
benefit accruals and is further amended after the date of
enactment to provide benefit accruals to a closed class of
participants. In either case, the relevant relief applies only
if the plan otherwise meets the requirements for the relief,
and, in applying the relevant relief, the date the class of
participants is closed is the effective date of the later
amendment.
6. Modification of PBGC premiums for CSEC plans (sec. 206 of the Act
and sec. 4006 of ERISA)
Present Law
Qualified retirement plans, including defined benefit
plans, are categorized as single employer plans or multiple
employer plans.\498\ A single employer plan is a plan
maintained by one employer.\499\ A multiple employer plan
generally is a single plan maintained by two or more unrelated
employers (that is, employers that are not treated as a single
employer under the aggregation rules).\500\
---------------------------------------------------------------------------
\498\ A third type of plan is a multiemployer plan, defined under
section 414(f) as a plan maintained pursuant to one or more collective
bargaining agreements with two or more unrelated employers and to which
the employers are required to contribute under the collective
bargaining agreement(s). Multiemployer plans are also known as Taft-
Hartley plans. Multiemployer plans are subject to different minimum
funding requirements from those applicable to single employer plans and
multiple employer plans, as well as to different PBGC premium and
benefit guarantee structures.
\499\ For this purpose, businesses and organizations that are
members of a controlled group of corporations, a group under common
control, or an affiliated service group are treated as one employer
(referred to as ``aggregation''). Secs. 414(b), (c), (m) and (o).
\500\ Sec. 413(c). Multiple employer plan status does not apply if
the plan is a multiemployer plan.
---------------------------------------------------------------------------
Defined benefit plans maintained by private employers are
generally subject to minimum funding requirements.\501\
Historically, single employer and multiple employer defined
benefit plans have been subject to the same minimum funding
requirements. However, when the funding requirements for single
employer plans were substantially revised by the Pension
Protection Act of 2006,\502\ effective 2008, a delayed
effective date was provided for certain multiple employer plans
in order to allow time for further congressional consideration
of appropriate rules for these plans. Such consideration
resulted in the enactment in 2014 of the Cooperative and Small
Employer Charity Pension Flexibility Act (``CSEC Act''),\503\
which provides specific funding rules for certain multiple
employer plans, referred to as CSEC plans.\504\
---------------------------------------------------------------------------
\501\ Secs. 412 and 430-433 and ERISA secs. 301-306. Unless a
funding waiver is obtained, an employer may be subject to a two-tier
excise tax under section 4971 if the funding requirements are not met.
\502\ Pub. L. No. 109-280.
\503\ Pub. L. No. 113-197.
\504\ As defined in section 414(y) and ERISA section 210(f), CSEC
plans include defined benefit plans maintained by certain cooperative
organizations, such as rural electric or telephone cooperatives, or by
certain tax-exempt organizations. The definition of a CSEC plan was
further amended by the Consolidated and Further Continuing
Appropriations Act, 2015, Pub. L. No. 113-235, December 16, 2014, to
include a plan that, as of June 25, 2010, was maintained by an employer
(1) that is a tax-exempt charitable organization and a Federally
chartered patriotic organization, (2) that has employees in at least 40
States, and (3) the primary exempt purpose of which is to provide
services with respect to children. For purposes of determining the
employer maintaining the plan, the aggregation rules for controlled
groups and groups under common control employers apply.
---------------------------------------------------------------------------
Private defined benefit plans are also covered by the
Pension Benefit Guaranty Corporation (``PBGC'') insurance
program, under which the PBGC guarantees the payment of certain
plan benefits, and plans are required to pay annual premiums to
the PBGC.\505\ Plan sponsors of single employer plans and
multiemployer plans must participate in the PBGC insurance
program. Single employer plans and multiple employer plans,
including CSEC plans, are subject to the same PBGC premium
requirements, consisting of flat-rate, per participant premiums
and variable rate premiums, based on the unfunded vested
benefits under the plan.\506\ For 2019, flat-rate premiums are
$80 per participant, and variable rate premiums are $43 for
each $1,000 of unfunded vested benefits, subject to a limit of
$541 multiplied by the number of plan participants.\507\ For
this purpose, unfunded vested benefits under a plan for a plan
year is the excess (if any) of (1) the plan's funding target
for the plan year, determined by taking into account only
vested benefits and using specified interest rates, \508\ over
(2) the fair market value of plan assets.
---------------------------------------------------------------------------
\505\ Title IV of ERISA.
\506\ The same PBGC benefit guarantee structure also applies to
single employer plans and multiple employer plans.
\507\ These premium rates have been increased several times by
legislation since 2005 and are subject to automatic increases to
reflect inflation (referred to as ``indexing'').
\508\ Corporate bond rates are used for PBGC liability measurement
purposes. For funding purposes, single employer plans are required to
use the 24-month average segment rates (before adjustment) determined
under Section 430(h)(2), as amended by the ``Moving Ahead for Progress
in the 21st Century Act'' (MAP-21), Pub. L. No. 112-141, the ``Highway
and Transportation Funding Act of 2014'' (HATFA), Pub. L. No.113-159,
and the Bipartisan Budget Act of 2015 (BBA), Pub. L. No. 114-74.
However, a plan sponsor is permitted to elect to use the monthly yield
curve under section 430(h)(2)(D)(ii) in place of the segment rates.
CSEC plans may use the third segment rate to determine current
liability. Sec. 433(h)(3). CSEC plans were also able to elect (not
later than the close of the first plan year of the plan beginning after
December 31, 2013), not to be treated as a CSEC plan so that the same
interest rates that apply to single employer plans would apply to CSEC
plans.
---------------------------------------------------------------------------
Under the funding rules applicable to single employer
plans, a plan's funding target is the present value of all
benefits accrued or earned under the plan as of the beginning
of the plan year, determined using certain specified actuarial
assumptions, including specified interest rates and mortality.
A single employer plan's funding target is a factor taken into
account in determining required contributions for the plan.
Although a CSEC plan's funding target is used under present law
to determine variable rate premiums, it does not apply in
determining required contributions for a CSEC plan. Instead, a
CSEC plan's funding liability applies, which is the present
value of all benefits accrued or earned under the plan as of
the beginning of the plan year, determined using reasonable
actuarial assumptions chosen by the plan's actuary.
Explanation of Provision
Under the provision, for CSEC plans, flat-rate premiums are
$19 per participant, and variable rate premiums are $9 for each
$1,000 of unfunded vested benefits.\509\ In addition, for
purposes of determining a CSEC plan's variable rate premiums,
unfunded vested benefits for a plan year is the excess (if any)
of (1) the plan's funding liability, determined by taking into
account only vested benefits, over (2) the fair market value of
plan assets.
---------------------------------------------------------------------------
\509\ These are the premium rates that applied to single employer
plans and multiple employer plans in 2005 and are not subject to
indexing.
---------------------------------------------------------------------------
The provision applies to such plans with plan years
beginning after December 31, 2018.
Effective Date
The provision is effective on date of enactment.
TITLE III--OTHER BENEFITS
1. Benefits provided to volunteer firefighters and emergency medical
responders (sec. 301 of the Act and sec. 139B of the Code)
Present Law
Benefits for volunteer firefighters and emergency medical responders
In general, a reduction in property tax by persons who
volunteer their services as emergency responders under a State
law program is includible in gross income.\510\ However, for
taxable years beginning after December 31, 2007, and before
January 1, 2011, an exclusion applied for any qualified State
and local tax benefit and any qualified payment provided to
members of qualified volunteer emergency response
organizations.\511\
---------------------------------------------------------------------------
\510\ CCA 200302045 (December 2002).
\511\ Sec. 139B. The exclusion applied also for purposes of taxes
under the Federal Insurance Contributions Act (``FICA'') under section
3121(a)(2), for Federal Unemployment Tax Act (``FUTA'') purposes under
section 3306(b)(20), and for Federal income tax purposes under section
3401(a)(23).
---------------------------------------------------------------------------
A qualified volunteer emergency response organization is a
volunteer organization that is organized and operated to
provide firefighting or emergency medical services for persons
in a State or a political subdivision and is required (by
written agreement) by the State or political subdivision to
furnish firefighting or emergency medical services in the State
or political subdivision.
A qualified State and local tax benefit is any reduction or
rebate of certain taxes provided by a State or political
division thereof on account of services performed by
individuals as members of a qualified volunteer emergency
response organization. These taxes are limited to State or
local income taxes, State or local real property taxes, and
State or local personal property taxes. A qualified payment is
a payment (whether reimbursement or otherwise) provided by a
State or political division thereof on account of the
performance of services as a member of a qualified volunteer
emergency response organization. The amount of excludable
qualified payments is limited to $30 for each month during
which a volunteer performs services.
Itemized deductions
Subject to certain limitations, individuals are allowed
itemized deductions for (1) State and local income taxes, real
property taxes, and personal property taxes, and (2)
contributions to charitable organizations, including
unreimbursed expenses incurred in performing volunteer services
for such an organization.\512\
---------------------------------------------------------------------------
\512\ Secs. 164(a) and 170.
---------------------------------------------------------------------------
The amount of State or local taxes taken into account in
determining the deduction for taxes is reduced by the amount of
any excludible qualified State and local tax benefit.
Similarly, expenses paid or incurred by an individual in
connection with the performance of services as a member of a
qualified volunteer emergency response organization are taken
into account for purposes of the charitable deduction only to
the extent the expenses exceed the amount of any excludible
qualified payment.
Explanation of Provision
The provision reinstates for one year the exclusions for
qualified State and local tax benefits and qualified payments
provided to members of qualified volunteer emergency response
organizations. The provision also increases the exclusion for
qualified payments to $50 for each month during which a
volunteer performs services. Under the provision, the
exclusions for qualified State and local tax benefits and
qualified payments do not apply for taxable years beginning
after December 31, 2020.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2019. As described above, the exclusions do
not apply for taxable years beginning after December 31, 2020.
Thus, the exclusions apply only for taxable years beginning
during 2020.
2. Expansion of section 529 plans (sec. 302 of the Act and sec. 529 of
the Code)
Present Law
In general
A qualified tuition program (often referred to as a ``529
plan'') is a program established and maintained by a State or
agency or instrumentality thereof, or by one or more eligible
educational institutions, which satisfies certain requirements
and under which a person may purchase tuition credits or
certificates on behalf of a designated beneficiary that entitle
the beneficiary to the waiver or payment of qualified higher
education expenses of the beneficiary (``prepaid tuition
contract''). In the case of a program established and
maintained by a State or agency or instrumentality thereof, a
qualified tuition program also includes a program under which a
person may make contributions to an account that is established
for the purpose of satisfying the qualified higher education
expenses of the designated beneficiary of the account, provided
it satisfies certain specified requirements (``tuition savings
account''). Section 529 provides specified income tax and
transfer tax rules for the treatment of accounts and contracts
established under qualified tuition programs.\513\ Under both
types of qualified tuition programs, a contributor establishes
an account for the benefit of a particular designated
beneficiary to provide for that beneficiary's higher education
expenses.
---------------------------------------------------------------------------
\513\ For purposes of this description, the term ``account'' is
used interchangeably to refer to a prepaid tuition benefit contract or
a tuition savings account established pursuant to a qualified tuition
program.
---------------------------------------------------------------------------
In general, prepaid tuition contracts and tuition savings
accounts established under a qualified tuition program involve
prepayments or contributions made by one or more individuals
for the benefit of a designated beneficiary. Decisions with
respect to the contract or account may be made by an individual
who is not the designated beneficiary. Qualified tuition
accounts or contracts generally require the designation of a
person (generally referred to as an ``account owner'') \514\
whom the program administrator (often a third-party
administrator retained by the State or by the educational
institution that established the program) may look to for
decisions, recordkeeping, and reporting with respect to the
account established for a designated beneficiary. The person or
persons who make the contributions to the account also need not
be the same person who is regarded as the account owner for
purposes of administering the account or the designated
beneficiary. Under many qualified tuition programs, the account
owner generally has control over the account or contract,
including the ability to change designated beneficiaries and to
withdraw funds at any time and for any purpose. Thus, in
practice, qualified tuition accounts or contracts generally
involve a contributor, a designated beneficiary, an account
owner (all three of whom may be the same person or different
people), and an administrator of the account or contract.
---------------------------------------------------------------------------
\514\ Section 529 refers to contributors and designated
beneficiaries but does not define or otherwise refer to the term
``account owner,'' which is a commonly used term among qualified
tuition programs.
---------------------------------------------------------------------------
Qualified higher education expenses
Distributions for the purpose of meeting the designated
beneficiary's higher education expenses are generally not
subject to tax. For purposes of receiving a distribution from a
qualified tuition program that qualifies for this favorable tax
treatment, the term qualified higher education expenses means
tuition, fees, books, supplies, and equipment required for the
enrollment or attendance of a designated beneficiary at an
eligible educational institution, and expenses for special
needs services in the case of a special needs beneficiary that
are incurred in connection with such enrollment or attendance.
Qualified higher education expenses generally also include room
and board for students who are enrolled at least half-time.
Qualified higher education expenses include the purchase of any
computer technology or equipment, or Internet access or related
services, if such technology or services are to be used
primarily by the beneficiary during any of the years a
beneficiary is enrolled at an eligible institution.
For distributions made after December 31, 2017, a
designated beneficiary may, on an annual basis, receive up to
$10,000 in aggregate 529 distributions to be used in connection
with expenses for tuition in connection with enrollment or
attendance at an elementary or secondary public, private, or
religious school. To the extent these distributions do not
exceed $10,000, they are treated in the same manner as
distributions for qualified higher education expenses.
Contributions to qualified tuition programs
Contributions to a qualified tuition program must be made
in cash. Section 529 does not impose a specific dollar limit on
the amount of contributions, account balances, or prepaid
tuition benefits relating to a qualified tuition account or
contract; however, the program is required to have adequate
safeguards to prevent contributions in excess of amounts
necessary to provide for the beneficiary's qualified higher
education expenses. Contributions generally are treated as a
completed gift that is subject to the gift tax but is eligible
for the gift tax annual exclusion.\515\ Contributions are not
tax deductible for Federal income tax purposes, although they
may be deductible for State income tax purposes. Amounts in the
account accumulate on a tax-free basis (i.e., income on
accounts in the plan is not subject to current Federal income
tax).
---------------------------------------------------------------------------
\515\ A contributor may elect to have a contribution in excess of
the gift tax annual exclusion be treated as if it was made ratably over
five years beginning in the year the contribution is made. Sec.
529(c)(2)(B).
---------------------------------------------------------------------------
A qualified tuition program may not permit any contributor
to, or designated beneficiary under, the program to direct
(directly or indirectly) the investment of any contributions
(or earnings thereon) more than two times in any calendar year,
and must provide separate accounting for each designated
beneficiary. A qualified tuition program may not allow any
interest in an account or contract (or any portion thereof) to
be used as security for a loan.
Deduction for interest on education loans
Certain individuals who have paid interest on qualified
education loans may claim an above-the-line deduction for the
interest expense, subject to a maximum annual deduction limit
of $2,500.\516\ For 2020, the deduction is phased out ratably
for taxpayers with modified AGI between $70,000 and $85,000
($140,000 and $170,000 for married taxpayers filing a joint
return). The income phaseout ranges are indexed for inflation.
---------------------------------------------------------------------------
\516\ Sec. 221.
---------------------------------------------------------------------------
A qualified education loan generally is defined as any
indebtedness incurred solely to pay for the costs of attendance
(including room and board) of the taxpayer, the taxpayer's
spouse, or any dependent of the taxpayer as of the time the
indebtedness was incurred in attending on at least a half-time
basis (1) an eligible educational institution, or (2) an
institution conducting internship or residency programs leading
to a degree or certificate from an institution of higher
education, a hospital, or a health care facility conducting
postgraduate training. The cost of attendance is reduced by any
amount excluded from gross income under the exclusions for
qualified scholarships and tuition reductions, employer-
provided educational assistance, interest earned on education
savings bonds, qualified tuition programs, and Coverdell
education savings accounts, as well as the amount of certain
other scholarships and similar payments.
Explanation of Provision
The provision makes two modifications to section 529 plans.
First, the provision allows the tax-free treatment of
distributions for higher education expenses to apply to
expenses for fees, books, supplies, and equipment required for
the participation of a designated beneficiary in an
apprenticeship program. The apprenticeship program must be
registered and certified with the Secretary of Labor under
section 1 of the National Apprenticeship Act.\517\
---------------------------------------------------------------------------
\517\ 29 U.S.C. 50.
---------------------------------------------------------------------------
Second, the provision allows tax-free treatment to apply to
distributions of certain amounts used to make payments on
principal or interest of a qualified education loan. No
individual may receive more than $10,000 of such distributions,
in aggregate, over the course of the individual's
lifetime.\518\ To the extent that an individual receives in
excess of $10,000 of such distributions, the portion of the
excess representing earnings is included in income and is
subject to a 10-percent penalty (following the general 529
rules for non-qualified distributions). The provision contains
a special rule allowing such amounts to be distributed to a
sibling of a designated beneficiary (i.e., a brother, sister,
stepbrother, or stepsister). This rule allows a 529 account
holder to make a student loan distribution to a sibling of the
designated beneficiary without changing the designated
beneficiary of the account. For purposes of the $10,000
lifetime limit on student loan distributions, a distribution to
a sibling of a designated beneficiary is applied towards the
sibling's lifetime limit, and not the designated beneficiary's
lifetime limit. The deduction available for interest paid by
the taxpayer during the taxable year on any qualified education
loan is disallowed to the extent such interest was paid from a
tax-free distribution from a 529 plan.
---------------------------------------------------------------------------
\518\ This limitation applies to such distributions from all 529
accounts. Thus, an individual may not avoid the limitation by receiving
separate $10,000 distributions from multiple 529 accounts.
---------------------------------------------------------------------------
Effective Date
The provision applies to distributions made after December
31, 2018.
TITLE IV--REVENUE PROVISIONS
1. Modification of required minimum distribution rules for designated
beneficiaries (sec. 401 of the Act and sec. 401(a)(9) of the
Code)
Present Law
In general
Minimum distribution rules apply to tax-favored employer-
sponsored retirement plans and IRAs.\519\ Employer-sponsored
retirement plans are of two general types: defined benefit
plans, under which benefits are determined under a plan formula
and paid from general plan assets, rather than individual
accounts; and defined contribution plans, under which benefits
are based on a separate account for each participant, to which
are allocated contributions, earnings and losses.
---------------------------------------------------------------------------
\519\ Secs. 401(a)(9), 403(b)(10), 408(a)(6), 408(b)(3), and
457(d)(2). Tax-favored employer-sponsored retirement plans include
qualified retirement plans and annuities under sections 401(a) and
403(a), tax-deferred annuity plans under section 403(b), and
governmental eligible deferred compensation plans under section 457(b).
Minimum distribution requirements also apply to eligible deferred
compensation plans under section 457(b) of tax-exempt employers.
---------------------------------------------------------------------------
In general, under the minimum distribution rules,
distribution of minimum benefits must begin to an employee (or
IRA owner) no later than a required beginning date and a
minimum amount must be distributed each year (sometimes
referred to as ``lifetime'' minimum distribution requirements).
These lifetime requirements do not apply to a Roth IRA.\520\
Minimum distribution rules also apply to benefits payable with
respect to an employee (or IRA owner) who has died (sometimes
referred to as ``after-death'' minimum distribution
requirements). The regulations provide a methodology for
calculating the required minimum distribution from an
individual account under a defined contribution plan or from an
IRA.\521\ In the case of annuity payments under a defined
benefit plan or an annuity contract, the regulations provide
requirements that the stream of annuity payments must satisfy.
---------------------------------------------------------------------------
\520\ Sec. 408A(c)(4).
\521\ Reflecting the directive in section 823 of the Pension
Protection Act of 2006 (Pub. L. No. 109-280), pursuant to Treas. Reg.
sec. 1.401(a)(9)-1, A-2(d), a governmental plan within the meaning of
section 414(d) or a governmental eligible deferred compensation plan is
treated as having complied with the statutory minimum distribution
rules if the plan complies with a reasonable and good faith
interpretation of those rules.
---------------------------------------------------------------------------
Failure to comply with the minimum distribution
requirements results in an excise tax imposed on the individual
who was required to take the distributions equal to 50 percent
of the amount by which the required minimum distribution
exceeds the actual amount distributed during the taxable
year.\522\ The excise tax may be waived in certain cases for
reasonable cause. For employer-sponsored retirement plans,
satisfying the minimum distribution requirement under the plan
terms and in operation is also a requirement for tax-favored
treatment.
---------------------------------------------------------------------------
\522\ Sec. 4974.
---------------------------------------------------------------------------
Required beginning date
For traditional IRAs, the required beginning date is April
1 following the calendar year in which the employee (or IRA
owner) attains age 70\1/2\. For employer-sponsored retirement
plans, for an employee other than an employee who is a five-
percent owner in the year the employee attains age 70\1/2\, the
required beginning date is April 1 after the later of the
calendar year in which the employee attains age 70\1/2\ or
retires. For an employee who is a five-percent owner under an
employer-sponsored tax-favored retirement plan in the year the
employee attains age 70\1/2\, the required beginning date is
the same as for IRAs even if the employee continues to work
past age 70\1/2\.
Lifetime rules
While an employee (or IRA owner) is alive, distributions of
the individual's interest are required to be made (in
accordance with regulations) over the life of the employee (or
IRA owner) or over the joint lives of the employee (or IRA
owner) and a designated beneficiary (or over a period not
extending beyond the life expectancy of such employee (or IRA
owner) or the life expectancy of such employee (or IRA owner)
and a designated beneficiary).\523\ For defined contribution
plans and IRAs, the required minimum distribution for each year
is determined by dividing the account balance as of the end of
the prior year by a distribution period which, while the
employee (or IRA owner) is alive, is the factor for the
employee's (or IRA owner's) age from the Uniform Lifetime Table
included in the Treasury regulations.\524\ The distribution
period for annuity payments under a defined benefit plan or
annuity contract (to the extent not limited to the life of the
employee (or IRA owner) or the joint lives of the employee (or
IRA owner) and a designated beneficiary) is generally subject
to the same limitations as apply to individual accounts.\525\
---------------------------------------------------------------------------
\523\ Sec. 401(a)(9)(A).
\524\ Treas. Reg. sec. 1.401(a)(9)-5. This table is based on the
joint life and last survivor expectancy of the individual and a
hypothetical beneficiary 10 years younger. For an individual with a
spouse as designated beneficiary who is more than 10 years younger (and
thus the number of years in the couple's joint life and last survivor
expectancy is greater than the Uniform Lifetime Table), the joint life
expectancy and last survivor expectancy of the couple (calculated using
the table in the regulations) is used. For this purpose and other
special rules that apply to the surviving spouse as beneficiary, a
former spouse to whom all or a portion of an employee's benefit is
payable pursuant to a qualified domestic relations order (within the
meaning of section 414(p)) is treated as the spouse (including a
surviving spouse) of the employee for purposes of section 401(a)(9).
\ 525\ Treas. Reg. sec. 1.401(a)(9)-6.
---------------------------------------------------------------------------
After-death rules
Payments over a distribution period
The after-death minimum distributions rules vary depending
on (i) whether an employee (or IRA owner) dies on or after the
required beginning date or before the required beginning date,
and (ii) whether there is a designated beneficiary for the
benefit.\526\ Under the regulations, a designated beneficiary
is an individual designated as a beneficiary under the plan or
IRA.\527\ Similar to the lifetime rules, for defined
contribution plans and IRAs (``individual accounts''), the
required minimum distribution for each year after the death of
the employee (or IRA owner) is generally determined by dividing
the account balance as of the end of the prior year by a
distribution period.
---------------------------------------------------------------------------
\526\ In the case of amounts for which the employee or IRA owner's
surviving spouse is the beneficiary, the surviving spouse generally is
permitted to do a tax-free rollover of such amounts to an IRA (or
account of a tax-favored employer-sponsored plan of the spouse's
employer) established in the surviving spouse's name as IRA owner or
employee. The rules applicable to the rollover account, including the
minimum distribution rules, are the same rules that apply to an IRA
owner or employee. In the case of an IRA for which the spouse is sole
beneficiary, this can be accomplished by simply renaming the IRA as an
IRA held by the spouse as IRA owner rather than as a beneficiary.
\527\ Treas. Reg. sec. 1.401(a)(9)-4, Q&A-1. The individual need
not be named as long as the individual is identifiable under the terms
of the plan (or IRA). However, the fact that an interest under a plan
or IRA passes to a certain individual under a will or otherwise under
State law does not make that individual a designated beneficiary unless
the individual is designated as a beneficiary under the plan or IRA.
---------------------------------------------------------------------------
If an employee (or IRA owner) dies on or after the required
beginning date, the basic statutory rule is that the remaining
interest must be distributed at least as rapidly as under the
method of distribution being used before death.\528\ If there
is no designated beneficiary, the distribution period is
measured by the employee's (or IRA owner's) life expectancy
using age as of the year of death.\529\ If there is a
designated beneficiary, the distribution period is (if longer)
the beneficiary's life expectancy calculated using the life
expectancy table in the regulations, determined in the year
after the year of death.\530\
---------------------------------------------------------------------------
\528\ Sec. 401(a)(9)(B)(i).
\529\ Treas. Reg. sec. 1.401(a)(9)-5, Q&A-5(a)(2).
\530\ Treas. Reg. sec. 1.401(a)(9)-5, Q&A-5(a)(1).
---------------------------------------------------------------------------
If an employee (or IRA owner) dies before the required
beginning date and any portion of the benefit is payable to a
designated beneficiary, the statutory rule is that
distributions are generally required to begin within one year
of the employee's (or IRA owner's) death (or such later date as
may be prescribed in regulations) and are permitted to be paid
(in accordance with regulations) over the life of the
designated beneficiary or over a period not extending beyond
the life expectancy of such beneficiary. If the beneficiary of
the employee (or IRA owner) is the individual's surviving
spouse, distributions are not required to commence until the
year in which the employee (or IRA owner) would have attained
age 70\1/2\. If the surviving spouse dies before the employee
(or IRA owner) would have attained age 70\1/2\, the after-death
rules apply after the death of the spouse as though the spouse
were the employee (or IRA owner). Under the regulations, for
individual accounts, the required minimum distribution for each
year is determined using a distribution period and the period
is measured by the designated beneficiary's life expectancy,
calculated in the same manner as if the individual died on or
after the required beginning date.\531\
---------------------------------------------------------------------------
\531\ Treas. Reg. sec. 1.401(a)(9)-5, A-5(b).
---------------------------------------------------------------------------
In cases where distribution after death is based on life
expectancy (either the remaining life expectancy of the
employee (or IRA owner) or a designated beneficiary), the
distribution period generally is fixed at the employee's (or
IRA owner's) death and then reduced by one for each year that
elapses after the year in which it is calculated. If the
designated beneficiary dies during the distribution period,
distributions continue to subsequent beneficiaries over the
remaining years in the distribution period.\532\
---------------------------------------------------------------------------
\532\ If the distribution period is based on the surviving
spouse's life expectancy (whether the employee or IRA owner's death is
before or after the required beginning date), the spouse's life
expectancy generally is recalculated each year while the spouse is
alive and then fixed the year after the spouse's death.
---------------------------------------------------------------------------
The distribution period for annuity payments under a
defined benefit plan or annuity contract (to the extent not
limited to the life of a designated beneficiary) is generally
subject to the same limitations as apply to individual
accounts.
Five-year rule
If an employee (or IRA owner) dies before the required
beginning date and there is no designated beneficiary, then the
entire remaining interest of the employee (or IRA owner) must
generally be distributed by the end of the fifth calendar year
following the individual's death.\533\
---------------------------------------------------------------------------
\533\ Section 401(a)(9)(B)(ii) provides that the entire interest
must be distributed within five years of the employee's death. Treas.
Reg. sec. 1.401(a)(9)-3, A-2, provides that this requirement is
satisfied if the entire interest is distributed by the end of the fifth
calendar year following the employee's death. There are provisions in
the regulations allowing a designated beneficiary to take advantage of
the five-year rule. See Treas. Reg. secs. 1.401(a)(9)-3, A-4, and
1.4974-2, A-7(b).
---------------------------------------------------------------------------
Multiple beneficiaries and trusts
Treasury regulations include special rules for determining
an employee's (or IRA owner's) designated beneficiary for
purposes of calculating the distribution period in the case of
multiple designated beneficiaries or in the case of a
beneficiary that is a trust.
Generally, if an employee (or IRA owner) has more than one
designated beneficiary, the designated beneficiary with the
shortest life expectancy is the designated beneficiary for
purposes of determining the distribution period.\534\
---------------------------------------------------------------------------
\534\ Treas. Reg. sec. 1.401(a)(9)-5, A-7. Exceptions apply in the
case of certain successor beneficiaries.
---------------------------------------------------------------------------
If a trust is named as an employee's (or IRA owner's)
beneficiary, the beneficiaries of the trust (and not the trust
itself) are treated as designated beneficiaries of the employee
or IRA owner if the following requirements are met: (1) the
trust is a valid trust under state law, or would be but for the
fact that there is no corpus, (2) the trust is irrevocable or
will, by its terms, become irrevocable upon the employee's (or
IRA owner's) death, (3) the trust beneficiaries who are
beneficiaries with respect to the trust's interest in the
employee's (or IRA owner's) benefit are identifiable from the
trust instrument,\535\ and (4) certain documentation
requirements \536\ are met.\537\
---------------------------------------------------------------------------
\535\ The beneficiary must be identifiable within the meaning of
Treas. Reg. sec. 1.401(a)(9)-4, A-1.
\536\ The documentation described in Treas. Reg. sec. 1.401(a)(9)-
4, A-6 must be provided to the plan administrator.
\537\ Treas. Reg. sec. 1.401(a)(9)-4, A-5.
---------------------------------------------------------------------------
Defined benefit plans and annuity distributions
The regulations provide rules for the amount of annuity
distributions from a defined benefit plan, or from an annuity
purchased by the plan from an insurance company, that are paid
over life (or a period not extending beyond life expectancy).
Annuity distributions are generally required to be
nonincreasing over time with certain exceptions, which include,
for example, (i) increases to the extent of certain specified
cost-of-living indices, (ii) a constant percentage increase
(for a qualified defined benefit plan, the constant percentage
cannot exceed five percent per year), (iii) certain
accelerations of payments, and (iv) increases to reflect when
an annuity is converted to a single life annuity after the
death of the beneficiary under a joint and survivor annuity or
after termination of the survivor annuity under a qualified
domestic relations order.\538\ If distributions are in the form
of a joint and survivor annuity and the survivor annuitant both
is an individual other than the surviving spouse and is younger
than the employee (or IRA owner), the survivor annuity benefit
must be limited to a percentage of the life annuity benefit for
the employee (or IRA owner). The survivor benefit as a
percentage of the benefit of the primary annuitant is required
to be smaller (but not required to be less than 52 percent) as
the difference in the ages of the primary annuitant and the
survivor annuitant becomes greater.
---------------------------------------------------------------------------
\538\ Treas. Reg. sec. 1.401(a)(9)-6, A-14.
---------------------------------------------------------------------------
Explanation of Provision
Change in after-death rules for defined contribution plans
The provision changes the after-death required minimum
distribution rules applicable to defined contribution plans, as
defined, with respect to required minimum distributions to
designated beneficiaries. A defined contribution plan for this
purpose means an eligible retirement plan (qualified retirement
plans, section 403(b) plans, governmental section 457(b) plans,
and IRAs) other than a defined benefit plan.\539\
---------------------------------------------------------------------------
\539\ Under the provision, a defined contribution plan is an
eligible retirement plan, as defined in sec. 402(c)(8)(B), other than a
defined benefit plan described in clause (iv) or (v) thereof or a
qualified trust that is part of a defined benefit plan.
---------------------------------------------------------------------------
Ten-year after-death rule for defined contributions plans
In general
Under the provision, the five-year rule is expanded to
become a 10-year period instead of five years (``10-year
rule''), such that the 10-year rule is the general rule for
distributions to designated beneficiaries after death
(regardless of whether the employee (or IRA owner) dies before,
on, or after the required beginning date) unless the designated
beneficiary is an eligible designated beneficiary as defined in
the provision. Thus, in the case of an ineligible designated
beneficiary, distribution of the employee (or IRA owner's)
entire benefit is required to be distributed by the end of the
tenth calendar year following the year of the employee or IRA
owner's death.
Eligible designated beneficiaries
For eligible designated beneficiaries, an exception to the
10-year rule (for death before the required beginning date)
applies whether or not the employee (or IRA owner) dies before,
on, or after the required beginning date. The exception
(similar to present law) generally allows distributions over
life or a period not extending beyond the life expectancy of an
eligible designated beneficiary beginning in the year following
the year of death. Eligible designated beneficiaries include
any designated beneficiary who, as of the date of death, is the
surviving spouse of the employee (or IRA owner),\540\ is
disabled, is a chronically ill individual, is an individual who
is not more than 10 years younger than the employee (or IRA
owner), or is a child of the employee (or IRA owner) who has
not reached the age of majority. In the case of a child who has
not reached the age of majority, calculation of the minimum
required distribution under this exception is only allowed
through the year that the child reaches the age of majority.
---------------------------------------------------------------------------
\540\ As in the case of the present law special rule in section
401(a)(9)(B)(iv) for surviving spouses, spouse is not defined in the
provision. Under Treas. Reg. sec. 1.401(a)(9)-8, Q&A-5, a spouse is the
employee's spouse under applicable State law. In the case of a special
rule for a surviving spouse, that determination is generally made based
on the employee's marital status on the date of death. An exception is
provided in Treas. Reg. sec. 1.401(a)(9)-6, Q&A-6, under which a former
spouse to whom all or a portion of the employee's benefits is payable
pursuant to a qualified domestics relations order as defined in section
414(p) is treated as the employee's spouse (including a surviving
spouse). In the case of a qualified joint and survivor annuity under
sections 401(a)(11) and 417, the spouse is generally determined as of
the annuity starting date.
---------------------------------------------------------------------------
Further, under the provision, the 10-year rule also applies
after the death of an eligible designated beneficiary or after
a child reaches the age of majority. Thus, for example, if a
disabled child of an employee (or IRA owner) is an eligible
designated beneficiary of a parent who dies when the child is
age 20 and the child dies at age 30, even though 52.1 years
remain in the measurement period,\541\ the disabled child's
remaining beneficiary interest must be distributed by the end
of the tenth year following the death of the disabled child. If
a child is an eligible designated beneficiary based on having
not reached the age of majority before the employee's (or IRA
owner's) death, the 10-year rule applies beginning with the
earlier of the date of the child's death or the date that the
child reaches the age of majority. The child's entire interest
must be distributed by the end of the tenth year following that
date.
---------------------------------------------------------------------------
\541\ The measurement period is the life expectancy of the child
calculated for the child's age in the year after the employee's (or IRA
owner's) death (age 21 (20 plus 1)).
---------------------------------------------------------------------------
As under present law, if the surviving spouse is the
designated beneficiary, a special rule allows the commencement
of distribution to be delayed until the end of the year that
the employee (or IRA owner) would have attained age 70\1/2\. If
the spouse dies before distributions were required to begin to
the spouse, the surviving spouse is treated as the employee (or
IRA owner) in determining the required distributions to
beneficiaries of the surviving spouse.
Definitions of disabled and chronically ill individual
Under the provision, disabled means unable to engage in any
substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be
expected to end in death or to be for a long-continued and
indefinite duration.\542\ Further, under the definition, an
individual is not considered to be disabled unless proof of the
disability is furnished in such form and manner as the
Secretary may require. Substantial gainful activity for this
purpose is the activity, or a comparable activity, in which the
individual customarily engaged prior to the arising of the
disability (or prior to retirement if the individual was
retired at the time the disability arose).\543\
---------------------------------------------------------------------------
\542\ The definition of disabled in section 72(m)(7) is
incorporated by reference.
\543\ Treas. Reg. sec. 1.72-17(f). Under the regulations, in
determining whether an individual is disabled, primary consideration is
given to the nature and severity of the individual's impairment.
However, consideration is also given to other factors such as the
individual's education, training, and work experience. Whether an
impairment in a particular case constitutes a disability is determined
with reference to all the facts in the case.
---------------------------------------------------------------------------
Under the provision, the definition of a chronically ill
individual for purposes of qualified long-term care insurance \
544\ is incorporated by reference with a modification. Under
this definition, a chronically ill individual is any individual
who (1) is unable to perform (without substantial assistance
from another individual) at least two activities of daily
living for an indefinite period (expected to be lengthy in
nature) \545\ due to a loss of functional capacity, (2) has a
level of disability similar (as determined under regulations
prescribed by the Secretary in consultation with the Secretary
of Health and Human Services) to the level of disability
described above requiring assistance with daily living based on
loss of functional capacity, or (3) requires substantial
supervision to protect the individual from threats to health
and safety due to severe cognitive impairment. The activities
of daily living for which assistance is needed for purposes of
determining loss of functional capacity are eating, toileting,
transferring, bathing, dressing, and continence.
---------------------------------------------------------------------------
\544\ Sec. 7702B(c)(2).
\545\ Section 7702B(c) only requires this period to be at least 90
days.
---------------------------------------------------------------------------
Special rules for trusts
Special rules apply in the case of an applicable multi-
beneficiary trust. An applicable multi-beneficiary trust is a
trust (1) that has more than one beneficiary, (2) all of the
beneficiaries of which are treated as designated beneficiaries
for purposes of determining the required minimum distribution
period, and (3) at least one of the beneficiaries of which is
an eligible designated beneficiary who is disabled or
chronically ill.
In the case of an applicable multi-beneficiary trust that
under its terms is to be divided immediately upon the death of
the employee (or IRA owner) into separate trusts for each
beneficiary, the exception to the 10-year rule for eligible
designated beneficiaries applies separately to any portion of
the employee's (or IRA owner's) interest that is payable to a
disabled or chronically ill eligible designated beneficiary.
Thus, for example, if an applicable multi-beneficiary trust is
to be divided immediately upon the death of the IRA owner into
separate trusts for three beneficiaries, one of whom is a
chronically ill eligible designated beneficiary, the exception
to the 10-year rule will apply to the portion of the IRA
owner's interest that is payable to the chronically ill
eligible designated beneficiary's trust. The portion of the IRA
owner's interest that is payable to the trusts for the other
two beneficiaries must then be distributed in accordance with
the 10-year rule.
In the case of an applicable multi-beneficiary trust under
the terms of which no individual other than a disabled or
chronically ill eligible designated beneficiary has any right
to the employee's (or IRA owner's) interest in the plan until
the death of all such eligible designated beneficiaries with
respect to the trust, the exception to the 10-year rule applies
to the distribution of the employee's (or IRA owner's) interest
and any beneficiary who is not a disabled or chronically ill
eligible designated beneficiary is treated as a beneficiary of
the eligible designated beneficiary upon the death of such
eligible designated beneficiary. Thus, the 10-year rule applies
to any portion of the employee's (or IRA owner's) interest
remaining after the death of the disabled or chronically ill
eligible designated beneficiary (or beneficiaries).
Annuity payments under commercial annuities
The provision applies to after-death required minimum
distributions under defined contribution plans and IRAs,
including annuity contracts purchased from insurance companies
under defined contribution plans or IRAs.
Effective Date
General effective date
In determining required minimum distributions after the
death of an employee (or IRA owner), the provision is generally
effective for required minimum distributions with respect to
employees (or IRA owners) with a date of death after December
31, 2019.
Delayed effective date for governmental and collectively bargained
plans
In the case of a governmental plan (as defined in section
414(d)), in determining required minimum distributions after
the death of an employee, the provision applies to
distributions with respect to employees who die after December
31, 2021.
In the case of a collectively bargained plan,\546\ in
determining required minimum distributions after the death of
an employee, the provision applies to distributions with
respect to employees who die in calendar years beginning after
the earlier of two dates. The first date is the later of (1)
the date on which the last collective bargaining agreement
ratified before date of enactment of the provision
terminates,\547\ or (2) December 31, 2019. The second date is
December 31, 2021.
---------------------------------------------------------------------------
\546\ A collectively bargained plan is a plan maintained pursuant
to one or more collective bargaining agreements between employee
representatives and one or more employers.
\547\ The date that the last agreement terminates is determined
without regard to any extension thereof agreed to on or after the date
of enactment of the provision. Further, any plan amendment made
pursuant to a collective bargaining agreement relating to the plan that
amends the plan solely to conform to any requirement added by the
provision shall not be treated as a termination of the collective
bargaining agreement.
---------------------------------------------------------------------------
10-year rule after the death of a beneficiary
In the case of an employee (or IRA owner) who dies before
the effective date (as described below) for the plan (or IRA),
if the designated beneficiary of the employee (or IRA owner)
dies on or after the effective date, the provision applies to
any beneficiary of the designated beneficiary as though the
designated beneficiary were an eligible designated beneficiary.
Thus, the entire interest must be distributed by the end of the
tenth calendar year after the death of the designated
beneficiary. For this purpose, the effective date is the first
day of the first calendar year to which this provision applies
to a plan with respect to employees dying on or after such date
(for example, January 1, 2020 under the general effective
date).
Certain annuities grandfathered
The modification to the after-death minimum distribution
rules does not apply to a qualified annuity that is a binding
annuity contract in effect on the date of enactment of the
provision and at all times thereafter. A qualified annuity with
respect to an individual is a commercial annuity,\548 \under
which the annuity payments are made over the lives of the
individual and a designated beneficiary (or over a period not
extending beyond the life expectancy of the individual or the
life expectancy of the individual and a designated beneficiary)
in accordance with the required minimum distribution
regulations for annuity payments as in effect before enactment
of this provision. In addition to these requirements, annuity
payments to the individual must begin before the date of
enactment, and the individual must have made an irrevocable
election before that date as to the method and amount of the
annuity payments to the individual or any designated
beneficiaries. Alternatively, if an annuity is not a qualified
annuity solely based on annuity payments not having begun
irrevocably before the date of enactment, an annuity can be a
qualified annuity if the individual has made an irrevocable
election before the date of enactment as to the method and
amount of the annuity payments to the individual or any
designated beneficiaries.
---------------------------------------------------------------------------
\548\ For this purpose, commercial annuity is defined in section
3405(e)(6).
---------------------------------------------------------------------------
2. Increase in penalty for failure to file (sec. 402 of the Act and
sec. 6651 of the Code)
Present Law
The Federal tax system is one of ``self-assessment,'' i.e.,
taxpayers are required to declare their income, expenses, and
ultimate tax due, while the IRS may propose subsequent changes.
This voluntary system requires that taxpayers comply with
deadlines and adhere to the filing requirements. While
taxpayers may obtain extensions of time in which to file their
returns, the Federal tax system consists of specific due dates
of returns. In order to foster compliance in meeting these
deadlines, Congress enacted a penalty for the failure to timely
file tax returns.\549\
---------------------------------------------------------------------------
\549\ See United States v. Boyle, 469 U.S. 241, 245 (1985).
---------------------------------------------------------------------------
A taxpayer who fails to file a tax return on or before its
due date is subject to a penalty equal to five percent of the
net amount of tax due for each month that the return is not
filed, up to a maximum of 25 percent of the net amount.\550\ If
the failure to file a return is fraudulent, the taxpayer is
subject to a penalty equal to 15 percent of the net amount of
tax due for each month the return is not filed, up to a maximum
of 75 percent of the net amount.\551\ The net amount of tax due
is the amount of tax required to be shown on the return reduced
by the amount of any part of the tax which is paid on or before
the date prescribed for payment of the tax and by the amount of
any credits against tax which may be claimed on the return.\
552\ The penalty will not apply if it is shown that the failure
to file was due to reasonable cause and not willful
neglect.\553\
---------------------------------------------------------------------------
\550\ Sec. 6651(a)(1).
\551\ Sec. 6651(f).
\552\ Sec. 6651(b)(1).
\553\ Sec. 6651(a)(1).
---------------------------------------------------------------------------
If a return is filed more than 60 days after its due date,
and unless it is shown that such failure is due to reasonable
cause, then the failure to file penalty may not be less than
the lesser of $205 \554\ or 100 percent of the amount required
to be shown as tax on the return.\555\ If a penalty for failure
to file and a penalty for failure to pay tax shown on a return
both apply for the same month, the amount of the penalty for
failure to file for such month is reduced by the amount of the
penalty for failure to pay tax shown on a return.\556\ If a
return is filed more than 60 days after its due date, then the
penalty for failure to pay tax shown on a return may not reduce
the penalty for failure to file below the lesser of $205 or 100
percent of the amount required to be shown on the return.\557\
---------------------------------------------------------------------------
\554\ The $205 amount is adjusted for inflation.
\555\ Sec. 6651(a)(1) (flush language). For this minimum penalty to
apply, the Tax Court has held, and the IRS has acquiesced, that there
must be an underpayment of tax. See Patronik-Holder v. Commissioner,
100 T.C. 374 (1993) (citing the Conference Report to the Tax Equity and
Fiscal Responsibility Act of 1982), AOD 1994-03, 1993-2 C.B. 1.
\556\ Sec. 6651(c)(1).
\557\ Ibid.
---------------------------------------------------------------------------
The failure to file penalty applies to all returns required
to be filed under subchapter A of Chapter 61 (relating to
income tax returns of an individual, fiduciary of an estate or
trust, or corporation; self-employment tax returns, and estate
and gift tax returns), subchapter A of chapter 51 (relating to
distilled spirits, wines, and beer), subchapter A of chapter 52
(relating to tobacco, cigars, cigarettes, and cigarette papers
and tubes), and subchapter A of chapter 53 (relating to machine
guns and certain other firearms).\558\ The failure to file
penalty is adjusted annually to account for inflation. The
failure to file penalty does not apply to any failure to pay
estimated tax required to be paid by sections 6654 or
6655.\559\ The failure to file penalty generally applies to
employment and excise tax returns, but they are not subject to
the minimum penalty described above for filing late.
---------------------------------------------------------------------------
\558\ Sec. 6651(a)(1).
\559\ Sec. 6651(e).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, if a return is filed more than 60 days
after its due date (including extensions), absent a showing
that the failure is due to reasonable cause and not willful
neglect, then the failure to file penalty may not be less than
the lesser of $435 (adjusted for inflation) or 100 percent of
the amount required to be shown as tax on the return.
Effective Date
The provision applies to returns with filing due dates
(including extensions) after December 31, 2019.
3. Increased penalties for failure to file retirement plan returns
(sec. 403 of the Act and sec. 6652 of the Code)
Present Law
Annual reporting for certain plans
An employer that maintains a pension, annuity, stock bonus,
profit-sharing or other funded deferred compensation plan (or
the plan administrator of the plan) is required to file an
annual return containing information with respect to the
qualification, financial condition, and operation of the
plan.\560\ The plan administrator of a defined benefit plan
subject to minimum funding requirements \561\ is required to
file an annual actuarial report.\562\ These filing requirements
are met by filing an Annual Return/Report of Employee Benefit
Plan, Form 5500 series, and providing the information as
required on the form and related instructions.\563\ A failure
to file Form 5500 generally results in a civil penalty of $25
for each day during which the failure continues, subject to a
maximum penalty of $15,000.\564\ This penalty may be waived if
it is shown that the failure is due to reasonable cause.
---------------------------------------------------------------------------
\560\ Sec. 6058.
\561\ Sec. 412. Most governmental plans (defined in section 414(d))
and church plans (defined in section 414(e)) are exempt from the
minimum funding requirements.
\562\ Sec. 6059.
\563\ Treas. Reg. secs. 301.6058-1(a) and 301.6059-1.
\564\ Sec. 6652(e). The failure to file penalties in section 6652
generally apply to certain information returns, including retirement
plan returns. The failure to file penalties in section 6651(a)(1),
discussed above in section 502 of the bill, generally apply to income,
estate, gift, employment and self-employment, and certain excise tax
returns.
---------------------------------------------------------------------------
Annual registration statement and notification of changes
For a plan subject to the vesting requirements under the
Employee Retirement Income Security Act of 1974 (``ERISA''),
the plan administrator is required to file a registration
statement with the IRS with respect to any plan participant who
(1) separated from service during the year and (2) had a vested
benefit under the plan, but who was not paid the benefit during
the year (a ``deferred vested'' benefit).\565\ The registration
statement generally must include the name of the plan, the name
and address of the plan administrator, the name and taxpayer
identification number of the separated participant, and the
nature, amount, and form of the participant's deferred vested
benefit. A failure to file a registration statement as required
generally results in a civil penalty of $1 for each participant
with respect to whom the failure applies, multiplied by the
number of days during which the failure continues, subject to a
maximum penalty of $5,000 for a failure with respect to any
plan year.\566\ This penalty may be waived if it is shown that
the failure is due to reasonable cause.
---------------------------------------------------------------------------
\565\ Code sec. 6057(a). Under Code section 6057(e) and ERISA
section 105(c), similar information must be provided to the separated
participant.
\566\ Sec. 6652(d)(1).
---------------------------------------------------------------------------
A plan administrator is also required to notify the IRS if
certain information in a registration changes; specifically,
such notification is required for any change in the name of the
plan or in the name or address of the plan administrator, the
termination of the plan, or the merger or consolidation of the
plan with any other plan or its division into two or more
plans. A failure to file a required notification of change
generally results in a penalty of $1 for each day during which
the failure continues, subject to a maximum penalty of $1,000
for any failure.\567\ This penalty may be waived if it is shown
that the failure is due to reasonable cause.
---------------------------------------------------------------------------
\567\ Sec. 6652(d)(2).
---------------------------------------------------------------------------
Withholding notices
Withholding requirements apply to distributions from tax-
favored employer-sponsored retirement plans and IRAs, but,
except in the case of certain distributions, payees may
generally elect not to have withholding apply.\568\ A plan
administrator or IRA custodian is required to provide payees
with notices of the right to elect no withholding. A failure to
provide a required notice generally results in a civil penalty
of $10 for each failure, subject to a maximum penalty of $5,000
for all failures during any calendar year.\569\ This penalty
may be waived if it is shown that the failure is due to
reasonable cause and not to willful neglect.
---------------------------------------------------------------------------
\568 \ Sec. 3405.
\569\ Sec. 6652(h).
---------------------------------------------------------------------------
Explanation of Provision
Increase to penalty for failure to file Form 5500
Under the provision, a failure to file Form 5500 generally
results in a penalty of $250 for each day during which the
failure continues, but the total amount imposed under this
subsection on any person for failure to file any return shall
not exceed $150,000.
Increase in penalties for annual registration statement and
notification of changes
Under the provision, a failure to file a registration
statement as required generally results in a penalty of $10 for
each participant with respect to whom the failure applies,
multiplied by the number of days during which the failure
continues, subject to a maximum penalty of $50,000 for a
failure with respect to any plan year. A failure to file a
required notification of change generally results in a penalty
of $10 for each day during which the failure continues, subject
to a maximum penalty of $10,000 for any failure.
Increase in penalties for withholding notices
Under the provision, a failure to provide a required
withholding notice generally results in a penalty of $100 for
each failure, subject to a maximum penalty of $50,000 for all
failures during any calendar year.
Effective Date
The provision is effective for returns, statements, and
notifications required to be filed, and withholding notices
required to be provided, after December 31, 2019.
4. Increase information sharing to administer excise taxes (sec. 404 of
the Act and sec. 6103(o) of the Code)
Present Law
Generally, tax returns and return information (``tax
information'') are confidential and may not be disclosed unless
authorized in the Code.\570\ Return information includes data
received, collected, or prepared by the Secretary with respect
to the determination of the existence or possible existence of
liability of any person under the Code for any tax, penalty,
interest, fine, forfeiture, or other imposition or offense.
Criminal penalties apply for the unauthorized inspection or
disclosure of tax information. Willful unauthorized disclosure
is a felony under section 7213 and the willful unauthorized
inspection of tax information is a misdemeanor under section
7213A. Taxpayers may also pursue a civil cause of action for
disclosures and inspections not authorized by section
6103.\571\
---------------------------------------------------------------------------
\570\ Sec. 6103(a)
\571\ Sec. 7431.
---------------------------------------------------------------------------
Section 6103 provides exceptions to the general rule of
confidentiality, detailing permissible disclosures. Under
section 6103(h)(1), tax information is open to inspection by or
disclosure to Treasury officers and employees whose official
duties require the inspection or disclosure for tax
administration purposes.
The heavy vehicle use tax, an annual highway use tax, is
imposed on the use of any highway motor vehicle that has a
gross weight of 55,000 pounds or more.\572\ Proof of payment of
the heavy vehicle use tax must be presented to customs
officials upon entry into the United States of any highway
motor vehicle subject to the tax and that has a base in a
contiguous foreign country.\573\ If the operator of the vehicle
is unable to present proof of payment of the tax with respect
to the vehicle, entry into the United States may be
denied.\574\
---------------------------------------------------------------------------
\572 \ Sec. 4481(a).
\573\ Treas. Reg. 41.6001-3(a).
\574\ Treas. Reg. 41.6001-3(b).
---------------------------------------------------------------------------
Prior to 2003, customs officials who had responsibility for
enforcing and/or collecting excise taxes were employees of the
U.S. Department of the Treasury (``Treasury''). Thus, prior to
2003, section 6103(h)(1) allowed disclosure of tax information
by the IRS to these customs officials in the performance of
their duties. In 2003, U.S. Customs and Border Protection
became an official agency of the U.S. Department of Homeland
Security.\575\ At that time, customs officials were transferred
from Treasury to the Department of Homeland Security.
---------------------------------------------------------------------------
\575\ The Homeland Security Act of 2002, Pub. L. No. 107-296
(``Homeland Security Act''), enacted November 25, 2002 established the
U.S. Department of Homeland Security. Several agencies were combined
under this new department.
---------------------------------------------------------------------------
Explanation of Provision
The provision allows the IRS to share returns and return
information with employees of U.S. Customs and Border
Protection whose official duties require such inspection or
disclosure for purposes of administering and collecting the
heavy vehicle use tax.
Effective Date
The provision is effective on the date of enactment
(December 20, 2019).
TITLE V--TAX RELIEF FOR CERTAIN CHILDREN
1. Modification of rules relating to the taxation of unearned income of
certain children (sec. 501 of the Act and sec. 1 of the Code)
Present Law
Income tax rates
To determine regular income tax liability, an individual
taxpayer generally must apply the tax rate schedules (or the
tax tables) to his or her 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.\576\ Estates and trusts are generally taxed in a
manner similar to individuals, to the extent that the income is
not distributed or required to be distributed under governing
law or under the terms of the governing instrument. They are
subject to a separate income tax rate schedule.\577\ For 2019,
the regular individual and estate and trust income tax rate
schedules are as follows:
---------------------------------------------------------------------------
\576\ Rev. Proc. 2018-57, 2018-49 I.R.B. 817, Sec.3.01.
\577\ Ibid.
TABLE 1.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2019
------------------------------------------------------------------------
If taxable income is: Then income tax equals:
------------------------------------------------------------------------
Single Individuals
Not over $9,700........................ 10% of the taxable income
Over $9,700 but not over $39,475....... $970 plus 12% of the excess
over $9,700
Over $39,475 but not over $84,200...... $4,543 plus 22% of the excess
over $39,475
Over $84,200 but not over $160,725..... $14,382.50 plus 24% of the
excess over $84,200
Over $160,725 but not over $204,100.... $32,748.50 plus 32% of the
excess over $160,725
Over $204,100 but not over $510,300.... $46,628.50 plus 35% of the
excess over $204,100
Over $510,300.......................... $153,798.50 plus 37% of the
excess over $510,300
Heads of Households
Not over $13,850....................... 10% of the taxable income
Over $13,850 but not over $52,850...... $1,385 plus 12% of the excess
over $13,850
Over $52,850 but not over $84,200...... $6,065 plus 22% of the excess
over $52,850
Over $84,200 but not over $160,700..... $12,962 plus 24% of the excess
over $84,200
Over $160,700 but not over $204,100.... $31,322 plus 32% of the excess
over $160,700
Over $204,100 but not over $510,300.... $45,210 plus 35% of the excess
over $204,100
Over $510,300.......................... $152,380 plus 37% of the excess
over $510,300
Married Individuals Filing Joint Returns and Surviving Spouses
Not over $19,400....................... 10% of the taxable income
Over $19,400 but not over $78,950...... $1,940 plus 12% of the excess
over $19,400
Over $78,950 but not over $168,400..... $9,086 plus 22% of the excess
over $78,950
Over $168,400 but not over $321,450.... $28,765 plus 24% of the excess
over $168,400
Over $321,450 but not over $408,200.... $65,497 plus 32% of the excess
over $321,450
Over $408,200 but not over $612,350.... $93,257 plus 35% of the excess
over $408,200
Over $612,350.......................... $164,709.50 plus 37% of the
excess over $612,350
Married Individuals Filing Separate Returns
Not over $9,700........................ 10% of the taxable income
Over $9,700 but not over $39,475....... $970 plus 12% of the excess
over $9,700
Over $39,475 but not over $84,200...... $4,543 plus 22% of the excess
over $39,475
Over $84,200 but not over $160,725..... $14,382.50 plus 24% of the
excess over $84,200
Over $160,725 but not over $204,100.... $32,748.50 plus 32% of the
excess over $160,725
Over $204,100 but not over $306,175.... $46,628.50 plus 35% of the
excess over $204,100
Over $306,175.......................... $82,354.75 plus 37% of the
excess over $306,175
Estates and Trusts
Not over $2,600........................ 10% of the taxable income
Over $2,600 but not over $9,300........ $260 plus 24% of the excess
over $2,600
Over $9,300 but not over $12,750....... $1,868 plus 35% of the excess
over $9,300
Over $12,750........................... $3,075.50 plus 37% of the
excess over $12,750
------------------------------------------------------------------------
Unearned income of children
Special rules (generally referred to as the ``kiddie tax'')
apply to the net unearned income of certain children.\578\
Generally, the kiddie tax applies to a child if: (1) the child
has not reached the age of 19 by the close of the taxable year,
or the child is a full-time student under the age of 24, and
either of the child's parents is alive at that time; (2) the
child's unearned income exceeds $2,200 (for 2019); and (3) the
child does not file a joint return. The kiddie tax applies
regardless of whether the child may be claimed as a dependent
by either or both parents. If a child is above age 17, the
kiddie tax applies to the net unearned income of that child
only if the child's earned income does not exceed one-half of
the amount of his or her support. For these purposes, unearned
income is income other than wages, salaries, professional fees,
other amounts received as compensation for personal services
actually rendered, and distributions from qualified disability
trusts.\579\ In general, a child is eligible to use the
preferential tax rates for qualified dividends and capital
gains.\580\
---------------------------------------------------------------------------
\578\ Sec. 1(g).
\579\ Secs. 1(g)(4) and 911(d)(2).
\580\ Sec. 1(h).
---------------------------------------------------------------------------
Public Law 115-97 temporarily modifies the kiddie tax by
separating the child's tax from the tax situation of the
child's parent or of any sibling. It is intended that the net
unearned income (both ordinary income and net capital gain) of
a child to whom the kiddie tax applies is taxed according to
the tax table applicable to a trust, while earned taxable
income \581\ of a child is taxed according to the tax table
applicable to the child (normally the table applicable to
unmarried individuals).\582\
---------------------------------------------------------------------------
\581\ For this purpose, earned taxable income means taxable income
reduced (but not below zero) by net unearned income. Section
1(j)(4)(D).
\582\ A technical correction may be necessary for the kiddie tax to
fully reflect this intent. As enacted, a child to whom the kiddie tax
applies uses modified unmarried and estates and trusts brackets to
calculate tax on income. The brackets are modified so that the total
amount taxed at a given rate does not exceed the amount that would be
taxed at that rate in the case of an individual to whom the kiddie tax
does not apply. For a detailed explanation see Joint Committee on
Taxation, General Explanation of Public Law 115-97 (JCS-1-18), December
20, 2018, pp. 7-8.
---------------------------------------------------------------------------
The modification of the kiddie tax does not apply to
taxable years beginning after December 31, 2025.
Alternative minimum tax
An alternative minimum tax (``AMT'') is imposed on an
individual, estate, or trust in an amount by which the
tentative minimum tax exceeds the regular income tax for the
taxable year.\583\ For 2019, the tentative minimum tax is the
sum of (1) 26 percent of so much of the taxable excess as does
not exceed $194,800 ($97,400 in the case of married filing
separately) \584\ and (2) 28 percent of the remaining taxable
excess.\585\ The taxable excess is so much of the alternative
minimum taxable income (``AMTI'') as exceeds the exemption
amount. AMTI is the taxpayer's taxable income increased by the
taxpayer's tax preferences and adjusted by determining the tax
treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of
those items.
---------------------------------------------------------------------------
\583\ Sec. 55.
\584\ Sec. 3.12 of Rev. Proc. 2018-57, supra. The breakpoint
between the 26-percent and 28-percent brackets is indexed for
inflation.
\585\ The maximum tax rates on net capital gain and dividends used
in computing the regular tax are used in computing the tentative
minimum tax.
---------------------------------------------------------------------------
For taxable years beginning in 2019, the exemption amount
is $111,700 for married individuals filing jointly and
surviving spouses, $71,700 for other unmarried individuals,
$55,850 for married individuals filing separately, and $25,000
for estates or trusts. In the case of a child to whom the
kiddie tax applies, the exemption amount may not exceed the
child's earned income \586\ plus $7,750. The exemption amount
is phased out by an amount equal to 25 percent of the amount by
which the individual's AMTI exceeds $1,020,600 for married
individuals filing jointly and surviving spouses, $510,300 for
other individuals, and $83,500 for estates or trusts. These
dollar amounts are indexed annually for inflation.\587\
---------------------------------------------------------------------------
\586\ As defined in Sec. 55.
\587\ Secs. 3.12 and 3.13 of Rev. Proc. 2018-57, supra.
---------------------------------------------------------------------------
Among the tax preferences and adjustments included in AMTI
are accelerated depreciation on certain property used in a
trade or business, circulation expenditures, research and
experimental expenditures, certain expenses and allowances
related to oil and gas, certain expenses and allowances related
to mining exploration and development, certain tax-exempt
interest income, and a portion of the gain excluded with
respect to the sale or disposition of certain small business
stock. The standard deduction, and certain itemized deductions,
such as the deduction for State and local taxes, are not
allowed to reduce AMTI.
Explanation of Provision
Unearned income of children
The provision reverses the temporary change enacted by
Public Law 115-97 to the calculation of the kiddie tax for
taxable years beginning after December 31, 2019. In addition,
the provision provides that taxpayers may elect to reverse the
temporary change to the calculation of the kiddie tax for
taxable years of the taxpayer which begin in 2018, 2019, or
both.
Under the provision, the net unearned income of a child
(for 2019, unearned income over $2,200) \588\ is taxed at the
parents' tax rates if the parents' tax rates are higher than
the tax rates of the child.\589\ The remainder of a child's
taxable income (i.e., earned income, plus unearned income up to
$2,200 (for 2019), less the child's standard deduction) is
taxed at the child's rates, regardless of whether the kiddie
tax applies to the child.
---------------------------------------------------------------------------
\588\ Section 1(g)(4)(A) provides for a reduction in the amount of
net unearned income by twice the basic standard deduction, which for
2019 is $1,100, if the child does not itemize deductions.
\589\ Special rules apply for determining which parent's rate
applies where a joint return is not filed.
---------------------------------------------------------------------------
The kiddie tax is calculated by computing the ``allocable
parental tax.'' This involves adding the net unearned income of
the child to the parent's income and then applying the parent's
tax rate. A child's ``net unearned income'' is the child's
unearned income less the sum of (1) the minimum standard
deduction allowed to dependents ($1,100 for 2019),\590\ and (2)
the greater of (a) such minimum standard deduction amount or
(b) the amount of allowable itemized deductions that are
directly connected with the production of the unearned
income.\591\
---------------------------------------------------------------------------
\590\ Sec. 3.02 of Rev. Proc. 2018-57, supra.
\591\ Sec. 1(g)(4).
---------------------------------------------------------------------------
The allocable parental tax equals the hypothetical increase
in tax to the parent that results from adding the child's net
unearned income to the parent's taxable income.\592\ If the
child has net capital gains or qualified dividends, these items
are allocated to the parent's hypothetical taxable income
according to the ratio of net unearned income to the child's
total unearned income. If a parent has more than one child
subject to the kiddie tax, the net unearned income of all
children is combined, and a single kiddie tax is calculated.
Each child is then allocated a proportionate share of the
hypothetical increase, based upon the child's net unearned
income relative to the aggregate net unearned income of all of
the parent's children subject to the tax.
---------------------------------------------------------------------------
\592\ Sec. 1(g)(3).
---------------------------------------------------------------------------
Generally, a child with a filing obligation must file a
separate return to report his or her income.\593\ The parents'
tax is not affected by the child's income, and the total tax
due from the child is the greater of:
---------------------------------------------------------------------------
\593\ Sec. 1(g)(6). See Form 8615, Tax for Certain Children Who
Have Unearned Income.
---------------------------------------------------------------------------
1. The sum of (a) the tax payable by the child on the
child's earned income and unearned income up to $2,200 (for
2019), plus (b) the allocable parental tax on the child's
unearned income, or
2. The tax on the child's income without regard to the
kiddie tax provisions.\594\
---------------------------------------------------------------------------
\594\ Sec. 1(g)(1).
---------------------------------------------------------------------------
If a child's gross income is only from interest and
dividends and the amount of the gross income (in 2019) is
greater than $1,100, and less than $11,000,\595\ the parents
may elect to report the child's gross income on the parents'
return and the child is treated as having no gross income. A
tax at the rate of 10 percent is imposed on up to $1,100 of the
child's gross income included on the parents' return.
---------------------------------------------------------------------------
\595\ Sec. 3.02 of Rev. Proc. 2018-57, supra.
---------------------------------------------------------------------------
Alternative minimum tax
The provision also temporarily suspends the limitation on
the AMT exemption amount for taxpayers subject to the kiddie
tax for taxable years beginning after December 31, 2017. This
modification to the alternative minimum tax does not apply to
taxable years beginning after December 31, 2025.
Effective Date
The provision to modify the calculation of the kiddie tax
applies to taxable years beginning after December 31, 2019, or
at the taxpayer's election, may apply to taxable years
beginning in 2018, 2019, or both.
The provision to modify the alternative minimum tax applies
to taxable years beginning after December 31, 2017.
TITLE VI--ADMINISTRATIVE PROVISIONS
1. Provisions relating to plan amendments (sec. 601 of the Act and sec.
401 of the Code)
Present Law
Present law provides a remedial amendment period during
which, under certain circumstances, a retirement plan may be
amended retroactively in order to comply with the tax
qualification requirements.\596\ In general, plan amendments to
reflect changes in the law generally must be made by the time
prescribed by law for filing the income tax return of the
employer for the employer's taxable year in which the change in
law occurs (including extensions). The Secretary of the
Treasury may extend the time by which plan amendments need to
be made.
---------------------------------------------------------------------------
\596\ Sec. 401(b).
---------------------------------------------------------------------------
The Code and ERISA provide that, in general, accrued
benefits cannot be reduced by a plan amendment.\597\ This
prohibition on the reduction of accrued benefits is commonly
referred to as the ``anti-cut-back rule.''
---------------------------------------------------------------------------
\597\ Code sec. 411(d)(6); ERISA sec. 204(g).
---------------------------------------------------------------------------
Explanation of Provision
The provision permits certain plan amendments made pursuant
to the changes in the Act, or regulations issued thereunder, to
be retroactively effective. If a plan amendment meets the
requirements of the provision, then the plan will be treated as
being operated in accordance with its terms and the amendment
will not violate the anti-cut-back rule. In order for this
treatment to apply, the plan must be operated as if the plan
amendment were in effect, and the amendment is required to be
made on or before the last day of the first plan year beginning
on or after January 1, 2022, or such later date as the
Secretary of the Treasury may prescribe. However, if the plan
is a governmental plan or, in the case of section 401 (and the
amendments made thereby), an applicable collectively bargained
plan, the amendment is required to be made on or before the
last day of the first plan year beginning on or after January
1, 2024 (or such later date as the Secretary of the Treasury
may prescribe). For this purpose, an applicable collectively
bargained plan is a plan maintained pursuant to one or more
collective bargaining agreements between employee
representatives and one or more employers ratified before the
date of enactment of this Act.
If the amendment is required to be made to retain a plan's
qualified status as a result of the changes in the law (or
regulations), the amendment is required to be made
retroactively effective as of the date on which the change
became effective with respect to the plan and the plan is
required to be operated in compliance until the amendment is
made. Amendments that are not required to retain a plan's
qualified status but that are made pursuant to the changes made
by the Act (or applicable regulations) may be made
retroactively effective as of the first day the amendment is
effective.
A plan amendment will not be considered to be pursuant to
the Act (or applicable regulations) if it has an effective date
before the effective date of the provision under the Act (or
regulations) to which it relates. Similarly, the provision does
not provide relief from the anti-cut-back rule for periods
prior to the effective date of the relevant provision (or
regulations) or the plan amendment. The Secretary of the
Treasury (or the Secretary's delegate) is authorized to provide
exceptions to the relief from the prohibition on reductions in
accrued benefits. It is intended that the Secretary will not
permit inappropriate reductions in contributions or benefits
that are not directly related to the provisions under the Act.
Effective Date
The provision is effective on date of enactment (December
20, 2019).
DIVISION Q--TAXPAYER CERTAINTY AND DISASTER TAX RELIEF ACT OF 2019
TITLE I--EXTENSION OF CERTAIN EXPIRING PROVISIONS
Subtitle A--Tax Relief and Support for Families and Individuals
1. Exclusion from gross income of discharge of qualified principal
residence indebtedness (sec. 101 of the Act and sec.
108(a)(1)(E) of the Code)
Present Law
In general
Gross income includes income that is realized by a debtor
from the discharge of indebtedness,\598\ 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.\599\ 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.
---------------------------------------------------------------------------
\598\ A debt cancellation that constitutes a gift or bequest is not
treated as income to the donee debtor. Sec. 102.
\599\ Secs. 61(a)(11) and 108.
---------------------------------------------------------------------------
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.\600\
---------------------------------------------------------------------------
\600\ Sec. 1017.
---------------------------------------------------------------------------
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.\601\
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.
---------------------------------------------------------------------------
\601\ The limitation is $1 million in the case of a married
individual filing a separate return. Sec. 108(h)(2).
---------------------------------------------------------------------------
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, 2018. The exclusion for qualified principal
residence indebtedness is also effective for discharges of
indebtedness on or after January 1, 2018 if the discharge is
subject to a written arrangement entered into prior to January
1, 2018.
Explanation of Provision
The provision extends for three additional years the
exclusion from gross income for discharges of qualified
principal residence indebtedness. Thus, the exclusion for
qualified principal residence indebtedness is effective for
discharges of indebtedness before January 1, 2021 and for
discharges of indebtedness on or after January 1, 2021 if the
discharge is subject to a written arrangement entered into
prior to January 1, 2021.
Effective Date
The provision generally applies to discharges of
indebtedness after December 31, 2017.
2. Treatment of mortgage insurance premiums as qualified residence
interest (sec. 102 of the Act and sec. 163(h) of the Code)
Present Law
In general
Qualified residence interest is deductible notwithstanding
the general rule that personal interest is nondeductible.\602\
---------------------------------------------------------------------------
\602\ Sec. 163(h).
---------------------------------------------------------------------------
Acquisition indebtedness
Qualified residence interest is interest on acquisition
indebtedness with respect to a principal and a second residence
of the taxpayer. 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. Acquisition indebtedness also includes
refinancing of such indebtedness to the extent the amount of
the indebtedness resulting from refinancing does not exceed the
amount of the refinanced indebtedness. The maximum amount of
debt that may be treated as acquisition indebtedness is
$750,000 ($375,000 in the case of married taxpayers filing
separately).
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,
2017, 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.\603\
---------------------------------------------------------------------------
\603\ Sec. 6050H(h) and Treas. Reg. sec. 1.6050H-3.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the deduction for qualified mortgage
insurance premiums for three years (with respect to contracts
entered into after December 31, 2006). Thus, the provision
applies to amounts paid or accrued in 2018, 2019, and 2020 (and
not properly allocable to any period after December 31, 2020).
Effective Date
The provision applies to amounts paid or accrued after
December 31, 2017.
3. Reduction in medical expense deduction floor (sec. 103 of the Act
and sec. 213 of the Code)
Present Law
For taxable years ending before January 1, 2019,
individuals may claim an itemized deduction for unreimbursed
medical expenses paid during the taxable year, but only to the
extent that the expenses exceed 7.5 percent of adjusted gross
income (``AGI'') for purposes of regular tax and the
alternative minimum tax (``AMT'').\604\ For taxable years
ending after December 31, 2018, the 7.5-percent threshold is
increased to 10 percent.
---------------------------------------------------------------------------
\604\ Sec. 213. The threshold was amended by the Patient Protection
and Affordable Care Act (Pub. L. No. 111-148). For taxable years
beginning after December 31, 2012, the threshold was 10 percent for
regular tax purposes and AMT purposes. A temporary special rule applied
in the case of a taxpayer who attained age 65 (or, in the case of a
married taxpayer, if either the taxpayer or the taxpayer's spouse
attained age 65) before the close of the taxable year, in which case
the threshold was 7.5 percent for regular tax purposes. The 2017 Tax
Act (Pub. L. No. 115-97) reduced the floor to 7.5 percent for all
taxpayers for taxable years beginning after December 31, 2016, and
ending before January 1, 2019.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for two years the threshold for
deducting medical expenses of 7.5 percent of AGI. The 7.5-
percent threshold applies for purposes of regular tax as well
as the AMT. The provision applies for taxable years beginning
before January 1, 2021.
Effective Date
The provision applies to taxable years ending after
December 31, 2018.
4. Deduction of qualified tuition and related expenses (sec. 104 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.\605\ 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, 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,\606\ at an
eligible institution of higher education for courses of
instruction of such individual at such institution.\607\ 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.
---------------------------------------------------------------------------
\605\ Sec. 222.
\606\ 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).
\607\ 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).
---------------------------------------------------------------------------
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.
Generally, no deduction is allowed unless the taxpayer receives
a payee statement furnished by the eligible institution of
higher education or other entity subject to reporting that
reports qualified tuition and related expenses.\608\
---------------------------------------------------------------------------
\608\ Secs. 222(d)(6) and 6050S.
---------------------------------------------------------------------------
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,\609\ 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.\610\ 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.
---------------------------------------------------------------------------
\609\ Secs. 222(d)(1) and 25A(g)(2).
\610\ Sec. 222(c). These reductions are the same as those that
apply to the American Opportunity and Lifetime Learning credits.
---------------------------------------------------------------------------
The deduction is not available for taxable years beginning
after December 31, 2017.
Explanation of Provision
The provision extends the qualified tuition deduction for
three years, through 2020.
Effective Date
The provision applies to taxable years beginning after
December 31, 2017.
5. Black Lung Disability Trust Fund excise tax (sec. 105 of the Act and
sec. 4121 of the Code)
Present Law
Before January 1, 2019, coal extracted from mines was taxed
at either $1.10 per ton if from an underground mine or $0.55
per ton if from a surface mine.\611\ The total amount of tax
was not to exceed 4.4 percent of the price at which such ton of
coal was sold by the producer.
---------------------------------------------------------------------------
\611\ Sec. 4121.
---------------------------------------------------------------------------
After December 31, 2018, the ``temporary increase
termination date,'' the tax rates declined to rates of $0.50
for underground mines and $0.25 for surface mines. After the
temporary increase termination date, the total amount of tax is
not to exceed two percent of the price at which such ton of
coal is sold by the producer.
Explanation of Provision
The provision reinstates the increased rates on coal
through December 31, 2020. Coal extracted will be taxed at
$1.10 per ton if from an underground mine or $0.55 per ton if
from a surface mine. The total amount of tax cannot exceed 4.4
percent of the price at which such ton of coal is sold by the
producer.
Effective Date
The provision applies on and after the first day of the
first calendar month beginning after the date of
enactment.\612\
---------------------------------------------------------------------------
\612\ The date of enactment of the Act was December 20, 2019; thus,
the provision reinstates the higher rates as of January 1, 2020,
through December 31, 2020.
---------------------------------------------------------------------------
Subtitle B--Incentives for Employment, Economic Growth, and Community
Development
1. Indian employment credit (sec. 111 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.\613\ The
credit is equal to 20 percent of the excess of eligible
employee qualified wages and health insurance costs during the
current taxable year over the amount of such wages and costs
incurred by the employer during calendar year 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.\614\
---------------------------------------------------------------------------
\613\ Sec. 45A.
\614\ Sec. 280C(a).
---------------------------------------------------------------------------
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 \615\ or section 4(10) of the Indian Child Welfare
Act of 1978.\616\ The definition in section 3(d) of the Indian
Financing Act includes, in addition to current Indian
reservations and certain other lands, ``former Indian
reservations in Oklahoma.'' For purposes of the credit, 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).
---------------------------------------------------------------------------
\615\ Pub. L. No. 93-262.
\616\ Pub. L. No. 95-608.
---------------------------------------------------------------------------
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 2017).\617\ 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.\618\ 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.
---------------------------------------------------------------------------
\617\ See Instructions for Form 8845, Indian Employment Credit
(2017).
\618\ Sec. 51(i)(1).
---------------------------------------------------------------------------
The wage credit is available for wages paid or incurred in
taxable years beginning on or before December 31, 2017.
Explanation of Provision
The provision extends the Indian employment credit for
three years (through taxable years beginning on or before
December 31, 2020).
Effective Date
The provision applies to taxable years beginning after
December 31, 2017.
2. Railroad track maintenance credit (sec. 112 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, 2018 (the ``railroad track maintenance
credit'' or ``credit'').\619\ 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.\620\ The credit may reduce
a taxpayer's tax liability below its tentative minimum
tax.\621\
---------------------------------------------------------------------------
\619\ 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).
\620\ 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.
\621\ Sec. 38(c)(4).
---------------------------------------------------------------------------
Limitation
The railroad track maintenance credit is limited to the
product of $3,500 times the number of miles of railroad track
\622\ (1) owned or leased by an eligible taxpayer as of the
close of its taxable year,\623\ 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.\624\
Amounts that exceed the limitation are not carried over to
another taxable year.\625\
---------------------------------------------------------------------------
\622\ 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).
\623\ 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).
\624\ Sec. 45G(b)(1).
\625\ Treas. Reg. sec. 1.45G-1(c)(2)(iii).
---------------------------------------------------------------------------
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.\626\ 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.\627\ Such
assignment is taken into account for the taxable year of the
assignee that includes the date that such assignment is treated
as effective. However, assignments, including related
expenditures paid or incurred, for taxable years ending after
January 1, 2017, and before January 1, 2018, are treated as
effective as of the close of such taxable year if made pursuant
to a written agreement entered into no later than May 10,
2018.\628\
---------------------------------------------------------------------------
\626\ Sec. 45G(b)(2). See also Treas. Reg. sec. 1.45G-1(d).
\627\ 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).
\628\ Bipartisan Budget Act of 2018, Pub. L. No. 115-123, Division
D, Title I, Subtitle B, sec. 40302(b)(2), February 9, 2018.
---------------------------------------------------------------------------
Eligible taxpayer
An eligible taxpayer means any Class II or Class III
railroad, and any person (including a Class I railroad \629\)
who transports property using the rail facilities \630\ of a
Class II or Class III railroad or who furnishes railroad-
related property \631\ or services \632\ 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.\633\
---------------------------------------------------------------------------
\629\ The Surface Transportation Board currently classifies a Class
I railroad as a carrier with annual operating revenue of $504,803,294
or more ($489,935,956 or more for 2018). See the Surface Transportation
Board Railroad Revenue Deflator Factors, available at https://
prod.stb.gov/reports-data/economic-data/railroad-revenue-deflator-
factors/. The seven Class I railroads are BNSF Railway Company,
Canadian National Railway (Grand Trunk Corporation), Canadian Pacific
(Soo Line Corporation), CSX Transportation, Kansas City Southern
Railway Company, Norfolk Southern Combined Railroad Subsidiaries, and
Union Pacific Railroad Company. See the U.S. Department of
Transportation Federal Railroad Administration Freight Rail Overview,
available at https://railroads.dot.gov/rail-network-development/
freight-rail-overview.
\630\ 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).
\631\ 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.
\632\ 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.
\633\ Sec. 45G(c).
---------------------------------------------------------------------------
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).\634\
---------------------------------------------------------------------------
\634\ 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 $40,384,263 or more, but
less than $504,803,294 ($39,194,876 or more, but less than
$489,935,956, for 2018), and a Class III railroad as a carrier with
annual operating revenue of less than $40,384,263 (less than
$39,194,876 for 2018). See the Surface Transportation Board Railroad
Revenue Deflator Factors, available at https://prod.stb.gov/reports-
data/economic-data/railroad-revenue-deflator-factors/.
---------------------------------------------------------------------------
Qualified railroad track maintenance expenditures
Qualified railroad track maintenance expenditures are
defined as gross expenditures (whether or not otherwise
chargeable to capital account \635\) 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 which made the assignment of such
track.\636\ 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.\637\ 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.\638\
---------------------------------------------------------------------------
\635\ 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.
\636\ Sec. 45G(d); Treas. Reg. sec. 1.45G-1(b)(5).
\637\ Treas. Reg. sec. 1.45G-1(c)(3)(ii).
\638\ Treas. Reg. sec. 1.45G-1(c)(3).
---------------------------------------------------------------------------
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.\639\ 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.\640\ 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.\641\
---------------------------------------------------------------------------
\639\ Sec. 45G(e)(3). See also sec. 1016(a)(29) and Treas. Reg.
sec. 1.45G-1(e).
\640\ Treas. Reg. sec. 1.45G-1(e)(2).
\641\ Ibid.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the present law credit for five
years, for qualified railroad track maintenance expenditures
paid or incurred during taxable years beginning before January
1, 2023.
Effective Date
The provision generally applies to expenditures paid or
incurred during taxable years beginning after December 31,
2017.
The provision also provides a safe harbor that treats any
assignment, including related expenditures paid or incurred,
for a taxable year beginning on or after January 1, 2018, and
ending before January 1, 2020, as effective as of the close of
such taxable year if made pursuant to a written agreement
entered into no later than March 19, 2020.
3. Mine rescue team training credit (sec. 113 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 (the ``mine rescue
team training credit'').\642\
---------------------------------------------------------------------------
\642\ Sec. 45N(a).
---------------------------------------------------------------------------
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.\643\
---------------------------------------------------------------------------
\643\ Sec. 45N(b).
---------------------------------------------------------------------------
An eligible employer is any taxpayer which employs
individuals as miners in underground mines in the United
States.\644\ The term ``wages'' has the meaning given to such
term by section 3306(b) \645\ (determined without regard to any
dollar limitation contained in that section).\646\
---------------------------------------------------------------------------
\644\ Sec. 45N(c).
\645\ Section 3306(b) defines wages for purposes of Federal
Unemployment Tax.
\646\ Sec. 45N(d).
---------------------------------------------------------------------------
No deduction is allowed for the portion of the expenses
otherwise allowable as a deduction for the taxable year that is
equal to the amount of the mine rescue team training credit
determined for the taxable year.\647\ The credit does not apply
to taxable years beginning after December 31, 2017.\648\
Additionally, the credit is not allowable for purposes of
computing the alternative minimum tax.\649\
---------------------------------------------------------------------------
\647\ Sec. 280C(e).
\648\ Sec. 45N(e).
\649\ Sec. 38(c). Note that the corporate alternative minimum tax
was repealed for taxable years beginning after December 31, 2017. See
Pub. L. No. 115-97, sec. 12001, December 22, 2017.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the credit for three years through
taxable years beginning before January 1, 2021.
Effective Date
The provision applies to taxable years beginning after
December 31, 2017.
4. Classification of certain race horses as three-year property (sec.
114 of the Act and sec. 168(e)(3)(A) 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.\650\ The period
for depreciation or amortization generally begins when the
asset is placed in service by the taxpayer.\651\ 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
placed in service convention.\652\ For some assets, the
recovery period for the asset is provided in section 168.\653\
In other cases, the recovery period of an asset is generally
set forth in Revenue Procedure 87-56.\654\
---------------------------------------------------------------------------
\650\ 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.
\651\ 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).
\652\ Sec. 168.
\653\ See sec. 168(e) and (g).
\654\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785). Exercising authority granted by Congress, the
Secretary issued Rev. Proc. 87-56, 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,\655\ 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.
---------------------------------------------------------------------------
\655\ 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,
2018, and (2) placed in service after December 31, 2017, and
more than two years old at such time it is placed in service by
the purchaser.\656\ A seven-year recovery period applies to any
race horse that is placed in service after December 31, 2017,
and that is two years old or younger at the time it is placed
in service.\657\
---------------------------------------------------------------------------
\656\ 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-hare-
the-same-birth-date-of-new-years-day.
\657\ 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 three years to apply to any race horse
(regardless of age when placed in service) which is placed in
service before January 1, 2021. 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, 2020.
Effective Date
The provision applies to property placed in service after
December 31, 2017.
5. Seven-year recovery period for motorsports entertainment complexes
(sec. 115 of the Act and sec. 168(i)(15) 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.\658\ The period
for depreciation or amortization generally begins when the
asset is placed in service by the taxpayer.\659\ 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
placed in service convention.\660\ For some assets, the
recovery period for the asset is provided in section 168.\661\
In other cases, the recovery period of an asset is generally
set forth in Revenue Procedure 87-56.\662\
---------------------------------------------------------------------------
\658\ 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.
\659\ 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).
\660\ Sec. 168.
\661\ See sec. 168(e) and (g).
\662\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785). Exercising authority granted by Congress, the
Secretary issued Rev. Proc. 87-56, 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,\663\ 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.
---------------------------------------------------------------------------
\663\ 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.\664\ The straight line depreciation method is
required for the aforementioned real property.\665\ 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.\666\ 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.\667\
---------------------------------------------------------------------------
\664\ Sec. 168(c).
\665\ Sec. 168(b)(3).
\666\ Sec. 168(d)(2) and (d)(4)(B).
\667\ 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.\668\
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.\669\ Racetrack
facilities are excluded from the definition of theme and
amusement park facilities classified under asset class
80.0.\670\
---------------------------------------------------------------------------
\668\ 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).
\669\ 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, landscaping, etc.) 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.
\670\ 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, 2018.\671\ For this purpose, a motorsports
entertainment complex means a racing track facility which (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 which are open to the public for the price of
admission.\672\
---------------------------------------------------------------------------
\671\ Sec. 168(e)(3)(C)(ii) and (i)(15)(D).
\672\ 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).\673\ 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.
---------------------------------------------------------------------------
\673\ Sec. 168(i)(15)(B).
---------------------------------------------------------------------------
A motorsports entertainment complex does not include any
transportation equipment, administrative services assets,
warehouses, administrative buildings, hotels, or motels.\674\
---------------------------------------------------------------------------
\674\ Sec. 168(i)(15)(C).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the seven-year recovery period for
motorsports entertainment complexes for three years to apply to
property placed in service before January 1, 2021.
Effective Date
The provision applies to property placed in service after
December 31, 2017.
6. Accelerated depreciation for business property on Indian
reservations (sec. 116 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:
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 \675\
---------------------------------------------------------------------------
\675\ Section 168(j)(2) does not provide shorter recovery periods
for water utility property, residential rental property, or railroad
grading and tunnel bores.
---------------------------------------------------------------------------
``Qualified Indian reservation property'' eligible for
accelerated depreciation includes property described in the
table above which 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;
\676\ and (4) is not property placed in service for purposes of
conducting or housing certain gaming activities.\677\
---------------------------------------------------------------------------
\676\ For these purposes, the term ``related persons'' is defined
in section 465(b)(3)(C).
\677\ 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).\678\
---------------------------------------------------------------------------
\678\ 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)) \679\ or section 4(10) of the Indian Child Welfare Act
of 1978 (25 U.S.C. 1903(10)).\680\ The definition in section
3(d) of the Indian Financing Act of 1974 includes, in addition
to current Indian reservations and certain other lands,
``former Indian reservations in Oklahoma.'' For purposes of
section 168(j), 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).\681\
---------------------------------------------------------------------------
\679\ Pub. L. No. 93-262.
\680\ Pub. L. No. 95-608.
\681\ Sec. 168(j)(6). See also IRS Notice 98-45, 1998-2 C.B. 257
(defining ``former Indian reservations in Oklahoma'' for purposes of
section 168(j)(6)); and the IRS ``Geographic Boundaries Determined for
Tax Incentives Associated with `Former Indian Reservations in
Oklahoma','' available at https://www.irs.gov/newsroom/geographic-
boundaries-determined-for-tax-incentives-associated-with-former-indian-
reservations-in-oklahoma#main-content.
---------------------------------------------------------------------------
The depreciation deduction allowed for regular tax purposes
is also allowed for purposes of the alternative minimum
tax.\682\
---------------------------------------------------------------------------
\682\ Sec. 168(j)(3). Note that the corporate alternative minimum
tax was repealed for taxable years beginning after December 31, 2017.
See Pub. L. No. 115-97, sec. 12001, December 22, 2017.
---------------------------------------------------------------------------
The accelerated depreciation for qualified Indian
reservation property is available with respect to property
placed in service before January 1, 2018.\683\ A taxpayer may
annually make an irrevocable election out of section 168(j) on
a class-by-class basis.\684\
---------------------------------------------------------------------------
\683\ Sec. 168(j)(9).
\684\ Sec. 168(j)(8).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for three years the accelerated
depreciation for qualified Indian reservation property to apply
to property placed in service before January 1, 2021.
Effective Date
The provision applies to property placed in service after
December 31, 2017.
7. Expensing rules for certain productions (sec. 117 of the Act and
sec. 181 of the Code)
Present Law
Under section 181, a taxpayer may elect \685\ 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, 2018,\686\ 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.\687\ 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.\688\
---------------------------------------------------------------------------
\685\ See Treas. Reg. sec. 1.181-2 for rules on making (and
revoking) an election under section 181.
\686\ 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.
\687\ 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, e.g., 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.
\688\ Sec. 181(a)(2)(B).
---------------------------------------------------------------------------
A section 181 election may only be made by an owner of the
production.\689\ 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.\690\ 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.\691\ 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.\692\
---------------------------------------------------------------------------
\689\ Treas. Reg. sec. 1.181-1(a).
\690\ Treas. Reg. sec. 1.181-1(a)(2)(i).
\691\ 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).
\692\ 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).
---------------------------------------------------------------------------
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.\693\ Solely for purposes of this rule, the term
``compensation'' does not include participations and residuals
(as defined in section 167(g)(7)(B)).\694\
---------------------------------------------------------------------------
\693\ Sec. 181(d)(3)(A).
\694\ 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).
---------------------------------------------------------------------------
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.\695\ Qualified
productions do not include sexually explicit productions as
referenced by section 2257 of title 18 of the U.S. Code.\696\
---------------------------------------------------------------------------
\695\ Sec. 181(d)(2)(B).
\696\ Sec. 181(d)(2)(C).
---------------------------------------------------------------------------
A qualified live theatrical production is defined as a live
staged production of a play (with or without music) which 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.\697\ 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 which has an audience capacity of not
more than 6,500.\698\ 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 productions that include or consist of any
performance of conduct described in section 2257(h)(1) of title
18 of the U.S. Code.\699\
---------------------------------------------------------------------------
\697\ Sec. 181(e)(2)(A).
\698\ Sec. 181(e)(2)(D).
\699\ Sec. 181(e)(2)(E).
---------------------------------------------------------------------------
For purposes of recapture under section 1245, any deduction
allowed under section 181 is treated as if it were a deduction
allowable for amortization.\700\ 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.\701\
---------------------------------------------------------------------------
\700\ Sec. 1245(a)(2)(C). For a discussion of the recapture rules
applicable to depreciation and amortization deductions, see Joint
Committee on Taxation, Tax Incentives for Domestic Manufacturing (JCX-
15-21), March 12, 2021, pp. 14-17. This document can be found on the
Joint Committee on Taxation website at www.jct.gov.
\701\ See Treas. Reg. sec. 1.181-4.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the special treatment for qualified
film, television, and live theatrical productions under section
181 for three years to qualified productions commencing prior
to January 1, 2021.
Effective Date
The provision applies to productions commencing after
December 31, 2017.
8. Empowerment zone tax incentives (sec. 118 of the Act and secs. 1391,
1394, 1396, 1397A, and 1397B of the Code)
Present Law
The Omnibus Budget Reconciliation Act of 1993 (``OBRA 93'')
\702\ authorized the designation of nine empowerment zones
(``Round I empowerment zones'') to provide tax incentives for
businesses to locate within certain targeted areas \703\
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,\704\ which were located in smaller rural areas and
cities.\705\
---------------------------------------------------------------------------
\702\ Pub. L. No. 103-66.
\703\ 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.
\704\ Sec. 1391(b)(1).
\705\ 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).
---------------------------------------------------------------------------
The Taxpayer Relief Act of 1997 \706\ 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'') \707\ 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.\708\ 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 incentives through
December 31, 2009. Subsequent legislation, most recently the
Bipartisan Budget Act of 2018, extended the empowerment zone
incentives through December 31, 2017.\709\
---------------------------------------------------------------------------
\706\ Pub. L. No. 105-34.
\707\ 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.
\708\ 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, MO/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.
\709\ 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.
---------------------------------------------------------------------------
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, and deferral of capital gains tax on the
sale of qualified assets sold and replaced.
The following is a description of the empowerment zone tax
incentives as in effect through 2017.
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.\710\
---------------------------------------------------------------------------
\710\ 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.
---------------------------------------------------------------------------
The wage credit rate applies to qualifying wages paid
before January 1, 2018. 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.\711\
---------------------------------------------------------------------------
\711\ 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.
---------------------------------------------------------------------------
An employer's deduction otherwise allowed for wages paid is
reduced by the amount of wage credit claimed for that taxable
year.\712\ Wages are not to be taken into account for purposes
of the wage credit if taken into account in determining the
employer's work opportunity tax credit under section 51.\713\
In addition, the $15,000 cap is reduced by any wages taken into
account in computing the work opportunity tax credit.\714\ The
wage credit may be used to offset up to 25 percent of the
employer's alternative minimum tax liability.\715\
---------------------------------------------------------------------------
\712\ Sec. 280C(a).
\713\ Sec. 1396(c)(3)(A).
\714\ Sec. 1396(c)(3)(B).
\715\ Sec. 38(c)(2). The corporate alternative minimum tax is
repealed for taxable years beginning after December 31, 2017. However,
the full amount of the minimum tax credit will be allowed in taxable
years beginning before 2022. See sec. 53(e), prior to amendment by Pub.
L. No. 116-136.
---------------------------------------------------------------------------
Increased section 179 expensing limitation
An enterprise zone business \716\ is allowed up to an
additional $35,000 of section 179 expensing for qualified zone
property placed in service before January 1, 2018.\717\ For
taxable years beginning in 2017, the total amount that may be
expensed is $545,000.\718\ 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.\719\
However, only 50 percent of the cost of qualified zone property
placed in service during the year by the taxpayer is taken into
account in determining whether the cost of qualifying property
placed in service during the taxable year exceeds the specified
dollar amount.\720\
---------------------------------------------------------------------------
\716\ 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).
\717\ Sec. 1397A. Note that section 168(k) provides 100-percent
bonus depreciation for qualified property acquired and placed in
service after September 27, 2017, and before January 1, 2023. The 100-
percent allowance is phased down by 20 percent per calendar year for
qualified property placed in service after December 31, 2022. Qualified
property includes MACRS property with an applicable recovery period of
20 years or less, and therefore generally includes qualified zone
property other than buildings.
\718\ $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.
For taxable years beginning after 2017, the relevant dollar amount
under section 179(b)(1) is $1,000,000 (indexed for inflation for
taxable years beginning after 2018). See also Section 3.25 of Rev.
Proc. 2018-18, 2018-10 I.R.B. 392; Section 3.26 of Rev. Proc. 2018-57;
and Section 3.26 of Rev. Proc. 2019-44.
\719\ For taxable years beginning in 2017, the relevant dollar
amount is $2,030,000. Sec. 179(b)(2) and Section 3.25 of Rev. Proc.
2016-55, 2016-45 I.R.B. 707. For taxable years beginning after 2017,
the relevant dollar amount under section 179(b)(2) is $2,500,000
(indexed for inflation for taxable years beginning after 2018). See
also Section 3.25 of Rev. Proc. 2018-18, 2018-10 I.R.B. 392; Section
3.26 of Rev. Proc. 2018-57; and Section 3.26 of Rev. Proc. 2019-44.
\720\ Sec. 1397A(a)(2). For example, assume that during 2017 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 $510,000 section 179(b)(1) dollar amount for 2017 is
increased to $545,000 (by the lesser of $35,000 or $4,500,000). That
amount is reduced by the excess section 179 property cost amount of
$220,000 ((50 percent $4,500,000)-$2,030,000). The taxpayer's
expensing limitation is $325,000 ($545,000-$220,000). 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.
---------------------------------------------------------------------------
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.\721\ Special rules are provided in the case of property
that is substantially renovated by the taxpayer.\722\
---------------------------------------------------------------------------
\721\ 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(e)).
\722\ Sec. 1397D(a)(2).
---------------------------------------------------------------------------
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.\723\
---------------------------------------------------------------------------
\723\ Sec. 1397C(b).
---------------------------------------------------------------------------
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 which 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 which is
used in such business is attributable to nonqualified financial
property.\724\
---------------------------------------------------------------------------
\724\ Sec. 1397C(c). For these purposes, the term ``employee''
includes the proprietor.
---------------------------------------------------------------------------
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.\725\ 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. 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.
---------------------------------------------------------------------------
\725\ 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).
---------------------------------------------------------------------------
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.\726\ These bonds can be
used in areas designated enterprise communities as well as
areas designated 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.
---------------------------------------------------------------------------
\726\ Sec. 1394.
---------------------------------------------------------------------------
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.\727\
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 which 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.
---------------------------------------------------------------------------
\727\ Pub. L. No. 114-113, Div. Q, sec. 171 (2015) (effective for
bonds issued after 2015).
---------------------------------------------------------------------------
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).\728\
---------------------------------------------------------------------------
\728\ Sec. 1394(b)(3).
---------------------------------------------------------------------------
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 so 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.\729\ 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.
---------------------------------------------------------------------------
\729\ Sec. 1397B.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for three years, through December 31,
2020, the period for which the designation of an empowerment
zone is in effect, thus extending for three years the
empowerment zone tax incentives, including the wage credit,
increased section 179 expensing for qualifying property, 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, 2017, termination shall not apply with respect to
such designation if the entity which made such nomination
amends the nomination to provide for a new termination date in
such manner as the Secretary may provide.\730\
---------------------------------------------------------------------------
\730\ Rev. Proc. 2020-16, 2020-27 I.R.B. 10, June 29, 2020.
---------------------------------------------------------------------------
Effective Date
The provision applies to taxable years beginning after
December 31, 2017.
9. American Samoa economic development credit (sec. 119 of the Act)
Present Law
Beginning in 2006, certain domestic corporations have been
entitled to an economic development credit with respect to
operations in American Samoa.\731\ The credit is not part of
the Code but is computed based on the rules of former sections
30A, 199, and 936.
---------------------------------------------------------------------------
\731\ This credit was again extended during the 116th Congress by
section 139 of the Taxpayer Certainty and Disaster Relief Act of 2020
(Division EE of Pub. L. No. 116-260), described in Part Seven of this
document.
---------------------------------------------------------------------------
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 \732\ in an election in effect for its
taxable year that included October 13, 1995, or that acquired
all of the assets of a trade or business that met the foregoing
conditions. 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.
---------------------------------------------------------------------------
\732\ 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 corporate 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.
---------------------------------------------------------------------------
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 rule denying a credit or deduction for any possessions
tax or foreign tax paid with respect to taxable income that is
taken into account in computing the credit under section 936
\733\ does not apply with respect to the credit allowed by this
provision.
---------------------------------------------------------------------------
\733\ See sec. 936(c).
---------------------------------------------------------------------------
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 12
taxable years of the corporation which begin after December 31,
2005, and before January 1, 2018. For any other corporation,
the credit applies to the first six taxable years of that
corporation which begin after December 31, 2011, and before
January 1, 2018.
Explanation of Provision
The provision extends the credit for three years 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 15 taxable years of the
corporation which begin after December 31, 2005, and before
January 1, 2021, and (b) in the case of any other corporation,
to the first nine taxable years of the corporation which begin
after December 31, 2011 and before January 1, 2021.
For purposes of this credit, the Code is applied without
regard to the repeal of sections 30A and 936 in 2018,\734\ or
the repeal of section 199 in 2017.\735\
---------------------------------------------------------------------------
\734\ See The Consolidated Appropriations Act 2018, Pub. L. No.
115-141, Division U, Title IV, at sec. 401(d)(1)(C) (the repeal of
section 936) and sec. 401(d)(1)(D)(viii)(I) (definition of intangible
property added to section 367(d)) (March 23, 2018).
\735\ Pub. L. 115-97, section 13305(a).
---------------------------------------------------------------------------
Effective Date
The provision is effective for taxable years beginning
after December 31, 2017.
Subtitle C--Incentives for Energy Production, Efficiency, and Green
Economy Jobs
1. Biodiesel and renewable diesel (sec. 121 of the Act and secs. 40A,
6426(c), and 6427(e) of the Code)
Present Law
Biodiesel
Present law provides an income tax credit for biodiesel
fuels (the ``biodiesel fuels credit''). 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, 2017.
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 which 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, 2017. 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, 2017.
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,
2017.
Explanation of Provision
The provision extends the present-law income tax credit,
excise tax credit, and payment provisions for biodiesel and
renewable diesel through December 31, 2022. The provision
creates a special rule to address claims regarding excise tax
credits and claims for payment for fuel sold or used during the
period beginning on January 1, 2018, through the close of the
last calendar quarter beginning before the date of enactment
(December 20, 2019). 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 those periods.\736\ 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.
---------------------------------------------------------------------------
\736\ IRS Notice 2020-8 provides rules claimants must follow to
make a one-time claim for payment of the credits and payments allowable
under sections 6426(c), 6426(d), and 6427(e) for biodiesel (including
renewable diesel) mixtures and alternative fuels sold or used during
calendar years 2018 and 2019.
---------------------------------------------------------------------------
Effective Date
The provision applies to fuel sold or used after December
31, 2017.
2. Second generation biofuel producer credit (sec. 122 of the Act and
sec. 40 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, 2017.
``Qualified second generation biofuel production'' is any
second generation biofuel which is produced by the taxpayer and
which, 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).\737\
---------------------------------------------------------------------------
\737\ In addition, for fuels derived from algae, cyanobacteria, 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.
---------------------------------------------------------------------------
``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. Special rules apply
for fuel derived from algae. 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 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 for three years, through
December 31, 2020.
Effective Date
The provision applies to qualified second generation
biofuel production after December 31, 2017.
3. Nonbusiness energy property (sec. 123 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.\738\ 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.
---------------------------------------------------------------------------
\738\ Sec. 25C.
---------------------------------------------------------------------------
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) the version 6.0 Energy Star program requirements, in the
case of an exterior window, a skylight, 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 which 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 of
such dwelling unit.
Additionally, credits are available for the amount of the
residential energy property expenditures paid or incurred by
the taxpayer during the taxable year. Residential energy
property expenditures are expenditures made by the taxpayer for
qualified energy property (1) that is installed on or in
connection with a dwelling unit located in the United States
and owned and used by the taxpayer as the taxpayer's principal
residence; and (2) the original use of which commences with the
taxpayer. Unlike qualified energy efficiency improvements,
residential energy efficiency improvements include both
qualified energy property and expenditures for labor costs
properly allocable to the onsite preparation, assembly, or
original installation of the qualified energy property. The
allowable credit for the purchase of certain qualified energy
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 which 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 which yields an energy factor of at least 2.0
in the standard Department of Energy test procedure, (2) an
electric heat pump which achieves the highest efficiency tier
established by the Consortium for Energy Efficiency, as in
effect on January 1, 2009,\739\ (3) a central air conditioner
which achieves the highest efficiency tier established by the
Consortium for Energy Efficiency, as in effect on January 1,
2009,\740\ (4) a natural gas, propane, or oil water heater
which has an energy factor of at least 0.82 or thermal
efficiency of at least 90 percent, and (5) a stove which 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 unity, and which 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.
---------------------------------------------------------------------------
\739\ 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.
\740\ 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.
---------------------------------------------------------------------------
Generally, the credit is available for property placed in
service prior to January 1, 2018. 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 the 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 which 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 for three years, through December 31, 2020. The
provision also updates the credit's requirements to reflect the
fact that the Department of Energy has replaced the energy
factor previously used to measure efficiency with a new
standard called the uniform energy factor.
Effective Date
The provision is effective for property placed in service
after December 31, 2017.
4. Qualified fuel cell motor vehicles (sec. 124 of the Act and sec. 30B
of the Code)
Present Law
A credit is available through 2017 for vehicles propelled
by chemically combining oxygen with hydrogen and creating
electricity (``fuel cell vehicles'').\741\ 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.
---------------------------------------------------------------------------
\741\ Sec. 30B.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the credit for fuel cell vehicles for
three years, through December 31, 2020.
Effective Date
The provision applies to property purchased after December
31, 2017.
5. Alternative fuel refueling property credit (sec. 125 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.\742\ 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.
---------------------------------------------------------------------------
\742\ Sec. 30C.
---------------------------------------------------------------------------
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, 2018.
Explanation of Provision
The provision extends for three years the 30-percent credit
for alternative fuel refueling property, through December 31,
2020.
Effective Date
The provision applies to property placed in service after
December 31, 2017.
6. Two-wheeled plug-in electric vehicle credit (sec. 126 of the Act and
sec. 30D of the Code)
Present Law
In general, for vehicles acquired before 2018, a 10-percent
credit is available for qualified two-wheeled plug-in electric
vehicles (``qualified electric motorcycles'').\743\ Qualified
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 qualified electric motorcycle is $2,500.
---------------------------------------------------------------------------
\743\ Sec. 30D(g). The credit lapsed and was not available for
vehicles placed in service in calendar year 2014. Before 2014, the
credit was also available for qualified vehicles having three wheels.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the qualified electric motorcycles
credit for three years, through December 31, 2020.
Effective Date
The provision applies to vehicles acquired after December
31, 2017.
7. Credit for electricity produced from certain renewable resources
(sec. 127 of the Act and sec. 45 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'').\744\ 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.
---------------------------------------------------------------------------
\744\ 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 (sec. Credit amount for 2019 \1\
45) (cents per kilowatt-hour) Expiration \2\
----------------------------------------------------------------------------------------------------------------
Wind.......................................... 2.5 December 31, 2019
Closed-loop biomass........................... 2.5 December 31, 2017
Open-loop biomass (including agricultural 1.2 December 31, 2017
livestock waste nutrient facilities).
Geothermal.................................... 2.5 December 31, 2017
Municipal solid waste (including landfill gas 1.2 December 31, 2017
facilities and trash combustion facilities).
Qualified hydropower.......................... 1.2 December 31, 2017
Marine and hydrokinetic....................... 1.2 December 31, 2017
----------------------------------------------------------------------------------------------------------------
\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 which 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 renewable power facilities, the provision extends for
three years (one year in the case of wind facilities), through
December 31, 2020, the beginning of construction deadline for
the renewable electricity production credit and the election to
claim the energy credit in lieu of the electricity production
credit. For wind facilities the construction of which begins in
calendar year 2020, the credit is reduced by 40 percent.
Effective Date
The provision takes effect on January 1, 2018.
8. Production credit for Indian coal facilities (sec. 128 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 Indian coal facility during the
12-year period beginning January 1, 2006, and ending December
31, 2017.\745\ 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, $2.525 per
ton for 2019). 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.
---------------------------------------------------------------------------
\745\ Sec. 45(e)(10).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the credit for the production of
Indian coal for three years, through December 31, 2020.
Effective Date
The extension of the credit applies to Indian coal produced
after December 31, 2017.
9. Energy-efficient homes credit (sec. 129 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 all
other applicable criteria are met.
The credit applies to homes that are purchased prior to
January 1, 2018.
Explanation of Provision
The provision extends the credit for three years, to homes
that are acquired prior to January 1, 2021.
Effective Date
The provision applies to homes acquired after December 31,
2017.
10. Special allowance for second generation biofuel plant property
(sec. 130 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.\746\ The period
for depreciation or amortization generally begins when the
asset is placed in service by the taxpayer.\747\ 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,\748\
and convention.\749\
---------------------------------------------------------------------------
\746\ 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.
\747\ 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).
\748\ 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.
\749\ Sec. 168.
---------------------------------------------------------------------------
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.\750\ In order to qualify,
the property generally must be placed in service before January
1, 2018.\751\
---------------------------------------------------------------------------
\750\ Sec. 168(l).
\751\ Sec. 168(l)(2)(D).
---------------------------------------------------------------------------
The additional first-year depreciation deduction is allowed
for both regular tax and alternative minimum tax purposes,\752\
but is not allowed in computing earnings and profits.\753\ 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.\754\
---------------------------------------------------------------------------
\752\ Sec. 168(l)(5). Note that the corporate minimum tax was
repealed for taxable years beginning after December 31, 2017. See Pub.
L. No. 115-97, sec. 2001, December 22, 2017.
\753\ Sec. 312(k)(3).
\754\ Sec. 168(l)(1)(B).
---------------------------------------------------------------------------
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.\755\ Qualified feedstock means any lignocellulosic or
hemicellulosic matter that is available on a renewable or
recurring basis,\756\ and any cultivated algae, cyanobacteria,
or lemna.\757\ Second generation biofuel does not include any
alcohol with a proof of less than 150 or certain unprocessed
fuel.\758\ 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.\759\
---------------------------------------------------------------------------
\755\ Secs. 168(l)(2)(A) and 40(b)(6)(E).
\756\ 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.
\757\ Sec. 40(b)(6)(F).
\758\ Sec. 40(b)(6)(E)(ii) and (iii).
\759\ Sec. 40(b)(6)(E)(iii).
---------------------------------------------------------------------------
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,
2018.\760\ 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, 2018 (and all
other requirements are met).\761\ 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.
---------------------------------------------------------------------------
\760\ Sec. 168(l)(2). Requirements relating to actions taken before
2007 are not described herein since they have little (if any) remaining
effect.
\761\ Sec. 168(l)(4) and (k)(2)(E).
---------------------------------------------------------------------------
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,\762\ (ii) any property
required to be depreciated under the alternative depreciation
system of section 168(g),\763\ (iii) any property any portion
of which is financed with the proceeds of a tax-exempt
obligation under section 103,\764\ 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).\765\
---------------------------------------------------------------------------
\762\ Sec. 168(l)(3)(A).
\763\ Sec. 168(l)(3)(B).
\764\ Sec. 168(l)(3)(C).
\765\ Sec. 168(l)(7).
---------------------------------------------------------------------------
A taxpayer may elect out of the additional first-year
depreciation for any class of property for any taxable
year.\766\
---------------------------------------------------------------------------
\766\ Sec. 168(l)(3)(D).
---------------------------------------------------------------------------
In addition, recapture rules apply if the property ceases
to be qualified second generation biofuel plant property.\767\
---------------------------------------------------------------------------
\767\ Sec. 168(l)(6).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the special depreciation allowance
for three years, to qualified second generation biofuel plant
property placed in service prior to January 1, 2021.
Effective Date
The provision applies to property placed in service after
December 31, 2017.
11. Energy efficient commercial buildings deduction (sec. 131 of the
Act and sec. 179D of the Code)
Present Law
In general
Section 179D permits a taxpayer an immediate deduction
equal to energy-efficient commercial building property
expenditures made by the taxpayer. Energy-efficient commercial
building property is defined as property (1) which is 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) which is 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) which is 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 which
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). For each building, 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.\768\ Individuals qualified to determine
compliance shall only be those recognized by one or more
organizations certified by the Secretary for such
purposes.\769\
---------------------------------------------------------------------------
\768\ 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.
\769\ The IRS has specified that only a ``qualified individual''
(as defined in section 5.05 of IRS Notice 2008-52) can certify that
energy efficient building property has met the requirements of the
section 179D deduction. A qualified individual is an individual who (1)
is not related (within the meaning of section 45(e)(4)) to the taxpayer
claiming the deduction under section 179D; (2) is an engineer or
contractor that is properly licensed as a professional engineer or
contractor in the jurisdiction in which the building is located; and
(3) has represented in writing to the taxpayer that the qualified
individual has the requisite qualifications to provide the
certification required or to perform the inspection and testing
required by IRS Notice 2008-40.
---------------------------------------------------------------------------
For energy-efficient commercial building property
expenditures made by a Federal, state, or local government or a
political subdivision thereof, such as a public school, the
deduction may be allocated to the person primarily responsible
for designing the energy efficient commercial building property
in lieu of the government or political subdivision thereof.
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, 2018.
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 which is
certified by a qualified individual \770\ 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.
---------------------------------------------------------------------------
\770\ Ibid.
---------------------------------------------------------------------------
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.\771\ 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.
---------------------------------------------------------------------------
\771\ IRS Notice 2008-40, supra, 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.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the deduction for three years,
through December 31, 2020.
Effective Date
The provision applies to property placed in service after
December 31, 2017.
12. Special rule for sales or dispositions to implement FERC or State
electric restructuring policy for qualified electric utilities
(sec. 132 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.\772\ The realized
gain is subject to current income tax \773\ unless the
recognition of the gain is deferred or excluded from income
under a special tax provision.\774\
---------------------------------------------------------------------------
\772\ See sec. 1001.
\773\ See secs. 61 and 451.
\774\ See, e.g., secs. 453, 1031, and 1033.
---------------------------------------------------------------------------
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
\775\ (the ``reinvestment property'').\776\ 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.
---------------------------------------------------------------------------
\775\ 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.
\776\ 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, 2018.\777\ 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 \778\) with respect to the transmission
facilities to which the election applies, and (2) an electric
utility (as defined in the Federal Power Act \779\).\780\
---------------------------------------------------------------------------
\777\ Sec. 451(k)(3).
\778\ 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.
\779\ 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.
\780\ Sec. 451(k)(6).
---------------------------------------------------------------------------
In general, an independent transmission company is defined
as: (1) an independent transmission provider \781\ approved by
the Federal Energy Regulatory Commission (``FERC''); (2) a
person (i) who the FERC determines under section 203 of the
Federal Power Act \782\ (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 which 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).\783\
---------------------------------------------------------------------------
\781\ For example, a regional transmission organization, an
independent system operator, or an independent transmission company.
\782\ 16 U.S.C. sec. 824b.
\783\ Sec. 451(k)(4).
---------------------------------------------------------------------------
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).\784\
Exempt utility property does not include any property that is
located outside of the United States.\785\
---------------------------------------------------------------------------
\784\ Sec. 451(k)(5).
\785\ Sec. 451(k)(5)(C).
---------------------------------------------------------------------------
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).\786\
---------------------------------------------------------------------------
\786\ Sec. 451(k)(7).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for three years, through December 31,
2020, the deferral provision for qualifying electric
transmission transactions.
Effective Date
The provision applies to dispositions after December 31,
2017.
13. Extension and clarification of excise tax credits relating to
alternative fuels (sec. 133 of the Act and secs. 6426 and 6427 of the
Code)
Present Law
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.
``Alternative fuel'' also does not include fuel (including
lignin, wood residues, or spent pulping liquors) derived from
the production of paper or pulp.
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 \787\ 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.
---------------------------------------------------------------------------
\787\ ``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.\788\ 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,
2017.
---------------------------------------------------------------------------
\788\ It has been argued that, for purposes of the alternative fuel
mixture credit, butane is liquefied petroleum gas. The term ``liquefied
petroleum gas'' is not defined for purposes of section 6426. Butane is
a gasoline blendstock under section 48.4081-1(c)(3)(i) of the Treasury
regulations and, therefore, is gasoline for purposes of section 4083.
In Revenue Ruling 2018-2, the Internal Revenue Service determined that
butane is not an alternative fuel but is a gasoline blendstock as
defined in the regulations. As a result, a mixture of butane and
gasoline is a mixture of two taxable fuels. The IRS held that it is not
an alternative fuel mixture and does not qualify for the alternative
fuel mixture credit.
---------------------------------------------------------------------------
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.
The payment provision for alternative fuel expired after
December 31, 2017.
Explanation of Provision
The provision extends the alternative fuel credit and
related payment provisions, and the alternative fuel mixture
credit through December 31, 2020.
The provision creates a special rule to address claims
regarding excise tax credits and claims for payment for
alternative fuel sold or used during the period beginning on
January 1, 2018, through the close of the last calendar quarter
beginning before the date of enactment. 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 those periods. 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.
The provision also makes it clear that for purposes of the
alternative fuel mixtures credit, an alternative fuel mixture
is not a mixture that includes liquefied petroleum gas,
compressed or liquefied natural gas, or compressed or liquefied
gas derived from biomass.
Effective Date
The provision generally applies to fuel sold or used after
December 31, 2017. The clarification applies to fuel sold or
used on or after the date of enactment, and to fuel sold or
used before such date of enactment, but only to the extent that
credits and claims of credit under section 6426(e) (relating to
the alternative fuel mixture credit) with respect to such sale
or use have not been paid or allowed as of such date and were
made on or after January 8, 2018.
Nothing contained in, or amendments made by, the provision
is to be construed to create any inference as to a change in
law or guidance in effect prior to enactment of the
provision.\789\
---------------------------------------------------------------------------
\789\ See Senators Grassley (Iowa) and Wyden (Oregon),
``Alternative Fuel Mixture Credit,'' Cong. Rec. 165:206, December 19,
2019, p. S7185. ``Mr. GRASSLEY: I do agree. The IRS got the law correct
when it issued Revenue Ruling 2018-2, and our clarification makes clear
that it is our intent for the IRS interpretation of the law to be
controlling for all claims. This is the basis of the ``no inference''
language in the bill that states: `Nothing contained in this subsection
or the amendments made by this subsection shall be construed to create
any inference as to a change in law or guidance in effect prior to
enactment of this subsection.' ''
---------------------------------------------------------------------------
14. Oil Spill Liability Trust Fund rate (sec. 134 of the Act and sec.
4611 of the Code)
Present Law
The Oil Spill Liability Trust Fund financing rate (``oil
spill tax'') was nine cents per barrel. It 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.\790\ The oil spill tax also applies to certain
uses and the exportation of domestic crude oil.\791\ 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.
---------------------------------------------------------------------------
\790\ The term ``crude oil'' includes crude oil condensates and
natural gasoline. The term ``petroleum product'' includes crude oil.
\791\ 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,
2018.
Explanation of Provision
The provision extends the oil spill tax through December
31, 2020.
Effective Date
The provision applies beginning on the first day of the
first calendar month beginning after the date of enactment
(December 20, 2019).\792\
---------------------------------------------------------------------------
\792\ The tax is reinstated for the period beginning on January 1,
2020, and ending on December 31, 2020.
---------------------------------------------------------------------------
Subtitle D--Certain Provisions Expiring at the End of 2019
1. New markets tax credit (sec. 141 of the Act and sec. 45D of the
Code)
Present Law
In general
The New Markets Tax Credit (``NMTC'') is a geography-based
tax credit program. Under section 45D(a), an investor may claim
tax credits for a qualified equity investment in a qualified
community development entity (``CDE''). The qualified CDE
designates equity investments as qualified equity investments,
rendering the investor eligible to receive tax credits. The
qualified CDE can only designate up to an amount allocated to
it by the Department of the Treasury's Community Development
Financial Institutions Fund (``CDFI Fund''). The CDFI Fund
allocates amounts to qualified CDEs through a competitive
application process.
The amount of the NMTC is determined on a credit allowance
date as an amount equal to the applicable percentage of the
investment in the qualified CDE on that date. The applicable
percentage is five percent for the first three years of the
investment and six percent for the remaining four years, for a
total credit of 39 percent over seven years. The credit
allowance date is the date of the investment and the next six
anniversary dates of the investment.
To continue to be eligible for tax credits, the taxpayer
must continue to hold the qualified equity investment on the
credit allowance date of each year. In other words, if the
qualified equity investment ceases, or ceases to be qualified,
the remaining tax credits are no longer allowed. The credits
already claimed may also be subject to recapture if the CDE
ceases to be qualified, if the proceeds of the investment cease
to be used in a qualified manner, or if the taxpayer redeems
its qualified equity investment.
Regulated financial institutions provide most of the equity
for NMTC transactions. In addition to receiving the NMTC,
financial institutions often receive credit under the Community
Reinvestment Act for investing in low-income census tracts.
Substantially all the qualified equity investment must be
used by the qualified CDE to provide investments in low-income
communities through qualified active low-income community
businesses.
Qualifying geography
The NMTC provisions require CDEs to serve or provide
investment capital for low-income communities or low-income
persons. A low-income community is either (1) a population
census tract that meets certain criteria or (2) a specific area
designated by the Secretary. Specifically, a ``low-income
community'' is a population census tract with either (1) a
poverty rate of at least 20 percent or (2) median family income
which 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. In
addition, a population census tract with a population of less
than 2,000 is treated as a low-income community for purposes of
the NMTC if such tract is within an empowerment zone (the
designation of which is in effect under section 1391) and is
contiguous to one or more low-income communities.
CDEs may also qualify for the NMTC if they serve targeted
populations, as designated by the Secretary, regardless of the
composition of the population census tract or tracts in which
the targeted populations live. 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 80 percent of
the area median family income or 80 percent of the statewide
nonmetropolitan area median family income.
Project structures
In a typical NMTC structure, an intermediary entity (the
``investment fund LLC'') receives equity investments from
investors (usually financial institutions) and debt from other
sources. The investment fund LLC's proceeds are then invested
as equity investment into a qualified CDE. The qualified CDE in
turn makes a qualified low-income community investment in a
qualified active low-income community business.
A qualified CDE is any domestic corporation or partnership:
(1) whose primary mission is serving or providing investment
capital for low-income communities or low-income persons; (2)
that maintains accountability to residents of low-income
communities by their representation on any governing board of
or any advisory board to the CDE; and (3) that is certified by
the Secretary as being a qualified CDE. A qualified equity
investment means stock (other than nonqualified preferred
stock) in a corporation or a capital interest in a partnership
that is acquired directly from a CDE for cash and includes an
investment of a subsequent purchaser if such investment was a
qualified equity investment in the hands of the prior holder.
Substantially all the investment proceeds must be used by the
CDE to make qualified low-income community investments. For
this purpose, qualified low-income community investments
include: (1) capital or equity investments in, or loans to,
qualified low income community businesses; (2) certain
financial counseling and other services to businesses and
residents in low-income communities; (3) the purchase from
another CDE of any loan made by such entity that is a qualified
low-income community investment; or (4) an equity investment
in, or loan to, another CDE.
Although equity investments in qualified active low-income
community businesses qualify under the NMTC rules, generally,
such investments are in the form of loans. Equity investors
that own a majority interest in a low-income community business
can have their NMTC credits recaptured if the business violates
the rules for qualification. However, Treasury regulations
provide a ``reasonable expectation'' safe harbor for CDEs that
lend to such a business; if the CDE ``reasonably expects'' that
the rules are being satisfied, NMTC credits are not subject to
recapture.\793\
---------------------------------------------------------------------------
\793\ Treas. Reg. sec. 1.45(D)-1(d)(6)(i).
---------------------------------------------------------------------------
A qualified active low-income community business is defined
as a business that satisfies, with respect to a taxable year,
the following requirements: (1) at least 50 percent of the
total gross income of the business is derived from the active
conduct of trade or business activities in any low-income
community; (2) a substantial portion of the tangible property
of such business is used in a low-income community; (3) a
substantial portion of the services performed for such business
by its employees is performed in a low-income community; and
(4) less than five percent of the average of the aggregate
unadjusted bases of the property of such business is
attributable to certain financial property or to certain
collectibles.
Allocation process
The CDFI Fund annually allocates NMTCs to CDEs under a
competitive application process. CDEs, in turn, allocate NMTCs
to equity investors. The maximum annual amount of NMTCs that
the CDFI Fund can allocate is $3.5 billion for calendar years
2010 through 2019. No amount of unused allocation limitation
may be carried to any calendar year after 2024.
For the 2018 allocation application round, the CDFI Fund
awarded 73 CDEs $3.5 billion in NMTCs from a total of 214
applications requesting $14.8 billion.\794\ The successful CDE
applicants focused on different types of investments and
geographic areas, including financing projects ranging from
large manufacturing plants to grocery and retail stores.\795\
---------------------------------------------------------------------------
\794\ Information is available at https://www.cdfifund.gov/news/346
(last visited June 29, 2021).
\795\ For the 2019 allocation application round, the CDFI Fund
awarded 76 CDEs more than $3.5 billion in NMTCs from a total of 206
applications requesting $14.7 billion. Information is available at
https://www.cdfifund.gov/news/385 (last visited June 29, 2021).
---------------------------------------------------------------------------
Applications for NMTCs are reviewed in two phases.\796\ In
Phase 1, applications are reviewed, scored, and ranked based on
two criteria: business strategy and community outcomes.
Applicants that meet the minimum scoring thresholds in Phase 1
advance to Phase 2 review and will be provided with
``preliminary'' awards, in descending order of final rank
score, until the available allocation authority is fulfilled.
Final rank scores are determined by evaluating management
capacity, capitalization strategy, and information regarding
previous awards.
---------------------------------------------------------------------------
\796\ The 2019 NMTC program allocation application provides
information on reviewer criteria throughout and is available at https:/
/www.cdfifund.gov/sites/cdfi/files/documents/2019-nmtc-program-
allocation-evaluation-process_508-compliant.pdf (last visited June 29,
2021).
---------------------------------------------------------------------------
In Phase 1, in evaluating and scoring the business strategy
criteria, the CDFI Fund is looking for a CDE to articulate,
with specificity, its strategy to use an allocation and to
describe a long track record serving low-income communities,
and of providing products and services like those that it
intends to provide through its investments. The CDE can earn
``priority points'' if it has a track record of five or more
years of experience providing capital and/or technical
assistance to disadvantaged businesses and communities. For the
community outcomes criteria, the CDFI Fund considers the extent
to which the CDE is working in particularly economically
distressed or otherwise underserved communities, shows that its
projected financing activities will generate demonstrable
community outcomes, and demonstrates meaningful engagement with
community stakeholders when vetting potential investments. In
general, the highest ranked applications provide specifics
concerning job creation, community development benefits, and a
track record of providing capital and/or technical assistance
to disadvantaged businesses and communities.
In Phase 2, management capacity is evaluated based on
management experience in low-income communities, asset and risk
management, and fulfilling government compliance requirements.
Capitalization is evaluated based on an applicant's track
record of raising capital, investor commitments (or a strategy
to secure such commitments), plan to pass along the benefits of
the credit to the underlying businesses, and willingness to
invest in amounts that exceed the minimum statutory
requirements. Applicants with prior year allocations are
evaluated on their effective use of prior-year allocations and
whether they have substantiated a need for additional
allocation authority.
Explanation of Provision
This provision extends the new markets tax credit for one
year, through 2020, permitting up to $5 billion in qualified
equity investments for the 2020 calendar year. The provision
also extends for one year, through 2025, the carryover period
for unused new markets tax credits.
Effective Date
The provision applies to calendar years beginning after
December 31, 2019.
2. Employer credit for paid family and medical leave (sec. 142 of the
Act and sec. 45S of the Code)
Present Law
In general
The Family and Medical Leave Act of 1993, as amended (the
``FMLA''), generally requires employers to provide employees
with up to 26 weeks of leave under certain circumstances.\797\
In general, FMLA does not require that the employer continue to
pay employees during such leave, although employers may choose
to pay for all or a portion of such leave. State and local
governments may provide, or State and local laws may require
employers to provide, employees with up to a certain amount of
paid leave for types of leave that may or may not fall under
the FMLA.
---------------------------------------------------------------------------
\797\ Pub. L. No. 103-3, Feb. 5, 1993.
---------------------------------------------------------------------------
Employer credit for paid family and medical leave
For wages paid in taxable years beginning after December
31, 2017, and before January 1, 2020, ``eligible employers''
may claim a general business credit equal to 12.5 percent of
the amount of eligible wages (based on the normal hourly wage
rate) paid to ``qualifying employees'' during any period in
which such employees are on ``family and medical leave'' if the
rate of payment under the program is 50 percent of the wages
normally paid to an employee for actual services performed for
the employer.\798\ The credit is increased by 0.25 percentage
points (but not above 25 percent) for each percentage point by
which the rate of payment exceeds 50 percent. The maximum
amount of family and medical leave that may be taken into
account with respect to any qualifying employee for any taxable
year is 12 weeks.
---------------------------------------------------------------------------
\798\ Wages for this purpose are Federal Unemployment Tax Act wages
defined in section 3306(b), without regard to the dollar limitation,
but do not include amounts taken into account for purposes of
determining any other credit under subpart D of the Code.
---------------------------------------------------------------------------
An ``eligible employer'' is one which has in place a
written policy that allows all qualifying full-time employees
not less than two weeks of annual paid family and medical
leave, and which allows all less-than-full-time qualifying
employees a commensurate amount of leave (on a pro rata basis)
compared to the leave provided to full-time employees. The
policy must also provide that the rate of payment under the
program is not less than 50 percent of the wages normally paid
to any such employee for services performed for the employer.
In addition, in order to be an eligible employer, the
employer is prohibited from certain practices or acts which are
also prohibited under the FMLA, regardless of whether the
employer is subject to the FMLA. Specifically, the employer
must provide paid family and medical leave in compliance with a
written policy that ensures that the employer will not
interfere with, restrain, or deny the exercise of or the
attempt to exercise, any right provided under the policy and
will not discharge or in any other manner discriminate against
any individual for opposing any practice prohibited by the
policy.
A ``qualifying employee'' means any individual who is an
employee under tax rules and principles and is defined in
section 3(e) of the Fair Labor Standards Act of 1938,\799\ as
amended, who has been employed by the employer for one year or
more, and who for the preceding year, had compensation not in
excess of 60 percent of the compensation threshold in such year
for highly compensated employees.\800\ For 2020, this 60
percent amount is $78,000.
---------------------------------------------------------------------------
\799\ Pub. L. No. 75-718, June 25, 1938.
\800\ Sec. 414(q)(1)(B) ($130,000 for 2020).
---------------------------------------------------------------------------
``Family and medical leave'' for purposes of new section
45S is generally defined as leave described under sections
102(a)(1)(A)-(E) or 102(a)(3) of the FMLA.\801\ If an employer
provides paid leave as vacation leave, personal leave, or other
medical or sick leave \802\ (unless the medical or sick leave
is specifically for one or more of the ``family and medical
leave'' purposes defined above), such paid leave would not be
considered to be family and medical leave. In addition, leave
paid for by a State or local government or required by State or
local law (including such leave required to be paid by the
employer) is not taken into account in determining the amount
of paid family and medical leave provided by the employer that
is eligible for the credit.
---------------------------------------------------------------------------
\801\ FMLA section 102(a)(1) provides leave for FMLA purposes due
to (A) the birth of a son or daughter of the employee and in order to
care for such son or daughter; (B) the placement of a son or daughter
with the employee for adoption or foster care; (C) caring for the
spouse, or a son, daughter, or parent, of the employee, if such spouse,
son, daughter, or parent has a serious health condition; (D) a serious
health condition that makes the employee unable to perform the
functions of the employee's position; (E) any qualifying exigency (as
the Secretary of Labor shall, by regulation, determine) arising out of
the fact that the spouse, or a son, daughter, or parent of the employee
is on covered active duty (or has been notified of an impending call or
order to covered active duty) in the Armed Forces. In addition, FMLA
section 102(a)(3) provides leave for FMLA purposes due to the need of
an employee who is a spouse, son, daughter, parent, or next-of-kin of
an eligible service member to care for such service member.
\802\ These terms mean these types of leave within the meaning of
FMLA section 102(d)(2).
---------------------------------------------------------------------------
The Secretary will make determinations as to whether an
employer or an employee satisfies the applicable requirements
for an eligible employer or qualifying employee, based on
information provided by the employer that the Secretary
determines to be necessary or appropriate.
Explanation of Provision
The provision extends the paid family and medical leave
credit for one year (for wages paid in taxable years beginning
after December 31, 2019, and before January 1, 2021).
Effective Date
The provision applies to wages paid in taxable years
beginning after December 31, 2019.
3. Work opportunity credit (sec. 143 of the Act and sec. 51 of the
Code)
Present Law
In general
The work opportunity tax credit is available on an elective
basis for employers hiring individuals from one or more of ten
targeted groups. The amount of the credit available to an
employer is determined by the amount of qualified wages paid by
the employer. Generally, qualified wages consist of wages
attributable to service rendered by a member of a targeted
group during the one-year period beginning with the day the
individual begins work for the employer (two years in the case
of an individual in the long-term family assistance recipient
category).
Targeted groups eligible for the credit
Generally, an employer is eligible for the credit only with
respect to qualified wages paid to members of a targeted group.
(1) Families receiving TANF
An eligible recipient is an individual certified by the
designated local agency (e.g., a State employment security
agency) as being a member of a family eligible to receive
benefits under the Temporary Assistance for Needy Families
Program (``TANF'') for a period of at least nine months, part
of which is during the 18-month period ending on the hiring
date. For these purposes, members of the family are defined to
include only those individuals who are taken into account for
purposes of determining eligibility for the TANF.
(2) Qualified veteran
A qualified veteran is a veteran who is certified by the
designated local agency as belonging to one of five categories:
(1) a member of a family eligible to receive assistance under a
supplemental nutritional assistance program (for at least a
three-month period during the year prior to the hiring date);
(2) entitled to compensation for a service-connected disability
and hired within one year of discharge; (3) entitled to
compensation for a service-connected disability and unemployed
for an aggregate of at least six months during the one-year
period ending on the hiring date; (4) unemployed for at least
four weeks but less than six months (whether or not
consecutive) during the one-year period ending on the date of
hiring; or (5) unemployed for at least six months (whether or
not consecutive) during the one-year period ending on the date
of hiring.
A veteran is an individual who has served on active duty
(other than for training) in the Armed Forces for more than 180
days or who has been discharged or released from active duty in
the Armed Forces for a service-connected disability. However,
any individual who has served for a period of more than 90 days
during which the individual was on active duty (other than for
training) is not a qualified veteran if any of this active duty
occurred during the 60-day period ending on the date the
individual was hired by the employer. This latter rule is
intended to prevent employers who hire current members of the
armed services (or those departed from service within the last
60 days) from receiving the credit.
(3) Qualified ex-felon
A qualified ex-felon is an individual certified by the
designated local agency as (1) having been convicted of a
felony under any State or Federal law; and (2) having a hiring
date within one year of release from prison or the date of
conviction.
(4) Designated community resident
A designated community resident is an individual certified
by the designated local agency as being at least age 18 but not
yet age 40 on the hiring date and as having a principal place
of abode within an empowerment zone, enterprise community,
renewal community, or a rural renewal county. For these
purposes, a rural renewal county is a county outside a
metropolitan statistical area (as defined by the Office of
Management and Budget) that had a net population loss for each
of the five-year periods 1990-1994 and 1995-1999. Qualified
wages do not include wages paid or incurred for services
performed while the individual's principal place of abode is
outside an empowerment zone, enterprise community, renewal
community or a rural renewal county.
(5) Vocational rehabilitation referral
A vocational rehabilitation referral is an individual who
is certified by the designated local agency as an individual
who has a physical or mental disability that constitutes a
substantial handicap to employment and who has been referred to
the employer while receiving, or after completing vocational
rehabilitation services: (1) under an individualized, written
plan for employment under a State plan approved under the
Rehabilitation Act of 1973; (2) under a rehabilitation plan for
veterans carried out under Chapter 31 of Title 38, U.S. Code;
or (3) under an individual work plan developed and implemented
by an employment network pursuant to subsection (g) of section
1148 of the Social Security Act. Certification is provided by
the designated local agency upon assurances from the vocational
rehabilitation agency that the employee has met the above
conditions.
(6) Qualified summer youth employee
A qualified summer youth employee is an individual: (1) who
performs services during any 90-day period between May 1 and
September 15; (2) who is certified by the designated local
agency as being 16 or 17 years of age on the hiring date; (3)
who has not been an employee of that employer before; and (4)
who is certified by the designated local agency as having a
principal place of abode within an empowerment zone, enterprise
community, or renewal community. As with designated community
residents, no credit is available for wages paid or incurred
for service performed while the individual's principal place
abode is outside an empowerment zone, enterprise community, or
renewal community. If, after the end of the 90-day period, the
employer continues to employ a youth who was certified during
the 90-day period as a member of another targeted group, the
limit on qualified first-year wages takes into account wages
paid to the youth while a qualified summer youth employee.
(7) Qualified supplemental nutrition assistance program
benefits recipient
A qualified supplemental nutrition assistance program
benefits recipient is an individual at least age 18 but not yet
age 40 certified by the designated local agency as being a
member of a family receiving assistance under a food and
nutrition program under the Food and Nutrition Act of 2008 for
a period of at least six months ending on the hiring date. In
the case of a family that ceases to be eligible for food and
nutrition assistance under section 6(o) of the Food and
Nutrition Act of 2008, the six-month requirement is replaced
with a requirement that the family has been receiving food and
nutrition assistance for at least three of the five months
ending on the date of hire. For these purposes, members of the
family are defined to include only those individuals taken into
account for purposes of determining eligibility for a food and
nutrition assistance program under the Food and Nutrition Act
of 2008.
(8) Qualified SSI recipient
A qualified SSI recipient is an individual designated by
the designated local agency as receiving supplemental security
income (``SSI'') benefits under Title XVI of the Social
Security Act for any month ending within the 60-day period
ending on the hiring date.
(9) Long-term family assistance recipient
A qualified long-term family assistance recipient is an
individual certified by the designated local agency as being:
(1) a member of a family that has received family assistance
for at least 18 consecutive months ending on the hiring date;
(2) a member of a family that has received such family
assistance for a total of at least 18 months (whether or not
consecutive) after August 5, 1997 (the date of enactment of the
welfare-to-work tax credit) if the individual is hired within
two years after the date that the 18-month total is reached; or
(3) a member of a family who is no longer eligible for family
assistance because of either Federal or State time limits, if
the individual is hired within two years after the Federal or
State time limits made the family ineligible for family
assistance.
(10) Long-term unemployment recipient
A qualified long-term unemployment recipient is an
individual certified by the designated local agency as being in
a period of unemployment which: (1) is 27 consecutive weeks or
more; and (2) includes a period in which the individual was
receiving unemployment compensation under State or Federal law.
Qualified wages
Generally, qualified wages are defined as cash wages paid
by the employer to a member of a targeted group. The employer's
deduction for wages is reduced by the amount of the
credit.\803\
---------------------------------------------------------------------------
\803\ Sec. 280C(a).
---------------------------------------------------------------------------
For purposes of the credit, generally, wages are defined by
reference to the FUTA definition of wages contained in sec.
3306(b) (without regard to the dollar limitation therein
contained). Special rules apply in the case of certain
agricultural labor and certain railroad labor.
Calculation of the credit
The credit available to an employer for qualified wages
paid to members of all targeted groups except for long-term
family assistance recipients equals 40 percent (25 percent for
employment of 400 hours or less) of qualified first-year wages.
Generally, qualified first-year wages are qualified wages (not
in excess of $6,000) attributable to service rendered by a
member of a targeted group during the one-year period beginning
with the day the individual began work for the employer.
Therefore, the maximum per-employee credit is $2,400 (40
percent of the first $6,000 of qualified first-year wages).
The general $6,000 limitation on qualified first-year wages
is different for certain targeted groups: (1) qualified summer
youth employees; (2) qualified veterans who are entitled to
compensation for a service-connected disability, and who are
hired within one year of discharge; (3) qualified veterans who
are entitled to compensation for a service-connected
disability, and who have been unemployed for an aggregate of at
least six months during the one-year period ending on the
hiring date; (4) qualified veterans unemployed for at least six
months (whether or not consecutive) during the one-year period
ending on the date of hiring; and (5) long-term family
assistance recipients. The maximum per-employee credit (and
limitation on qualified wages) for a member of each of the
first four of these groups is, respectively: (1) $1,200 (40
percent of the first $3,000 of qualified first-year wages); (2)
$4,800 (40 percent of the first $12,000 of qualified first-year
wages); (3) $9,600 (40 percent of the first $24,000 of
qualified first-year wages); and (4) $5,600 (40 percent of the
first $14,000 of qualified first-year wages).
In the case of long-term family assistance recipients, the
credit equals 40 percent (25 percent for employment of 400
hours or less) of $10,000 for qualified first-year wages and 50
percent of the first $10,000 of qualified second-year wages.
Generally, qualified second-year wages are qualified wages (not
in excess of $10,000) attributable to service rendered by a
member of the long-term family assistance category during the
one-year period beginning on the day after the one-year period
beginning with the day the individual began work for the
employer. Therefore, the maximum credit per employee is $9,000
(40 percent of the first $10,000 of qualified first-year wages
plus 50 percent of the first $10,000 of qualified second-year
wages). Except for long-term family assistance recipients, no
credit is allowed for second-year wages.
Certification rules
Generally, an individual is not treated as a member of a
targeted group unless: (1) on or before the day on which an
individual begins work for an employer, the employer has
received a certification from a designated local agency that
the individual is a member of a targeted group; or (2) on or
before the day an individual is offered employment with the
employer, a pre-screening notice is completed by the employer
with respect to that individual, and not later than the 28th
day after the individual begins work for the employer, the
employer submits the notice, signed by the employer and the
individual under penalties of perjury, to the designated local
agency as part of a written request for certification. For
these purposes, a pre-screening notice is a document (in such
form as the Secretary may prescribe) which contains information
provided by the individual on the basis of which the employer
believes that the individual is a member of a targeted group.
An otherwise qualified unemployed veteran is treated as
certified by the designated local agency as having aggregate
periods of unemployment (whichever is applicable under the
qualified veterans rules described above) if the veteran is
certified by the agency as being in receipt of unemployment
compensation under a State or Federal law for such applicable
periods. The Secretary of the Treasury is authorized to provide
alternative methods of certification for unemployed veterans.
Minimum employment period
No credit is allowed for qualified wages paid to employees
who work less than 120 hours in the first year of employment.
Qualified tax-exempt organizations employing qualified veterans
The credit is not available to qualified tax-exempt
organizations other than those employing qualified veterans. If
a qualified tax-exempt organization employs a qualified veteran
(as described above) a tax credit against the FICA taxes of the
organization is allowed for the wages of the qualified veteran
which are paid for the veteran's services in furtherance of the
activities related to the function or purpose constituting the
basis of the organization's exemption under section 501.\804\
---------------------------------------------------------------------------
\804\ Sec. 3111(e).
---------------------------------------------------------------------------
The credit available to a tax-exempt employer for qualified
wages paid to a qualified veteran equals 26 percent (16.25
percent for employment of 400 hours or less) of qualified
first-year wages. The amount of qualified first-year wages
eligible for the credit is the same as those for non-tax-exempt
employers (i.e., $6,000, $12,000, $14,000 or $24,000, depending
on the category of qualified veteran).
A qualified tax-exempt organization means an employer that
is described in section 501(c) and exempt from tax under
section 501(a).
The Social Security Trust Funds are held harmless from the
effects of this provision by a transfer from the Treasury
General Fund.
Treatment of possessions
The ``VOW to Hire Heroes Act of 2011'' (the ``VOW Act'')
\805\ provides a reimbursement mechanism for the U.S.
possessions (American Samoa, Guam, the Commonwealth of the
Northern Mariana Islands, the Commonwealth of Puerto Rico, and
the United States Virgin Islands). The Secretary pays to each
mirror Code possession (Guam, the Commonwealth of the Northern
Mariana Islands, and the United States Virgin Islands) an
amount equal to the loss to that possession as a result of the
VOW Act changes to the qualified veterans rules.\806\
Similarly, the Secretary pays to each non-mirror Code
possession (American Samoa and the Commonwealth of Puerto Rico)
the amount that the Secretary estimates as being equal to the
loss to that possession that would have occurred as a result of
the VOW Act changes if a mirror Code tax system had been in
effect in that possession. The Secretary makes this payment to
a non-mirror Code possession only if that possession
establishes to the satisfaction of the Secretary that the
possession has implemented (or, at the discretion of the
Secretary, will implement) an income tax benefit that is
substantially equivalent to the qualified veterans credit
allowed under the VOW Act modifications.
---------------------------------------------------------------------------
\805\ Pub. L. No. 112-56.
\806\ Prior to enactment of the VOW Act, there were two categories
of qualified veterans to whom wages paid by an employer were eligible
for the credit. Employers that hired veterans who were eligible to
receive assistance under a supplemental nutritional assistance program
were entitled to a maximum credit of 40 percent of $6,000 of qualified
first-year wages paid to such individual. Employers that hired veterans
who were entitled to compensation for a service-connected disability
were entitled to a maximum wage credit of 40 percent of $12,000 of
qualified first-year wages paid to such individual. The VOW Act
expanded the work opportunity tax credit with respect to qualified
veterans resulting in the present-law treatment of qualified veterans
described above.
---------------------------------------------------------------------------
An employer that is allowed a credit against U.S. tax under
the VOW Act with respect to a qualified veteran must reduce the
amount of the credit claimed by the amount of any credit (or,
in the case of a non-mirror Code possession, another tax
benefit) that the employer claims against its possession income
tax.
Other significant rules
The work opportunity tax credit is not allowed for wages
paid to a relative or dependent of the taxpayer. No credit is
allowed for wages paid to an individual who is a more than 50-
percent owner of the entity. Similarly, wages paid to
replacement workers during a strike or lockout are not eligible
for the work opportunity tax credit. Wages paid to any employee
during any period for which the employer received on-the-job
training program payments with respect to that employee are not
eligible for the work opportunity tax credit. The work
opportunity tax credit generally is not allowed for wages paid
to individuals who were previously employed by the employer.
Expiration
The work opportunity tax credit is not available for
individuals who begin work for an employer after December 31,
2019.
Explanation of Provision
The provision extends for one year the work opportunity tax
credit making it available with respect to individuals who
begin work for an employer before January 1, 2021.
Effective Date
The provision generally applies to individuals who begin
work for an employer after December 31, 2019.
4. Certain provisions related to beer, wine, and distilled spirits
(sec. 144 of the Act and secs. 263A, 5001, 5041, 5051, 5212, 5415, and
5555 of the Code)
Exemption for aging process of beer, wine, and distilled spirits
Present Law
The uniform capitalization (``UNICAP'') rules require
certain direct and indirect costs allocable to real property or
tangible personal property produced by the taxpayer to be
included in either inventory or capitalized into the basis of
such property, as applicable. For real or personal property
acquired by the taxpayer for resale, section 263A generally
requires certain direct and indirect costs allocable to such
property to be included in inventory.\807\
---------------------------------------------------------------------------
\807\ Sec. 263A. Note that a taxpayer that meets the gross receipts
test of section 448(c) is generally exempt from the application of
section 263A. See sec. 263A(i). The gross receipts test looks to
whether the average annual gross receipts for the three-taxable-year
period ending with the prior taxable year is under a threshold amount
($26 million for 2020). See sec. 448(c) and Rev. Proc. 2019-44, 2019-47
I.R.B. 1093.
---------------------------------------------------------------------------
In the case of interest expense, the UNICAP rules apply
only to interest paid or incurred during the property's
production period \808\ and that is allocable to property
produced by the taxpayer or acquired for resale which (1) is
either real property or property with a class life of at least
20 years, (2) has an estimated production period exceeding two
years, or (3) has an estimated production period exceeding one
year and a cost exceeding $1,000,000.\809\ The production
period with respect to any property is the period beginning on
the date on which production of the property begins,\810\ and,
except as described below, ending on the date on which the
property is ready to be placed in service or held for
sale.\811\
---------------------------------------------------------------------------
\808\ See Treas. Reg. sec. 1.263A-12.
\809\ Sec. 263A(f).
\810\ In the case of tangible personal property, the production
period begins on the first date the taxpayer's accumulated production
expenditures, including planning and design expenditures, are at least
five percent of the taxpayer's total estimated accumulated production
expenditures for the property unit. Treas. Reg. sec. 1.263A-12(c)(3).
Thus, the production period may begin before physical production
activity has commenced. See Treas. Reg. sec. 1.263A-12(c)(3). For
example, in the case of the beer, wine, and distilled spirits
industries, the production period may include time spent planning and
designing ingredients, production space, or production personnel.
\811\ Sec. 263A(f)(5)(B). The production period for a unit of
property produced for sale ends on the date that the unit is ready to
be held for sale and all production activities reasonably expected to
be undertaken by, or for, the taxpayer or a related person are
complete. Treas. Reg. sec. 1.263A-12(d)(1).
---------------------------------------------------------------------------
For interest costs paid or accrued after December 31, 2017,
and before January 1, 2020, the aging period for beer,\812\
wine,\813\ or distilled spirits \814\ is excluded from the
production period as determined for purposes of the UNICAP
interest capitalization rules. Thus, producers of beer, wine,
or distilled spirits (other than spirits unfit for beverage
purposes) are able to deduct interest expenses (subject to any
other applicable limitation) attributable to a shorter
production period that does not include the aging period of
beer, wine, or distilled spirits. In the case of interest costs
paid or accrued after December 31, 2019, the production period
as determined for purposes of the UNICAP interest
capitalization rules will include the aging period for beer,
wine, or distilled spirits.
---------------------------------------------------------------------------
\812\ As defined in section 5052(a).
\813\ As defined in section 5041(a).
\814\ As defined in section 5002(a)(8), except such spirits that
are unfit for use for beverage purposes.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for one year (i.e., through December
31, 2020) the exclusion of the aging period for beer, wine, or
distilled spirits from the production period as determined for
purposes of the UNICAP interest capitalization rules.
Effective Date
The provision applies to interest costs paid or accrued
after December 31, 2019.
Reduced rate of excise tax on beer and transfer of beer between bonded
facilities
Present Law
In general
Federal excise taxes are imposed at different rates on
distilled beer, wine, and distilled spirits and are imposed on
these products when produced or imported. Generally, these
excise taxes are administered and enforced by the Alcohol and
Tobacco Tax and Trade Bureau (``TTB''), except the taxes on
imported bottled beer, wine, and distilled spirits are
collected by the Customs and Border Protection Bureau (the
``CBP'') of the Department of Homeland Security (under
delegation by the Secretary).\815\
---------------------------------------------------------------------------
\815\ Bulk (non-bottled) beer, wine, and distilled spirits may be
imported and transferred in bond free of tax. See secs. 5232, 5364, and
5418. TTB collects tax on such items when they are removed from bond.
---------------------------------------------------------------------------
Liability for the excise tax on beer arises when the
alcohol is produced or imported but is not payable until the
beer is removed from the brewery or customs custody for
consumption or sale. Generally, beer may be transferred between
commonly owned breweries without payment of tax; however, tax
liability follows these products. Imported bulk beer may be
released from customs custody without payment of tax and
transferred in bond to a brewery, which becomes liable for the
tax on such beer. Beer may be exported without payment of tax
and may be withdrawn from a brewery without payment of tax or
free of tax for certain authorized uses, including industrial
uses and non-beverage uses.\816\
---------------------------------------------------------------------------
\816\ Sec. 5053.
---------------------------------------------------------------------------
Notwithstanding the current, temporary rates described
below, the rate of tax on beer is $18 per barrel.\817\ Small
brewers are eligible for a reduced tax rate of $7 per barrel on
the first 60,000 barrels of beer domestically produced and
removed each year.\818\ Small brewers are defined as brewers
producing not more than two million barrels of beer during a
calendar year. The lower rates for small producers reduce the
effective per-gallon tax rate from approximately 58 cents per
gallon to approximately 22.6 cents per gallon for this beer.
---------------------------------------------------------------------------
\817\ Sec. 5051. One barrel of beer is equal to 31 gallons.
\818\ Sec. 5051(a)(2).
---------------------------------------------------------------------------
In the case of a controlled group, the two million barrel
limitation for small brewers is applied to the controlled
group, and the 60,000 barrels eligible for the reduced rate of
tax, are apportioned among the brewers that are component
members of such group. The term ``controlled group'' has the
meaning assigned to it by section 1563(a), except that the
phrase ``more than 50 percent'' is substituted for the phrase
``at least 80 percent'' in each place it appears in section
1563(a).
Individuals may produce limited quantities of beer for
personal or family use without payment of tax during each
calendar year. The limit is 200 gallons per calendar year for
households of two or more adults and 100 gallons per calendar
year for single-adult households.
For calendar years 2018 and 2019, the rate of tax on beer
is temporarily lowered to $16 per barrel on the first six
million barrels brewed by the brewer or imported by the
importer. In general, in the case of a controlled group of
brewers, the six million barrel limitation is applied and
apportioned at the level of the controlled group. Beer brewed
or imported in excess of the six million barrel limit continues
to be taxed at $18 per barrel. In the case of small brewers,
such brewers are taxed at a rate of $3.50 per barrel on the
first 60,000 barrels domestically produced, and $16 per barrel
on any further barrels produced.
Transfer rules and removals without tax
Certain removals or transfers of beer are exempt from tax.
Beer may be transferred without payment of the tax between
bonded premises under certain conditions specified in the
regulations.\819\ The tax liability accompanies the beer that
is transferred in bond. However, beer may only be transferred
without payment of tax between breweries if both breweries are
owned by the same brewer.
---------------------------------------------------------------------------
\819\ Sec. 5414.
---------------------------------------------------------------------------
The shared ownership requirement of section 5414 is
temporarily relaxed for calendar years 2018 and 2019. Thus, a
brewer may transfer beer from one brewery to another without
payment of tax, provided that: (i) the breweries are owned by
the same person; (ii) one brewery owns a controlling interest
in the other; (iii) the same person or persons have a
controlling interest in both breweries; or (iv) the proprietors
of the transferring and receiving premises are independent of
each other, and the transferor has divested itself of all
interest in the beer so transferred, and the transferee has
accepted responsibility for payment of the tax.
For purposes of transferring the tax liability pursuant to
(iv) above, such relief from liability shall be effective from
the time of removal from the transferor's bonded premises, or
from the time of divestment, whichever is later.
Explanation of Provision
The provision extends for one year the temporary rate
schedule on beer.
The provision extends for one year the temporary rules
regarding shared ownership.
Effective Date
The provision to extend the temporary rate schedule applies
to beer removed after December 31, 2019.
The provision to extend the temporary rules regarding
shared ownership applies to calendar quarters beginning after
December 31, 2019.
Reduced rate of excise tax on certain wine, adjustment of alcohol
content level for application of excise taxes, and definition
of mead and low alcohol by volume wine
Present Law
In general
Excise taxes are imposed on wine, based on the wine's
alcohol content and carbonation levels. Notwithstanding
temporary changes to alcohol content allowances described
below, the following table outlines the rates of tax on wine.
------------------------------------------------------------------------
Tax (and code section) Tax rates
------------------------------------------------------------------------
Wines (sec. 5041)
``Still wines'' \820\ not more than 14 $1.07 per wine gallon \821\
percent alcohol.
``Still wines'' more than 14 percent, $1.57 per wine gallon
but not more than 21 percent, alcohol.
``Still wines'' more than 21 percent, $3.15 per wine gallon
but not more than 24 percent, alcohol.
``Still wines'' more than 24 percent $13.50 per proof gallon
alcohol. (taxed as distilled
spirits)
Champagne and other sparkling wines... $3.40 per wine gallon
Artificially carbonated wines......... $3.30 per wine gallon
------------------------------------------------------------------------
Liability for the excise taxes on wine arises when the wine
is produced or imported but is not payable until the wine is
removed from the bonded wine cellar or winery, or from customs
control, for consumption or sale. Generally, bulk and bottled
wine may be transferred between bonded premises; however, the
tax liability on such wine becomes the responsibility of the
transferee. Bulk natural wine may be released from customs
custody without payment of tax and transferred in bond to a
winery. Wine may be exported without payment of tax and may be
withdrawn from a wine cellar or winery without payment of tax
or free of tax for certain authorized uses, including
industrial uses and non-beverage uses.\822\
---------------------------------------------------------------------------
\820\ A ``still wine'' is a non-effervescent or minimally
effervescent wine containing no more than 0.392 grams of carbon dioxide
per hundred milliliters of wine. Champagne wine typically contains more
than twice that amount.
\821\ A wine gallon is a U.S. liquid gallon.
\822\ Sec. 5042.
---------------------------------------------------------------------------
Credits and exemptions for certain wine producers
Notwithstanding the current, temporary credits described
below, domestic wine producers having aggregate annual
production not exceeding 250,000 wine gallons (``small domestic
producers'') receive a credit against the wine excise tax equal
to 90 cents per gallon (the amount of a wine tax increase
enacted in 1990) on the first 100,000 wine gallons of wine
domestically produced and removed during a calendar year.\823\
The credit is reduced (but not below zero) by one percent for
each 1,000 gallons produced in excess of 150,000 wine gallons;
the credit may not be applied to the tax liability on sparkling
wines. In the case of a controlled group, the 250,000 wine
gallon limitation for wineries is applied to the controlled
group, and the 100,000 wine gallons eligible for the credit,
are apportioned among the wineries that are component members
of such group. The term ``controlled group'' has the meaning
assigned to it by section 1563(a), except that the phrase
``more than 50 percent'' is substituted for the phrase ``at
least 80 percent'' in each place it appears in sec. 1563(a).
---------------------------------------------------------------------------
\823\ Sec. 5041(c).
---------------------------------------------------------------------------
The credit against the wine excise tax for small domestic
producers is temporarily modified for calendar years 2018 and
2019 in several ways. First, the 250,000 wine gallon domestic
production limitation is removed (thus making the credit
available for all wine producers and importers). Second, under
the modifications, the credit may be applied to the tax
liability on sparkling wine. Third, with respect to wine
produced in, or imported into, the United States during a
calendar year, the credit amount is modified to (1) $1.00 per
wine gallon for the first 30,000 wine gallons of wine, plus;
(2) 90 cents per wine gallon on the next 100,000 wine gallons
of wine, plus; (3) 53.5 cents per wine gallon on the next
620,000 wine gallons of wine.\824\ Finally, there is no
phaseout of the credit with additional production.
---------------------------------------------------------------------------
\824\ The credit rate for hard cider is tiered at the same level of
production or importation, but is equal to 6.2 cents, 5.6 cents, and
3.3 cents, respectively.
---------------------------------------------------------------------------
Other temporary changes
Alcohol-by-volume levels of the first two tiers of the
excise tax on wine are temporarily modified for calendar years
2018 and 2019, by changing 14 percent to 16 percent. Thus, a
wine producer or importer may temporarily produce or import
``still wine'' that has an alcohol-by-volume level of up to 16
percent and remain subject to the lowest rate of $1.07 per wine
gallon.
Mead and certain sparkling, low alcohol-by-volume wines are
temporarily designated to be taxed at the lowest rate
applicable to ``still wine,'' $1.07 per wine gallon of wine for
calendar years 2018 and 2019. Mead is defined as a wine that
contains not more than 0.64 grams of carbon dioxide per hundred
milliliters of wine,\825\ which is derived solely from honey
and water, contains no fruit product or fruit flavoring, and
contains less than 8.5 percent alcohol-by-volume. The sparkling
wines eligible to be taxed at the lowest rate are those wines
that contain not more than 0.64 grams of carbon dioxide per
hundred milliliters of wine,\826\ which are derived primarily
from grapes or grape juice concentrate and water, which contain
no fruit flavoring other than grape, and which contain less
than 8.5 percent alcohol by volume.
---------------------------------------------------------------------------
\825\ The Secretary is authorized to prescribe tolerances to this
limitation as may be reasonably necessary in good commercial practice.
\826\ The Secretary is authorized to prescribe tolerances to this
limitation as may be reasonably necessary in good commercial practice.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for one year the temporary
modifications to the credit against the wine excise tax.
The provision extends for one year the temporary
modification to the alcohol-by-volume levels for purposes of
the excise tax.
The provision extends for one year the temporary rates on
mead and certain sparkling, low alcohol-by-volume wines.
Effective Date
The provisions apply to wine removed after December 31,
2019.
Reduced rate of excise tax on certain distilled spirits and transfer of
bonded spirits
Present Law
Notwithstanding the current, temporary rates described
below, distilled spirits are taxed at a rate of $13.50 per
proof gallon.\827\ Liability for the excise tax on distilled
spirits arises when the alcohol is produced or imported 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. 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 be exported without payment of
tax and may be withdrawn from a distillery without payment of
tax or free of tax for certain authorized uses, including
industrial uses and non-beverage uses.
---------------------------------------------------------------------------
\827\ Secs. 5001, 5006, 5043, and 5054.
---------------------------------------------------------------------------
For calendar years 2018 and 2019, there is a temporary tax
rate schedule for distilled spirits based on annual quantity
produced or imported. The rate of tax is lowered to $2.70 per
proof gallon on the first 100,000 proof gallons of distilled
spirits produced, $13.34 on the next 22,130,000 proof gallons,
and $13.50 for amounts thereafter. Rules prevent members of the
same controlled group from receiving the lower rate on more
than 100,000 proof gallons of distilled spirits. Additionally,
importers of distilled spirits are eligible for the temporary
lower rates subject to documentation of the annual total
production of the producer.
Additionally, for calendar years 2018 and 2019, distillers
may transfer spirits in bond in containers other than bulk
containers without payment of tax.
Explanation of Provision
The provision extends for one year the temporary rate
schedule on distilled spirits and the eligibility of that rate
schedule for importers.
The provision extends for one year the allowance for
distillers to transfer spirits in bond in containers other than
bulk containers without payment of tax.
Effective Date
The provision to extend the temporary rate schedule applies
to distilled spirits removed after December 31, 2019.
The provision to extend the allowance for distillers to
transfer spirits in bond in containers other than bulk
containers without payment of tax applies to distilled spirits
transferred in bond after December 31, 2019.
Simplification of rules regarding records, statements, and returns
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.\828\ For calendar quarters
beginning after February 9, 2018, and before January 1, 2020,
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 which has been removed for consumption on
the premises of the brewery.
---------------------------------------------------------------------------
\828\ Sec. 5555(a).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for one year the requirement that the
Secretary permits 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 which has been removed for consumption on the premises of
the brewery.
Effective Date
The provision applies to calendar quarters beginning after
December 31, 2019.
5. Extension of look-through treatment of payments between related
controlled foreign corporations under foreign personal holding
company rules (sec. 145 of the Act and sec. 954(c)(6) of the
Code)
Present Law
In general
The rules of subpart F \829\ require U.S. shareholders with
a 10-percent or greater interest in a controlled foreign
corporation (``CFC'') to include certain income of the CFC
(referred to as ``subpart F income'') on a current basis for
U.S. tax purposes.\830\
---------------------------------------------------------------------------
\829\ Secs. 951-964.
\830\ Sec. 951(a).
---------------------------------------------------------------------------
Subpart F income includes foreign base company income.\831\
One category of foreign base company income is foreign personal
holding company income, which includes passive income such as
dividends, interest, rents, and royalties, among other types of
income.\832\ There are several exceptions to these rules. For
example, foreign personal holding company income does not
include dividends and interest received by a CFC from a related
corporation organized and operating in the same foreign country
in which the CFC is organized, or rents and royalties received
by a CFC from a related corporation for the use of property
within the country in which the CFC is organized.\833\
Interest, rent, and royalty payments do not qualify for this
exclusion to the extent that such payments reduce the subpart F
income of the payor.
---------------------------------------------------------------------------
\831\ Secs. 952(a)(2) and 954.
\832\ Sec. 954(c)(1).
\833\ Sec. 954(c)(3).
---------------------------------------------------------------------------
In addition, subpart F income of a CFC does not include any
item of income from sources within the United States that is
effectively connected with the conduct by such CFC of a trade
or business within the United States (``ECI'') unless such item
is exempt from taxation (or is subject to a reduced rate of
tax) pursuant to a tax treaty.\834\
---------------------------------------------------------------------------
\834\ Sec. 952(b).
---------------------------------------------------------------------------
``CFC look-through''
Section 954(c)(6), colloquially referred to as ``CFC look-
through,'' provides that dividends, interest (including
factoring income that is treated as equivalent to interest
under section 954(c)(1)(E)), rents, and royalties received or
accrued by one CFC from a related CFC are not treated as
foreign personal holding company income to the extent
attributable or properly allocable to income of the payor that
is neither subpart F income nor treated as ECI. For this
purpose, a related CFC is a CFC that controls or is controlled
by the other CFC, or a CFC that is controlled by the same
person or persons that control the other CFC. Ownership of more
than 50 percent of the CFC's stock (by vote or value)
constitutes control for these purposes.
The Secretary is authorized to prescribe regulations that
are necessary or appropriate to carry out CFC look-through,
including such regulations as may be necessary or appropriate
to prevent the abuse of the purposes of such rule.
CFC look-through applies to taxable years of foreign
corporations beginning after December 31, 2005, and before
January 1, 2020, and to taxable years of U.S. shareholders with
or within which such taxable years of foreign corporations end.
Explanation of Provision
The provision extends for one year the application of CFC
look-through, to taxable years of foreign corporations
beginning before January 1, 2021, and to taxable years of U.S.
shareholders with or within which such taxable years of foreign
corporations end.
Effective Date
The provision applies to taxable years of foreign
corporations beginning after December 31, 2019, and to taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
6. Credit for health insurance costs of eligible individuals (sec. 146
of the Act and sec. 35 of the Code)
Present Law
Eligible coverage months
An eligible individual is allowed a refundable tax credit
for 72.5 percent of the individual's premiums for qualified
health insurance of the individual and qualifying family
members for each eligible coverage month beginning in the
taxable year.\835\ The credit is commonly referred to as the
health coverage tax credit (``HCTC''). The credit is available
only with respect to amounts paid by the individual for
qualified health insurance. Advance monthly payments paid by
the Secretary directly to the health plan administrator are
available.\836\
---------------------------------------------------------------------------
\835\ Qualifying family members are the individual's spouse and any
dependent for whom the individual is entitled to claim a dependency
exemption. Any individual who has certain specified coverage is not a
qualifying family member.
\836\ Sec. 7527.
---------------------------------------------------------------------------
Eligibility for the credit is determined on a monthly
basis. In general, an eligible coverage month is any month if
(1) the month begins before January 1, 2020, and (2) as of the
first day of the month, (i) the individual is an eligible
individual; (ii) is covered by qualified health insurance the
premium for which is paid by the individual; (iii) does not
have other specified coverage; and (iv) is not imprisoned under
Federal, State, or local authority. In the case of a joint
return, the eligibility requirements are met if at least one
spouse satisfies the requirements.
Eligible individuals
An eligible individual is an individual who is (1) an
eligible Trade Adjustment Assistance (``TAA'') recipient, (2)
an eligible alternative TAA recipient or an eligible
reemployment TAA recipient, or (3) an eligible Pension Benefit
Guaranty Corporation (``PBGC'') pension recipient. In general,
an individual is an eligible TAA recipient for a month if the
individual (1) receives for any day of the month a trade
readjustment allowance under the Trade Act of 1974 or would be
eligible to receive such an allowance but for the requirement
that the individual exhaust unemployment benefits before being
eligible to receive an allowance, and (2) with respect to such
allowance, is covered under a required certification. An
individual is an eligible alternative TAA recipient or an
eligible reemployment TAA recipient for a month if the
individual participates in certain programs under the Trade Act
of 1974 providing wage supplements and receives a related
benefit for the month. Generally, an individual is an eligible
PBGC pension recipient for any month if the individual (1) is
age 55 or over as of the first day of the month, and (2)
receives a benefit for the month, any portion of which is paid
by the PBGC. A person who may be claimed as a dependent on
another person's tax return is not an eligible individual. In
addition, an otherwise eligible individual is not eligible for
the credit for a month if, as of the first day of the month,
the individual has certain specified coverage, such as certain
employer-provided coverage or coverage under certain
governmental health programs.
Qualified health insurance
Qualified health insurance in respect of which the credit
is allowed is: (1) coverage under a COBRA continuation
provision; \837\ (2) State-based continuation coverage provided
by the State under a State law that requires such coverage; (3)
coverage offered through a qualified State high risk pool; (4)
coverage under a health insurance program offered to State
employees or a comparable program; (5) coverage through an
arrangement entered into by a State and a group health plan, an
issuer of health insurance coverage, an administrator, or an
employer; (6) coverage offered through a State arrangement with
a private sector health care coverage purchasing pool; (7)
coverage under a State-operated health plan that does not
receive any Federal financial participation; (8) coverage under
a group health plan that is available through the employment of
the eligible individual's spouse; (9) coverage under individual
health insurance \838\ (other than coverage purchased through
an American Health Benefit Exchange); \839\ and (10) coverage
under an employee benefit plan funded by a voluntary employee
beneficiary association (``VEBA'') \840\ established pursuant
to an order of a bankruptcy court (or by agreement with an
authorized representative).\841\
---------------------------------------------------------------------------
\837\ As defined in section 9832(d)(1).
\838\ For this purpose, ``individual health insurance'' means any
insurance that constitutes medical care offered to individuals other
than in connection with a group health plan. Such term does not include
Federal- or State-based health insurance coverage.
\839\ The premium assistance credit is provided for eligible
individuals and families who purchase health insurance through an
American Health Benefit Exchange. See sec. 36B.
\840\ As defined in section 501(c)(9).
\841\ See 11 U.S.C. sec. 1114.
---------------------------------------------------------------------------
Qualified health insurance does not include any State-based
coverage (i.e., coverage described in (2)-(7) in the preceding
paragraph) unless the State has elected to have such coverage
treated as qualified health insurance and such coverage meets
certain consumer-protection requirements.\842\ Such State
coverage must provide that each qualifying individual is
guaranteed enrollment if the individual pays the premium for
enrollment or provides a qualified health insurance costs
eligibility certificate and pays the remainder of the premium.
In addition, the State-based coverage cannot impose any pre-
existing condition limitation with respect to qualifying
individuals. State-based coverage cannot require a qualifying
individual to pay a premium or contribution that is greater
than the premium or contribution for a similarly situated
individual who is not a qualified individual. Finally, benefits
under the State-based coverage must be the same as (or
substantially similar to) benefits provided to similarly
situated individuals who are not qualifying individuals.
---------------------------------------------------------------------------
\842\ For guidance on how a State elects a health program to be
qualified health insurance for purposes of the credit, see Rev. Proc.
2004-12, 2004-1 C.B. 528.
---------------------------------------------------------------------------
A qualifying individual for this purpose is an eligible
individual who seeks to enroll in the State-based coverage and
who has aggregate periods of creditable coverage \843\ of three
months or longer, does not have other specified coverage, and
is not imprisoned.
---------------------------------------------------------------------------
\843\ Creditable coverage is determined under section 9801(c).
---------------------------------------------------------------------------
Qualified health insurance does not include coverage under
a flexible spending or similar arrangement or any insurance if
substantially all of the coverage is for excepted benefits.
Explanation of Provision
The provision extends the availability of the health
coverage tax credit for 12 months by amending the definition of
eligible coverage month to include months beginning before
January 1, 2021.
Effective Date
The provision is effective for months beginning after
December 31, 2019.
TITLE II--DISASTER TAX RELIEF
1. Definitions (sec. 201 of the Act and secs. 24, 32, 38, 72, 165, and
170 of the Code))
The provisions below provide temporary tax relief to those
areas affected by certain major disasters declared in 2018 and
the majority of 2019.
The provisions use the terms ``qualified disaster area,''
``qualified disaster zone,'' ``qualified disaster,'' and
``incident period.'' As used in the bill, ``qualified disaster
area'' refers to an area with respect to which a major disaster
has been declared by the President during the period beginning
on January 1, 2018, and ending on the date which is 60 days
after the date of enactment of the Act (December 20, 2019),
under section 401 of the Robert T. Stafford Disaster Relief and
Emergency Assistance Act (the ``Stafford Act''), if the
incident period of the disaster with respect to which such
declaration is made begins on or before the date of the
enactment of the Act. However, the ``California wildfire
disaster area,'' as defined in the Bipartisan Budget Act of
2018,\844\ is not a qualified disaster area.
---------------------------------------------------------------------------
\844\ Pub. L. No. 115-123, sec. 20102.
---------------------------------------------------------------------------
A ``qualified disaster zone'' refers to that portion of the
applicable ``qualified disaster area,'' as described above,
which has been determined by the President to warrant
individual or individual and public assistance from the Federal
government under the Stafford Act by reason of the applicable
qualified disaster.
A ``qualified disaster'' means, with respect to the
applicable qualified disaster area, the disaster by reason of
which a major disaster was declared with respect to such area.
``Incident period'' means, with respect to the applicable
qualified disaster, the period specified by the Federal
Emergency Management Agency as the period during which such
disaster occurred, except that such period shall not be treated
as beginning before January 1, 2018, or ending after the date
which is 30 days after the date of enactment of the Act.
2. Special disaster-related rules for use of retirement funds (sec. 202
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.\845\ 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.\846\
---------------------------------------------------------------------------
\845\ 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.
\846\ Sec. 72(t). Under present law, the 10-percent early
withdrawal tax does not apply to distributions from a governmental
section 457(b) plan.
---------------------------------------------------------------------------
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 IRS 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.\847\
---------------------------------------------------------------------------
\847\ Secs, 402(c)(3)(B) and 408(d)(3)(I). Rev. Proc. 2020-46,
2020-45 I.R.B. 995, further provides for a self-certification procedure
(subject to verification on audit) that may be used by a taxpayer
claiming eligibility for a waiver of the 60-day requirement with
respect to a rollover into a plan or IRA in certain specified
circumstances.
---------------------------------------------------------------------------
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 account balance 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.\848\ 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 a 10-percent early distribution 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 precludes any additional loan that
would cause the limit to be exceeded, the rules relating to
loans do not limit the number of loans an employee may obtain
from a plan.
---------------------------------------------------------------------------
\848\ Sec. 72(p).
---------------------------------------------------------------------------
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 ``qualified disaster
distributions'' from a qualified retirement plan, a section
403(b) plan, or an IRA. In addition, as discussed further,
income attributable to a qualified disaster distribution may be
included in income ratably over three years, and the amount of
a qualified disaster distribution may be recontributed to an
eligible retirement plan within three years.
A ``qualified disaster distribution'' is any distribution
from a qualified retirement plan, section 403(b) plan, or
governmental section 457(b) plan, made on or after the first
day of the incident period of a qualified disaster and before
the date which is 180 days after the date of enactment, to an
individual whose principal place of abode at any time during
the incident period is located in the qualified disaster area
and who has sustained an economic loss by reason of such
disaster, regardless of whether a distribution otherwise would
be permissible.\849\
---------------------------------------------------------------------------
\849\ A qualified disaster distribution is subject to income tax
withholding unless the recipient elects otherwise. Mandatory 20-percent
withholding does not apply.
---------------------------------------------------------------------------
A plan is not treated as violating any Code requirement
merely because it treats a distribution as a qualified disaster
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 for each qualified disaster. The total
amount of distributions to an individual from all eligible
retirement plans that may be treated as qualified disaster
distributions with respect to each qualified disaster is
$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, or because
an individual may have been affected by more than one qualified
disaster.
Any amount required to be included in income as a result of
a qualified disaster 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 disaster 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 disaster distribution in 2019, 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 2021, the amount of
the qualified disaster 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 disaster
distribution \850\ during the period beginning on the date
which is 180 days before the first day of the incident period
of the qualified disaster and ending on the date which is 30
days after the last day of such incident period, which was to
be used to purchase or construct a principal residence in a
qualified disaster area, but which was not so purchased or
constructed on account of the qualified disaster, may, during
the ``applicable period,'' 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.\851\ The
``applicable period'' is, in the case of a principal residence
in a qualified disaster area with respect to any qualified
disaster, the period beginning on the first day of the incident
period of such qualified disaster and ending on the date which
is 180 days after the date of enactment. 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.
---------------------------------------------------------------------------
\850\ 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).
\851\ Under sections 402(c), 403(a)(4), 403(b)(8), or 408(d)(3), as
the case may be.
---------------------------------------------------------------------------
Loans
In the case of a ``qualified individual'' who obtained a
loan from a qualified employer plan \852\ made during the 180-
day period beginning on the date of enactment, in lieu of the
permitted maximum loan amount as the lesser of 50 percent of
the participant's account balance or $50,000, 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, and the loan is not treated as a
distribution.\853\ For this purpose, a ``qualified individual''
is an individual whose principal place of abode, during any
portion of the incident period of any qualified disaster, was
located in the qualified disaster area and who sustained an
economic loss by reason of the qualified disaster.
---------------------------------------------------------------------------
\852\ As defined under section 72(p)(4).
\853\ See sec. 72(p)(2)(A).
---------------------------------------------------------------------------
In the case of such a qualified individual (with respect to
a qualified disaster) with an outstanding loan (on or after the
first day of the incident period of such qualified disaster),
from a qualified employer plan, if the due date for any
repayment with respect to such a loan \854\ occurs during the
period beginning on the first day of the incident period of
such qualified disaster and ending on the date which is 180
days after the last day of such incident period, the due date
is delayed for one year (or, if later, until the date which is
180 days after the date of enactment) and any subsequent
repayments will be appropriately adjusted to reflect the delay
in any repayment date noted above and any interest accruing
during such delay, but the repayment delay is disregarded in
determining the 5-year period and the term of the loan.\855\
---------------------------------------------------------------------------
\854\ See sec. 72(p)(2).
\855\ Under section 72(p)(2)(B) or (C).
---------------------------------------------------------------------------
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, 2020 (or in the case of a
governmental plan, January 1, 2022), 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.
3. Employee retention credit for employers affected by qualified
disasters (sec. 203 of the Act and sec. 38 of the Code)
Present Law
Congress has at times enacted employee retention credits
against employer income tax in response to specific natural
disasters.\856\ There is not a generally applicable employer
income tax credit for wages paid in connection with natural
disasters.
---------------------------------------------------------------------------
\856\ See, e.g., sec. 20103 of Pub. L. No. 115-123 (providing a
credit in response to 2017 California wildfires); sec. 503 of Pub. L.
No. 115-63, as amended by sec. 20201(b) of Pub. L. No. 115-123
(providing a credit in response to Hurricanes Harvey, Irma, and Maria);
and former sec. 1400R (providing a credit in response to Hurricanes
Katrina, Rita, and Wilma).
---------------------------------------------------------------------------
Explanation of Provision
The provision provides an income tax 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 in a qualified disaster zone at any
time during the incident period of the applicable qualified
disaster and (2) with respect to which the trade or business
described in (1), as a result of damage sustained by reason of
the applicable qualified disaster, is inoperable on any day
during the period beginning on the first day of the applicable
incident period of the applicable qualified disaster and ending
on the date of enactment of this bill.
An eligible employee is, with respect to an eligible
employer, an employee whose principal place of employment,
determined immediately before the applicable qualified
disaster, with such eligible employer was in the applicable
qualified 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 \857\ paid or incurred by an
eligible employer with respect to an eligible employee 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 applicable
qualified disaster and (2) ending on the earlier of (i) the
date on which the trade or business resumes significant
operations at such principal place of employment or (ii) the
date which is 150 days after the last day of the applicable
incident period. Qualified wages include wages paid without
regard to whether the employee performs services, performs
services at a different place of employment than the principal
place of employment, or performs services at the principal
place of employment before significant operations resume.
---------------------------------------------------------------------------
\857\ For this purpose, ``wages'' is defined in section 51(c)(1),
without regard to section 3306(b)(2)(B).
---------------------------------------------------------------------------
The credit is treated as a current year business credit
under section 38(b) and therefore is subject to the income tax
liability limitations of section 38(c). Rules similar to
sections 51(i)(1), 52, and 280C(a) apply.\858\
---------------------------------------------------------------------------
\858\ Section 51(i)(2) provides a rule that employers may not claim
the work opportunity credit for wages paid to rehired employees.
Section 52 provides, for purposes of the work opportunity credit, rules
to treat a controlled group of corporations, or trades or businesses
under common control, as a single employer, as well as special rules
for tax-exempts, estates and trusts, and certain other entities.
Section 280C denies a deduction for the portion of wages paid or
incurred for the taxable year for which certain wage-based credits are
earned.
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment
(December 20, 2019).
4. Temporary suspension of limitation on charitable contributions (sec.
204(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.\859\
---------------------------------------------------------------------------
\859\ Sec. 170.
---------------------------------------------------------------------------
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,
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.\860\ 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.
---------------------------------------------------------------------------
\860\ Sec. 170(d).
---------------------------------------------------------------------------
Explanation of Provision
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 section 170(b)(1)(G)(ii)
(generally relating to cash contributions to public charities).
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 under 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 January 1, 2018, and ending on the date
which is 60 days after the date of enactment, 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 made 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 one or more
qualified disaster areas. Taxpayers must obtain from the
recipient organization a contemporaneous written acknowledgment
substantiating that the contribution was used (or is to be
used) for this purpose. A taxpayer must elect to have the
contributions treated as qualified contributions.
Effective Date
The provision is effective on the date of enactment
(December 20, 2019).
5. Special rules for qualified disaster-related personal casualty
losses (sec. 204(b) of the Act and sec. 165 of the Code)
Present Law
An individual taxpayer may claim an itemized deduction for
a personal casualty loss only if the loss was attributable to a
disaster declared by the President under section 401 of the
Stafford Act.\861\ All other personal casualty losses are
deductible only to the extent that those losses do not exceed
the individual's personal casualty gains. Personal casualty
losses are deductible only if they exceed $100 per casualty. In
addition, aggregate net losses (i.e., the excess of personal
casualty losses over personal casualty gains) are deductible
only to the extent they exceed 10 percent of the individual
taxpayer's adjusted gross income.
---------------------------------------------------------------------------
\861\ 165(h)(5).
---------------------------------------------------------------------------
Congress has at times enacted more generous casualty loss
provisions in response to specific natural disasters.\862\
---------------------------------------------------------------------------
\862\ See, e.g., sec. 20104(b) of Pub. L. No. 115-123 (certain
California wildfires); Sec. 504(b) of Pub. L. No. 115-63 (Hurricanes
Harvey, Irma, and Maria); and former sec. 1400S(b) (Hurricanes Katrina,
Rita, and Wilma).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, if an individual has a personal
casualty loss which arose in a qualified disaster area on or
after the first day of the incident period of the applicable
qualified disaster and which was attributable to that qualified
disaster, the individual is allowed a deduction for the loss
without regard to whether the individual's aggregate net losses
exceed 10 percent of adjusted gross income. A casualty loss is
deductible, however, only if it exceeds $500.\863\
---------------------------------------------------------------------------
\863\ The $100 per casualty rule still applies with respect to
other deductible personal casualty losses.
---------------------------------------------------------------------------
For a personal casualty loss to which the provision
applies, an individual is allowed a deduction in addition to
the standard deduction. The deduction is also allowed in
determining alternative minimum tax.
Effective Date
The provision is effective on the date of enactment
(December 20, 2019).
6. Special rule for determining earned income (sec. 204(c) of the Act
and secs. 24 and 32 of the Code)
Present Law
The Code provides eligible taxpayers with an earned income
tax credit (``EITC'') and a child tax credit. In general, the
EITC is a refundable income tax credit for low-income
workers.\864\ 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.
---------------------------------------------------------------------------
\864\ Sec. 32
---------------------------------------------------------------------------
Taxpayers with incomes below certain threshold amounts are
eligible for a $2,000 child tax credit for each qualifying
child.\865\ In some circumstances, all or a portion of the
otherwise allowable credit is treated as a refundable income
tax credit (the ``additional child tax credit''). Generally,
the amount of the additional child tax credit equals 15 percent
of the taxpayer's earned income in excess of $2,500. The
maximum amount of the refundable credit for each qualifying
child is $1,400 for taxable years beginning in 2019.\866\
---------------------------------------------------------------------------
\865\ Sec. 24.
\866\ Rev. Proc. 2018-57. This amount is indexed for inflation.
---------------------------------------------------------------------------
Congress has at times enacted provisions that allow
individuals to use their earned income from the prior, rather
than current, taxable year in determining the amount of the
EITC or additional child tax credit.\867\
---------------------------------------------------------------------------
\867\ See, e.g., sec. 20104(c) of Pub. L. No. 115-123 (certain
California wildfires); Sec. 504(c) of Pub. L. No. 115-63 (Hurricanes
Harvey, Irma, and Maria); and former sec. 1400S(d) (Hurricanes Katrina,
Rita, and Wilma).
---------------------------------------------------------------------------
Explanation of Provision
The provision permits a qualified individual to elect to
calculate the EITC and additional child tax credit for an
applicable taxable year using the individual's earned income
from the prior taxable year. A qualified individual is
permitted to make the election with respect to an applicable
taxable year only if the individual's earned income for that
taxable year is less than his or her earned income for the
preceding taxable year.
A qualified individual is an individual (1) whose principal
place of abode at any time during the incident period of a
qualified disaster was in the applicable qualified disaster
zone or (2) who during any portion of the incident period was
not in the applicable qualified disaster zone but whose
principal place of abode was in the applicable qualified
disaster area and was displaced from that abode by reason of
the qualified disaster. An applicable taxable year is any
taxable year which includes any portion of the incident period
of a qualified disaster.
For purposes of the provision, in the case of a joint
return for a taxable year which includes an applicable taxable
year, the provision applies if either spouse is a qualified
individual. In such cases, earned income for the preceding
taxable year is the sum of the earned income of each spouse for
such preceding taxable year.
An 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. Additionally, 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
(December 20, 2019).
7. Automatic extension of filing deadlines in case of certain taxpayers
affected by Federally declared disasters (sec. 205 of the Act
and sec. 7508A of the Code)
Present Law
In general, the Secretary may specify a period of up to one
year that may be disregarded for performing various acts under
the Internal Revenue Code, such as filing tax returns, paying
taxes, or filing a claim for credit or refund of tax, for any
taxpayer determined by the Secretary to be affected by a
Federally declared disaster or a terroristic or military action
with respect to any tax liability of the taxpayer.\868\ In
addition, the period specified by the Secretary may be
disregarded in determining the amount of any interest, penalty,
additional amount, or addition to tax, and the amount of any
credit or refund.
---------------------------------------------------------------------------
\868\ Sec. 7508A.
---------------------------------------------------------------------------
There are special rules provided for pensions and other
employee benefit plans. The Secretary may prescribe a period of
up to one year which may be disregarded in determining the date
by which any action by a pension or other employee benefit
plan, or by any sponsor, administrator, participant,
beneficiary, or other person with respect to such plan,
affected by a Federally declared disaster or a terroristic or
military action would be required or permitted to be completed.
A plan is not treated as operating in a manner inconsistent
with its terms or in violation of its terms merely due to
disregarding any such periods.
The suspension of time may apply to the following acts:
1. Filing any return of income, estate, gift, employment,
or excise tax;
2. Payment of any income, estate, gift, employment, or
excise tax or any installment thereof or of any other liability
to the United States in respect thereof;
3. Filing a petition with the Tax Court for redetermination
of a deficiency, or for review of a decision rendered by the
Tax Court;
4. Allowance of a credit or refund of any tax;
5. Filing a claim for credit or refund of any tax;
6. Bringing suit upon any such claim for credit or refund;
7. Assessment of any tax;
8. Giving or making any notice or demand for the payment of
any tax, or with respect to any liability to the United States
in respect of any tax;
9. Collection of the amount of any liability in respect of
any tax;
10. Bringing suit by the United States in respect of any
liability in respect of any tax; and
11. Any other act required or permitted under the internal
revenue laws specified by the Secretary of the Treasury.\869\
---------------------------------------------------------------------------
\869\ Sec. 7508(a)(1). Under Treasury regulations, an additional
act was added to this list with respect to affected pension plans and
affected taxpayers with respect to such plans: Making contributions to
a qualified retirement plan (within the meaning of section 4974(c))
under section 219(f)(3), 404(a)(6), 404(h)(1)(B), or 404(m)(2); making
distributions under section 408(d)(4); recharacterizing contributions
under section 408A(d)(6); or making a rollover under section 402(c),
403(a)(4), 403(b)(8), or 408(d)(3). Treas. Reg. sec. 301.7508A-
1(c)(1)(iii). In addition, Revenue Procedure 2018-58 supplements the
list of postponed acts in section 7508(a)(1) and Treasury Regulation
section 301.7508A-1(c)(1) with an additional list of time-sensitive
acts.
---------------------------------------------------------------------------
For a tax-related deadline to be postponed under this
authority, the IRS generally will publish, as soon as
practicable after the declaration of the disaster or occurrence
of a terroristic or military action, a revenue ruling, revenue
procedure, notice, announcement, news release, or other
guidance authorizing the postponement and describing the acts
postponed, the postponement period, and the covered disaster
area.\870\
---------------------------------------------------------------------------
\870\ Treas. Reg. sec. 301.7508A-1(e).
---------------------------------------------------------------------------
Explanation of Provision
The provision provides to qualified taxpayers in the case
of a Federally declared disaster a mandatory 60-day period that
is disregarded in the same manner as the period specified under
the Secretary's discretionary authority to provide disaster
relief under section 7508A(a).\871\ The 60-day period begins on
the earliest incident date specified in the declaration to
which the relevant disaster area relates and ends on the date
which is 60 days after the latest incident date so specified. A
disaster area is the geographic area of a Federally declared
disaster, which is any disaster subsequently determined by the
President to warrant assistance by the Federal government under
the Stafford Act.\872\
---------------------------------------------------------------------------
\871\ The Treasury Department published final regulations relating
to the new mandatory 60-day postponement of certain time-sensitive tax-
related deadlines by reason of a federally declared disaster in T.D.
9950, 86 Fed. Reg. 31146-51, June 11, 2021. See also Treas. Reg. sec.
301.7508A-1(g).
\872\ Sec. 165(i)(5).
---------------------------------------------------------------------------
Qualified taxpayers are (1) any individual whose principal
residence is located in a disaster area, (2) any taxpayer if
the taxpayer's principal place of business (other than the
business of performing services as an employee) is located in a
disaster area, (3) any individual who is a relief worker
affiliated with a recognized government or philanthropic
organization and who is assisting in a disaster area, (4) any
taxpayer whose records necessary to meet a deadline for the
acts listed above are maintained in a disaster area, (5) any
individual visiting a disaster area who was killed or injured
as a result of the disaster, and (6) solely with respect to a
joint return, any spouse of an individual who is a qualified
taxpayer.
In the case of a pension or other employee benefit plan, or
any sponsor, administrator, participant, beneficiary or other
person with respect to such a plan,\873\ the provision provides
that a rule similar to the mandatory 60-day period rule
described above applies with respect to any of the following
actions:
---------------------------------------------------------------------------
\873\ For this purpose, a definition similar to the definition of
``qualified taxpayer'' is intended to generally apply.
---------------------------------------------------------------------------
1. Making contributions to a section 401(a) qualified
retirement plan, a section 403(a) annuity, a section 403(b)
tax-sheltered annuity, or a section 408 individual retirement
account or annuity (IRA);
2. Making distributions of contributions to an IRA prior to
the due date for filing the individual's tax return for the
year in which the contribution was made;
3. Recharacterizing IRA contributions by making a trustee-
to-trustee transfer from a traditional IRA to a Roth IRA, or
vice versa, before the due date (including extensions) for the
individual's income tax return for that year; \874\ or
---------------------------------------------------------------------------
\874\ In the case of a recharacterization, the contribution will be
treated as having been made to the transferee IRA (and not the
original, transferor IRA) as of the date of the original contribution.
Pursuant to section 13611 of Pub. L. No. 115-97, this rule does not
apply to a conversion contribution to a Roth IRA effective for taxable
years beginning after December 31, 2017.
---------------------------------------------------------------------------
4. Making a rollover.\875\
---------------------------------------------------------------------------
\875\ Such actions are those provided under Treas. Reg. sec.
301.7508A-1(c)(1)(iii), described above.
---------------------------------------------------------------------------
The mandatory 60-day period provided under the provision is
in addition to, or concurrent with as the case may be, any
period of suspension provided by the Secretary.
Effective Date
The provision applies to Federally declared disasters
declared after the date of enactment of the Act (December 20,
2019).
8. Modification of the tax rate for the excise tax on investment income
of private foundations (sec. 206 of the Act and sec. 4940 of the Code)
Present Law
Under section 4940(a), private foundations that are
recognized as exempt from Federal income tax under section
501(a) (other than exempt operating foundations \876\) are
subject to a two-percent excise tax on their net investment
income. Net investment income generally includes interest,
dividends, rents, royalties (and income from similar sources),
and capital gain net income, and is reduced by expenses
incurred to earn this income. The two-percent rate of tax is
reduced to one-percent in any year in which a foundation
exceeds the average historical level of its charitable
distributions. Specifically, the excise tax rate is reduced if
the foundation's qualifying distributions (generally, amounts
paid to accomplish exempt purposes) \877\ equal or exceed the
sum of (1) the amount of the foundation's assets for the
taxable year multiplied by the average percentage of the
foundation's qualifying distributions over the five taxable
years immediately preceding the taxable year in question, and
(2) one percent of the net investment income of the foundation
for the taxable year.\878\ In addition, the foundation cannot
have been subject to tax in any of the five preceding years for
failure to meet minimum qualifying distribution requirements in
section 4942.
---------------------------------------------------------------------------
\876\ Sec. 4940(d)(1). Exempt operating foundations generally
include organizations such as museums or libraries that devote their
assets to operating charitable programs but have difficulty meeting the
``public support'' tests necessary not to be classified as a private
foundation. To be an exempt operating foundation, an organization must:
(1) be an operating foundation (as defined in section 4942(j)(3)); (2)
be publicly supported for at least 10 taxable years; (3) have a
governing body no more than 25 percent of whom are disqualified persons
and that is broadly representative of the general public; and (4) have
no officers who are disqualified persons. Sec. 4940(d)(2).
\877\ Sec. 4942(g).
\878\ Sec. 4940(e).
---------------------------------------------------------------------------
Private foundations that are not exempt from tax under
section 501(a), such as certain charitable trusts, are subject
to an excise tax under section 4940(b). The tax is equal to the
excess of the sum of the excise tax that would have been
imposed under section 4940(a) if the foundation were tax exempt
and the amount of the tax on unrelated business income that
would have been imposed if the foundation were tax exempt, over
the income tax imposed on the foundation under subtitle A of
the Code.
Private foundations are required to make a minimum amount
of qualifying distributions each year to avoid tax under
section 4942. The minimum amount of qualifying distributions a
foundation has to make to avoid tax under section 4942 is
reduced by the amount of section 4940 excise taxes paid.\879\
---------------------------------------------------------------------------
\879\ Sec. 4942(d)(2).
---------------------------------------------------------------------------
Explanation of Provision
The provision replaces the two rates of excise tax on tax-
exempt private foundations with a single rate of tax of 1.39
percent. Thus, under the provision, a tax-exempt private
foundation generally is subject to an excise tax of 1.39
percent on its net investment income. A taxable private
foundation is subject to an excise tax equal to the excess (if
any) of the sum of the 1.39-percent net investment income
excise tax and the amount of the tax on unrelated business
income (both calculated as if the foundation were tax-exempt),
over the income tax imposed on the foundation. The provision
repeals the special reduced excise tax rate for private
foundations that exceed their historical level of qualifying
distributions.
Effective Date
The provision is effective for taxable years beginning
after the date of enactment (December 20, 2019).
9. Additional low-income housing tax credit allocations for qualified
2017 and 2018 California disaster areas (sec. 207 of the Act and sec.
42 of the Code)
Present Law
A taxpayer may claim the low-income housing tax credit
annually over a 10-year period for the costs of building or
rehabilitating rental housing occupied by low-income tenants.
The amount of credit that may be claimed each year is equal to
the applicable percentage of the qualified basis of each
qualified low-income building.
Credit calculations
The applicable percentage for a low-income building is set
for the earlier of: (1) the month the building is placed in
service; or (2) at the election of the taxpayer, (a) the month
the taxpayer and the State housing credit agency enter into a
binding agreement with respect to such building for a credit
allocation, or (b) in the case of a tax-exempt bond-financed
project for which no credit allocation is required, the month
in which the tax-exempt bonds are issued.
These credit percentages are adjusted monthly by the IRS on
a discounted after-tax basis (assuming a 28-percent tax rate)
based on the average of the Applicable Federal Rates for mid-
term and long-term obligations for the month the building is
placed in service. The discounting formula assumes that each
credit is received on the last day of each year and that the
present value is computed on the last day of the first year. In
a project consisting of two or more buildings placed in service
in different months, a separate credit percentage may apply to
each building.
The applicable percentage for non-Federally subsidized
newly constructed housing and non-Federally subsidized
substantial rehabilitation is calculated such that the present
value of the credit amounts is at least 70 percent of a
building's qualified basis, depending on the prevailing
interest rate. For buildings placed in service after July 30,
2008, the applicable percentage cannot be less than 9
percent.\880\ These credits are sometimes referred to as
``nine-percent credits''.\881\
---------------------------------------------------------------------------
\880\ See sec. 42(b) and (e). This credit is referred to as the 70-
percent credit. See Joint Committee on Taxation, General Explanation of
the Tax Reform Act of 1986 (JCS-10-87), May 4, 1987. This document can
be found on the Joint Committee on Taxation website at www.jct.gov.
However, under the Housing and Economic Recovery Act of 2008, the
minimum applicable percentage for such credits was temporarily set at
nine percent (the ``nine-percent floor''). The Consolidated
Appropriations Act, 2016 made the nine-percent floor permanent. The
enactment of the nine-percent floor on the credit implies that, under
the statutory formula, the present value is always 70 percent or
greater.
\881\ See sec. 42(b)(1)(B) and (e).
---------------------------------------------------------------------------
The applicable percentage for Federally subsidized newly
constructed housing, Federally subsidized substantial
rehabilitation, and certain housing acquisition costs is
calculated such that the present value of the credit amounts
equals 30 percent of a building's qualified basis.\882\ These
credits are sometimes referred to as ``four-percent credits.''
---------------------------------------------------------------------------
\882\ This credit is referred to as the 30-percent credit. See
Joint Committee on Taxation, General Explanation of the Tax Reform Act
of 1986 (JCS-10-87), May 4, 1987. This document can be found on the
Joint Committee on Taxation website at www.jct.gov.
---------------------------------------------------------------------------
Credit allocations and placed-in-service requirements
Generally, the low-income housing tax credit is allowable
only if either 50 percent or more of the aggregate basis of the
building and land is financed by tax-exempt bonds subject to
the volume cap \883\ or the owner of a low-income building
receives a credit allocation from the State. Unless an
exception applies, the building must be placed in service by
the end of the calendar year in which the allocation is made.
---------------------------------------------------------------------------
\883\ Sec. 42(h)(4).
---------------------------------------------------------------------------
However, the taxpayer may receive an extension to have the
building placed in service by the end of the second calendar
year following the calendar year in which the allocation is
made (a ``carryover allocation''). To be eligible for a
carryover allocation, more than 10 percent of the taxpayer's
reasonably expected basis in the building (as of the close of
the second calendar year following the calendar year in which
the allocation is made) must be incurred by the date that is
one year after the allocation date.
State housing credit ceiling
In general
The total amount of housing credits available for
allocation by a State is limited by the State housing credit
ceiling for the calendar year. However, the amount of housing
credit allocated by a State to a low-income building reduces
the State housing credit ceiling only once, in the year the
housing credit is allocated.
The State housing credit ceiling is an amount equal to the
sum of four components: (1) the unused State housing credit
ceiling (if any) for the preceding calendar year (the ``unused
carryforward component''), (2) the population component, (3)
the amount of State housing credit ceiling returned in the
calendar year (the ``returned credit component''), plus (4) the
amount (if any) that the Secretary allocates to the State from
the national pool of unused housing credits (the ``national
pool component'').\884\
---------------------------------------------------------------------------
\884\ Sec. 42(h)(3)(C); Treas. Reg. sec. 1.42-14(a)(1).
---------------------------------------------------------------------------
The unused carryforward component is the excess, if any, of
(1) the sum of the population, returned credit, and national
pool components for the preceding calendar year, over (2) the
aggregate amount of housing tax credits actually allocated by
the State for such year, reduced by the amount of credits
allocated from such year's unused State housing credit
ceiling.\885\ Any credits in the unused carryforward component
that are not allocated in the current calendar year are
forfeited to the national pool.
---------------------------------------------------------------------------
\885\ Sec. 42(h)(3)(C); Treas. Reg. sec. 1.42-14(b).
---------------------------------------------------------------------------
For 2020, the population component is equal to the greater
of (1) $2.8125 multiplied by the State population or (2)
$3,217,500.\886\
---------------------------------------------------------------------------
\886\ Rev. Proc. 2019-44. These amounts include a temporary
increase enacted in the Consolidated Appropriations Act of 2018, Pub.
L. No. 115-141. These limits do not apply in the case of projects that
also receive financing with proceeds of tax-exempt bonds issued subject
to the private activity bond volume limit.
---------------------------------------------------------------------------
Stacking order rule
A stacking order rule governs the order in which credits
are treated as allocated from the four components of the State
housing credit ceiling.\887\ Credits are first treated as
allocated from the unused carryforward component. After all of
the credits in the unused carryforward component have been
allocated, any credits then allocated are treated as allocated
from the sum of the population, returned credit, and national
pool components.
---------------------------------------------------------------------------
\887\ Treas. Reg. sec. 1.42-14(g).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, the State housing credit ceiling of
California for calendar year 2020 is increased by the aggregate
housing credit dollar amount allocated by the State housing
credit agency of California for 2020 to buildings located in
qualified 2017 and 2018 California disaster areas,\888\ up to
the average amount of the State housing credit ceilings of
California for 2017 and 2018.\889\
---------------------------------------------------------------------------
\888\ Qualified 2017 and 2018 California disaster areas are those
areas in California which are determined by the President (before
January 1, 2019) to warrant individual or individual and public
assistance from the Federal government under the Stafford Act by reason
of a major disaster the incident period of which begins or ends in
calendar year 2017 or 2018, as specified by the Federal Emergency
Management Agency.
\889\ The average amount is equal to 50 percent of the sum of the
State housing credit ceilings of California for calendar years 2017 and
2018.
---------------------------------------------------------------------------
The provision also provides that credit allocations are
treated as made first from these additional amounts for
purposes of determining the unused State housing credit ceiling
to be carried forward in a calendar year.
Effective Date
The provision is effective on the date of enactment
(December 20, 2019).
10. Treatment of certain possessions (sec. 208 of the Act)
Present Law
Citizens of the United States are generally subject to
Federal income tax on their U.S. and foreign income regardless
of whether they live in a U.S. State, the District of Columbia,
a foreign country, or a U.S. territory. Residents of the U.S.
territories 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 source of income specific to the territory.
The application of the Federal tax rules to the territories
varies from one territory to another. Three territories, Guam,
the Commonwealth of the Northern Mariana Islands, and the U.S.
Virgin Islands, are referred to as mirror Code territories
because the Code serves as the internal tax law of those
territories (substituting the particular territory for the
United States wherever the Code refers to the United States). A
resident of one of those territories generally files a single
tax return only with the territory of which the individual is a
resident, and not with the United States.\890\ Income tax paid
by a bona fide resident of a mirror Code territory generally is
allocated between the U.S. government and the territory
government under special rules administered by the U.S.
Treasury Department and the revenue authority of the territory
government.
---------------------------------------------------------------------------
\890\ Sec. 932 and former sec. 935.
---------------------------------------------------------------------------
American Samoa and Puerto Rico, by contrast, are non-mirror
Code territories. These two territories have their own internal
tax laws, and a resident of either American Samoa \891\ or
Puerto Rico may be required to file income tax returns with
both the territory of residence and the United States. In
general, U.S.-source income and other income from outside the
territory of residence is included on a U.S. income tax return,
and income from sources within the territory of residence is
reported on the territory income tax return.
---------------------------------------------------------------------------
\891\ Tax laws of American Samoa follow, with certain modification,
the Internal Revenue Code as in effect December 31, 2000. See Am. Sam.
Code Ann. sec. 11.0404.
---------------------------------------------------------------------------
Explanation of Provision
The provision requires the Secretary to make a payment to
each mirror Code territory in an amount equal to the loss in
revenue by reason of the temporary disaster-related tax relief
allowable by reason of Title II of the Act to residents of such
territory against its income tax. The Secretary must determine
the amount of each payment based on information provided by the
government of the respective territory.
The provision requires the Secretary to make a payment to
each non-mirror Code territory in an amount estimated by the
Secretary as the aggregate benefits (if any) of the temporary
disaster-related tax relief that would have been provided to
residents of that territory if a mirror code tax system had
been in effect in the territory. Accordingly, the amount of
each payment to a non-mirror Code territory is an estimate of
the aggregate benefits that would be allowed to the territory's
residents if the temporary tax relief provided by Title II of
the Act to U.S. residents were provided by the territory to its
residents. The Secretary is not permitted to make a payment to
a territory unless the territory has a plan that has been
approved by the Secretary under which the territory will
promptly distribute the payment to its residents.
Effective Date
The provision is effective on the date of enactment
(December 20, 2019).
TITLE III--OTHER PROVISIONS
1. Modification of income for purposes of determining tax-exempt status
of certain mutual or cooperative telephone or electric companies (sec.
301 of the Act and sec. 501(c)(12) of the Code)
Present Law
Under Code section 501(c)(12), certain mutual or
cooperative organizations, including telephone and electric
companies, are exempt from Federal income tax under Code
section 501(a), provided that certain requirements are
satisfied. To qualify for exemption under Code section
501(c)(12), at least 85 percent of the organization's income
must consist of amounts collected from members for the sole
purpose of meeting losses and expenses.\892\ Present law
includes special rules regarding the treatment of specific
types of income under the 85-percent test for mutual or
cooperative electric and telephone companies.\893\
---------------------------------------------------------------------------
\892\ See sec. 501(c)(12)(A). The IRS has interpreted the term
``income,'' for purposes of the 85-percent test, as meaning gross
income. Rev. Rul. 74-362, 1974-2 C.B. 170; IRS Audit Technique Guide--
Local Benevolent Life Insurance Association, Mutual Irrigation
Companies and Like Organizations--IRC Section 501(c)(12).
\893\ See sec. 501(c)(12)(B)-(H).
---------------------------------------------------------------------------
Under Code section 118, the gross income of a corporation
does not include any contribution to its capital. Public Law
115-97 amended Code section 118 to provide that contributions
to capital do not include contributions by any governmental
entity or civic group (other than a contribution made by a
shareholder as such).\894\ Thus, under present law, mutual or
cooperative telephone or electric companies described in Code
section 501(c)(12) generally must include such contributions in
non-member income for purposes of the 85-percent test.
---------------------------------------------------------------------------
\894\ Sec. 118(b)(2).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, in the case of a mutual or cooperative
telephone or electric company described in Code section
501(c)(12), the 85-percent test shall be applied without taking
into account: (i) any grant, contribution, or assistance
provided pursuant to the Robert T. Stafford Disaster Relief and
Emergency Assistance Act or any similar grant, contribution, or
assistance by any local, State, or regional governmental entity
for the purposes of relief, recovery, or restoration from, or
preparation for, a disaster or emergency; or (ii) any grant or
contribution by any governmental entity (other than a
contribution in aid of construction or any other contribution
as a customer or potential customer) the purpose of which is
substantially related to providing, constructing, restoring, or
relocating electric, communication, broadband, internet, or
other utility facilities or services.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2017.
2. Repeal of increase in unrelated business taxable income for certain
fringe benefit expenses (sec. 302 of the Act and sec. 512(a)(7) of the
Code)
Present Law
Tax exemption for certain organizations
Section 501(a) exempts certain organizations from Federal
income tax. Such organizations include: (1) tax-exempt
organizations described in section 501(c) (including among
others section 501(c)(3) charitable organizations and section
501(c)(4) social welfare organizations); (2) religious and
apostolic organizations described in section 501(d); and (3)
trusts forming part of a pension, profit-sharing, or stock
bonus plan of an employer described in section 401(a).
Unrelated business income tax
The unrelated business income tax (``UBIT'') generally
applies to income derived from a trade or business regularly
carried on by the organization that is not substantially
related to the performance of the organization's tax-exempt
functions.\895\ An organization that is subject to UBIT and
that has $1,000 or more of gross unrelated business taxable
income must report that income on Form 990-T (Exempt
Organization Business Income Tax Return).
---------------------------------------------------------------------------
\895\ Secs. 511-514.
---------------------------------------------------------------------------
Most exempt organizations may operate an unrelated trade or
business so long as the organization remains primarily engaged
in activities that further its exempt purposes. Therefore, an
organization may generally engage in a substantial amount of
unrelated business activity without jeopardizing exempt status.
A section 501(c)(3) (charitable) organization, however, may not
operate an unrelated trade or business as a substantial part of
its activities.\896\ Therefore, the unrelated trade or business
activity of a section 501(c)(3) organization must be
insubstantial.
---------------------------------------------------------------------------
\896\ Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
An organization determines its unrelated business taxable
income by subtracting from its gross unrelated business income
the deductions directly connected with the unrelated trade or
business.\897\
---------------------------------------------------------------------------
\897\ Sec. 512(a).
---------------------------------------------------------------------------
Organizations subject to tax on unrelated business income
Most exempt organizations are subject to UBIT.
Specifically, organizations subject to UBIT generally include:
(1) organizations exempt from tax under section 501(a),
including organizations described in section 501(c) (except for
U.S. instrumentalities and certain charitable trusts);\898\ (2)
qualified pension, profit-sharing, and stock bonus plans
described in section 401(a);\899\ and (3) certain State
colleges and universities.\900\
---------------------------------------------------------------------------
\898\ Sec. 511(a)(2)(A).
\899\ Sec. 511(a)(2)(A).
\900\ Sec. 511(a)(2)(B).
---------------------------------------------------------------------------
Exclusions from unrelated business taxable income
Certain types of income are specifically excluded from
unrelated business taxable income, such as dividends, interest,
royalties, and certain rents,\901\ unless derived from debt-
financed property or from certain 50-percent controlled
subsidiaries.\902\ Certain types of activities are not
considered unrelated trade or business activities, such as
activities in which substantially all the work is performed by
volunteers, which involve the sale of donated goods, or which
are carried on for the convenience of members, students,
patients, officers, or employees of a charitable
organization.\903\ Additional activities exempt from UBIT
include certain activities of trade shows and State fairs,\904\
conducting bingo games,\905\ and the distribution of low-cost
items incidental to the solicitation of charitable
contributions.\906\
---------------------------------------------------------------------------
\901\ Sec. 512(b).
\902\ Sec. 512(b)(13).
\903\ Sec. 513(a).
\904\ Sec. 513(d).
\905\ Sec. 513(f).
\906\ Sec. 513(h).
---------------------------------------------------------------------------
Specific deduction against unrelated business taxable income
In computing unrelated business taxable income, an exempt
organization may take a specific deduction of $1,000. This
specific deduction may not be used to create a net operating
loss that will be carried back or forward to another year.\907\
---------------------------------------------------------------------------
\907\ Sec. 512(b)(12).
---------------------------------------------------------------------------
In the case of a diocese, province of a religious order, or
a convention or association of churches, there is also allowed
a specific deduction with respect to each parish, individual
church, district, or other local unit. The specific deduction
is equal to the lower of $1,000 or the gross income derived
from any unrelated trade or business regularly carried on by
the local unit.\908\
---------------------------------------------------------------------------
\908\ Ibid.
---------------------------------------------------------------------------
Increase in unrelated business taxable income for certain fringe
benefit expenses
Under section 512(a)(7), unrelated business taxable income
of a tax-exempt organization is increased to the extent that a
deduction is not allowable by reason of section 274 for any
item with respect to qualified transportation fringe benefits
\909\ or any parking facility used in connection with qualified
parking.\910\ The determination of unrelated business taxable
income associated with providing qualified transportation
fringes, including parking facilities used in connection with
qualified parking, is consistent with the determination of the
deduction disallowance under section 274.\911\
---------------------------------------------------------------------------
\909\ See sec. 132(f).
\910\ See sec. 132(f)(5)(C).
\911\ See sec. 274(a)(4).
---------------------------------------------------------------------------
Section 512(a)(7) does not apply to any item directly
connected with an unrelated trade or business that is regularly
carried on by the organization. The Secretary is granted
specific authority to issue regulations or other guidance
necessary or appropriate to carry out the provision, including
regulations or guidance providing for the appropriate
allocation of depreciation and other costs with respect to
facilities used for parking.\912\ The $1,000 specific deduction
available to organizations under section 512(b)(12) remains in
effect and may be used to offset unrelated business taxable
income resulting from the application of section 512(a)(7).
---------------------------------------------------------------------------
\912\ See IRS Notice 2018-99; Prop. Treas. Reg. sec. 1.274-12, 85
Fed. Reg. 37599, June 2020.
---------------------------------------------------------------------------
Explanation of Provision
The provision repeals section 512(a)(7) (the increase in
unrelated business taxable income for certain fringe benefit
expenses).
Effective Date
The provision is effective as if included in the amendments
made by section 13703 of Public Law 115-97 (i.e., for amounts
paid or incurred after December 31, 2017).
PART FOUR: VIRGINIA BEACH STRONG ACT (PUBLIC LAW 116-98) \913\
---------------------------------------------------------------------------
\913\ H.R. 4566. The bill was introduced in the House of
Representatives on September 27, 2019, and was passed by the House by
voice vote on December 9, 2019. The Senate passed the bill without
amendment by voice vote the next day. The President signed the bill on
December 20, 2019.
---------------------------------------------------------------------------
1. Special rules for contributions for relief of the families of the
mass shooting in Virginia Beach (sec. 2 of the Act)
Present Law
Tax exemption for charitable organizations
Organizations described in section 501(c)(3) (generally,
charitable organizations) are exempt from Federal income
taxation under section 501(a). A section 501(c)(3) organization
must be organized and operated exclusively for exempt purposes,
and no part of the net earnings of such an organization may
inure to the benefit of any private shareholder or individual.
An organization is not organized or operated exclusively for
one or more exempt purposes unless the organization serves a
public rather than a private interest. Thus, an organization
described in section 501(c)(3) generally must serve a
charitable class of persons that is indefinite or of sufficient
size.
Deduction for charitable contributions
In general, under present law, taxpayers may claim an
income tax deduction for charitable contributions. A charitable
contribution generally is a contribution or gift to or for the
use of an organization described in section 170(c) (describing
certain charitable, governmental, and other organizations).
Contributions to individuals generally are not deductible as
charitable contributions.
A donor who claims a charitable deduction for a
contribution of money, regardless of amount, must maintain as a
record of the contribution a bank record or a written
communication from the donee showing the name of the donee
organization, the date of the contribution, and the amount of
the contribution.\914\ In addition to the foregoing
recordkeeping requirements, substantiation requirements apply
in the case of charitable contributions with a value of $250 or
more.\915\ No charitable deduction is allowed for any
contribution of $250 or more unless the taxpayer substantiates
the contribution by a contemporaneous written acknowledgment of
the contribution by the donee organization.
---------------------------------------------------------------------------
\914\ Sec. 170(f)(17).
\915\ Sec. 170(f)(8).
---------------------------------------------------------------------------
Explanation of Provision
The provision clarifies that a cash contribution made on or
after May 31, 2019, for the exclusive benefit of the families
of the dead or wounded victims of the mass shooting in Virginia
Beach, Virginia, that occurred on May 31, 2019, will not fail
to qualify for a charitable deduction merely because the
contribution is for the exclusive benefit of such families.
Under the provision, certain payments by an organization
are treated as: (1) related to the purpose or function
constituting the basis for the organization's exempt status;
and (2) are not treated as inuring to the benefit of any
private individual, if the payments are made in good faith
using a reasonable and objective formula that is consistently
applied. Such payments are payments made: (1) on or after May
31, 2019, and on or before June 1, 2021 (2) to the spouse or
any dependent (as defined in section 152 of the Code) of the
dead or wounded victims of the mass shooting in Virginia Beach,
Virginia, that occurred on May 31, 2019 (3) by an organization
that is exempt from tax under section 501(a) (determined
without regard to such payments).
Effective Date
The provision is effective on the date of enactment
(December 20, 2019).
PART FIVE: FAMILIES FIRST CORONAVIRUS RESPONSE ACT (PUBLIC LAW 116-127)
\916\
---------------------------------------------------------------------------
\916\ H.R. 6201. The bill was introduced in the House of
Representatives on March 11, 2020, and was passed by the House on March
14, 2020. The Senate passed the bill without amendment on March 18,
2020. The President signed the bill the same day.
---------------------------------------------------------------------------
DIVISION G--TAX CREDITS FOR PAID SICK AND PAID FAMILY AND MEDICAL LEAVE
Present Law
Federal employment taxes
Federal employment taxes are imposed on wages paid to
employees with respect to employment and include taxes imposed
under the Federal Insurance Contributions Act (``FICA''), the
Federal Unemployment Tax Act (``FUTA''), and Federal income
tax.\917\ In addition, Tier 1 of the Railroad Retirement Tax
Act (``RRTA'') imposes a tax on compensation paid to railroad
employees and representatives.\918\
---------------------------------------------------------------------------
\917\ Secs. 3101, 3111, 3301, and 3401.
\918\ Sec. 3221.
---------------------------------------------------------------------------
FICA taxes are comprised of two components: the Old-Age,
Survivors, and Disability Insurance (``OASDI'') and Hospital
Insurance (``Medicare'').\919\ With respect to OASDI taxes, the
applicable rate is 12.4 percent with half of such rate (6.2
percent) imposed on the employee and the remainder (6.2
percent) imposed on the employer.\920\ The tax is assessed on
covered wages up to the OASDI wage base ($137,700 in
2020).\921\ Generally, the OASDI wage base rises based on
increases in the national average wage index.\922\
---------------------------------------------------------------------------
\919\ The Hospital Insurance tax includes two components: Medicare
tax and Additional Medicare tax. Additional Medicare taxes are imposed
on wages in excess of certain thresholds and are only imposed on the
employee. Sec. 3101(b). There is no employer match for Additional
Medicare tax. For purposes of this explanation, when referencing
Medicare taxes, the term does not include Additional Medicare tax.
\920\ Sec. 3101.
\921\ Indexed for inflation, the OASDI wage base is $142,800 in
2021.
\922\ Sec. 230 of the Social Security Act (42 U.S.C. sec. 430).
---------------------------------------------------------------------------
The employee portion of OASDI taxes must be withheld and
remitted to the Federal government by the employer during the
quarter, as required by the applicable deposit rules.\923\ The
employer is liable for the employee portion of OASDI taxes, in
addition to its own share, whether or not the employer
withholds the amount from the employee's wages.\924\ OASDI and
Medicare taxes are generally allocated by statute among
separate trust funds: the OASDI Trust Funds, Medicare's
Hospital Insurance Trust Fund, and Supplementary Medical
Insurance Trust Fund.\925\
---------------------------------------------------------------------------
\923\ Sec. 3102(a) and Treas. Reg. sec. 31.3121(a)-2. Sec. 6302.
\924\ Sec. 3102(b).
\925\ Secs. 201 and 1817 of the Social Security Act, Pub. L. No.
74-271 as amended (42 U.S.C. secs. 401 and 1395i). Section 201, 42
U.S.C. sec. 402. This section appropriates to the OASI and DI trust
funds 100 percent ``the taxes imposed . . . by chapter 21 (other than
sections 3101(b) and 3111(b) [i.e., current sections 3101(a) and
3111(a)]) of the Internal Revenue Code of 1954 with respect to wages
(as defined in section 3121 of such Code)'' ``determined by the
Secretary of the Treasury by applying the applicable rates of tax under
such subchapter or chapter 21 (other than sections 3101(b) and 3111(b))
to such wages.'' Accordingly, the amount appropriated is based on the
tax rate in effect on wages as defined in the statute. Similarly,
section 1817 of the Social Security Act, 42 U.S.C. sec. 1395i,
appropriates to the HI trust fund 100 percent of ``the taxes imposed by
sections 3101(b) and 3111(b) of the Internal Revenue Code of 1986 with
respect to wages reported to the Secretary of the Treasury or his
delegate pursuant to subtitle F of such Code after December 31, 1965,
as determined by the Secretary of the Treasury by applying the
applicable rates of tax under such sections to such wages.''
---------------------------------------------------------------------------
Generally, the term ``wages'' for OASDI tax purposes means
all remuneration for ``employment,'' including the cash value
of all remuneration (including benefits) paid in any medium
other than cash, with certain exceptions.\926\ The name given
to the remuneration for employment is immaterial. OASDI wages
includes salaries, vacation allowances, bonuses, deferred
compensation, commissions, and fringe benefits. The term
``employment'' is generally defined for FICA tax purposes as
any service, of whatever nature, performed by an employee for
the person employing him or her, with certain specific
exceptions.
---------------------------------------------------------------------------
\926\ Sec. 3121(a).
---------------------------------------------------------------------------
OASDI Trust Funds
The taxes related to the OASDI program collected from FICA
and under the Self-Employment Contributions Act (``SECA'') are
deposited into two separate OASDI Trust Funds: (1) the Old-Age
and Survivors Insurance (``OASI'') Trust Fund which pays
retirement and survivor benefits, and (2) the Disability
Insurance (``DI'') Trust Fund which pays disability
benefits.\927\ The major source of income to the OASDI Trust
Funds is employment taxes, specifically FICA and SECA. The
OASDI Trust Funds are financial accounts in the U.S. Treasury.
The only purposes for which these trust funds can be used are
to pay benefits and program administrative costs. A fixed
proportion (dependent on the allocation of tax rates by trust
fund) of the taxes received under FICA and SECA is deposited in
the OASI Trust Fund to the extent that such taxes are not
needed immediately to pay expenses. Taxes are deposited in the
fund on every business day and the Railroad Retirement Board
(``RRB''). The SSA collects taxes to fund the program, while
the RRB is tasked with distributing benefits to eligible
railroad industry employees and their family members to provide
income assurance during retirement. These two governing bodies
cooperate in determining an individual's benefits.
---------------------------------------------------------------------------
\927\ 42 U.S.C. sec. 401.
---------------------------------------------------------------------------
Railroad retirement program
Railroad workers do not participate in the OASDI system.
Compensation subject to RRTA tax is exempt from FICA
taxes.\928\ Instead, the railroad retirement system, while
separate from and parallel to the Social Security
Administration (``SSA''), is overseen by the SSA
---------------------------------------------------------------------------
\928\ Sec. 3121(b)(9).
---------------------------------------------------------------------------
RRTA tax rates
The RRTA imposes a tax on compensation paid by covered
employers to employees in recognition for the performance of
services.\929\ Employees whose compensation is subject to RRTA
are ultimately eligible for railroad retirement benefits that
fall under a two-tier structure. Rail employees and employers
pay tier 1 taxes at the same rate as other employment
taxes.\930\ In addition, rail employees and employers both pay
tier 2 taxes which are used to finance railroad retirement
benefits over and above social security benefit levels.\931\
Tier 2 benefits are similar to a private defined benefit
pension. Those taxes are funneled to the railroad retirement
system and used to fund basic retirement benefits for railroad
workers and an investment trust that generates returns for the
pension fund.
---------------------------------------------------------------------------
\929\ Secs. 3201 through 3233. Instead of FICA taxes, railroad
employers and employees are subject, under the RRTA, to taxes
equivalent to the Social Security and Medicare taxes under FICA. Under
the RRTA, employers and employees are also subject to an additional
tax, referred to as the ``tier 2'' tax, on compensation up to a certain
amount.
\930\ 7.65 percent, consisting of 6.2 percent for retirement on
earnings up to $137,700 in 2020, and 1.45 percent for Medicare hospital
insurance on all earnings. An additional 0.9 percent in Medicare taxes
are withheld from employees on earnings above $200,000.
\931\ In 2020, the tier 2 tax rate on earnings up to $102,300 is
4.9 percent for employees and 13.1 percent for employers.
---------------------------------------------------------------------------
Coordination between OASDI Trust Funds and RRB's Social
Security Equivalent Benefit Fund
The railroad retirement system and the OASDI programs have
been coordinated financially since 1951. The purpose of the
financial interchange is to place the OASDI Trust Funds in the
same position they would have been in if railroad employment
had been covered under OASDI since its inception. Generally,
under the interchange, for a given fiscal year there is
computed the revenue that would have been collected by the
OASDI Trust Funds if railroad employment had been covered
directly by the SSA. This amount is netted against the amount
of benefits SSA would have paid to railroad beneficiaries based
on railroad and nonrailroad earnings during that period. Where
OASDI benefits that would have been paid exceed revenue to the
trust funds that would have been due, the excess, plus an
allowance for interest and administrative expenses, is
transferred from the OASDI Trust Funds to the RRB's Social
Security Equivalent Benefit Account. If revenue exceeds
benefits, the RRB would transfer an amount equal to the
difference from the RRB's Social Security Equivalent Benefit
Account to the OASDI Trust Funds.
OASDI and Medicare benefits
The OASDI program under the Social Security Act provides
for the payment of benefits to individuals based on wages
earned as an employee and credited to the employee's earnings
record.\932\ Eligibility for Medicare coverage under the Social
Security Act generally is based on eligibility for OASDI
benefits and, thus, on wages credited to an employee's earnings
record.\933\ The definitions of ``wages'' and ``employment''
for purposes of OASDI and Medicare eligibility are similar to
those definitions for FICA tax purposes described above.\934\
---------------------------------------------------------------------------
\932\ OASDI benefits are provided by Title II of the Social
Security Act (42 U.S.C. secs. 401 et seq.).
\933\ Sec. 226 of the Social Security Act (42 U.S.C. sec. 426).
\934\ Secs. 209 and 210 of the Social Security Act (42 U.S.C. secs.
409 and 410).
---------------------------------------------------------------------------
Self-employment taxes
SECA imposes tax on the self-employment income of an
individual. SECA taxes consist of OASDI tax and Medicare
tax.\935\ Under the OASDI component, the rate of tax is 12.4
percent on self-employment income up to the OASDI wage base
($137,700 for 2020).\936\ Under the basic Medicare tax
component, the second rate of tax is 2.9 percent of all self-
employment income (without regard to the OASDI wage base).\937\
As is the case with employees, an additional Medicare tax
applies to the Medicare portion of SECA tax on self-employment
income in excess of a threshold amount.\938\
---------------------------------------------------------------------------
\935\ Secs. 1401(a), 1401(b).
\936\ Sec. 1401(a). In calculating the SECA tax for OASDI, the
OASDI wage base taken into account is reduced by FICA wages paid to the
individual during the taxable year.
\937\ Sec. 1401(b)(1).
\938\ Sec. 1401(b)(2).
---------------------------------------------------------------------------
Self-employment income subject to SECA tax is determined as
the net earnings from self-employment derived by an individual
during any taxable year, subject to certain exceptions. Net
earnings from self-employment is the gross income derived by an
individual from any trade or business less allowed deductions
which are attributable to the trade or business and permitted
under the SECA rules. Certain passive income and related
deductions are not taken into account in determining net
earnings from self-employment, including rentals from real
estate unless received in the course of a trade or business as
a real estate dealer,\939\ dividends and interest unless such
dividends and interest are received in the course of a trade or
business as a dealer in stocks or securities,\940\ and sales or
exchanges of capital assets and certain other property unless
the property is stock in trade which would properly be included
in inventory or held primarily for sale to customers in the
ordinary course of the trade or business.\941\
---------------------------------------------------------------------------
\939\ Sec. 1402(a)(1).
\940\ Sec. 1402(a)(2).
\941\ Sec. 1402(a)(3).
---------------------------------------------------------------------------
For purposes of computing net earnings from self-
employment, taxpayers are permitted a deduction equal to the
product of the taxpayer's net self-employment income
(determined without regard to this deduction) and one-half of
the sum of the rates for OASDI and Medicare, i.e., 7.65 percent
of net earnings.\942\ This deduction is determined without
regard to the 0.9 percent Additional Medicare tax that may
apply to an individual. This deduction reflects the fact that
the FICA rates apply to an employee's wages, which do not
include FICA taxes paid by the employer, whereas the self-
employed individual's net earnings are economically equivalent
to an employee's wages plus the employer share of FICA
taxes.\943\ This is generally referred to as the ``regular
method'' of determining net earnings from self-employment, and
in Internal Revenue Service forms and publications is expressed
as multiplying total net earnings from self-employment by 92.35
percent.
---------------------------------------------------------------------------
\942\ Sec. 1402(a)(12).
\943\ The deduction is intended to provide parity between FICA and
SECA taxes because the employer may deduct, as a business expense, its
share of the FICA taxes paid. As presently written, the deduction for
SECA taxes is not the exact economic equivalent to the deduction for
FICA taxes. See Joint Committee on Taxation, Options to Improve Tax
Compliance and Reform Tax Expenditures, (JCS-2-05), January 27, 2005,
for a detailed description of this issue.
---------------------------------------------------------------------------
Employment tax and income tax in the U.S. territories
FICA tax
Employers and employees in the U.S. territories are
generally subject to FICA payroll tax obligations.\944\ In
contrast, employers and employees in the territories are
generally not subject to withholding at the source for Federal
income tax, although they are subject to withholding of local
taxes.\945\ These payroll obligations of the employers are
generally applicable to Federal agencies with personnel in the
territory. Employers in the territories file quarterly tax
returns with the Federal government to report and pay FICA
taxes for employees in the respective territories.
---------------------------------------------------------------------------
\944\ The U.S. territories referred to in this document are
American Samoa, the Commonwealth of the Northern Mariana Islands, Guam,
Puerto Rico, and the U.S. Virgin Islands.
\945\ Under section 3401(a)(8), most wages paid to U.S. persons for
services performed in one of the territories are excluded if the
payments are subject to withholding by the territory, or, in the case
of Puerto Rico, the payee is a bona fide resident of the territory for
the full year.
---------------------------------------------------------------------------
Income tax
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.
territories 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 source of income specific to the territory.
The application of the Federal income tax rules to the
territories varies from one territory to another. Three
territories, Guam, the Commonwealth of the Northern Mariana
Islands, and the U.S. Virgin Islands, are referred to as mirror
Code territories because the Code serves as the internal tax
law of those territories (substituting the particular territory
for the United States wherever the Code refers to the United
States). A resident of one of those territories generally files
a single tax return only with the territory of which the
individual is a resident, and not with the United States.\946\
Income tax paid by a bona fide resident of a mirror Code
territory generally is allocated between the U.S. government
and the territory government under special rules administered
by the U.S. Treasury Department and the revenue authority of
the territory government.
---------------------------------------------------------------------------
\946\ Sec. 932 and former sec. 935.
---------------------------------------------------------------------------
American Samoa and Puerto Rico, by contrast, are referred
to as non-mirror Code territories that have their own internal
tax laws. A resident of either American Samoa or Puerto Rico
may be required to file income tax returns with both the
territory of residence and the United States. In general, U.S.-
source income and other income from outside the territory of
residence is included on a U.S. income tax return, and income
from sources within the territory of residence is reported on
the territory income tax return.
1. Payroll credit for required paid sick leave (sec. 7001 of the Act)
Explanation of Provision
In general
Under the provision, an employer is allowed a credit
against the Old-Age, Survivors, and Disability Insurance Act
(``OASDI'') tax or Railroad Retirement Tax Act (``RRTA'') tax
imposed on the employer for each calendar quarter in an amount
equal to 100 percent of the qualified sick leave wages paid by
the employer with respect to that calendar quarter, subject to
the limits described below. The provision defines qualified
sick leave wages as wages (as defined in section 3121(a)) and
compensation (as defined in section 3231(e)) paid by an
employer which are required to be paid by reason of Division E
of the bill, the Emergency Paid Sick Leave Act (``EPSLA''). As
described below, the credit may be increased by certain health
plan expenses of the employer.
The EPSLA requires certain employers to provide an employee
with paid sick time to the extent that the employee is unable
to work or telework due to a need for leave because: (1) the
employee is subject to a Federal, State, or local quarantine or
isolation order related to COVID-19; (2) the employee has been
advised by a health care provider to self-quarantine due to
concerns related to COVID-19; (3) the employee is experiencing
symptoms of COVID-19 and seeking a medical diagnosis; (4) the
employee is caring for an individual who is subject to an order
described in clause (1) or has been advised as described in
clause (2); (5) the employee is caring for the employee's son
or daughter if the school or place of care of the son or
daughter has been closed, or the child care provider of such
son or daughter is unavailable due to COVID-19 precautions; or
(6) the employee is experiencing any other substantially
similar condition specified by the Secretary of Health and
Human Services in consultation with the Secretary of the
Treasury and the Secretary of Labor.\947\
---------------------------------------------------------------------------
\947\ Division E of the bill, sec. 5102(a).
---------------------------------------------------------------------------
Credit against OASDI and RRTA tax
The provision limits the amount of qualified sick leave
wages taken into account with respect to an individual for
purposes of the credit. The provision provides different
limitations for different circumstances under which qualified
sick leave wages are paid. In the case of paid sick time
qualifying under clauses (1), (2), or (3) above, the amount of
qualified sick leave wages taken into account for purposes of
the credit may not exceed $511 for any day (or any portion
thereof) for which the individual is paid such sick time. In
the case of paid sick time qualifying under clauses (4), (5),
or (6) above, the amount of qualified sick leave wages taken
into account may not exceed $200 for any day (or portion
thereof) for which the individual is paid such sick time. In
addition, the provision provides that the aggregate number of
days taken into account for the calendar quarter with respect
to an individual under all clauses may not exceed the excess
(if any) of 10 over the aggregate number of days so taken into
account for all preceding calendar quarters.
The credit allowed is increased under the provision by so
much of the employer's qualified health plan expenses as are
properly allocable to the qualified sick leave wages for which
the credit is allowed. Qualified health plan expenses are
amounts paid or incurred by the employer to provide and
maintain a group health plan,\948\ but only to the extent such
amounts are excluded from the employees' income as coverage
under an accident or health plan.\ 949\ Qualified health plan
expenses are allocated to qualified sick leave wages in such
manner as the Secretary of the Treasury (or the Secretary's
delegate) may prescribe. Except as otherwise provided by the
Secretary, such allocations is treated as properly made under
the provision if made on the basis of being pro rata among
covered employees and pro rata on the basis of periods of
coverage (relative to the time periods of leave to which such
wages relate).
---------------------------------------------------------------------------
\948\ Group health plan for this purpose is defined in section
5000(b)(1).
\949\ For the exclusion, see section 106(a).
---------------------------------------------------------------------------
The provision provides that the credit allowed may not
exceed the OASDI tax or RRTA tax imposed on the employer,
reduced by any credits allowed for the employment of qualified
veterans \ 950\ and research expenditures of qualified small
businesses \951\ for that calendar quarter on the wages paid
with respect to all the employer's employees. However, if for
any calendar quarter the amount of the credit exceeds the OASDI
tax or RRTA tax imposed on the employer, reduced as described
in the prior sentence, such excess is treated as a refundable
overpayment.\952\
---------------------------------------------------------------------------
\950\ This credit is described in section 3111(e).
\951\ This credit is described in section 3111(f).
\952\ The excess is treated as an overpayment and refunded under
sections 6402(a) and 6413(b). In addition, any amount that is due to an
employer is treated in the same manner as a refund due from a credit
provision. 31 U.S.C. sec. 1324. Thus, amounts are appropriated to the
Secretary of the Treasury for refunding such excess amounts.
---------------------------------------------------------------------------
If an employer claims a credit under this provision, the
amount so claimed is included in gross income. Thus, the credit
is not taken into account for purposes of determining any
amount allowable as a payroll tax deduction, deduction for
qualified sick leave wages, or deduction for health plan
expenses (or any amount capitalizable to basis). For example,
assume an employer claims a credit of $5,510 for $5,110 of
qualified sick leave wages and $400 of health plan expenses
paid during the quarter. Under the provision, the employer has
an offsetting income inclusion amount of $5,510, and the
employer may deduct $5,110 of qualified sick leave wages and
$400 of health plan expenses (assuming such costs are not
subject to capitalization). In addition, the employer's income
tax deduction for any tax imposed by section 3111(a) or
3221(a), the employer's share of OASDI or RRTA tax, for such
quarter will not be reduced.\953\
---------------------------------------------------------------------------
\953\ Note that the qualified sick leave wages paid are not subject
to the tax imposed by section 3111(a) or 3221(a). Employers also
receive an increase in the otherwise available credit in the amount of
the tax imposed by section 3111(b) on qualified sick leave wages.
---------------------------------------------------------------------------
Any qualified sick leave wages taken into account under the
provision are not taken into account for purposes of
determining a section 45S credit.\954\ Thus, the employer may
not claim a credit under section 45S with respect to the
qualified sick leave wages paid, but may be able to take a
credit under section 45S with respect to any additional wages
paid, provided the requirements of section 45S are met with
respect to the additional wages.
---------------------------------------------------------------------------
\954\ Section 45S provides an employer credit for certain paid
family and medical leave.
---------------------------------------------------------------------------
Under the provision, an employer may elect, at such time
and in such manner as provided by the Secretary of the Treasury
(or the Secretary's delegate), to have the provision not apply
to such employer for a calendar quarter. Further, the credit
allowed under this provision does not apply to the Government
of the United States, the government of any State or political
subdivision thereof, or any agency or instrumentality of any of
those entities. Under the provision, employers in the U.S.
territories may claim the credit by filing their quarterly
Federal employment tax returns.
The provision provides that the Secretary of the Treasury
(or the Secretary's delegate) shall prescribe such regulations
or other guidance as may be necessary to carry out the purposes
of this provision, including regulations or other guidance: (1)
to prevent the avoidance of the purposes of the limitations
under this provision; (2) to minimize compliance and record-
keeping burdens under this provision; (3) providing for waiver
of penalties for failure to deposit amounts in anticipation of
the allowance of the credit under this provision; (4) for
recapturing the benefit of credits determined under this
provision in cases where there is a subsequent adjustment to
the credit; and (5) to ensure that the wages taken into account
under this provision conform with the paid sick time required
to be provided under the EPSLA.\955\ With respect to clause
(5), it is intended that the Secretary of the Treasury (or the
Secretary's delegate) be provided broad authority to ensure
qualified sick leave wages under this provision includes paid
sick time required to be paid under the EPSLA.
---------------------------------------------------------------------------
\955\ Division E of the bill.
---------------------------------------------------------------------------
Under the provision, amounts are appropriated to the OASDI
Trust Funds and the Social Security Equivalent Benefit Account
established under the Railroad Retirement Act of 1974 \ 956\
equal to the reduction in revenues to the Treasury by reason of
the provision. Such amounts are transferred from the general
fund at such times and in such manner as to replicate to the
extent possible the transfers that would have occurred to the
OASDI Trust Funds or Social Security Equivalent Benefit Account
had this provision not been enacted.\957\
---------------------------------------------------------------------------
\956\ Sec. 15A(a) (45 U.S.C. sec. 231n-1(a)).
\957\ The amounts appropriated are determined according to the tax
rate in effect on wages, as described above, according to the Social
Security Act.
---------------------------------------------------------------------------
The IRS has subsequently implemented this provision.\958\
---------------------------------------------------------------------------
\958\ Notice 2020-54, 2020-31 I.R.B. 226, July 27, 2020.
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment (March
18, 2020). The provision applies for the period that begins on
a date within 15 days of the date of enactment, prescribed by
the Secretary of the Treasury (or the Secretary's delegate),
and that ends on December 31, 2020.
2. Credit for sick leave for certain self-employed individuals (sec.
7002 of the Act)
Explanation of Provision
In general
Under the provision, an eligible self-employed individual
is allowed an income tax credit for any taxable year for a
qualified sick leave equivalent amount, as described below. An
eligible self-employed individual is defined as an individual
who regularly carries on any trade or business \ 959\ and would
be entitled to receive paid leave during the taxable year under
Division E of the bill, the Emergency Paid Sick Leave Act
(``EPSLA''), if the individual were an employee of an employer
(other than himself or herself) that is subject to the
requirements of the Act.
---------------------------------------------------------------------------
\959\ Within the meaning of sec. 1402.
---------------------------------------------------------------------------
The EPSLA requires certain employers to provide an employee
with paid sick time to the extent that the employee is unable
to work or telework due to a need for leave because: (1) the
employee is subject to a Federal, State, or local quarantine or
isolation order related to COVID-19; (2) the employee has been
advised by a health care provider to self-quarantine due to
concerns related to COVID-19; (3) the employee is experiencing
symptoms of COVID-19 and seeking a medical diagnosis; (4) the
employee is caring for an individual who is subject to an order
described in clause (1) or has been advised as described in
clause (2); (5) the employee is caring for the employee's son
or daughter if the school or place of care of the son or
daughter has been closed, or the child care provider of such
son or daughter is unavailable due to COVID-19 precautions; or
(6) the employee is experiencing any other substantially
similar condition specified by the Secretary of Health and
Human Services in consultation with the Secretary of the
Treasury and the Secretary of Labor.\960\
---------------------------------------------------------------------------
\960\ Division E of the bill, sec. 5102(a).
---------------------------------------------------------------------------
Qualified sick leave equivalent amount
The qualified sick leave equivalent amount with respect to
an eligible self-employed individual is an amount equal to the
number of days during the taxable year that the self-employed
individual cannot perform services for which that individual
would have been entitled to sick leave pursuant to the EPSLA
\961\ (if the individual were employed by an employer),
multiplied by the lesser of two amounts: (a) $511 in the case
of paid sick time described in clauses (1), (2), or (3) above
($200 in the case of paid sick time described in clauses (4),
(5), or (6) above); or (b) 100 percent of the average daily
self-employment income of the individual for the taxable year
in the case of any day of paid sick time described in clauses
(1), (2), or (3) above (67 percent in the case of paid sick
time described in clauses (4), (5), or (6) above).
---------------------------------------------------------------------------
\961\ Division E of the bill.
---------------------------------------------------------------------------
The number of days taken into account in determining the
qualified sick leave equivalent amount may not exceed, with
respect to any taxable year, 10 days, taking into account any
days taken in all preceding taxable years. The individual's
average daily self-employment income under the provision is an
amount equal to the net earnings from self-employment for the
taxable year divided by 260.
Additional rules
The provision provides that the credit allowed is
refundable.\962\ No credit is allowed to an individual unless
the individual maintains such documentation as the Secretary of
Treasury (or the Secretary's delegate) may prescribe to
establish that the individual is an eligible self-employed
individual.
---------------------------------------------------------------------------
\962\ Any refund due to an individual is treated in the same manner
as a refund due from a credit provision. 31 U.S.C. sec. 1324. Thus,
amounts are appropriated to the Secretary of the Treasury for refunding
such amounts.
---------------------------------------------------------------------------
If an eligible self-employed individual receives qualified
sick leave wages,\963\ the individual's qualified sick leave
equivalent amount determined under the provision is reduced
(but not below zero) to the extent that the sum of the
qualified sick leave equivalent amount and the qualified sick
leave wages received exceeds $2,000 ($5,110 in the case of any
day any portion of which is paid sick time described in clause
(1), (2), or (3) above, with respect to section 5102(a) of the
EPSLA). For example, assume that an eligible self-employed
individual's qualified sick leave equivalent amount is $1,500,
but the individual also works for a covered employer under the
EPSLA and received qualified sick leave wages under clause (5)
above (with respect to section 5102(a) of such Act) of $1,000
to care for the individual's son or daughter while school was
closed due to COVID-19. The individual's qualified sick leave
equivalent amount would be reduced by $500,\964\ resulting in a
credit under the provision of $1,000.\965\
---------------------------------------------------------------------------
\963\ As defined by sec. 7001(c) of the Act, described above.
\964\ ($1,500 + $1,000)-$2,000 = $500.
\965\ $1,500-$500 = $1,000.
---------------------------------------------------------------------------
Application of credit in certain territories
Under the provision, the Secretary of the Treasury (or the
Secretary's delegate) is directed to make payments to each
territory with a mirror Code tax system that relate to the cost
(if any) of each territory's credits for sick leave for certain
self-employed individuals. The Secretary is further directed to
make similar payments to each non-mirror Code territory.
With respect to mirror Code territories, the Secretary
makes payments equal to the loss in revenue by reason of the
application of the credit for sick leave for certain self-
employed individuals to the territory's mirror Code. This
amount is determined by the Secretary based on information
provided by the governments of the respective territories.
With respect to Puerto Rico and American Samoa (non-mirror
Code territories), the Secretary is directed to make payments
in an amount estimated by the Secretary as being equal to the
aggregate benefits that would have been provided to the
residents of each territory from the credit for sick leave for
certain self-employed individuals if a mirror Code tax system
had been in effect in such territory. These payments will not
be made unless the territory has a plan approved by the
Secretary to promptly distribute the payments to its residents.
Regulatory authority
The Secretary of the Treasury (or the Secretary's delegate)
is directed to prescribe such regulations or other guidance as
may be necessary to carry out the purposes of the bill,
including (1) to effectuate the purposes of this provision, and
(2) to minimize compliance and record-keeping burdens under the
provision. The IRS has subsequently implemented this
provision.\966\
---------------------------------------------------------------------------
\966\ Notice 2020-54, 2020-31 I.R.B. 226, July 27, 2020.
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment (March
18, 2020). The only days that may be taken into account in
determining the qualified sick leave equivalent amount are days
occurring during the period beginning on a date selected by the
Secretary of the Treasury (or the Secretary's delegate) which
is during the 15-day period beginning on the date of enactment
and ending on December 31, 2020.
3. Payroll credit for required paid family leave (sec. 7003 of the Act)
Explanation of Provision
In general
Under the provision, an employer is allowed a credit
against the Old-Age, Survivors, and Disability Insurance
(``OASDI'') tax or Railroad Retirement Tax Act (``RRTA'') tax
imposed on the employer for each calendar quarter in an amount
equal to 100 percent of the qualified family leave wages paid
by the employer with respect to that calendar quarter, subject
to the limits described below. The provision defines qualified
family leave wages as wages (within the meaning of section
3121(a)) and compensation (within the meaning of section
3231(e)) paid by an employer by reason of Division C of the
bill, the Emergency Family and Medical Leave Expansion Act
(``EFMLEA''). As described below, the credit may be increased
by certain health plan expenses of the employer.
The EFMLEA requires certain employers to provide public
health emergency leave to employees under the Family and
Medical Leave Act of 1993 (``FMLA'').\967\ This requirement
generally applies when an employee is unable to work or
telework due to a need for leave to care for a son or daughter
under age 18 because the school or place of care has been
closed, or the child care provider is unavailable, due to a
public health emergency. The bill defines a public health
emergency as an emergency with respect to COVID-19 declared by
a Federal, State, or local authority. An employer that is
required to provide this additional family and medical leave is
allowed a tax credit in respect of the leave.
---------------------------------------------------------------------------
\967\ Division C of the bill, section 3102.
---------------------------------------------------------------------------
The first 10 days of public health emergency leave required
under the EFMLEA may consist of unpaid leave, after which paid
leave is required. The paid leave is for the duration of the
period provided in the EFMLEA, which is a maximum of 10 weeks.
The amount of required paid leave under the provision is based
on an amount not less than two-thirds of an employee's regular
rate of pay, and the number of hours the employee would
otherwise be normally scheduled to work. Additional guidance is
provided for employees with varying schedules. The paid leave
mandated by the EFMLEA may not exceed $200 per day and $10,000
in the aggregate.
Credit against OASDI and RRTA tax
Under the provision, employers are allowed a credit against
OASDI or RRTA taxes in an amount equal to 100 percent of
qualified family leave wages paid by the employer during the
quarter. Qualified family leave wages for purposes of the
credit means wages \968\ and compensation \969\ paid by an
employer which were required to be paid pursuant to the EFMLEA.
The maximum amount of qualified family leave wages eligible for
the credit is $200 for any day (or portion thereof) for which
the employee is paid qualified family leave wages, and in the
aggregate with respect to all calendar quarters, $10,000. The
credit is not allowed in respect of unpaid leave.
---------------------------------------------------------------------------
\968\ Sec. 3121(a) (defining wages for FICA tax purposes).
\969\ Sec. 3221(a) (defining compensation for RRTA tax purposes).
---------------------------------------------------------------------------
The credit allowed is increased under the provision by so
much of the employer's qualified health plan expenses as are
properly allocable to the qualified family leave wages for
which the credit is allowed. The provision defines qualified
health plan expenses as amounts paid or incurred by the
employer to provide and maintain a group health plan,\970\ but
only to the extent such amounts are excluded from the
employees' income as coverage under an accident or health
plan.\971\ Qualified health plan expenses are allocated to
qualified family leave wages in such manner as the Secretary of
the Treasury (or the Secretary's delegate) may prescribe.
Except as otherwise provided by the Secretary, such allocations
are treated as properly made under the provision if made on the
basis of being pro rata among covered employees and pro rata on
the basis of periods of coverage (relative to the time periods
of leave to which such wages relate).
---------------------------------------------------------------------------
\970\ Group health plan for this purpose is defined in section
5000(b)(1).
\971\ For the exclusion, see section 106(a).
---------------------------------------------------------------------------
The provision provides that the credit allowed may not
exceed the OASDI tax or RRTA tax imposed on the employer,
reduced by any credits allowed for the employment of qualified
veterans \972\ and research expenditures of qualified small
businesses \973\ for that calendar quarter on the wages paid
with respect to all of the employer's employees. However, if
for any calendar quarter the amount of the credit exceeds the
OASDI tax or RRTA tax imposed on the employer, reduced as
described under the prior sentence, such excess is treated as a
refundable overpayment.\974\
---------------------------------------------------------------------------
\972\ This credit is described in section 3111(e).
\973\ This credit is described in section 3111(f).
\974\ The excess is treated as an overpayment and refunded under
sections 6402(a) and 6413(b). In addition, any amount that is due to an
employer is treated in the same manner as a refund due from a credit
provision. 31 U.S.C. sec. 1324. Thus, amounts are appropriated to the
Secretary of the Treasury for refunding such excess amounts.
---------------------------------------------------------------------------
If an employer claims a credit under this provision, the
amount so claimed is included in gross income. Thus, the credit
is not taken into account for purposes of determining any
amount allowable as a payroll tax deduction, deduction for
qualified family leave wages, or deduction for health plan
expenses (or any amount capitalizable to basis). For example,
assume an employer claims a credit of $2,700 for $2,500 of
qualified family leave wages and $200 of health plan expenses
paid during the quarter. Under the provision, the employer will
have an offsetting income inclusion amount of $2,700, and the
employer may deduct $2,500 of qualified family leave wages and
$200 of health plan expenses (assuming such costs are not
subject to capitalization). In addition, the employer's income
tax deduction for any tax imposed by section 3111(a) or
3221(a), the employer's share of OASDI or RRTA tax, for such
quarter will not be reduced.\975\
---------------------------------------------------------------------------
\975\ Note that the qualified family leave wages paid are not
subject to the tax imposed by section 3111(a) or 3221(a). Employers
also receive an increase in the otherwise available credit in the
amount of the tax imposed by section 3111(b) on qualified family leave
wages. See subsequent explanation of sec. 7005 of the bill.
---------------------------------------------------------------------------
Any wages taken into account in determining the credit
under this provision are not taken into account for purposes of
determining the section 45S credit. Thus, the employer may not
claim a credit under section 45S with respect to the qualified
family leave wages paid, but may be able to take a credit under
section 45S with respect to any additional wages paid, provided
the requirements of section 45S are met with respect to the
additional wages.
Under the provision an employer may elect, at such time and
in such manner as provided by the Secretary of the Treasury (or
the Secretary's delegate), to have the provision not apply to
the employer for a calendar quarter. The credit allowed under
this provision does not apply to the Government of the United
States, the government of any State or political subdivision
thereof, or any agency or instrumentality of any of these
entities. Under the provision, employers in the territories may
claim the credit by filing their quarterly Federal employment
tax returns.
The provision provides that the Secretary of the Treasury
(or the Secretary's delegate) shall prescribe such regulations
or other guidance as may be necessary to carry out the purposes
of the provision, including regulations or other guidance: (1)
to prevent the avoidance of the purposes of the limitations
under the provision; (2) to minimize compliance and record-
keeping burdens under the provision; (3) providing for waiver
of penalties for failure to deposit amounts in anticipation of
the allowance of the credit under the provision; (4) for
recapturing the benefit of credits determined under the
provision in cases where there is a subsequent adjustment to
the credit; and (5) to ensure that the wages taken into account
under the provision conform with the paid family leave required
to be provided under the EFMLEA.\976\ With respect to clause
(5), it is intended that the Secretary of the Treasury (or the
Secretary's delegate) be provided broad authority to ensure
qualified family leave wages under this provision includes paid
sick time required to be paid under the EFMLEA.\977\
---------------------------------------------------------------------------
\976\ Division C of the bill, sec. 3102.
\977\ Ibid.
---------------------------------------------------------------------------
Under the provision, amounts are appropriated to the OASDI
Trust Funds and the Social Security Equivalent Benefit Account
established under the Railroad Retirement Act of 1974 \978\
equal to the reduction in revenues to the Treasury by reason of
the provision. Such amounts are transferred from the general
fund at such times and in such manner as to replicate to the
extent possible the transfers that would have occurred to the
Trust Funds or Account had the provision not been enacted.
---------------------------------------------------------------------------
\978\ Sec. 15A(a) (45 U.S.C. sec. 231n-1(a)).
---------------------------------------------------------------------------
The IRS has subsequently implemented this provision.\979\
---------------------------------------------------------------------------
\979\ Notice 2020-54, 2020-31 I.R.B. 226, July 27, 2020.
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment (March
18, 2020). The provision applies for the period that begins on
a date, within 15 days of the date of enactment, prescribed by
the Secretary of the Treasury (or the Secretary's delegate) and
that ends on December 31, 2020.
4. Credit for family leave for certain self-employed individuals (sec.
7004 of the Act)
Explanation of Provision
In general
Under the provision, an eligible self-employed individual
is allowed an income tax credit for any taxable year for a
qualified family leave equivalent amount, as described below.
An eligible self-employed individual is defined as an
individual who regularly carries on any trade or business \980\
and would be entitled to receive paid leave during the taxable
year under Division C of the bill, the Emergency Family and
Medical Leave Expansion Act (``EFMLEA''), if the individual
were an employee of an employer (other than himself or herself)
that is subject to the requirements of the Act.
---------------------------------------------------------------------------
\980\ Within the meaning of sec. 1402.
---------------------------------------------------------------------------
The EFMLEA requires certain employers to provide public
health emergency leave to employees under the Family and
Medical Leave Act of 1993 (``FMLA'').\981\ This requirement
generally applies when an employee is unable to work or
telework due to a need for leave to care for a son or daughter
under age 18 because the school or place of care has been
closed, or the child care provider is unavailable, due to a
public health emergency. The bill defines a public health
emergency as an emergency with respect to COVID-19 declared by
a Federal, State, or local authority.
---------------------------------------------------------------------------
\981\ Division C of the bill.
---------------------------------------------------------------------------
An employer that is required to provide this additional
family and medical leave is allowed a tax credit in respect of
the leave. In general, under the provision, a self-employed
individual is allowed a similar tax credit in situations in
which a credit would be allowed if the individual were an
employee of an employer subject to the leave requirements.
The first 10 days of public health emergency leave required
under the EFMLEA may consist of unpaid leave, after which paid
leave is required. The paid leave is for the duration of the
period provided in the EFMLEA, which is a maximum of 10 weeks.
The amount of required paid leave under the provision is based
on an amount not less than two-thirds of an employee's regular
rate of pay, and the number of hours the employee would
otherwise be normally scheduled to work. Additional guidance is
provided for employees with varying schedules. The paid leave
mandated by the EFMLEA may not exceed $200 per day and $10,000
in the aggregate.
Qualified family leave equivalent amount
The qualified family leave equivalent amount with respect
to an eligible self-employed individual is an amount equal to
the number of days (up to 50) during the taxable year that the
self-employed individual cannot perform services for which that
individual would be entitled to paid leave pursuant to the
EFMLEA \982\ (if the individual were employed by an employer),
multiplied by the lesser of two amounts: (1) 67 percent of the
average daily self-employment income of the individual for the
taxable year, or (2) $200. The individual's average daily self-
employment income under the provision is an amount equal to the
individual's net earnings from self-employment for the year
divided by 260.
---------------------------------------------------------------------------
\982\ Division C of the bill.
---------------------------------------------------------------------------
Additional rules
The provision provides that the credit allowed is
refundable.\983\ No credit is allowed to an individual unless
the individual maintains such documentation as the Secretary of
the Treasury (or the Secretary's delegate) may prescribe to
establish that the individual is an eligible self-employed
individual.
---------------------------------------------------------------------------
\983\ Any refund due to an individual is treated in the same manner
as a refund due from a credit provision. 31 U.S.C. sec. 1324. Thus,
amounts are appropriated to the Secretary of the Treasury for refunding
such amounts.
---------------------------------------------------------------------------
If an eligible self-employed individual receives qualified
family leave wages,\984\ the individual's qualified family
leave equivalent amount determined under the provision is
reduced (but not below zero) to the extent that the sum of the
qualified family leave equivalent amount and the qualified
family leave wages received exceeds $10,000. For example,
assume that an eligible self-employed individual's qualified
family leave equivalent amount is $5,000, but the individual
also works for an employer that is a covered employer under the
EFMLEA and received qualified family leave wages of $9,000 to
care for the individual's son or daughter while school was
closed due to COVID-19. The individual's qualified family leave
equivalent amount would be reduced by $4,000,\985\ resulting in
a credit under the provision of $1,000.\986\
---------------------------------------------------------------------------
\984\ As defined by sec. 7003(c) of the bill, described above.
\985\ ($5,000 + $9,000) - $10,000 = $4,000.
\986\ $5,000 - $4,000 = $1,000.
---------------------------------------------------------------------------
Application of credit in certain territories
Under the provision, the Secretary of the Treasury (or the
Secretary's delegate) makes payments to each territory with a
mirror Code tax system that relate to the cost of each
territory's credits for family leave for certain self-employed
individuals. The Secretary of the Treasury (or the Secretary's
delegate) makes similar payments to each non-mirror Code
territory.
With respect to mirror Code territories, the Secretary of
the Treasury (or the Secretary's delegate) makes payments equal
to the loss in revenue by reason of the application of the
credit for family leave for certain self-employed individuals
to the territory's mirror Code. This amount is determined by
the Secretary of the Treasury (or the Secretary's delegate)
based on information provided by the governments of the
respective territories.
With respect to Puerto Rico and American Samoa (non-mirror
Code territories), the Secretary makes payments in an amount
estimated by the Secretary of the Treasury (or the Secretary's
delegate) as being equal to the aggregate benefits that would
have been provided to the residents of each territory from the
credit for family leave for certain self-employed individuals
if a mirror Code tax system had been in effect in such
territory. These payments will not be made unless the territory
has a plan approved by the Secretary of the Treasury (or the
Secretary's delegate) to promptly distribute the payments to
its residents.
Regulatory authority
The Secretary of the Treasury (or the Secretary's delegate)
is directed to prescribe such regulations as are necessary to
carry out the purposes of the provision, including (1) to
prevent the avoidance of the purposes of the bill, and (2) to
minimize compliance and record-keeping burdens under the
provision.
The IRS has subsequently implemented this provision.\987\
---------------------------------------------------------------------------
\987\ Notice 2020-54, 2020-31 I.R.B. 226, July 27, 2020.
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment (March
18, 2020). The only days that may be taken into account in
determining the qualified family leave equivalent amount are
days occurring during the period beginning on a date selected
by the Secretary of the Treasury (or the Secretary's delegate)
which is during the 15-day period beginning on the date of
enactment and ending on December 31, 2020.
5. Special rule related to tax on employers (sec. 7005 of the Act)
Explanation of Provision
Under the provision, any wages or compensation required to
be paid to employees by reason of the Emergency Family and
Medical Leave Expansion Act (``EFMLEA'') or the Emergency Paid
Sick Leave Act (``EPSLA'') are not considered wages for
purposes of Old-Age, Survivors, and Disability Insurance
(``OASDI'') tax or compensation for purposes of Railroad
Retirement Tax Act (``RRTA'') tax. As a result, no OASDI or
RRTA taxes will be collected on such amounts from employers to
be contributed to the OASDI or railroad retirement programs.
The amount of the credit allowed by sections 7001 and 7003
of the bill is increased by the amount of tax imposed by
section 3111(b) \988\ on qualified sick leave wages or
qualified family leave wages, for which a credit is allowed
under such section 7001 or 7003, respectively. The no-double-
benefit rule described above for sections 7001 and 7003 applies
for purposes of this credit increase.
---------------------------------------------------------------------------
\988\ Section 3111(b) imposes on the employer a Medicare hospital
insurance excise tax of 1.45 percent on all wages paid by the employer.
---------------------------------------------------------------------------
The provision provides that amounts will be transferred to
the Federal Old-Age and Survivors Insurance Trust Fund, the
Federal Disability Insurance Trust Fund, and the Social
Security Equivalent Benefit Account from Treasury's general
fund in an amount equal to the reduction in revenues to the
Treasury resulting from not treating such paid emergency sick
leave and emergency family and medical leave as wages or
compensation for employment tax purposes. Such amounts are to
be transferred from the general fund at such times and in such
manner as to replicate, to the extent possible, the transfers
which would have occurred to such Trust Fund or Account had the
provision not been enacted.\989\
---------------------------------------------------------------------------
\989\ Secs. 201 and 1817 of the Social Security Act, Pub. L. No.
74-271 as amended (42 U.S.C. secs. 401 and 1395i). Section 201, 42
U.S.C. sec. 402. This section appropriates to the OASI and DI trust
funds 100 percent ``the taxes imposed . . . by chapter 21 (other than
sections 3101(b) and 3111(b) [i.e., current sections 3101(a) and
3111(a)]) of the Internal Revenue Code of 1954 with respect to wages
(as defined in section 3121 of such Code)'' ``determined by the
Secretary of the Treasury by applying the applicable rates of tax under
such subchapter or chapter 21 (other than sections 3101(b) and 3111(b))
to such wages.'' Accordingly, the amount appropriated is based on the
tax rate in effect on wages as defined in the statute. Similarly,
section 1817 of the Social Security Act, 42 U.S.C. sec. 1395i,
appropriates to the HI trust fund 100 percent of ``the taxes imposed by
sections 3101(b) and 3111(b) of the Internal Revenue Code of 1986 with
respect to wages reported to the Secretary of the Treasury or his
delegate pursuant to subtitle F of such Code after December 31, 1965,
as determined by the Secretary of the Treasury by applying the
applicable rates of tax under such sections to such wages.''
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment (March
18, 2020).
PART SIX: CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY (``CARES'')
ACT (PUBLIC LAW 116-136) \990\
---------------------------------------------------------------------------
\990\ H.R. 748. On March 25, 2020, the Senate passed an amendment
in the nature of a substitute to a House bill introduced in January
2019. R The House passed the Senate amendment without amendment by
voice vote on March 27, 2020. The President signed the bill the same
day.
---------------------------------------------------------------------------
TITLE II--ASSISTANCE FOR AMERICAN WORKERS, FAMILIES, AND BUSINESSES
Subtitle B--Rebates and Other Individual Provisions
1. 2020 recovery rebates for individuals (sec. 2201 of the Act and sec.
6428 of the Code)
Present Law
In general
A United States citizen or resident alien generally is
subject to the U.S. individual income tax on his or her
worldwide taxable income. Taxable income equals the taxpayer's
total gross income less certain exclusions, exemptions, and
deductions. In determining taxable income, an individual may
claim either a standard deduction or itemized deductions.
An individual's income tax liability is determined by
computing his or her regular income tax liability (and any
additional tax liabilities such as self-employment taxes or
household employment taxes) and, if applicable, alternative
minimum tax liability. After computing income tax liability,
all withholding and estimated tax payments as well as other
available credits are applied to determine whether there is a
balance due (i.e., tax owed for that year) or an overpayment
that may be refunded for that taxable year.
There is no permanent provision under present law that
authorizes rebates to individuals during a taxable year. As
part of the Economic Stimulus Act of 2008, Congress enacted a
temporary stimulus provision under former section 6428. An
overview of the computation of individual income tax liability,
credits, and former section 6428 is described below.
Income tax liability
Regular income tax liability is determined by applying the
regular income tax rate schedules (or tax tables) to the
individual's taxable income. The regular income tax rate
schedules are divided into several ranges of income, known as
income brackets, and the statutory tax rate on an additional
dollar of income (referred to as the ``marginal tax rate'')
increases as the individual's income increases from one bracket
to the next. The income bracket amounts are adjusted annually
for inflation. Separate rate schedules apply based on filing
status: single individuals (other than heads of households and
surviving spouses), heads of households, married individuals
filing joint returns (including surviving spouses), married
individuals filing separate returns, and estates and trusts.
Lower rates may apply to capital gains and certain
dividends (``qualified dividends'') than the rates generally
applicable to wages and other so-called ``ordinary income.''
Additional taxes not based on the income brackets may also be
owed by the individual for the taxable year, such as self-
employment tax or household employment taxes.
Refunds and refundable tax credits
In general
An individual may reduce his or her income tax liability by
available income tax credits. In some instances, a credit is
wholly or partially refundable. That is, if the amount of a
taxpayer's refundable income tax credits exceeds the taxpayer's
income tax liability (net of other nonrefundable credits), such
credits create an overpayment, which may generate a refund or
be credited against any other internal revenue tax
liability.\991\ A refund or credit is authorized for a taxable
year only if an overpayment exists, that is, if the amounts
paid or deemed paid exceed the tax liability for that
year.\992\ The refundable tax credits that may generate a
refund include (i) actual remittances or withheld taxes and
(ii) credits that deem payments to have been made.\993\ Two
major refundable credits are the child tax credit and the
earned income tax credit.
---------------------------------------------------------------------------
\991\ See secs. 37, 6401, 6402.
\992\ See sec. 6402(a).
\993\ Secs. 31-37.
---------------------------------------------------------------------------
All other credits are nonrefundable in that they may reduce
or eliminate income tax liability but may not cause this
liability to decrease below zero. Even if an overpayment exists
for a year, a refund may be withheld to offset against tax
liabilities from other taxable periods \994\ or against certain
nontax debts.\995\
---------------------------------------------------------------------------
\994\ Sec. 6402(a) allows such offset at the discretion of the
Secretary.
\995\ Sec. 6402(c), (d), (e), and (f).
---------------------------------------------------------------------------
Child tax credit
An individual may claim a tax credit of $2,000 for each
qualifying child under the age of 17.\996\ Generally, under
section 152, a qualifying child must have the same principal
place of abode as the taxpayer for more than half of the
taxable year, must not provide over half of his or her own
support for the taxable year, must not file a joint return for
the taxable year, and must satisfy a relationship test.\997\ To
satisfy the relationship test, the child must be the taxpayer's
son, daughter, stepson, stepdaughter, brother, sister,
stepbrother, stepsister, adopted child, foster child, or a
descendant of any such individual. The credit is phased out and
reduced to zero at higher-income levels. A child who is not a
citizen, national, or resident of the United States may not be
a qualifying child.
---------------------------------------------------------------------------
\996\ Sec. 24.
\997\ Sec. 152(c).
---------------------------------------------------------------------------
No credit is allowed unless the individual includes the
name and Social Security Number (``SSN'') of each qualifying
child on the individual's income tax return.\998\ For this
purpose, the SSN must be issued by the Social Security
Administration before the due date of the return (including
extensions) and must be issued to a citizen of the United
States or pursuant to a provision of the Social Security Act
relating to the lawful admission for employment in the United
States.\999\
---------------------------------------------------------------------------
\998\ Sec. 24(e) and (h)(7).
\999\ Sec. 24(h)(7).
---------------------------------------------------------------------------
To the extent the child tax credit exceeds the taxpayer's
tax liability, the taxpayer is eligible for a refundable credit
(the additional child tax credit) equal to 15 percent of earned
income in excess of $2,500,\1000\ not to exceed $1,400 per
child in 2020. The maximum amount of the refundable portion of
the credit is indexed for inflation.
---------------------------------------------------------------------------
\1000\ Families with three or more children may determine the
additional child tax credit by taking the greater of (1) the earned
income formula, or (2) the alternative formula (i.e., the amount by
which the taxpayer's Social Security taxes exceed the taxpayer's earned
income tax credit).
---------------------------------------------------------------------------
Tax treatment of the U.S. territories
Citizens of the United States are generally subject to
Federal income tax on their U.S. and foreign income regardless
of whether they live in a U.S. State, the District of Columbia,
a foreign country, or a U.S. territory. Residents of the U.S.
territories 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 source of income specific to the territory.
The application of the Federal tax rules to the territories
varies from one territory to another. Three territories, Guam,
the Commonwealth of the Northern Mariana Islands, and the U.S.
Virgin Islands, are referred to as mirror Code territories
because the Code serves as the internal tax law of those
territories (substituting the particular territory for the
United States wherever the Code refers to the United States). A
resident of one of those territories generally files a single
tax return only with the territory of which the individual is a
resident, and not with the United States.\1001\ Income tax paid
by a bona fide resident of a mirror Code territory generally is
allocated between the U.S. government and the territory
government under special rules administered by the U.S.
Treasury Department and the revenue authority of the territory
government.
---------------------------------------------------------------------------
\1001\ Sec. 932 and former sec. 935.
---------------------------------------------------------------------------
American Samoa and Puerto Rico, by contrast, are non-mirror
Code territories. These two territories have their own internal
tax laws,\1002\ and a resident of either American Samoa or
Puerto Rico may be required to file income tax returns with
both the territory of residence and the United States. In
general, U.S.-source income and other income from outside the
territory of residence is included on a U.S. income tax return,
and income from sources within the territory of residence is
reported on the territory income tax return.
---------------------------------------------------------------------------
\1002\ The tax laws of American Samoa follow, with certain
modifications, the Internal Revenue Code as in effect December 31,
2000. See Am. Sam. Code Ann. Sec. 11.0404.
---------------------------------------------------------------------------
Residents of the territories may be eligible for refundable
income tax credits. Under which law (the Code, a mirror Code,
or the internal tax law of a non-mirror Code territory) and by
which method (filing with the Internal Revenue Service or with
the territory revenue authority) a territory resident claims a
refundable credit varies from one credit to another. The U.S.
Treasury reimburses territory governments for the costs of some
refundable credits.
2008 recovery rebates for individuals
As part of the Economic Stimulus Act of 2008,\1003\
Congress enacted a one-time recovery rebate income tax credit
for 2008. The credit was refundable, and most taxpayers
received advance refunds before filing their 2008 Federal
income tax returns.
---------------------------------------------------------------------------
\1003\ Pub. L. No. 110-185, sec. 101 (Feb. 13, 2008). The 2008
recovery rebate, codified as section 6428, was later repealed as
deadwood in Pub. L. No. 113-295, sec. 221(a)(112)(A), December 19,
2014.
---------------------------------------------------------------------------
Eligibility for and computation of rebate credit
The credit was the sum of two components, a basic component
and a qualifying child component. Eligible individuals \1004\
were allowed a basic component equal to the greater of:
---------------------------------------------------------------------------
\1004\ An eligible individual was any individual other than: (1) a
nonresident alien; (2) an estate or trust; or (3) a dependent.
---------------------------------------------------------------------------
Net income tax liability,\1005\ not to
exceed $600 ($1,200 in the case of a joint return), or
---------------------------------------------------------------------------
\1005\ Net income tax liability was defined as the excess of the
sum of the individual's regular tax liability and alternative minimum
tax over the sum of all nonrefundable credits (other than the child tax
credit).
---------------------------------------------------------------------------
$300 ($600 in the case of a joint return) if
the eligible individual had (1) qualifying income
\1006\ of at least $3,000 or (2) a net income tax
liability of at least $1 and gross income greater than
the sum of the applicable basic standard deduction
amount and one personal exemption (two personal
exemptions for a joint return).
---------------------------------------------------------------------------
\1006\ Qualifying income was defined as the sum of the eligible
individual's: (a) earned income; (b) Social Security benefits; and (c)
veteran's payments. The definition of earned income had the same
meaning as the definition for purposes of the earned income tax credit
at that time, except that it did not include net earnings from self-
employment that are not taken into account in computing taxable income.
---------------------------------------------------------------------------
An eligible individual was any individual other than: (1) a
nonresident alien; (2) an estate or trust; or (3) a dependent.
If an individual was eligible for any amount of the basic
component, the individual also may have been eligible for the
qualifying child component of $300 for each qualifying child of
such individual. For these purposes, the child tax credit
definition of a qualifying child applied.
The amount of the credit was phased out at a rate of five
percent of adjusted gross income (``AGI'') above certain income
levels. The beginning point of this phaseout range was $75,000
of AGI ($150,000 in the case of joint returns).
To be eligible for the credit, taxpayers--including both
married spouses filing a joint return--had to provide an SSN.
There was a limited exception to the SSN requirement where one
spouse was a member of the Armed Forces of the United States at
any time during the taxable year. In addition, any qualifying
child had to have an SSN to qualify for purposes of the
qualifying child credit component. Any credit amount allowed
for a qualifying child in the case of a taxpayer claiming an
individual as a qualifying child but providing an SSN for the
individual associated with an individual too old to be a
qualifying child was treated as a mathematical or clerical
error.\1007\
---------------------------------------------------------------------------
\1007\ In the event of a mathematical or clerical error, the IRS
may assess additional tax without issuance of a notice of deficiency as
otherwise required. Sec. 6213(b).
---------------------------------------------------------------------------
Advance payments of recovery rebate
Most taxpayers were allowed the recovery rebate credit in
the form of an advance refund amount during 2008, issued either
as a direct deposit or as a check from Treasury.\1008\ The
amount of the advance refund was computed in the same manner as
the credit, except that it was done on the basis of tax returns
filed for 2007 (instead of 2008). Accordingly, the advance
refund amount was based on a taxpayer's filing status, number
of qualifying children, AGI, net income tax liability, and
qualifying income as reported for 2007. Taxpayers that did not
file a 2007 income tax return did not receive the advance
refund amount but could claim the recovery rebate amount on
their 2008 income tax returns.\1009\
---------------------------------------------------------------------------
\1008\ The IRS issued more than $96 billion in advance payments to
more than 119 million individuals during 2008. In addition, it issued
more than $8.5 billion in recovery rebate credits (claimed on
taxpayers' 2008 tax returns) to almost 21 million taxpayers as of April
17, 2009. Treasury Inspector General for Tax Administration,
``Evaluation of the Planning, Computation, and Issuance of the Recovery
Rebate Credit'' (Sept. 9, 2009), available at https://www.treasury.gov/
tigta/auditreports/2009reports/200940129fr.pdf.
\1009\ IRS Notice 2008-28 created a mechanism for certain
individuals not otherwise required to file an income tax return to
receive an advance refund amount. 2008-10 I.R.B. 546. Such taxpayers
were instructed to file a Form 1040A with specific information entered
to allow the IRS to compute the advance refund amount. Revenue
Procedure 2008-21 provided additional guidance regarding how to
electronically file the form. 2008-12 I.R.B. 657.
---------------------------------------------------------------------------
On their 2008 income tax returns, taxpayers could reconcile
the recovery rebate amount (using 2008 information) with any
advance refund amount received during 2008 (using 2007
information). If the recovery rebate amount less the advance
refund amount was a positive number (because, for example, the
taxpayer paid no tax in 2007 but paid tax in 2008), the
taxpayer was allowed that amount as a refundable credit against
2008 tax liability. If, however, the result was negative
(because, for example, the taxpayer paid tax in 2007 but owed
no tax for 2008), that negative amount did not increase the
taxpayer's tax liability in 2008. Failure to reduce the
recovery rebate amount by any advance refund amount was treated
as a mathematical or clerical error.
Additional provisions
The Economic Stimulus Act of 2008 required Treasury to make
payments to the U.S. territories to compensate them for the
cost of the recovery rebate credit. To each mirror Code
territory (Guam, the Commonwealth of the Northern Mariana
Islands, and the U.S. Virgin Islands), Treasury was to make a
payment in an amount equal to the aggregate amount of the
credits allowable by reason of the provision to that
territory's residents against its income tax, based on
information provided by the government of the respective
territory. To each non-mirror Code territory (American Samoa
and Puerto Rico), Treasury was to make a payment in an amount
estimated by Treasury as being equal to the aggregate credits
that would have been allowed to residents of that territory if
a mirror Code tax system had been in effect in that territory.
The payment was not made to any territory without a mirror Code
unless that territory had a plan that had been approved by the
Secretary under which the territory would promptly distribute
the payment to its residents. A taxpayer who was allowed a
credit, or received a payment under a credit-related plan, from
the taxpayer's territory government was not allowed the
recovery rebate credit under the Code.
The Economic Stimulus Act of 2008 did not alter any of the
offset authority under the law in effect at the time. As such,
any overpayment resulting from the recovery rebate credit was
subject to the refund offset provisions for tax debts and for
certain non-tax debts.\1010\
---------------------------------------------------------------------------
\1010\ The Economic Stimulus Act of 2008 included a provision that
any recovery rebate credit or refund allowed or made to an individual
(including to any resident of a U.S. territory) was not taken into
account as income and was not taken into account as resources for the
month of receipt and the following two months for purposes of
determining eligibility of such individual or any other individual for
benefits or assistance, or the amount or extent of benefits or
assistance, under any Federal program or under any State or local
program financed in whole or in part with Federal funds. A similar
provision applicable to all tax refunds, including advance payments of
refundable credits, was subsequently codified as section 6409. See
infra footnote 35.
---------------------------------------------------------------------------
Explanation of Provision
In response to the economic and health crises in 2020,
Congress enacted a refundable income tax credit for individuals
that is advanceable to eligible individuals, as described
below.
In general
The provision provides a one-year refundable income tax
credit for 2020, referred to as the 2020 recovery rebate. The
credit is referred to as a rebate because it includes rules,
described below, under which the Secretary of the Treasury
(herein ``Secretary'') makes an advance payment to a taxpayer
for the amount of the credit (determined based on prior year
filing characteristics or other information) before the
taxpayer files a 2020 Federal income tax return.\1011\ The IRS
refers to such advance payments as economic impact payments.
---------------------------------------------------------------------------
\1011\ Within two weeks of the enactment of the CARES Act on March
27, 2020, Treasury disbursed more than 81 million payments totaling
more than $147 billion. As of May 31, 2020, Treasury had disbursed
160.4 million payments totaling $269.3 billion. In total, Treasury
disbursed 161.9 million advance payments worth $271.4 billion. U.S.
Government Accountability Office, ``COVID-19, Opportunities to Improve
Federal Response and Recovery Efforts,'' GAO-20-625, June 2020, at 25;
IRS, ``SOI Tax Stats--Coronavirus Aid, Relief, and Economic Security
(CARES Act) Statistics, available at https://www.irs.gov/statistics/
soi-tax-stats-coronavirus-aid-relief-and-economic-security-act-cares-
act-statistics (last visited January 28, 2021).
---------------------------------------------------------------------------
An eligible individual is allowed a refundable income tax
credit for the first taxable year beginning in 2020 equal to
the sum of:
$1,200 ($2,400 in the case of a joint
return), and
$500 for each qualifying child of such
individual.\1012\
---------------------------------------------------------------------------
\1012\ Sec. 6428(a).
---------------------------------------------------------------------------
An eligible individual is any individual other than (1) a
nonresident alien, (2) an estate or trust, or (3) a
dependent.\1013\ For these purposes, the child tax credit
definition of a qualifying child applies (generally, a
qualifying child as defined in section 152 who is under the age
of 17).
---------------------------------------------------------------------------
\1013\ Sec. 6428(d).
---------------------------------------------------------------------------
Unlike the 2008 recovery rebate credit, there are no
eligibility requirements related to minimum levels of
qualifying income, gross income, or net tax liability.
The amount of the credit is phased out at a rate of five
percent of AGI above certain threshold amounts.\1014\ The
threshold amount at which the credit begins to phase out is
$150,000 of AGI for joint filers, $112,500 of AGI for head of
household filers, and $75,000 of AGI for all other
filers.\1015\ Thus, the credit is fully phased out (i.e.,
reduced to zero) for joint filers with no children at $198,000
of AGI and for a single filer at $99,000 of AGI.
---------------------------------------------------------------------------
\1014\ Sec. 6428(c).
\1015\ For example, a married couple that files jointly with two
qualifying children and has an AGI below the phaseout range would be
entitled to a recovery rebate credit of $3,400 ($2,400 + $500 + $500).
If that couple's AGI was $175,000, the credit would be $2,150 ($3,400 -
.05 * ($175,000 - $150,000)). The credit would be fully phased out for
this couple at $218,000 of AGI.
---------------------------------------------------------------------------
Identification number requirement
No credit is allowed to an individual who does not include
a valid identification number on the individual's income tax
return.\1016\ In the case of a joint return that does not
include valid identification numbers for both spouses, no
credit is allowed. In addition, a qualifying child shall not be
taken into account in determining the amount of the credit if a
valid identification number for the child is not included on
the return.
---------------------------------------------------------------------------
\1016\ Sec. 6428(g).
---------------------------------------------------------------------------
For purposes of this requirement, a valid identification
number is an SSN as defined for purposes of the child tax
credit,\1017\ which means it must be issued by the Social
Security Administration before the due date of the return
(including extensions) to a citizen of the United States or
pursuant to a provision of the Social Security Act relating to
the lawful admission for employment in the United States.\1018\
Two exceptions to this requirement are provided. First, an
adoption identification number is considered a valid
identification number in the case of a qualifying child who is
adopted or placed for adoption. Second, when a married couple
files a joint return and at least one spouse was a member of
the Armed Forces of the United States during the taxable year
for which the return is filed, only one spouse is required to
provide a valid identification number.
---------------------------------------------------------------------------
\1017\ Sec. 24(h)(7).
\1018\ This SSN rule is based on the child tax credit SSN rule in
section 24(h)(7). See also sec. 205(c)(2)(B)(i)(I) (or that portion of
subclause (III) that relates to subclause (I)) of the Social Security
Act.
---------------------------------------------------------------------------
The failure to provide a correct valid identification
number is treated as a mathematical or clerical error. If a
taxpayer claims an individual as a qualifying child, but based
on the SSN provided the individual is too old to be a
qualifying child, the provision of the SSN is treated as a
mathematical or clerical error.
Advance payments of the recovery rebate credit
A taxpayer may receive the recovery rebate credit as an
advance refund in the form of a direct deposit to their bank
account or as a check or prepaid debit card issued by the
Secretary during calendar year 2020.\1019\ The amount of the
advance refund is computed in the same manner as the recovery
rebate credit, except that the calculation is made on the basis
of the income tax return filed for 2019 (instead of 2020), if
available, or otherwise on the basis of the income tax return
filed for 2018.\1020\ Accordingly, the advance refund amount
generally is based on a taxpayer's filing status, number of
qualifying children, and AGI as reported for 2019 or 2018. The
Secretary is directed to issue advance refunds as rapidly as
possible.
---------------------------------------------------------------------------
\1019\ To the extent it has bank information from payment of a
prior refund or for receipt of Federal benefits, Treasury generally
uses an individuals' most recent direct deposit information to expedite
delivery of these amounts rather than mailing the rebate checks. IRS,
``Economic Impact Payment Information Center--Topic D: Receiving My
Payment, Q D3, D9, https://www.irs.gov/newsroom/economic-impact-
payment-information-center-topic-d-receiving-my-payment (updated May
15, 2020). Treasury has created an online portal for individuals to
provide direct deposit information to the IRS for this purpose where
the IRS may not have such information. IRS, ``Treasury, IRS unveil
online application to help with Economic Impact Payments; Get My
Payment allows people to provide direct deposit information and gives
payment date,'' IR-2020-72 (April 15, 2020), available at https://
www.irs.gov/newsroom/treasury-irs-unveil-online-application-to-help-
with-economic-impact-payments.
\1020\ Sec. 6428(f).
---------------------------------------------------------------------------
If a taxpayer has not filed an income tax return for 2019
or 2018, in administering the advance refund the Secretary is
authorized to use information with respect to that taxpayer
that is provided on a 2019 Form SSA-1099, Social Security
Benefit Statement, or a 2019 Form RRB-1099, Social Security
Equivalent Benefit Statement.\1021\ Recipients of these forms
include Social Security retirement, disability, and survivor
benefit recipients and railroad retirees who are not otherwise
required to file a Federal income tax return. An individual in
one of these categories is allowed a $1,200 payment per person
without the necessity of a return filing or other action.\1022\
---------------------------------------------------------------------------
\1021\ Sec. 6428(f)(5)(B).
\1022\ IRS, ``Economic impact payments: what you need to know,''
IR-2020-61 (March 30, 2020), available at https://www.irs.gov/newsroom/
economic-impact-payments-what-you-need-to-know.
---------------------------------------------------------------------------
Supplemental Security Income recipients and recipients of
compensation and benefit payments from the Department of
Veterans Affairs similarly are allowed $1,200 per-person
payments automatically without the requirement of filing a
return or taking other action.\1023\ Other taxpayers who did
not have a return-filing obligation could register to receive
the advance refund by filing a simplified tax return using the
``non-filer portal,'' a web tool developed by the IRS, or could
use a simplified Federal income tax return filing procedure for
taxable year 2019.\1024\
---------------------------------------------------------------------------
\1023\ IRS, ``Supplemental Security Income recipients will receive
automatic Economic Impact Payments,'' IR-2020-73 (April 15, 2020),
available at https://www.irs.gov/newsroom/supplemental-security-income-
recipients-will-receive-automatic-economic-impact-payments-step-
follows-work-between-treasury-irs-social-security-administration; IRS,
``Veterans Affairs recipients will receive automatic Economic Impact
Payments,'' IR-2020-75 (April 17, 2020), available at https://
www.irs.gov/newsroom/veterans-affairs-recipients-will-receive-
automatic-economic-impact-payments-step-follows-work-between-treasury-
irs-va.
\1024\ Rev. Proc. 2020-28, 2020-19 I.R.B. 792; IRS, ``Treasury, IRS
launch new tool to help non-filers register for Economic Impact
Payments,'' IR-2020-69 (April 10, 2020), available at https://
www.irs.gov/newsroom/treasury-irs-launch-new-tool-to-help-non-filers-
register-for-economic-impact-payments. In September 2020, the IRS
reported that more than 7 million people had used the non-filer tool to
register for a payment. IRS, ``IRS releases state-by-state breakdowns
of nearly 9 million non-filers who will be mailed letters about
Economic impact Payments, IR-2020-214, September 17, 2020, available at
https://www.irs.gov/newsroom/irs-releases-state-by-state-breakdown-of-
nearly-9-million-non-filers-who-will-be-mailed-letters-about-economic-
impact-payments.
Federal benefit recipients also could use the web tool for non-
filers to enter information regarding any qualifying children to claim
the additional $500 per child payment as an advance refund. IRS, ``IRS
takes new steps to ensure people with children receive $500 economic
impact payments,'' IR-2020-180 (August 14, 2020), available at https://
www.irs.gov/newsroom/irs-takes-new-steps-to-ensure-people-with-
children-receive-500-economic-impact-payments; IRS, ``Register by Nov.
21 to get an Economic Impact Payment,'' IR-2020-260, November 19, 2020,
available at https://www.irs.gov/newsroom/register-by-nov-21-to-get-an-
economic-impact-payment-same-deadline-for-federal-beneficiaries-to-get-
missed-500-per-child-payments.
Under the provision, the Secretary (or the Secretary's delegate) is
directed to conduct a public awareness campaign, in coordination with
the Commissioner of Social Security and the heads of other relevant
Federal agencies, to provide information regarding the availability of
the recovery rebate credit, including information with respect to
individuals who may not have filed a tax return for 2019 or 2018. Among
other actions, the IRS mailed letters to approximately nine million
individuals who typically are not required to file Federal income tax
returns but may qualify for an advance refund. IRS, ``IRS to mail
special letter to estimated 9 million non-filers, urging them to claim
Economic Impact Payments by Oct. 15 at IRS.gov, IR-2020-203, September
8, 2020, available at https://www.irs.gov/newsroom/irs-to-mail-special-
letter-to-estimated-9-million-non-filers-urging-them-to-claim-economic-
impact-payment-by-oct-15-at-irsgov.
---------------------------------------------------------------------------
The amount of the recovery rebate credit allowed on a
taxpayer's 2020 income tax return (based on 2020 information)
must be reduced (but not below zero) by any advance refund
received during 2020 (based on 2019 or 2018 information).\1025\
If the recovery rebate amount less the advance refund is a
positive number (because, for example, a qualifying child was
born to the taxpayer during 2020), the taxpayer is allowed that
difference as a refundable credit against 2020 income tax
liability. If, however, the result is negative (because, for
example, the taxpayer's AGI was higher in 2020 and was in the
phaseout range), the taxpayer's 2020 tax liability is not
increased by that negative amount. In addition, an eligible
taxpayer who did not receive an advance refund may claim the
recovery rebate amount on his or her 2020 income tax return. A
taxpayer's failure to reduce the recovery rebate amount by an
advance refund is treated as a mathematical or clerical error.
The advance refund is not includible in gross income.\1026\
---------------------------------------------------------------------------
\1025\ Sec. 6428(e).
\1026\ Under section 6409, the recovery rebate credit is
disregarded in the administration of Federal programs and Federally
assisted programs. Any refund due to the credit, including any advance
payment of the credit, is not taken into account as income and is not
taken into account as resources for a period of 12 months from receipt
for purposes of determining eligibility for benefits or assistance
under any Federal program or under any State or local program financed
with Federal funds.
---------------------------------------------------------------------------
The Secretary may not issue an advance refund after
December 31, 2020. Within 15 days of distribution of the
advance refund, the Secretary is required to send a notice by
mail to the taxpayer's last known address that indicates the
method by which the payment was made, the amount of such
payment, and a phone number at the IRS to report any failure to
receive such payment.
Treatment of the U.S. territories
The provision directs the Secretary to make payments to
each mirror Code territory (Guam, the Commonwealth of the
Northern Mariana Islands, and the U.S. Virgin Islands) that
relate to the cost (if any) of each territory's recovery rebate
credit. The Secretary is further directed to make similar
payments to each non-mirror Code territory (American Samoa and
Puerto Rico).
The provision requires the Secretary to pay to each mirror
Code territory amounts equal to the aggregate amount of the
credits allowable by reason of the provision to that
territory's residents against its income tax. Such amounts are
determined by the Secretary based on information provided by
the government of the respective territory.
To each non-mirror Code territory, the provision requires
the Secretary to pay amounts estimated by the Secretary as
being equal to the aggregate credits that would have been
allowed to residents of that territory if a mirror Code tax
system had been in effect in that territory. Accordingly, the
amount of each payment to a non-mirror Code territory is an
estimate of the aggregate amount of the credits that would be
allowed to the territory's residents if the credit provided by
the provision to U.S. residents were provided by the territory
to its residents. This payment will not be made to any U.S.
territory unless it has a plan that has been approved by the
Secretary under which the territory will promptly distribute
the payment to its residents.
No credit against U.S. income taxes is permitted under the
provision for any person to whom a credit is allowed against
territory income taxes as a result of the provision (i.e.,
under that territory's mirror income tax). Similarly, no credit
against U.S. income taxes is permitted for any person who is
eligible for a payment under a non-mirror Code territory's plan
for distributing to its residents the payment described above
from the U.S. Treasury.
Exception from reduction or offset
Any overpayment resulting from the recovery rebate credit
or from similar payments to residents of the U.S. territories
is not subject to reduction or offset by other assessed Federal
taxes that would otherwise be subject to levy or collection. In
addition, the overpayments resulting from these credits are not
subject to offset for other taxes or non-tax debts owed to the
Federal government or State governments.
As an exception to the above rule, an overpayment resulting
from the recovery rebate credit is subject to the offset
against overpayments of the amount of any past-due
support.\1027\ The term past-due support means the amount of a
delinquency, determined under a court order, or an order of an
administrative process established under State law, for support
and maintenance of a child (whether or not a minor), or of a
child (whether or not a minor) and the parent with whom the
child is living.\1028\ The State must have notified the
Secretary of the taxpayer's delinquency in order for the offset
to apply. If the offset applies, the Secretary remits the
offset amount to the State collecting such support and notifies
the taxpayer of the remittance. The offset of past-due child
support applies before any other reductions allowed by law and
before the crediting of the overpayment to the taxpayer's
future tax liability.
---------------------------------------------------------------------------
\1027\ Sec. 6402(c). Following distribution of a significant share
of the advance payments, the IRS announced that it would issue catch-up
payments to individuals where such individual's portion of the payment
had been diverted to pay a spouse's past-due child support. IRS,
``50,000 spouses to get catch-up Economic Impact Payments,'' IR-2020-
192, August 25, 2020, available at, https://www.irs.gov/newsroom/irs-
50000-spouses-to-get-catch-up-economic-impact-payments; IRS, ``Economic
Impact Payment Information Center--Topic D: Receiving My Payment,'' Q&A
D2, available at, https://www.irs.gov/newsroom/economic-impact-payment-
information-center-topic-d-receiving-my-payment.
\1028\ Sec. 464(c) of the Social Security Act, 42 U.S.C. sec.
664(c).
---------------------------------------------------------------------------
An overpayment resulting from the recovery rebate credit
may be subject to claims by the taxpayer's creditors under
applicable State law or Federal bankruptcy law.
Effective Date
The provision is effective on the date of enactment (March
27, 2020).
2. Special rules for use of retirement funds (sec. 2202 of the Act and
sec. 72 of the Code)
Present Law
Distributions from tax-favored retirement plans
A distribution from a tax-qualified plan described in
section 401(a) (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.\1029\ These plans
are referred to collectively as ``eligible retirement plans.''
\1030\ 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.\1031\
---------------------------------------------------------------------------
\1029\ 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.
\1030\ Sec. 402(c)(8)(B). Eligible retirement plans also include
annuity plans described in section 403(a).
\1031\ Sec. 72(t). The 10-percent early withdrawal tax does not
apply to distributions from a governmental section 457(b) plan.
---------------------------------------------------------------------------
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 IRS 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.\1032\
---------------------------------------------------------------------------
\1032\ Rev. Proc. 2020-46, 2020-45 I.R.B. 995, provides for a self-
certification procedure (subject to verification on audit) that may be
used by a taxpayer claiming eligibility for a waiver of the 60-day
requirement with respect to a rollover into a plan or IRA in certain
specified circumstances.
---------------------------------------------------------------------------
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 under certain types of plans in
the case of financial hardship or an unforeseeable emergency.
Loans from tax-favored retirement plans
Employer-sponsored retirement plans are permitted, but not
required, to 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 (1) the loan amount must not exceed the lesser
of 50 percent of the participant's account balance or $50,000
(generally taking into account outstanding balances of previous
loans), and (2) 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.\1033\ 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 a 10-percent early withdrawal tax, if applicable. A deemed
distribution is not eligible for rollover to another eligible
retirement plan. The rules generally do not limit the number of
loans an employee may obtain from a plan except to the extent
that any additional loan would cause the aggregate loan balance
to exceed limitations.
---------------------------------------------------------------------------
\1033\ Sec. 72(p).
---------------------------------------------------------------------------
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.
Disaster relief
Congress has at times liberalized the plan distribution and
loan provisions for individuals affected by certain natural
disasters.\1034\
---------------------------------------------------------------------------
\1034\ See, e.g., sec. 20102 of Pub. L. No. 115-123 (providing
relief in response to 2017 California wildfires); sec. 502 of Pub. L.
No. 115-63 (providing relief in response to Hurricanes Harvey, Irma,
and Maria); and former sec. 1400Q (providing relief in response to
Hurricanes Katrina, Rita, and Wilma). For a more detailed description
of the most recently enacted provision, see Joint Committee on
Taxation, General Explanation of Certain Tax Legislation Enacted in the
115th Congress (JCS-2-19), October 2019, pp. 22-26.
---------------------------------------------------------------------------
Explanation of Provision
Distributions and recontributions
The provision allows an exception to the 10-percent early
withdrawal tax for a ``coronavirus-related distribution'' from
a qualified retirement plan, a section 403(b) plan, or an
IRA.\1035\ The provision also allows a taxpayer to include
income attributable to a coronavirus-related distribution
ratably over three years and to recontribute the amount of the
distribution to an eligible retirement plan within three years.
---------------------------------------------------------------------------
\1035\ This exception also applies to an annuity plan described in
section 403(a). The 10-percent early withdrawal tax generally does not
apply to section 457 plans. Sec. 72(t)(1).
---------------------------------------------------------------------------
A ``coronavirus-related distribution'' is any distribution
from a qualified retirement plan, section 403(b) plan,
governmental section 457(b) plan, or an IRA, made on or after
January 1, 2020, and before December 31, 2020, to an individual
(1) who was diagnosed with the virus SARS-CoV-2 or with
coronavirus disease 2019 (``COVID-19'') by a test approved by
the Centers for Disease Control and Prevention; (2) whose
spouse or dependent \1036\ is diagnosed with such virus or
disease by such a test; or (3) who experiences adverse
financial consequences as a result of being quarantined; being
furloughed or laid off, or having work hours reduced due to
such virus or disease; being unable to work due to lack of
child care due to such virus or disease; closing or reducing
hours of a business owned or operated by the individual due to
such virus or disease; or other factors as determined by the
Secretary (or the Secretary's delegate).\1037\ The
administrator of the plan may rely on the individual's
certification that he or she satisfies the conditions described
in clauses (1), (2), or (3) in determining whether any
distribution is a coronavirus-related distribution.
---------------------------------------------------------------------------
\1036\ Dependent is defined in section 152.
\1037\ A coronavirus-related distribution is subject to income tax
withholding unless the recipient elects otherwise. Mandatory 20-percent
withholding does not apply.
---------------------------------------------------------------------------
A plan is not treated as violating any Code requirement
merely because it treats a distribution as a coronavirus-
related 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. A plan is not required to treat a
distribution as a coronavirus-related distribution.
Any amount required to be included in income as a result of
a coronavirus-related 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 coronavirus-related distribution may, at
any time during the three-year period beginning the day after
the date on which the distribution was received, be
recontributed in one or more contributions 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 coronavirus-
related distribution in 2020, that amount is included in
income, generally ratably over the year of the distribution and
the following two years and is not subject to the 10-percent
early withdrawal tax. If, in 2022, the amount of the
coronavirus-related distribution is recontributed to an
eligible retirement plan, the individual may file amended
returns to claim a refund of the tax attributable to the
amounts previously included in income. In addition, if 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.
Loans
The provision modifies the rules applicable to loans,
providing that for a qualified individual, in order for the
loan not to be treated as a distribution, the permitted maximum
loan amount from a qualified employer plan \1038\ during the
180-day period beginning on the date of enactment is the lesser
of the present value of the nonforfeitable accrued benefit of
the employee under the plan or $100,000.\1039\ For this
purpose, qualified individual has the same meaning as persons
eligible to receive coronavirus-related distributions.
---------------------------------------------------------------------------
\1038\ For this purpose, qualified employer plan is defined in
section 72(p)(4).
\1039\ See sec. 72(p)(2)(A).
---------------------------------------------------------------------------
In the case of a qualified individual with an outstanding
loan from a qualified employer plan on or after the date of
enactment, the provision delays by one year the due date for
any repayment with respect to such loan, if the due date for
the repayment otherwise would fall during the period beginning
on the date of enactment and ending on December 31, 2020. Under
the provision, any subsequent repayments are appropriately
adjusted to reflect the delay in the earlier repayment due date
and any interest accruing during that delay. The repayment
delay is disregarded for purposes of the requirement that a
loan be repaid within five years.
Plan amendments
A plan amendment made under the provision (or a regulation
interpreting the provision) 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 on or after January 1, 2022 (or in the case of a
governmental plan, January 1, 2024), or a later date prescribed
by the Secretary. The provision treats the plan as being
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 to be made (or, if
earlier, the date the amendment is adopted). For an amendment
to be treated as 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 (March
27, 2020).
3. Temporary waiver of required minimum distribution rules for certain
retirement plans and accounts (sec. 2203 of the Act and secs. 401 and
402 of the Code)
Present Law
Required minimum distributions
Employer-provided qualified retirement plans and IRAs are
subject to required minimum distribution rules. A qualified
retirement plan for this purpose means a tax-qualified plan
described in section 401(a) (such as a defined benefit pension
plan or a section 401(k) plan), an employee retirement annuity
described in section 403(a), a tax-sheltered annuity described
in section 403(b), and a plan described in section 457(b) that
is maintained by a governmental employer.\1040\ An employer-
provided qualified retirement plan that is a defined
contribution plan is a plan that provides (1) an individual
account for each participant and (2) for benefits based on the
amount contributed to the participant's account and any income,
expenses, gains, losses, and forfeitures of accounts of other
participants which may be allocated to such participant's
account.\1041\
---------------------------------------------------------------------------
\1040\ The required minimum distribution rules also apply to
section 457(b) plans maintained by tax-exempt employers other than
governmental employers.
\1041\ Sec. 414(i).
---------------------------------------------------------------------------
Required minimum distributions generally must begin by
April 1 of the calendar year following the calendar year in
which the individual (employee or IRA owner) reaches age 72.
Prior to January 1, 2020, the age after which required minimum
distributions were required to begin was 70\1/2\.\1042\ Thus,
for individuals who attained age 70\1/2\ before January 1,
2020, required minimum distributions generally must begin by
April 1 of the calendar year following the calendar year in
which the individual attained age 70\1/2\. In the case of an
employer-provided qualified retirement plan, the required
minimum distribution date for an individual who is not a five-
percent owner of the employer maintaining the plan may be
delayed to April 1 of the year following the year in which the
individual retires if the plan provides for this later
distribution date. For all subsequent years, including the year
in which the individual was paid the first required minimum
distribution by April 1, the individual must take the required
minimum distribution by December 31.
---------------------------------------------------------------------------
\1042\ The Setting Every Community Up for Retirement Enhancement
Act of 2019 (``SECURE Act''), enacted as part of the Further
Consolidated Appropriations Act, 2020, Pub. L. No. 116-94, Div. O, sec.
114, increased the age after which required minimum distributions must
begin from 70\1/2\ to 72, effective for distributions required to be
made after December 31, 2019, with respect to individuals who attain
age 70\1/2\ after that date.
---------------------------------------------------------------------------
For IRAs and defined contribution plans, the required
minimum distribution for each year generally is determined by
dividing the account balance as of the end of the prior year by
the number of years in the distribution period.\1043\ The
distribution period is generally derived from the Uniform
Lifetime Table.\1044\ This table is based on the joint life
expectancies of the individual and a hypothetical beneficiary
10 years younger than the individual. For an individual with a
spouse as designated beneficiary who is more than 10 years
younger, the joint life expectancy of the couple is used
(because the couple's remaining joint life expectancy is longer
than the length provided in the Uniform Lifetime Table). There
are special rules in the case of annuity payments from an
insurance contract.
---------------------------------------------------------------------------
\1043\ Treas. Reg. sec. 1.401(a)(9)-5.
\1044\ Treas. Reg. sec. 1.401(a)(9)-9.
---------------------------------------------------------------------------
If an individual dies before the individual's entire
interest is distributed, and the individual has a designated
beneficiary, unless the designated beneficiary is an eligible
designated beneficiary, the individual's entire account must be
distributed within 10 years after the individual's death. This
rule applies regardless of whether the individual dies before
or after the individual's required beginning date.\1045\
---------------------------------------------------------------------------
\1045\ The SECURE Act provided special rules for required minimum
distributions for defined contribution plans (including, for this
purpose, IRAs), generally effective with respect to individuals who die
after December 31, 2019 (later effective dates apply to governmental
plans and collectively bargained plans). For additional information,
including rules applicable to defined contribution plans before the
effective date of the SECURE Act, see the section describing section
401 of the SECURE Act in Part Three of this document.
---------------------------------------------------------------------------
In the case of an eligible designated beneficiary, the
remaining required minimum distributions are distributed over
the life of the beneficiary (or over a period not extending
beyond the life expectancy of such beneficiary). Such
distributions must begin no later than December 31 of the
calendar year immediately following the calendar year in which
the individual dies. An eligible designated beneficiary is a
designated beneficiary who is (1) the surviving spouse of the
individual; (2) a child of the individual who has not reached
majority; (3) disabled; (4) chronically ill; or (5) not more
than 10 years younger than the individual.\1046\ If the
eligible designated beneficiary is the individual's spouse,
commencement of distributions is permitted to be delayed until
December 31 of the calendar year in which the deceased
individual would have attained age 72. The required minimum
distribution for each year is determined by dividing the
account balance as of the end of the prior year by a
distribution period, which is determined by reference to the
beneficiary's life expectancy.\1047\ Special rules apply in the
case of trusts for disabled or chronically ill
beneficiaries.\1048\
---------------------------------------------------------------------------
\1046\ Sec. 401(a)(9)(E)(ii).
\1047\ Treas. Reg. sec. 1.401(a)(9)-5, A-5.
\1048\ Sec. 401(a)(9)(H)(iv).
---------------------------------------------------------------------------
In the case of an individual who does not have a designated
beneficiary, if an individual dies on or after the individual's
required beginning date, the distribution period for the
remaining required minimum distributions is equal to the
remaining years of the deceased individual's single life
expectancy, using the age of the deceased individual in the
year of death.\1049\ If an individual dies before the required
beginning date, the individual's entire account must be
distributed no later than December 31 of the calendar year that
includes the fifth anniversary of the individual's death.\1050\
---------------------------------------------------------------------------
\1049\ Treas. Reg. sec. 1.401(a)(9)-5, A-5(a).
\1050\ Treas. Reg. sec. 1.401(a)(9)-3, Q&As 1, 2.
---------------------------------------------------------------------------
A special after-death rule applies for an IRA if the
beneficiary of the IRA is the surviving spouse. The surviving
spouse is permitted to choose to calculate required minimum
distributions both while the surviving spouse is alive and
after death as though the surviving spouse is the IRA owner,
rather than a beneficiary.\1051\
---------------------------------------------------------------------------
\1051\ Treas. Reg. sec. 1.408-8, Q&A 5.
---------------------------------------------------------------------------
Roth IRAs are not subject to the minimum distribution rules
during the IRA owner's lifetime. However, Roth IRAs are subject
to the post-death minimum distribution rules that apply to
traditional IRAs. For Roth IRAs, the IRA owner is treated as
having died before the individual's required beginning date.
Failure to make a required minimum distribution triggers a
50-percent excise tax, payable by the individual or the
individual's beneficiary. The tax is imposed during the taxable
year that begins with or within the calendar year during which
the distribution was required.\1052\ The tax may be waived if
the failure to distribute is reasonable error and reasonable
steps are taken to remedy the violation.\1053\
---------------------------------------------------------------------------
\1052\ Sec. 4974(a).
\1053\ Sec. 4974(d).
---------------------------------------------------------------------------
Eligible rollover distributions
With certain exceptions, distributions from an employer-
provided qualified retirement plan are eligible to be rolled
over tax free into another employer-provided qualified
retirement plan or an IRA. This can be achieved by contributing
the amount of the distribution to the other plan or IRA within
60 days of the distribution, or by a direct payment by the plan
to the other plan or IRA (referred to as a ``direct
rollover''). Distributions that are not eligible for rollover
include (i) any distribution that is one of a series of
periodic payments generally for a period of 10 years or more
(or a shorter period for distributions made for certain life
expectancies) and (ii) any distribution to the extent that the
distribution is a required minimum distribution.\1054\
---------------------------------------------------------------------------
\1054\ Sec. 402(c)(4). Distributions that are not eligible rollover
distributions also include distributions made upon hardship of the
employee.
---------------------------------------------------------------------------
For any distribution that is eligible for rollover, an
employer-provided qualified retirement plan must offer the
distributee the right to have the distribution made in a direct
rollover.\1055\ Before making the distribution, the plan
administrator must provide the distributee with a written
explanation of the direct rollover right and related tax
consequences.\1056\ Unless a distributee elects to have the
distribution made in a direct rollover, the distribution is
generally subject to mandatory 20-percent income tax
withholding.\1057\
---------------------------------------------------------------------------
\1055\ Sec. 401(a)(31).
\1056\ Sec. 402(f).
\1057\ Sec. 3405(c). This mandatory withholding does not apply to a
distributee that is a beneficiary other than a surviving spouse of an
employee.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, no minimum distribution is required
for calendar year 2020 from an IRA or from an employer-provided
qualified retirement plan that is a defined contribution plan
\1058\ that is a tax-qualified plan described in section
401(a), an employee retirement annuity described in section
403(a), a tax-sheltered annuity described in section 403(b), or
a plan described in section 457(b) that is maintained by a
governmental employer. The next required minimum distributions
for these plans will be for calendar year 2021. The provision
waives the 2020 minimum distribution requirement for lifetime
distributions to employees and IRA owners and for after-death
distributions to beneficiaries.
---------------------------------------------------------------------------
\1058\ Defined contribution plan is defined in section 414(i).
---------------------------------------------------------------------------
In the case of an individual whose required beginning date
is April 1, 2020 (because, for example, the individual attained
age 70\1/2\ in 2019), the provision waives the minimum
distribution requirement with respect to a distribution that
would have been required to be made in 2020 on account of the
distribution not having been made in 2019.
In the case of an individual whose required beginning date
is April 1, 2021 (because, for example, the individual attains
age 72 in 2020), the first year for which a minimum
distribution would have been required is 2020. Under the
provision, no distribution is required for 2020, and thus, no
distribution will be required to be made by April 1, 2021.
However, the provision does not change the individual's
required beginning date for purposes of determining the
required minimum distribution for calendar years after 2020.
Thus, for an individual whose required beginning date is April
1, 2021, the required minimum distribution for 2021 will be
required to be made no later than December 31, 2021. If the
individual dies on or after April 1, 2021, the required minimum
distribution for the individual's beneficiary will be
determined using the rule for death on or after the
individual's required beginning date.
In the case of an individual who dies and whose interest is
required to be distributed within five years,\1059\ under the
provision, the five-year period is determined without regard to
calendar year 2020. For example, for an account with respect to
an individual who died in 2018, the five-year period ends in
2024 instead of 2023.
---------------------------------------------------------------------------
\1059\ See sec. 401(a)(9)(B)(ii).
---------------------------------------------------------------------------
If, as a result of the provision, all or a portion of a
2020 distribution that would have been a required minimum
distribution is instead an eligible rollover distribution, the
distribution (or portion thereof) is not treated as an eligible
rollover distribution for purposes of the direct rollover
requirement, the requirement for notice and written explanation
of the direct rollover requirement, or the mandatory 20-percent
income tax withholding for eligible rollover distributions.
Thus, for example, a plan may offer an individual a direct
rollover of an eligible rollover distribution that would have
been a required minimum distribution for 2020 (if not for this
provision), but the plan is not required to offer a direct
rollover. Similarly, the plan is not required to provide the
employee notice and a written explanation of the direct
rollover requirement and is not required to withhold 20 percent
from the distribution. The employee may roll over the
distribution by contributing it to an eligible retirement plan
within 60 days of the distribution.
Effective Date
The provision is effective for calendar years beginning
after December 31, 2019.
4. Allowance of partial above-the-line deduction for charitable
contributions (sec. 2204 of the Act and sec. 62 of the Code)
Present Law
Adjusted gross income and taxable income of an individual
Adjusted gross income
Under the Code, gross income means ``income from whatever
source derived'' except for certain items specifically exempt
or excluded by statute.\1060\ An individual's AGI is determined
by subtracting certain ``above-the-line'' deductions from gross
income. These deductions include trade or business expenses,
losses from the sale or exchange of property, contributions to
a qualified retirement plan by a self-employed individual,
contributions to certain IRAs, certain moving expenses for
members of the Armed Forces, and certain education-related
expenses.\1061\
---------------------------------------------------------------------------
\1060\ Sec. 61.
\1061\ Sec. 62. In addition, alimony payments are generally
deductible by the payor spouse for divorce and separation instruments
executed before January 1, 2019.
---------------------------------------------------------------------------
Taxable income
To determine taxable income, an individual reduces AGI by
the applicable standard deduction or his or her itemized
deductions,\1062\ and by the deduction for qualified business
income.\1063\
---------------------------------------------------------------------------
\1062\ Sec. 63(a) and (b).
\1063\ Secs. 63(b)(3), (d)(3), and 199A.
---------------------------------------------------------------------------
A taxpayer may reduce AGI by the amount of the applicable
standard deduction to arrive at taxable income. The basic
standard deduction varies depending on a taxpayer's filing
status. For 2020, the amount of the standard deduction is
$12,400 for a single individual and for a married individual
filing separately, $18,650 for a head of household, and $24,800
for married taxpayers filing jointly and for a surviving
spouse. An additional standard deduction is allowed with
respect to any individual who is elderly (i.e., above age 64)
and/or blind.\1064\ The amounts of the basic standard deduction
and the additional standard deductions are indexed annually for
inflation.
---------------------------------------------------------------------------
\1064\ For 2020, the additional amount is $1,300 for married
taxpayers (for each spouse meeting the applicable criterion) and
surviving spouses. The additional amount for single individuals and
heads of households is $1,650. If an individual is both elderly and
blind, the individual is entitled to two additional standard
deductions, for a total additional amount (for 2020) of $2,600 or
$3,300, as applicable.
---------------------------------------------------------------------------
In lieu of taking the applicable standard deduction, an
individual may elect to itemize deductions. The deductions that
may be itemized include personal State and local income,
property, and sales taxes (up to $10,000 annually ($5,000 for
married taxpayers filing separately)), home mortgage interest
(on mortgages up to certain specified dollar amounts),
charitable contributions, certain investment interest, medical
expenses (in excess of 7.5 percent of AGI), and casualty and
theft losses attributable to Federally declared disasters (in
excess of 10 percent of AGI and in excess of $100 per loss).
Itemized deduction for charitable contributions
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
recipient organization.\1065\ For individuals, the deduction
for charitable contributions is available only to a taxpayer
who elects to itemize deductions.
---------------------------------------------------------------------------
\1065\ Sec. 170.
---------------------------------------------------------------------------
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.
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 recipient
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.\1066\
---------------------------------------------------------------------------
\1066\ Sec. 170(b)(1)(H).
---------------------------------------------------------------------------
Charitable contributions that exceed the applicable
percentage limit generally may be carried forward for up to
five years.\1067\ In general, contributions carried over from a
prior year are taken into account after contributions for the
current year that are subject to the same percentage limit.
---------------------------------------------------------------------------
\1067\ Sec. 170(b)(1)(G)(ii) and (d).
---------------------------------------------------------------------------
Explanation of Provision
The provision permits an eligible individual to claim an
above-the-line deduction in an amount not to exceed $300 for
qualified charitable contributions made during a taxable year
that begins in 2020.\1068\ The above-the-line deduction is not
available for contributions made during a taxable year that
begins after 2020. An eligible individual is an individual who
does not elect to itemize deductions.\1069\ Thus, a taxpayer
taking the standard deduction, who absent the provision would
not be able to deduct any charitable contributions, may claim
an above-the-line deduction for qualified charitable
contributions.
---------------------------------------------------------------------------
\1068\ Sec. 62(a)(22).
\1069\ Sec. 62(f)(1). The $300 limit applies to the tax-filing
unit. Thus, for example, married taxpayers who file a joint return and
do not elect to itemize deductions are allowed to deduct up to a total
of $300 in qualified charitable contributions on the joint return.
---------------------------------------------------------------------------
A qualified charitable contribution is a cash contribution
for which a deduction is allowable under section 170
(determined without regard to the percentage limitations under
section 170(b)) that is paid 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)).\1070\ 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. A qualified charitable contribution
does not include an amount that is treated as a contribution in
the taxable year by reason of being carried forward from a
prior contribution year under section 170(b)(1)(G) or (d)(1).
---------------------------------------------------------------------------
\1070\ Sec. 62(f)(2).
---------------------------------------------------------------------------
Effective Date
The provision is effective for taxable years beginning
after December 31, 2019.
5. Modification of limitations on charitable contributions during 2020
(sec. 2205 of the Act and sec. 170 of the Code)
Present Law
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
recipient organization.\1071\
---------------------------------------------------------------------------
\1071\ Sec. 170.
---------------------------------------------------------------------------
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 contribution base is defined
as the taxpayer's AGI computed without regard to any net
operating loss carryback. The applicable percentage of the
contribution base varies depending on the type of recipient
organization and property contributed.
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,
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
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 with certain modifications.
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.
Carryforwards of excess contributions
Charitable contributions that exceed the applicable
percentage limitation may be carried forward for up to five
years.\1072\ 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 rule.
---------------------------------------------------------------------------
\1072\ Sec. 170(d).
---------------------------------------------------------------------------
Contributions of food inventory
A taxpayer's deduction for charitable contributions of
inventory generally is limited to the taxpayer's basis
(typically, cost) in the inventory, or, if less, the fair
market value of the inventory. For certain contributions of
inventory, however, a C corporation may claim an enhanced
deduction equal to the lesser of (1) basis plus one-half of the
item's appreciation (i.e., basis plus one-half of fair market
value in excess of basis) or (2) two times basis.\1073\
---------------------------------------------------------------------------
\1073\ Sec. 170(e)(3).
---------------------------------------------------------------------------
Any taxpayer engaged in a trade or business, whether or not
a C corporation, is eligible to claim the enhanced deduction
for donations of food inventory.\1074\ The enhanced deduction
for food inventory is available only for food that qualifies as
``apparently wholesome food.'' Apparently wholesome food is
defined as food intended for human consumption that meets all
quality and labeling standards imposed by Federal, State, and
local laws and regulations even though the food may not be
readily marketable due to appearance, age, freshness, grade,
size, surplus, or other conditions.
---------------------------------------------------------------------------
\1074\ Sec. 170(e)(3)(C).
---------------------------------------------------------------------------
For taxpayers other than C corporations, the total
deduction for donations of food inventory in a taxable year
generally may not exceed 15 percent of the taxpayer's net
income for such taxable year from all sole proprietorships, S
corporations, or partnerships (or other non-C corporation
trades or businesses) from which contributions of apparently
wholesome food are made. For C corporations, these
contributions are made subject to a limitation of 15 percent of
taxable income (as modified). The general 10-percent limitation
for a C corporation does not apply to these contributions, but
the 10-percent limitation applicable to other contributions is
reduced by the amount of these contributions. Qualifying food
inventory contributions in excess of these 15-percent
limitations may be carried forward and treated as qualifying
food inventory contributions in each of the five succeeding
taxable years in order of time.
Disaster relief
Congress has at times liberalized the charitable
contribution limitations for contributions made in response to
certain natural disasters.\1075\
---------------------------------------------------------------------------
\1075\ See, e.g., sec. 20104(a) of Pub. L. No. 115-123 (increasing
limits in response to 2017 California wildfires); sec. 504(a) of Pub.
L. No. 115-63 (increasing limits in response to Hurricanes Harvey,
Irma, and Maria); and former sec. 1400S (increasing limits in response
to Hurricanes Katrina, Rita, and Wilma). For a more detailed
description of the most recently enacted provision (related to the 2017
California wildfires), see Joint Committee on Taxation, General
Explanation of Certain Tax Legislation Enacted in the 115th Congress
(JCS-2-19), October 2019, pp. 27-29.
---------------------------------------------------------------------------
Explanation of Provision
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 (AGI computed
without regard to any net operating loss carryback) exceeds the
deduction for other charitable contributions. Contributions in
excess of this amount are carried over to succeeding taxable
years as contributions described in section 170(b)(1)(G),
subject to the limitations of section 170(b)(1)(G)(ii).
In the case of a corporation, the deduction for qualified
contributions is allowed up to 25 percent of the corporation's
taxable income. 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
calendar year 2020 to a charitable organization described in
section 170(b)(1)(A), other than contributions (i) to 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. A taxpayer
must elect to have contributions treated as qualified
contributions.
For charitable contributions of food inventory that are
made during 2020 and which qualify for the enhanced deduction,
the 15-percent limitations described above are increased to 25
percent.
Effective Date
The provision is effective for taxable years ending after
December 31, 2019.
6. Exclusion for certain employer payments of student loans (sec. 2206
of the Act and secs. 127, 3121, 3306, and 3401 of the Code)
Present Law
Employer-provided educational assistance programs
Under section 127, an employee may exclude from gross
income for income tax purposes \1076\ and the employer may
exclude from wages for employment tax purposes \1077\ up to
$5,250 annually of educational assistance provided by the
employer to the employee. For the exclusion to apply, certain
requirements must be satisfied: (1) the educational assistance
must be provided pursuant to a separate written plan of the
employer; (2) employers must provide reasonable notification of
the terms and availability of the program to eligible
employees; (3) the employer's educational assistance program
must not discriminate in favor of highly compensated employees;
and (4) no more than five percent of the amounts paid or
incurred by the employer during the year for educational
assistance under a qualified educational assistance program may
be provided for the class of individuals consisting of (i) more
than five-percent owners of the employer and (ii) the spouses
or dependents of such owners.
---------------------------------------------------------------------------
\1076\ See also sec. 3401(a)(18).
\1077\ Secs. 3121(a)(18) and 3306(b)(13).
---------------------------------------------------------------------------
For purposes of the exclusion, ``educational assistance''
means the payment by an employer of expenses incurred by or on
behalf of the employee for education of the employee including,
but not limited to, tuition, fees and similar payments, books,
supplies, and equipment. Educational assistance also includes
the provision by the employer of courses of instruction for the
employee, including books, supplies, and equipment. Educational
assistance does not include payment for or the provision of (1)
tools or supplies that may be retained by the employee after
completion of a course, (2) meals, lodging, or transportation,
or (3) any education involving sports, games, or hobbies. The
education need not be job-related or part of a degree
program.\1078\ Educational assistance qualifies for the
exclusion only if the employer does not give the employee a
choice between educational assistance and other remuneration
includible in the employee's income.
---------------------------------------------------------------------------
\1078\ Treas. Reg. sec. 1.127-2(c)(4).
---------------------------------------------------------------------------
The exclusion for employer-provided educational assistance
applies only with respect to education provided to the
employee. The exclusion does not apply, for example, to
assistance provided directly or indirectly for the education of
the spouse or a child of the employee.
The employer's costs for providing such educational
assistance are generally deductible as a trade or business
expense.\1079\
---------------------------------------------------------------------------
\1079\ See sec. 162.
---------------------------------------------------------------------------
In the absence of the specific exclusion for employer-
provided educational assistance under section 127, employer-
provided educational assistance is excludable from gross income
for income tax purposes \1080\ and wages for employment tax
purposes \1081\ only if the education expenses qualify as a
working condition fringe benefit under section 132(d) or as a
qualified tuition reduction under section 117(d). In general,
education qualifies as a working condition fringe benefit if
the employee could have deducted the education expenses under
section 162 if the employee paid for the education.\1082\ In
general, education expenses are deductible by an individual
under section 162 if the education (1) maintains or improves a
skill required in a trade or business currently engaged in by
the taxpayer, or (2) meets the express requirements of the
taxpayer's employer, applicable law, or regulations imposed as
a condition of continued employment.\1083\ However, education
expenses are generally not deductible if they relate to certain
minimum educational requirements or to education or training
that enables a taxpayer to begin working in a new trade or
business.\1084\
---------------------------------------------------------------------------
\1080\ See also sec. 3401(a)(19).
\1081\ Secs. 3121(a)(20) and 3306(b)(16).
\1082\ Sec. 132(d).
\1083\ Treas. Reg. sec. 1.162-5.
\1084\ For taxable years beginning before January 1, 2026, trade or
business expenses relating to the trade or business of the performance
of services by the taxpayer as an employee are disallowed miscellaneous
itemized deductions. Secs. 62(a)(1), 67(g), and 162(a).
---------------------------------------------------------------------------
Section 117(d) provides an exclusion from gross income and
wages for qualified tuition reductions for certain education
provided to employees of certain educational organizations, and
to the spouses and dependents of such employees.
Employer payment of employee student loans
In general, gross income includes all income from whatever
source derived, such as compensation for services, fringe
benefits, and similar items, absent an exclusion.\1085\ The
exclusion from income for educational assistance does not apply
to payments of principal or interest made by an employer to or
on behalf of its employee on an education loan incurred by an
employee of the employer. Because the educational assistance
exclusion does not apply to these payments of education loans,
the amount of these payments is includible in the employee's
taxable wages. These amounts are generally deductible by the
employer as a trade or business expense.\1086\
---------------------------------------------------------------------------
\1085\ Sec. 61.
\1086\ See sec. 162.
---------------------------------------------------------------------------
Deduction for student loan interest
Under section 221, certain individual taxpayers may claim
an above-the-line deduction for interest paid on student
loans.\1087\ Only interest paid on a ``qualified education
loan'' is eligible for the deduction.
---------------------------------------------------------------------------
\1087\ Sec. 62(a)(17), 221; see also sec. 163(h)(2)(F).
---------------------------------------------------------------------------
A qualified education loan generally is defined as any
indebtedness incurred to pay for the costs of the attendance at
an eligible educational institution on at least a half-time
basis.\1088\ The payments may be for attendance of the
taxpayer, the taxpayer's spouse, or any dependent of the
taxpayer as of the time the indebtedness was incurred. Eligible
educational institutions are (1) post-secondary educational
institutions and certain vocational schools defined by
reference to section 481 of the Higher Education Act of 1965,
and (2) institutions conducting internship or residency
programs leading to a degree or certificate from an institution
of higher education, a hospital, or a health care facility
conducting postgraduate training.\ 1089\ Additionally, to
qualify as an eligible educational institution, an institution
must be eligible to participate in Department of Education
student aid programs.
---------------------------------------------------------------------------
\1088\ Secs. 221(d)(1)-(3); see also sec. 25A(b)(3).
\1089\ Secs. 25A(f)(2) and 221(d)(2).
---------------------------------------------------------------------------
The maximum allowable deduction per year is $2,500. The
deduction is phased out and reduced to zero at higher-income
levels.\1090\ Dependents are ineligible to claim the deduction.
---------------------------------------------------------------------------
\1090\ For 2020, the phaseout range is for modified adjusted gross
income between $140,000 to $170,000 for married taxpayers filing a
joint return and between $70,000 and $85,000 for other taxpayers. Sec.
221(b)(2)(B); Rev. Proc. 2019-44, 2019-47 I.R.B. 1093.
---------------------------------------------------------------------------
Explanation of Provision
The provision expands the definition of the term
``educational assistance'' excludible from income and from
wages to include payments of principal or interest made by an
employer on a qualified education loan incurred by an employee
of the employer.\1091\ Thus, the employee may exclude these
payments from gross income for income tax purposes and the
employer may exclude these payments from wages for employment
tax purposes. The term ``qualified education loan'' is defined
in section 221(d)(1). The loan must be incurred for the
education of the employee. The exclusion applies to payments
made to the employee or a lender. The provision does not apply
to payments made on or after January 1, 2021.
---------------------------------------------------------------------------
\1091\ Sec. 127(c)(1)(B), as amended by the Act.
---------------------------------------------------------------------------
Payments made under this provision are subject to the
general requirements of section 127, including the $5,250 cap,
the requirement that assistance be provided pursuant to a
separate written plan of the employer, and the
nondiscrimination requirement.
The provision also provides that the employee may not claim
a deduction under section 221 for interest paid on student
loans on an amount for which an exclusion is allowable under
the provision.\1092\
---------------------------------------------------------------------------
\1092\ Sec. 221(e)(1), as amended by the Act.
---------------------------------------------------------------------------
Effective Date
The provision is effective for payments made after the date
of enactment (March 27, 2020).
Subtitle C--Business Provisions
1. Employee retention credit for employers subject to closure due to
COVID-19 (sec. 2301 of the Act)
Present Law
In general
Federal employment taxes and OASDI Trust Funds
Federal employment taxes are imposed on wages paid to
employees with respect to employment and include taxes levied
under the Federal Insurance Contributions Act (``FICA''), the
Federal Unemployment Tax Act (``FUTA''), and Federal income
tax.\1093\ In addition, tier 1 of the Railroad Retirement Tax
Act (``RRTA'') imposes a tax on compensation paid to railroad
employees and representatives.\1094\
---------------------------------------------------------------------------
\1093\ Secs. 3101, 3111, 3301, and 3401.
\1094\ Sec. 3221.
---------------------------------------------------------------------------
FICA taxes comprise two components: Old-Age, Survivors, and
Disability Insurance (``OASDI'') taxes and Hospital Insurance
(``Medicare'') taxes.\1095\ With respect to OASDI taxes, the
applicable rate is 12.4 percent with half of such rate (6.2
percent) imposed on the employee and the remainder (6.2
percent) imposed on the employer.\1096\ The tax is assessed on
covered wages up to the OASDI wage base ($137,700 in 2020).
Generally, the OASDI wage base rises based on increases in the
national average wage index.\1097\
---------------------------------------------------------------------------
\1095\ The Hospital Insurance (``HI'') tax has two components:
Medicare tax and Additional Medicare tax. Medicare tax is imposed on
wages, as defined in section 3121(a), with respect to employment, as
defined in section121(b), at a rate of 1.45 percent for the employer.
Sec. 3101(b)(1). An equivalent 1.45 percent is withheld from employee
wages. Sec. 3111(b)(1). For purposes of this description, Medicare tax
does not include Additional Medicare tax. Additional Medicare taxes are
withheld from employee wages in excess of $200,000 at a rate of
0.9rcent. Sec. 3101(b)(2). There is no equivalent employer's share of
Additional Medicare taxes.
\1096\ Sec. 3101.
\1097\ Sec. 230 of the Social Security Act (42 U.S.C. sec. 430).
---------------------------------------------------------------------------
The employee portion of OASDI taxes must be withheld and
remitted to the Federal government by the employer during the
calendar quarter, as required by the applicable deposit
rules.\1098\ The employer is liable for the employee portion of
OASDI taxes, in addition to its own share, whether or not the
employer withholds the amount from the employee's wages.\1099\
OASDI and Medicare taxes are generally allocated by statute
among separate trust funds: the OASDI Trust Funds, Medicare's
Hospital Insurance Trust Fund, and Supplementary Medical
Insurance Trust Fund.\1100\
---------------------------------------------------------------------------
\1098\ Sec. 3102(a) and Treas. Reg. sec. 31.3121(a)-2. See also
sec. 6302.
\1099\ Sec. 3102(b).
\1100\ Secs. 201 and 1817 of the Social Security Act, Pub. L. No.
74-271 as amended (42 U.S.C. secs. 401 and 1395i).
---------------------------------------------------------------------------
Generally, the term ``wages'' for OASDI tax purposes means
all remuneration for ``employment,'' including the cash value
of all remuneration (including benefits) paid in any medium
other than cash, with certain exceptions.\1101\ The name given
to the remuneration for employment is immaterial. OASDI wages
includes salaries, vacation allowances, bonuses, deferred
compensation, commissions, and fringe benefits. The term
``employment'' is generally defined for FICA tax purposes as
any service, of whatever nature, performed by an employee for
the person employing him or her, with certain specific
exceptions.
---------------------------------------------------------------------------
\1101\ Sec. 3121(a).
---------------------------------------------------------------------------
The taxes related to the OASDI program collected from FICA
are deposited into two separate OASDI Trust Funds: (1) the Old-
Age and Survivors Insurance (``OASI'') Trust Fund, which pays
retirement and survivor benefits, and (2) the Disability
Insurance (``DI'') Trust Fund, which pays disability
benefits.\1102\ The major sources of income to the OASDI Trust
Funds are FICA taxes and taxes under the Self-Employment
Contributions Act (``SECA''). The OASDI Trust Funds are
financial accounts in the U.S. Treasury. The only purposes for
which these trust funds can be used are to pay benefits and
program administrative costs. A fixed proportion (dependent on
the allocation of tax rates by trust fund) of the taxes
received under FICA and SECA is deposited in the OASI Trust
Fund to the extent that such taxes are not needed immediately
to pay expenses.
---------------------------------------------------------------------------
\1102\ 42 U.S.C. sec. 401.
---------------------------------------------------------------------------
Railroad retirement program
Railroad workers do not participate in the OASDI system.
Compensation subject to RRTA tax is exempt from FICA
taxes.\1103\ The RRTA imposes a tax on compensation paid by
covered employers to employees in recognition for the
performance of services.\1104\ The term ``compensation'' means
any form of money remuneration paid to an individual for
services rendered as an employee to one or more employers, with
certain exceptions.\1105\ Employees whose compensation is
subject to RRTA tax are generally eligible for railroad
retirement benefits under a two-tier structure. Rail employees
and employers pay tier 1 taxes at the same rate as other
employment taxes.\1106\ In addition, rail employees and
employers both pay tier 2 taxes, which are used to finance
railroad retirement benefits above Social Security benefit
levels.\1107\ Tier 2 benefits are similar to a private defined
benefit pension.
---------------------------------------------------------------------------
\1103\ Sec. 3121(b)(9).
\1104\ Secs. 3201 through 3233. Instead of FICA taxes, railroad
employers and employees are subject, under the RRTA, to taxes
equivalent to the Social Security and Medicare taxes under FICA. Under
the RRTA, employers and employees are also subject to an additional
tax, referred to as the ``tier 2'' tax, on compensation up to a certain
amount.
\1105\ Sec. 3231(e).
\1106\ 7.65 percent, consisting of 6.2 percent for retirement on
earnings up to $137,700 in 2020, and 1.45rcent for Medicare hospital
insurance on all earnings. An additional 0.9 percent in Medicare taxes
are withheld from employees on earnings above $200,000.
\1107\ In 2020, the tier 2 tax rate on earnings up to $102,300 is
4.9 percent for employees and 13.1 percent for employers.
---------------------------------------------------------------------------
Employment tax in the U.S. territories
Employers and employees in the U.S. territories are
generally subject to FICA payroll tax obligations.\1108\ In
contrast, employers and employees in the territories are
generally not subject to withholding at the source for Federal
income tax, although they are subject to withholding of local
taxes.\1109\ These payroll obligations of the employers are
generally applicable to Federal agencies with personnel in the
territory. Employers in the territories file quarterly tax
returns with the Federal government to report and pay FICA
taxes for employees in the respective territories.
---------------------------------------------------------------------------
\1108\ See sec. 3121(b) and (e) and Covenant to Establish a
Commonwealth of the Northern Mariana Islands in Political Union with
the United States of America, Sec. 601(c). The U.S. territories
referred to in this document are American Samoa, the Commonwealth of
the Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin
Islands.
\1109\ Under section 3401(a)(8), most wages paid to U.S. persons
for services performed in one of the territories are exempt from
Federal income tax withholding if the payments are subject to
withholding by the territory, or, in the case of Puerto Rico, the payee
is a bona fide resident of the territory for the full year.
---------------------------------------------------------------------------
Employee retention credits against income taxes
Congress has at times enacted employee retention credits
against employer income tax in response to natural
disasters.\1110\ These enactments generally provide a credit of
40 percent of the wages (up to a maximum of $6,000 in wages per
employee) paid by certain employers harmed by the applicable
disaster to employees employed in the applicable disaster zone
during the period when the employer's business was inoperable
due to the applicable disaster. The credits are treated as a
current year business credit under section 38(b) and therefore
subject to the Federal income tax liability limitations of
section 38(c). Rules similar to those in sections 51(i)(1), 52,
and 280C(a) apply to the credits.\1111\
---------------------------------------------------------------------------
\1110\ See, e.g., sec. 203 of Pub. L. No. 116-94, Div. Q (providing
a credit in response to certain major disasters declared in 2018 and
2019); sec. 20103 of Pub. L. No. 115-123 (providing a credit in
response to 2017 California wildfires); Sec. 503 of Pub. L. No. 115-63,
as amended by sec. 20201(b) of Pub. L. No. 115-123 (providing a credit
in response to Hurricanes Harvey, Irma, and Maria); and former sec.
1400R (providing a credit in response to Hurricanes Katrina, Rita, and
Wilma).
\1111\ For a more detailed description of a recently enacted
employee retention credit (related to certain major disasters declared
in 2018 and 2019), see Joint Committee on Taxation, Description of H.R.
3301, The Taxpayer Certainty and Disaster Tax Relief Act of 2019 (JCX-
30-19), June 2019 pp. 80-81. See also the description of section03 of
the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE
of Pub. L. No. 116-260).
---------------------------------------------------------------------------
Refundable payroll tax credits for paid sick and paid family and
medical leave
On March 18, 2020, the President signed into law the
Families First Coronavirus Response Act (``FFCRA''),\1112\
Divisions C and E of which require certain employers to provide
certain types of paid leave to certain employees affected by
the outbreak of COVID-19. Sections 7001 and 7003 of Division G
of that Act provide refundable credits against a portion of
payroll tax liability for certain sick and family leave wages
required to be paid under Divisions C and E.\1113\ Those
credits are described above in Part Five of this document.
---------------------------------------------------------------------------
\1112\ Pub. L. No. 116-127.
\1113\ For a full description of Division G, see Part Five of this
document; see also Joint Committee on Taxation, Technical Explanation
of Division G, ``Tax Credits for Paid Sick and Paid Family and Medical
Leave,'' of H.R. 6201, the ``Families First Coronavirus Response Act''
(JCX-10-20), March 2020.
---------------------------------------------------------------------------
Explanation of Provision
In general The provision allows an eligible employer to
claim a credit against applicable employment taxes for each
calendar quarter in an amount equal to 50 percent of the
qualified wages with respect to each employee of such employer
for such calendar quarter. Applicable employment taxes are
OASDI tax imposed on the employer and so much of the RRTA tax
imposed on the employer as is attributable to the rate in
effect under section 3111(a). The amount of qualified wages
with respect to any employee which may be taken into account in
calculating the credit for all calendar quarters may not exceed
$10,000. Therefore, under the provision, the maximum amount of
credit per employee for all calendar quarters is $5,000. The
provision applies only to wages paid after March 12, 2020, and
before January 1, 2021.
The credit allowed may not exceed the applicable employment
taxes imposed on the eligible employer for that calendar
quarter on the wages paid with respect to all of the employer's
employees, reduced by any credits allowed for the employment of
qualified veterans,\1114\ for research expenditures of a
qualified small business,\1115\ or for paid sick or family
leave under sections 7001 and 7003 of the Families First
Coronavirus Response Act. However, if for any calendar quarter
the amount of the credit exceeds the applicable employment
taxes imposed on the employer, reduced as described in the
prior sentence, such excess is treated as a refundable
overpayment.\1116\
---------------------------------------------------------------------------
\1114\ Sec. 3111(e).
\1115\ Sec. 3111(f).
\1116\ The excess is treated as an overpayment and refunded under
sections 6402(a) and 6413(b). For purposes of section 1324 of Title 31,
United States Code, any amount due to an employer under the provision
is treated in the same manner as a refund due from the credits against
applicable employment taxes described above. Thus, pursuant to that
section, amounts are appropriated to the Secretary for refunding such
excess amounts.
---------------------------------------------------------------------------
For example, assume that, for a calendar quarter, an
eligible employer had applicable employment taxes prior to any
credits of $10,000 and (1) a credit for research expenditures
of a qualified small business of $4,000, (2) a $3,000 credit
for paid sick leave under section 7001 of FFCRA, and (3) a
$5,000 employee retention credit. The eligible employer's
applicable employment taxes are reduced to $0 and it has a
$2,000 refundable overpayment.\1117\ If, instead, the eligible
employer had applicable employment taxes prior to any credits
of $2,000, its applicable employment taxes are reduced to $0
and it has an $8,000 refundable overpayment.\1118\
---------------------------------------------------------------------------
\1117\ The tax is reduced by the $4,000 research expenditures
credit, the $3,000 paid sick leave credit, and $3,000 of the $5,000
employee retention credit. The $2,000 excess employee retention credit
is treated as refundable.
\1118\ The tax is reduced by the $2,000 research expenditures
credit, the other $2,000 of which is not refundable. See sec. 3111(f).
The $3,000 paid sick leave credit is treated as refundable, section
7001(b)(4) of the Families First Coronavirus Response Act, as is the
$5,000 employee retention credit.
---------------------------------------------------------------------------
Amounts are appropriated to the OASDI Trust Funds and the
Social Security Equivalent Benefit Account established under
the RRTA\1119\ equal to the reduction in revenues to the
Treasury by reason of the credit. Such amounts are transferred
from the general fund at such times and in such manner as to
replicate to the extent possible the transfers that would have
occurred to the Trust Funds or Account had the credit not been
enacted.
---------------------------------------------------------------------------
\1119\ See sec. 15A(a) of the RRTA (45 U.S.C. sec. 231n-1(a)).
---------------------------------------------------------------------------
Definition of eligible employer
An eligible employer is any employer which was carrying on
a trade or business during calendar year 2020 and which meets
either of two tests.
Under the first test (the ``governmental order test''),
such employer is an eligible employer if it experiences a
calendar quarter in which the operation of the trade or
business is fully or partially suspended during the calendar
quarter due to orders from an appropriate governmental
authority limiting commerce, travel, or group meetings (for
commercial, social, religious, or other purposes) due to COVID-
19.
For example, a restaurant in a State under a Statewide
order that restaurants offer only take-out service meets the
governmental order test, as does a concert venue in a State
under a Statewide order limiting gatherings to no more than 10
people. Similarly, an accounting firm that is in a county where
accounting firms are among businesses subject to a directive
from public health authorities to cease all activities other
than minimum basic operations and that closes its offices and
does not require employees who cannot work from home (e.g.,
custodial employees, mail room employees) to work meets this
test. However, a grocery store in a State that generally
imposes limitations on food service, gathering size, and travel
outside the home, but exempts grocery stores (and travel to and
from grocery stores) from any COVID-19 related restrictions
(e.g., because grocery stores are deemed an ``essential
business'' that is excepted from restrictions) would not meet
this test.
Under the second test (the ``reduced gross receipts
test''), such employer is an eligible employer if it
experiences a significant decline in gross receipts. The
employer is treated as experiencing a significant decline in
gross receipts in the period (i) beginning with the first
calendar quarter beginning after December 31, 2019, for which
gross receipts (within the meaning of section 448(c)) for the
calendar quarter are less than 50 percent of gross receipts for
the same calendar quarter in the prior year, and (ii) ending
with the quarter following the first calendar quarter beginning
after a calendar quarter described in (i) in which gross
receipts exceed 80 percent of gross receipts for the same
calendar quarter for the prior year.
For example, if an employer had gross receipts of $100 in
each calendar quarter of 2019 and then had gross receipts in
the first, second, third, and fourth quarters of 2020 of $100,
$40, $90, and $100, respectively, the period in which such
employer is treated as meeting the significant decline in gross
receipts test is the second and third quarters of 2020.
An organization described in section 501(c) may qualify as
an eligible employer under either test. The requirement that an
eligible employer be carrying on a trade or business during
calendar year 2020 and the governmental order test are to be
applied as if they referred to all operations of such
organization, and not merely those which are treated as a trade
or business.
Definition of qualified wages
The definition of qualified wages depends on the average
number of full-time and full-time-equivalent employees of the
eligible employer during 2019.\1120\ All persons treated as a
single employer under subsection (a) or (b) of section 52 or
subsection (m) or (o) of section 414 are treated as one
employer for purposes of the provision.
---------------------------------------------------------------------------
\1120\ The provision states that the metric is the ``average number
of full-time employees (within the meaning of section 4980H of the
Internal Revenue Code of 1986).'' This language includes full-time
equivalents as referred to in section 4980H(c)(2)(E), which reads as
follows:
---------------------------------------------------------------------------
(E) Full-time equivalents treated as full-time employees.
Solely for purposes of determining whether an employer is
an applicable large employer under this paragraph, an
employer shall, in addition to the number of full-time
employees for any month otherwise determined, include for
such month a number of full-time employees determined by
dividing the aggregate number of hours of service of
employees who are not full-time employees for the month by
120.
For an eligible employer that had more than 100 such
employees in 2019, qualified wages are wages paid by the
eligible employer with respect to which an employee is not
providing services due to circumstances that cause the eligible
employer to meet either the governmental order test or the
reduced gross receipts test.
For example, if a restaurant that had an average of 150
full-time employees during 2019 meets the governmental order
test, and the restaurant continues to pay kitchen employees'
wages as if they were working 40 hours per week but only
requires them to work 15 hours per week, the wages paid to the
kitchen employees for the 25 hours per week with respect to
which the kitchen employees are not providing services are
qualified wages. However, if the same restaurant reduces
kitchen employees' working hours from 40 hours per week to 15
hours per week and only pays wages for 15 hours per week, no
wages paid to the kitchen employees are qualified wages.
As another example, if an accounting firm that had an
average of 500 full-time employees during 2019 meets the
governmental order test, and during the period in which the
governmental order is in place the accounting firm closes its
office and does not require custodial and mail room employees
to work but continues to pay them their full salaries, wages
paid to those custodial and mail room employees for the time
they do not work are qualified wages. Similarly, if the
accounting firm continues to pay administrative assistants
their full salaries but only requires them to work two days per
week on a rotating schedule reflecting reduced demand for
assistance resulting from the office closure, the portion of an
administrative assistant's salary attributable to days not
worked are qualified wages.
Qualified wages paid to an employee by an eligible employer
that had more than 100 full-time employees in 2019 cannot
exceed the amount such employee would have been paid for
working an equivalent duration during the 30 days immediately
preceding the period in which the eligible employer met either
the governmental order test or the reduced gross receipts test.
For example, if an eligible employer subject to this rule
paid an employee $15 per hour for all hours worked prior to
meeting the governmental order test, but during the period when
the eligible employer meets the governmental order test pays
the same employee $10 per hour for hours when the employee is
providing services and $20 per hour for hours when the employee
is not providing services, only $15 per hour of wages paid when
the employee is not providing services are qualified wages. As
another example, if an eligible employer subject to this rule
paid an employee $15 per hour for all hours worked prior to
meeting the governmental order test, but during the period when
the eligible employer meets the governmental order test pays
the same employee $20 per hour (both for hours when the
employee is providing services and for hours when the employee
is not providing services), only $15 per hour of wages paid
when the employee is not providing services are qualified
wages.
For an eligible employer that had an average of 100 or
fewer full-time employees in 2019, qualified wages are wages
paid to any employee either during the time period in which
such eligible employer meets the governmental order test or
during a quarter in which the eligible employer meets the
reduced gross receipts test.
For example, if a restaurant that had an average of 45
full-time employees during 2019 meets the governmental order
test, and the restaurant continues to pay kitchen employees'
wages as if they were working 40 hours per week but only
requires them to work 15 hours per week, all of such employees'
wages paid during the period to which the governmental order
applies are qualified wages. If the same restaurant responds to
the governmental order by reducing the hours of kitchen
employees who had previously worked 40 hours per week to 15
hours per week and only pays wages for 15 hours per week, such
wages paid during the period to which the governmental order
applies are qualified wages.
As another example, if a grocery store that had an average
of 75 full-time employees during 2019 meets the reduced gross
receipts test for the second and third calendar quarters of
2020, all wages paid by the grocery store during those quarters
are qualified wages.
Qualified wages do not include any wages\1121\ or
compensation\1122\ taken into account under sections 7001 or
7003 of FFCRA. Qualified wages also include so much of the
employer's qualified health plan expenses as are properly
allocable to qualified wages under the provision. Qualified
health plan expenses are defined as amounts paid or incurred by
the employer to provide and maintain a group health plan,\1123\
but only to the extent such amounts are excluded from the
employees' income as coverage under an accident or health
plan.\1124\ Qualified health plan expenses are allocated to
qualified wages in such manner as the Secretary (or the
Secretary's delegate) may prescribe. Except as otherwise
provided by the Secretary (or the Secretary's delegate), such
allocations are treated as properly made if made pro rata among
covered employees and pro rata on the basis of periods of
coverage (relative to the time periods of leave to which such
wages relate). This broad grant of authority permits the
Secretary (or the Secretary's delegate) to treat qualified
health plan expenses as qualified wages in a situation where no
other qualified wages are paid by the eligible employer or to
the particular employee to which such expenses are allocable.
---------------------------------------------------------------------------
\1121\ Sec. 3121(a).
\1122\ Sec. 3231(e).
\1123\ Group health plan for this purpose is defined in section
5000(b)(1).
\1124\ For the exclusion, see section 106(a).
---------------------------------------------------------------------------
Other rules, definitions, and guidance
No credit is available under the provision to any employer
that receives a small business interruption loan (i.e., a
covered loan under paragraph (36) of section 7(a) of the Small
Business Act (15 U.S.C. 636(a)) as added by section 1102 of the
Act).
If a taxpayer claims a credit under this provision, rules
similar to the rules of sections 51(i)(1) and 280C(a) apply.
Thus, for example, an employee retention credit may not be
generated by an individual employer hiring his or her children.
In addition, the credit is taken into account for purposes of
determining any amount allowable as an income tax deduction for
qualified wages (or any amount capitalizable to basis) or for
payroll taxes associated with such qualified wages. For
example, assume a calendar year employer pays $2,500 of
qualified wages for the second quarter of 2020. If the employer
claimed no ERTC, the employer would be able to deduct $2,500 of
wage expense (assuming such wages are not subject to
capitalization) and $155 of OASDI tax liability, for a total
income tax deduction of $2,655 for the quarter with respect to
those wages. If the employer claims an ERTC of $1,250 for those
wages, the ERTC would offset $155 of OASDI liability and $1,095
of wage expense, leaving $1,405 of qualified wages as
deductible for income tax purposes.
Continuing the example above, assume that the employer
delays the deposit of its $155 of OASDI tax liability until
December 31, 2021, pursuant to section 2302 of the CARES
Act,\1125\ and thus does not have a current income tax
deduction for such OASDI tax.\1126\ If the employer claims an
ERTC of $1,250, the ERTC would offset $1,250 of wage expense,
leaving $1,250 of qualified wages as deductible for income tax
purposes.
---------------------------------------------------------------------------
\1125\ See subsequent description of section 2302 of the CARES Act,
``Delay of Payment of Employer Payroll Taxes.''
\ 1126\ In general, an employer's payroll tax liability is
deductible when paid by the employer to the governmental authority. See
section 461 and Treas. Reg. secs. 1.461-1 and 1.461-4(g). However, an
accrual method employer who has adopted the recurring item exception
method of accounting for its payroll taxes may generally deduct such
taxes for which it has a fixed and determinable liability by the end of
its taxable year if it pays the taxes by the earlier of the date the it
files a timely income tax return (including extensions) for such
taxable year or the 15th day of the ninth calendar month following the
close of such taxable year (e.g., by September 15, 2021, for the 2020
calendar taxable year). See section 461(h), Treas. Reg. sec. 1.461-5,
and Rev. Proc. 2008-25, 2008-1 C.B. 686. Thus, if the 2020 payroll
taxes are not paid until December 31, 2021, they will not be deductible
in 2020 by a calendar year employer, regardless of whether the employer
uses the cash or accrual method of accounting.
---------------------------------------------------------------------------
An employer may elect, at such time and in such manner as
provided by the Secretary (or the Secretary's delegate), to
have the credit not apply for a calendar quarter. Further, the
credit is not available to the Government of the United States,
the government of any State or political subdivision thereof,
or any agency or instrumentality of any of those entities.
Employers in the U.S. territories may claim the credit by
filing their quarterly Federal employment tax returns.
The provision does not apply to wages paid to any employee
for any period with respect to any employer if such employer is
allowed a credit under section 51 (i.e., the work opportunity
tax credit) with respect to such employee for such period.
Furthermore, any wages taken into account in determining the
credit allowed under the provision shall not be taken into
account for purposes of determining the credit allowed under
section 45S (i.e., the employer credit for paid family and
medical leave).
Any credit allowed under the provision is treated as a
credit described in section 3511(d)(2) (relating to third party
payors).
The provision directs the Secretary (or the Secretary's
delegate) to waive any penalty under section 6656 for failure
to make a deposit of applicable employment taxes if the
Secretary (or the Secretary's delegate) determines that such
failure was due to the reasonable anticipation of the credit
allowed under the provision.
The Secretary (or the Secretary's delegate) is required to
provide such regulations or other guidance as may be necessary
to carry out the purposes of the credit, including regulations
or other guidance: (1) to allow the advance payment of the
credit based on such information as the Secretary (or the
Secretary's delegate) may require;\1127\ (2) to provide for the
reconciliation of such advance payment with the amount advanced
at the time of filing the return of tax for the applicable
calendar quarter or taxable year; (3) to provide for recapture
of the credit if it is allowed to a taxpayer which receives a
small business interruption loan; (4) with respect to the
application of the credit to third party payors (including
professional employer organizations, certified professional
employer organizations, or agents under section 3504),
including regulations or guidance allowing such payors to
submit documentation necessary to substantiate the eligible
employer status of employers that use such payors; and (5) for
application of the reduced gross receipts test to any employer
which was not carrying on a trade or business for all or part
of the same calendar quarter in the prior year.
---------------------------------------------------------------------------
\ 1127\ For 2020, the IRS provided Form 7200, Advance Payment of
Employer Credits Due to COVID-19, to allow taxpayers to request advance
payment of the credit. The instructions to Form 7200 explain,
Eligible employers who pay . . . qualified wages eligible
for the employee retention credit should retain an amount
of the employment taxes equal to the amount of . . . their
employee retention credit, rather than depositing these
amounts with the IRS. The employment taxes that are
available for the credit[] include withheld federal income
tax, the employee share of social security and Medicare
taxes, and the employer share of social security and
Medicare taxes with respect to all employees. If there
aren't sufficient employment taxes to cover the cost of . .
. the employee retention credit, employers can file Form
7200 to request an advance payment from the IRS. Don't
reduce your deposits and request advance credit payments
for the same expected credit. You will need to reconcile
your advance credit payments and reduced deposits on your
---------------------------------------------------------------------------
employment tax return.
See instructions to IRS Form 7200, revised March 2020,
available at https://www.irs.gov/instructions/i7200.
Effective Date
The provision is effective on the date of enactment (March
27, 2020).
2. Delay of payment of employer payroll taxes (sec. 2302 of the Act and
secs. 6302 and 6654 of the Code)
Present Law
Federal employment taxes are imposed on wages paid to
employees with respect to employment and include Federal income
tax as well as taxes levied under the Federal Insurance
Contributions Act (``FICA''), Federal Unemployment Tax Act
(``FUTA'').\1128\ In addition, tier 1 of the Railroad
Retirement Tax Act (``RRTA'') imposes a tax on compensation
paid to railroad employees and representatives.\1129\
---------------------------------------------------------------------------
\1128\ Secs. 3401, 3101, 3111, and 3301.
\1129\ Sec. 3221.
---------------------------------------------------------------------------
FICA taxes are comprised of two components: Old-Age,
Survivors, and Disability Insurance (``OASDI'') and Medicare
taxes.\1130\ With respect to OASDI taxes, the applicable rate
is 12.4 percent with half of such rate (6.2 percent) imposed on
the employee and the remainder (6.2 percent) imposed on the
employer.\1131\ The tax is assessed on covered wages up to the
OASDI wage base ($137,700 in 2020). Generally, the OASDI wage
base rises based on increases in the national average wage
index.\1132\
---------------------------------------------------------------------------
\1130\ The Hospital Insurance (``HI'') tax has two components:
Medicare tax and Additional Medicare tax. Medicare tax is imposed on
wages, as defined in Section 3121(a), with respect to employment, as
defined in Section 3121(b), at a rate of 1.45 percent for the employer.
Sec. 3101(b)(1). An equivalent 1.45 percent is withheld from employee
wages. Sec. 3111(b)(1). For purposes of this description, Medicare tax
does not include Additional Medicare tax. Additional Medicare taxes are
withheld from employee wages in excess of $200,000 at a rate of 0.9
percent. Sec. 3101(b)(2). There is no equivalent employer's share of
Additional Medicare taxes.
\1131\ Sec. 3101.
\1132\ Sec. 230 of the Social Security Act (42 U.S.C. sec. 430).
---------------------------------------------------------------------------
Generally, the term ``wages'' for OASDI tax purposes means
all remuneration for ``employment,'' including the cash value
of all remuneration (including benefits) paid in any medium
other than cash, with certain exceptions.\1133\ The name given
to the remuneration for employment is immaterial. OASDI wages
includes salaries, vacation allowances, bonuses, deferred
compensation, commissions, and fringe benefits. The term
``employment'' is generally defined for FICA tax purposes as
any service, of whatever nature, performed by an employee for
the person employing him or her, with certain specific
exceptions.
---------------------------------------------------------------------------
\1133\ Sec. 3121(a).
---------------------------------------------------------------------------
Railroad retirement program
Railroad workers do not participate in the OASDI system.
Accordingly, compensation subject to RRTA tax is exempt from
FICA taxes.\1134\ The RRTA imposes a tax on compensation paid
by covered employers to employees in recognition for the
performance of services.\1135\ Employees whose compensation is
subject to RRTA are ultimately eligible for railroad retirement
benefits that fall under a two-tier structure. Rail employees
and employers pay tier 1 taxes at the same rate as FICA
taxes.\1136\ In addition, rail employees and employers both pay
tier 2 taxes that are used to finance railroad retirement
benefits over and above Social Security benefit levels.\1137\
Tier 2 benefits are similar to benefits under a defined benefit
plan. Those taxes are funneled to the railroad retirement
system and used to fund basic retirement benefits for railroad
workers and an investment trust that generates returns for the
pension fund.
---------------------------------------------------------------------------
\1134\ Sec. 3121(b)(9).
\1135\ Secs. 3201 through 3233. Instead of FICA taxes, railroad
employers and employees are subject, under the RRTA, to taxes
equivalent to the Social Security and Medicare taxes under FICA. Under
the RRTA, employers and employees are also subject to an additional
tax, referred to as the ``tier 2'' tax, on compensation up to a certain
amount.
\1136\ 7.65 percent, consisting of 6.2 percent for retirement on
earnings up to $137,700 in 2020, and 1.45 percent for Medicare hospital
insurance on all earnings. An additional 0.9 percent in Medicare taxes
are withheld from employees on earnings above $200,000.
\1137\ In 2020, the tier 2 tax rate on earnings up to $102,300 is
4.9 percent for employees and 13.1 percent for employers.
---------------------------------------------------------------------------
Self-employment taxes
The Self-Employed Contributions Act (``SECA'') imposes tax
on the self-employment income of an individual. SECA taxes
consist of OASDI tax and Medicare tax.\1138\ Under the OASDI
component, the first rate of tax is 12.4 percent on self-
employment income up to the OASDI wage base ($137,700 for
2020).\1139\ Under the basic Medicare tax component, the second
rate of tax is 2.9 percent of all self-employment income
(without regard to the OASDI wage base).\1140\ As is the case
with employees, an Additional Medicare tax applies to the
Medicare portion of SECA tax on self-employment income in
excess of a threshold amount.\1141\
---------------------------------------------------------------------------
\1138\ Sec. 1401(a) and (b).
\1139\ Sec. 1401(a).
\1140\ Sec. 1401(b)(1).
\1141\ Sec. 1401(b)(2).
---------------------------------------------------------------------------
Self-employment income subject to SECA tax is determined as
the net earnings from self-employment derived by an individual
during any taxable year, subject to certain exceptions. Net
earnings from self-employment are equal to the gross income
derived by an individual from any trade or business less
allowed deductions that are attributable to the trade or
business and permitted under the SECA rules. Certain passive
income and related deductions are not taken into account in
determining net earnings from self-employment, including
rentals from real estate (unless received in the course of a
trade or business as a real estate dealer),\1142\ dividends and
interest (unless such dividends and interest are received in
the course of a trade or business as a dealer in stocks or
securities),\1143\ and sales or exchanges of capital assets and
certain other property (unless the property is stock in trade
that would properly be included in inventory or held primarily
for sale to customers in the ordinary course of the trade or
business).\1144\
---------------------------------------------------------------------------
\1142\ Sec. 1402(a)(1).
\1143\ Sec. 1402(a)(2).
\1144\ Sec. 1402(a)(3).
---------------------------------------------------------------------------
For purposes of computing net earnings from self-
employment, taxpayers are permitted a deduction equal to the
product of the taxpayer's net self-employment income
(determined without regard to this deduction) and one-half of
the sum of the rates for OASDI tax and Medicare tax (i.e., 7.65
percent of net earnings).\1145\ This deduction is determined
without regard to the additional 0.9 percent Additional
Medicare tax that may apply to an individual. This deduction
reflects the fact that the FICA rates apply to an employee's
wages, which do not include FICA taxes paid by the employer,
whereas the self-employed individual's net earnings are
economically equivalent to an employee's wages plus the
employer's share of FICA taxes.\1146\ This is generally
referred to as the ``regular method'' of determining net
earnings from self-employment, and in Internal Revenue Service
forms and publications it is expressed as multiplying total net
earnings from self-employment by 92.35 percent.
---------------------------------------------------------------------------
\1145\ Sec. 1402(a)(12).
\1146\ The deduction is intended to provide parity between FICA and
SECA taxes because the employer may deduct, as a business expense, its
share of the FICA taxes paid. presently written, the deduction
for SECA taxes is not the exact economic equivalent to the deduction
for FICA taxes. See Joint Committee on Taxation, Options to Improve Tax
Compliance and Reform Tax Expenditures (JCS-2-05), January 2005, for a
detailed description of this issue.
---------------------------------------------------------------------------
Deposit requirements
The employee portion of OASDI taxes must be withheld and
remitted to the Federal government by the employer during the
quarter, as required by the applicable deposit rules.\1147\ The
employer is liable for the employee portion of OASDI taxes, in
addition to its own share, whether or not the employer withheld
the amount from the employee's wages.\1148\ Employers that make
payments of wages and withhold Federal income and FICA taxes
are required to make deposits of those taxes in a timely
manner.
---------------------------------------------------------------------------
\1147\ Sec. 3102(a) and Treas. Reg. sec. 31.3121(a)-2. Sec. 6302.
\1148\ Sec. 3102(b).
---------------------------------------------------------------------------
The regulations under section 6302 provide that an employer
generally must deposit employment taxes under a monthly or
semi-weekly schedule, with certain exceptions.\1149\ The
applicable deposit schedule is determined based on the total
tax liability reported on an employer's quarterly employment
tax return during a lookback period. In general, an employer is
a monthly depositor if the total Federal income and FICA tax
liability for the four quarters in the lookback period was
$50,000 or less. A semiweekly depositor is an employer for
which the total tax liability reported during the lookback
period was more than $50,000. Employers that accumulate
$100,000 or more of employment tax liability on any day are
required to make deposits of those taxes by the close of the
next banking day.\1150\
---------------------------------------------------------------------------
\1149\ Treas. Reg. sec. 31.6302-1. In certain circumstances,
employers may make employment tax payments with the filing of a return
instead of periodic deposits under a monthly or semiweekly schedule.
For example, to the extent an employer's total employment tax liability
for the current or prior quarter is less than $2,500, the employer may
make a payment with a timely filed IRS Form 944, Employer's ANNUAL
Federal Tax Return, or IRS Form 941, Employer's QUARTERLY Federal Tax
Return.
\1150\ Treas. Reg. sec. 31.6302-1(c).
---------------------------------------------------------------------------
If the aggregate amount of tax reported on an employment
tax return exceeds the total amount of deposits made by the
employer for the same quarter, the balance due must be remitted
in accordance with the applicable form and instructions.\1151\
---------------------------------------------------------------------------
\1151\ Treas. Reg. secs. 31.6302-1(h)(7) and 31.6302-1(i)(2).
---------------------------------------------------------------------------
A penalty may be imposed for the failure to deposit
employment taxes by the prescribed date.\1152\ The amount of
the penalty varies depending on when the deposit is made in
relation to the applicable deadline. The penalty is two percent
of the unpaid amount if the payment is made within five days of
the deadline, five percent if the payment is made within six
and 15 days of the due date, 10 percent if the payment is made
more than 15 days after the due date, and 15 percent for taxes
still unpaid after the 10th day following a notice and demand
from the Internal Revenue Service. The failure to deposit
penalty may be waived if the taxpayer demonstrates the failure
was due to reasonable cause and not willful neglect.\1153\
---------------------------------------------------------------------------
\1152\ Sec. 6656.
\1153\ Sec. 6656(a).
---------------------------------------------------------------------------
A penalty may also apply in the event that a taxpayer fails
to make a payment of tax due on a tax return with the return
absent a showing that the failure to pay was due to reasonable
cause and not due to willful neglect.\1154\ The amount of the
penalty is equal to one-half percent of the net amount of tax
due for each month that the return is not filed. This penalty
is coordinated with the penalty for the failure to timely file
a tax return, by reducing the failure to file penalty by the
amount of the failure to pay penalty for that month.\1155\ The
maximum amount of the failure to pay penalty is 25 percent of
the tax due.
---------------------------------------------------------------------------
\1154\ Secs. 6151(a) and 6651(a)(2).
\1155\ Sec. 6651(a)(1).
---------------------------------------------------------------------------
With respect to self-employed individuals, estimated tax
payments at least equal to (1) 90 percent of the current year's
tax liability or (2) 100 percent of prior year's tax liability,
must be made by the applicable deadlines.\1156\ A penalty is
imposed by applying the underpayment interest rate to the
amount of the underpayment for the period of underpayment. The
penalty does not apply if the tax shown on the return is less
than $1,000. There is no general reasonable cause waiver for
the failure to pay estimated tax, but a waiver is available to
the extent the Secretary determines that a taxpayer suffered a
casualty or other unusual circumstance if imposition of a
penalty would be against equity and good conscience.\1157\
---------------------------------------------------------------------------
\1156\ Secs. 6654.
\1157\ Sec. 6654(e)(3).
---------------------------------------------------------------------------
Third-party arrangements
Responsibility for employment tax obligations generally
rests with the person who is the employer of an employee under
a common-law test that has been incorporated into Treasury
regulations.\1158\ An employer-employee relationship exists if
the person for whom the services are performed has the right to
direct and control the performance of services by an
individual, not only to the result to be accomplished by the
work but also the details and means by which that result is
accomplished. In some cases, however, a person other than the
common-law employer may be responsible for effectuating the
employer's employment tax obligations.
---------------------------------------------------------------------------
\1158\ Treas. Reg. secs. 31.3401(c)-1, 31.3121(d)-1(c)(1), and
31.3306(i)-1(a). A similar concept for RRTA purposes applies under
Treas. Reg. sec. 31.3231(b)-1(a)(1)(i).
---------------------------------------------------------------------------
An employer may designate a third-party agent to be
responsible for employment tax withholding, depositing, and
reporting requirements on behalf of the employer.\1159\ The
reporting functions undertaken by this third party, a ``section
3504 agent,'' may include filing employment tax returns and
furnishing Forms W-2, Wage and Tax Statement, to the employer's
employees. An employer remains jointly and severally liable
with the section 3504 agent for satisfaction of the employer's
employment tax obligations.\1160\
---------------------------------------------------------------------------
\1159\ Sec. 3504. Treas. Reg. sec. 31-3504-1 provides the criteria
for the designation by an employer of an agent by application to the
IRS. IRS Form 2678 is used for this purpose. In addition, under Treas.
Reg. sec. 31.3504-2, designation of an agent may result from the
payment of wages or compensation by a payor to an individual performing
services for a client of the payor pursuant to a services agreement
meeting certain criteria. The rules for designating an agent is a
departure from the general principle that a taxpayer has a nondelegable
duty with respect to employment tax obligations. See U.S. v. Boyle, 469
U.S. 241 (1985).
\1160\ Treas. Reg. sec. 31.3405-1(a).
---------------------------------------------------------------------------
Another third-party entity is a ``professional employer
organization,'' which provides employees to perform services in
the business of the professional employer organization's
customers, including small and medium-sized businesses.\1161\
In many cases, before the professional employer organization
arrangement is finalized, the employees already work in the
customer's business as employees of the customer. A ``certified
professional employer organization'' (``CPEO'') is an entity
that has applied to the Secretary to be treated as a CPEO and
has been certified to meet certain requirements. A CPEO is
treated as the employer of any work-site employee performing
services for any customer of the CPEO but only with respect to
remuneration remitted by the CPEO to a work-site
employee.\1162\ A CPEO is subject to employment tax
withholding, depositing, and reporting requirements and
associated liability with respect to the work-site employees
performing services for a customer of the CPEO, subject to the
limitations and requirements of section 3511.
---------------------------------------------------------------------------
\1161\ ``Professional employer organization'' is not a legal term
with a specific definition. The term ``employee leasing company'' is
also occasionally used to describe the same or similar relationship
between service provider and customer in this context, but both terms
can be used to describe a variety of arrangements.
\1162\ Sec. 3511.
---------------------------------------------------------------------------
Explanation of Provision
The provision allows eligible employers and self-employed
individuals to delay the deposit of certain employment taxes.
The deposit and payment of ``applicable employment taxes''
during the ``payroll tax deferral period'' is treated as made
timely if made by an applicable date. For this purpose, the
term ``applicable employment taxes'' includes the following:
the employer's share of OASDI taxes,\1163\ the employer's share
of the equivalent Social Security portion of RRTA taxes and
employee representative RRTA taxes,\1164\ and, for self-
employed individuals, the equivalent of the employer's Social
Security portion of SECA taxes.\1165\ The employer's share of
OASDI taxes, and equivalent portions for RRTA and SECA taxes,
is 6.2 percent of wages, compensation, or net earnings from
self-employment, up to the 2020 wage base, $137,700.
---------------------------------------------------------------------------
\1163\ Sec. 3111(a).
\1164\ Secs. 3221(a) and 3211(a).
\1165\ Sec. 1401(a).
---------------------------------------------------------------------------
The period beginning on March 27, 2020 and ending before
January 1, 2021 is the ``payroll tax deferral period.'' Half of
the applicable employment taxes required to be deposited during
the payroll tax deferral period must be deposited on or before
December 31, 2021, and the remaining fifty percent of the
applicable employment tax liability accrued during the payroll
tax deferral period must be deposited on or before December 31,
2022. To the extent an employer deposits applicable employment
taxes otherwise due during the payroll tax deferral period by
the foregoing applicable dates, notwithstanding the
requirements under section 6302, such deposits will be treated
as timely.\1166\ For SECA tax purposes, 50 percent of the tax
liability incurred under section 1401(a) during the payroll tax
deferral period shall not be treated as taxes requiring
estimated tax payments until the applicable dates.\1167\
---------------------------------------------------------------------------
\1166\ Secs. 6656 and 6651(a)(2).
\1167\ Sec. 6654.
---------------------------------------------------------------------------
In order to be eligible to defer the deposit of applicable
employment taxes, the employer or self-employed person must not
have had indebtedness forgiven under sections 1106 or 1109 of
the Act.
In the case of a section 3504 agent designated by an
employer to perform the employer's employment tax obligations,
the employer will be solely liable for the payment of the
applicable employment taxes by the applicable date for any
wages paid by the agent on behalf of the employer during the
payroll tax deferral period. For sole liability to attach to
the employer, the employer must direct the agent to defer
payment of applicable employment taxes during the payroll tax
deferral period. Likewise, a customer of a CPEO that directs
the CPEO to defer payment of applicable employment taxes shall,
notwithstanding subsections (a) and (c) of section 3511, be
solely liable for the subsequent payment of the applicable
employment taxes by the deadlines outlined in the provision.
The customer's liability is only with respect to wages paid by
the CPEO to any work-site employee performing services for such
customer during the payroll tax deferral period.
The provision directs the Secretary (or the Secretary's
delegate) to promulgate regulations or other guidance as may be
necessary to carry out the purposes of the provision, including
the administration and enforcement of the liability of third-
party entities, section 3504 agents and CPEOs. The IRS
subsequently has implemented this provision.\1168\
---------------------------------------------------------------------------
\1168\ Notice 2020-22, 2020-17 I.R.B. 664, April 20, 2020.
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment (March
27, 2020).
3. Modifications for net operating losses (sec. 2303 of the Act and
sec. 172 of the Code)
Present Law
A net operating loss (``NOL'') generally means the amount
by which a taxpayer's business deductions exceed its gross
income.\1169\ A taxpayer generally may deduct in a taxable year
an NOL carried to such year.\1170\ For NOLs arising in taxable
years beginning after December 31, 2017, the NOL deduction
generally is limited to 80 percent of taxable income determined
without regard to the NOL deduction (the ``80-percent taxable
income limitation'').\1171\ Excess losses generally may be
carried forward indefinitely, but not back,\1172\ and
carryovers of such NOLs to other taxable years are adjusted to
take account of the 80-percent taxable income limitation. NOLs
offset taxable income in the order of the taxable years to
which the NOL may be carried.\1173\
---------------------------------------------------------------------------
\1169\ Sec. 172(c).
\1170\ Sec. 172(a). Certain additional limitations apply to NOLs
claimed by taxpayers other than a corporation. See sec. 172(d)(4).
\1171\ Sec. 172(a). For this purpose, a real estate investment
trust is subject to a limit based on 80 percent of its real estate
investment trust taxable income (as defined in section 857(b)(2) but
without regard to the deduction for dividends paid (as defined in
section 561)). See sec. 172(d)(6)(C).
\1172\ Sec. 172(b)(1)(A). An NOL arising in a taxable year
beginning before January 1, 2018, generally is carried back two years
or forward 20 years.
\1173\ Sec. 172(b)(2). The amount of the NOL that may be carried to
a taxable year is reduced by the taxable income for prior taxable years
to which the NOL may be carried.
---------------------------------------------------------------------------
Special rules apply with respect to NOLs arising in certain
circumstances. These include a special rule providing a two-
year carryback in the case of certain farming losses.\1174\ A
separate special rule provides a two-year carryback and 20-year
carryover for NOLs of a property and casualty insurance company
(i.e., an insurance company as defined in section 816(a)) other
than a life insurance company).\1175\ Further, the 80-percent
taxable income limitation does not apply to the NOLs of such
insurance companies.
---------------------------------------------------------------------------
\1174\ Sec. 172(b)(1)(B). For this purpose, the term ``farming
loss'' means the lesser of (1) the amount that would be the NOL for the
taxable year if only income and deductions attributable to farming
businesses (as defined in section 263A(e)(4)) are taken into account,
or (2) the amount of the NOL for such taxable year. For any loss year,
a farming business may irrevocably elect out of the two-year carryback.
The election must be made in the manner as prescribed by the Secretary
by the due date (including extensions) of the taxpayer's return for the
taxable year of the NOL.
\1175\ Sec. 172(b)(1)(C).
---------------------------------------------------------------------------
NOLs arising in taxable years beginning before January 1,
2018, are not subject to the 80-percent taxable income
limitation. Further, such NOLs remain subject to the 20-year
carryover limitation and the relevant carryback rules in effect
for taxable years beginning before January 1, 2018.
A taxpayer with NOL carryovers to a taxable year from both
taxable years beginning before 2018 (``pre-2018 NOL
carryovers'') and taxable years beginning after 2017 (``post-
2017 NOL carryovers'') computes its tax liability as follows.
First, the taxpayer may deduct an NOL in the amount of its pre-
2018 NOL carryovers without limitation. Second, the taxpayer
may deduct an additional NOL equal to the lesser of (1) its
post-2017 NOL carryovers or (2) 80 percent of the excess (if
any) of the taxpayer's taxable income (before any NOL deduction
attributable to post-2017 NOL carryovers) over the NOL
deduction attributable to pre-2018 NOL carryovers.
Explanation of Provision
The provision makes several changes with respect to NOLs
arising in taxable years beginning after December 31, 2017.
80-percent taxable income limitation
The provision suspends the application of the 80-percent
taxable income limitation for taxable years beginning after
December 31, 2017, and before January 1, 2021.\1176\ The 80-
percent taxable income limitation continues to apply in the
case of any taxable year beginning after December 31, 2020, and
with respect to NOLs arising in taxable years beginning after
December 31, 2017, carried to such a taxable year.\1177\
---------------------------------------------------------------------------
\1176\ Sec. 172(a).
\1177\ Sec. 172(a)(2). Section 172(a)(2)(A) provides that NOLs
arising in taxable years beginning before January 1, 2018, carried to a
taxable year beginning after December 31, 2020, are not subject to the
80-percent taxable income limitation.
---------------------------------------------------------------------------
The provision clarifies that the 80-percent taxable income
limitation is calculated without regard to the deductions
allowable under sections 172, 199A, and 250. The provision also
clarifies the method for calculating NOL carrybacks and
carryovers under section 172(b)(2)(C) to ensure proper
coordination with the taxable income limitation of section
172(a)(2). The provision makes conforming changes to the rules
regarding the determination of taxable income of real estate
investment trusts and holders of residual interests in real
estate mortgage investment conduits.
Carryback of NOLs arising in 2018, 2019, and 2020
In general
The provision modifies the rules relating to NOLs arising
in 2018, 2019, and 2020.\1178\ Specifically, the provision
provides that any NOL arising in a taxable year beginning after
December 31, 2017, and before January 1, 2021, may be carried
to the five taxable years preceding the taxable year of such
loss (the ``five-year carryback period'').\1179\ Special rules
apply for real estate investment trusts \1180\ and life
insurance companies.\1181\ The provision allows taxpayers to
use NOLs to a greater extent to offset taxable income in prior
or future years in order to provide taxpayers with liquidity in
the form of tax refunds and reduced current and future tax
liability.
---------------------------------------------------------------------------
\1178\ Sec. 172(b)(1)(D).
\1179\ See sec. 172(b)(1)(D)(i). Pursuant to section 172(b)(2), any
NOL carryback must be carried to the earliest taxable years to which
such loss may be carried.
NOLs eligible for the five-year carryback period include, for
example, those arising with respect to farming losses, which would
otherwise be subject to a two-year carryback period. See, e.g., sec.
172(b)(1)(B).
\1180\ See sec. 172(b)(1)(D)(ii). This rule provides that an NOL
for any taxable year for which the provisions of part II of subchapter
M (relating to real estate investment trusts) apply to the taxpayer may
not be carried to any taxable year preceding the taxable year of such
loss. Further, an NOL for a taxable year for which the provisions of
part II of subchapter M (relating to real estate investment trusts) do
not apply to the taxpayer may not be carried to any preceding taxable
year in which such provisions do apply to the taxpayer.
\1181\ See sec. 172(b)(1)(D)(iii). An NOL of a life insurance
company carried to a life insurance company taxable year beginning
before January 1, 2018, is treated in the same manner as an operations
loss carryback (within the meaning of section 810 as in effect before
its repeal) of such company to such taxable year.
---------------------------------------------------------------------------
Treatment of taxable years with section 965(a) inclusion
The provision also provides special rules relating to NOL
carrybacks to years to which section 965 applies. If an NOL of
a taxpayer is carried to a taxable year in which the taxpayer
included an amount in income by reason of section 965(a) (i.e.,
2017, 2018, or both), the taxpayer may elect to exclude section
965(a) inclusion years from the five-year carryback
period.\1182\ This election does not extend the five-year
carryback period; instead, a taxpayer making this election is
permitted to use the NOL in a subsequent year within the five-
year carryback period in which the taxpayer has taxable income.
This election, as well as an election under section 172(b)(3)
to waive the entire carryback period with respect to an NOL
arising in a taxable year beginning in 2018 or 2019,\1183\ is
required to be made by the due date (including extensions) for
filing the taxpayer's return for the first taxable year ending
after the date of enactment of the Act.\1184\ If a taxpayer
does not elect to exclude its section 965(a) inclusion year(s)
from the five-year carryback period and an NOL of the taxpayer
arising in a taxable year beginning after December 31, 2017,
and before January 1, 2021, is carried to such year(s), then
the taxpayer is treated as having made an election under
section 965(n) (i.e., an election not to apply any NOL
deduction to such taxpayer's section 965(a) inclusion amount
net of the section 965(c) deduction) with respect to such
taxable year(s).\1185\
---------------------------------------------------------------------------
\1182\ Sec. 172(b)(1)(D)(v)(I) (providing that ``[i]f the 5-year
carryback period under clause (i)(I) with respect to any net operating
loss of a taxpayer includes 1 or more taxable years in which an amount
is includible in gross income by reason of section 965(a), the taxpayer
may, in lieu of the election otherwise available under paragraph (3),
elect under such paragraph to exclude all such taxable years from such
carryback period.'').
\1183\ For guidance regarding elections to waive the carryback
period with respect to NOLs arising in taxable years beginning in 2018
or 2019, see sec. 4.01(1) of Rev. Proc. 2020-24.
\1184\ Sec. 172(b)(1)(D)(v)(II). For guidance regarding this
election, see sec. 4.01(2) of Rev. Proc. 2020-24.
\1185\ Sec. 172(b)(1)(D)(iv). For guidance regarding this deemed
election, see sec. 4.02 of Rev. Proc. 2020-24.
---------------------------------------------------------------------------
The following example illustrates the application of the
special rules relating to NOL carrybacks to years to which
section 965 applies:
Suppose, in 2020, a calendar-year taxpayer has a $120 loss.
Because the provision (pursuant to section 172(b)(1)(D)) allows
a special five-year carryback period in the case of NOLs
arising in a taxable year beginning after December 31, 2017,
and before January 1, 2021, the taxpayer may carry the $120 NOL
from 2020 to the five taxable years preceding the taxable year
of such loss. For an NOL arising in 2020, the relevant taxable
years within the relevant five-year carryback period are 2015,
2016, 2017, 2018, and 2019. If the taxpayer had $20 of taxable
income in 2015 and $30 of taxable income in 2016 (both without
regard to any NOL deduction), then the taxpayer is entitled to
a $20 NOL deduction in 2015 and a $30 NOL deduction in 2016.
The remaining unused portion of the 2020 NOL (i.e., the
remaining $70 of the $120 NOL carryback) may be applied to the
taxpayer's 2017 taxable year and, to the extent allowed under
section 172(b), to each subsequent year.
If, in 2017, the taxpayer had a section 965(a) inclusion
(net of the section 965(c) deduction), which the taxpayer
elected under section 965(h) to pay in installments, and other
taxable income (before any NOL deduction), the taxpayer has two
options: (1) apply the provision's default rule, which deems
the taxpayer to have made an election under section 965(n) not
to apply the NOL to such taxpayer's section 965(a) inclusion
amount net of the section 965(c) deduction; \1186\ or (2) elect
to exclude 2017, the taxpayer's section 965(a) inclusion year,
from the five-year carryback period (i.e., carry back the 2020
NOL only to 2015, 2016, 2018, and 2019, before carrying
forward).\1187\
---------------------------------------------------------------------------
\1186\ Sec. 172(b)(1)(D)(iv).
\1187\ Sec. 172(b)(1)(D)(v)(I).
---------------------------------------------------------------------------
The special rules relating to NOL carrybacks to years to
which section 965 applies allow taxpayers to use NOLs to a
greater extent to offset taxable income in prior or future
years in order to provide taxpayers with liquidity in the form
of tax refunds and reduced current and future tax liability.
For example, the election to exclude section 965(a) inclusion
years from the five-year carryback period allows taxpayers with
an outstanding section 965 tax liability to use NOLs in another
year such that any resulting overpayment would result in an
authorized refund rather than offset the outstanding section
965 tax liability.
Other rules relating to NOLs
The provision makes technical and conforming amendments.
Generally, the provision clarifies the effective date of
certain changes made by Public Law 115-97 to section 172. The
provision clarifies that the 80-percent taxable income
limitation with respect to an NOL applies with respect to
taxable years to which NOLs arising in taxable years beginning
after December 31, 2017, may be carried. The provision also
clarifies that the amendments made by Public Law 115-97
relating to NOL carryovers and carrybacks apply to NOLs arising
in taxable years beginning after December 31, 2017. In
addition, the provision clarifies the statutory language
governing the operation of the rules relating to the taxable
years to which NOLs may be carried back and carried forward.
Timeliness of application for refund
The provision provides rules relating to the timeliness of
refund applications with respect to NOL carryovers arising in
fiscal taxable years beginning before January 1, 2018, and
ending after December 31, 2017, and the timeliness with respect
to an election to waive or change carrybacks under section
172(b). Specifically, the provision allows taxpayers until 120
days after the date of enactment of the Act to use the
tentative carryback adjustment procedures of section 6411(a)
for the carryback of an NOL arising in a taxable year beginning
before January 1, 2018, and ending after December 31, 2017
(without regard to the 12-month limitation in section
6411).\1188\ The provision also provides an election to forgo
the carryback of such an NOL, or to reduce any period to which
such an NOL may be carried back, if made by the date that is
120 days after the date of enactment of the Act
(notwithstanding that section 172 requires such elections be
made by the due date (including extensions) for filing the
taxpayer's return for the taxable year of the loss). For
example, under this election, a taxpayer may elect to reduce a
five-year period to which such an NOL may be carried back to a
two-year period to which such an NOL may be carried back. In
addition, the provision provides that any election to forgo any
carryback of such an NOL that may have already been made may be
revoked within 120 days after the date of enactment of the Act
(notwithstanding the irrevocability rule in section 172(b)).
---------------------------------------------------------------------------
\1188\ For guidance regarding applications under section 6411(a)
with respect to an NOL arising in a taxable year that began before
January 1, 2018, and ended after December 31, 2017, see sec. 4.04(1) of
Rev. Proc. 2020-24. For guidance regarding applications under section
6411(a) with respect to NOLs arising in taxable years beginning after
December 31, 2017, sec. 4.04(2) of Rev. Proc. 2020-24 directs taxpayers
to consult Notice 2020-26 for procedures on how to file applications
under section 6411(a) for taxable years that may otherwise be outside
the period for filing such applications. Notice 2020-26 grants a six-
month extension of time to file an application for a tentative
carryback adjustment under section 6411 with respect to the carryback
of an NOL that arose in a taxable year that began during calendar year
2018 and that ended on or before June 30, 2019.
---------------------------------------------------------------------------
Effective Date
The provision suspending application of the 80-percent
taxable income limitation applies to taxable years beginning
after December 31, 2017, and to taxable years beginning on or
before December 31, 2017, to which net operating losses arising
in taxable years beginning after December 31, 2017, are
carried.
The provision modifying the rules relating to carrybacks
applies to NOLs arising in taxable years beginning after
December 31, 2017, and taxable years beginning before, on, or
after such date to which such NOLs are carried.
The technical amendments made by the provision are
effective as if included in section 13302 of Public Law 115-97.
4. Modification of limitation on losses for taxpayers other than
corporations (sec. 2304 of the Act and secs. 461(l) and (j) of the
Code)
Present Law
Limitation on excess business loss of a taxpayer other than a
corporation
For taxable years beginning after December 31, 2017, and
before January 1, 2026, an excess business loss of a taxpayer
other than a corporation is not allowed for the taxable
year.\1189\ The disallowed excess business loss is treated as
an NOL for the taxable year for purposes of determining any NOL
carryover to subsequent taxable years.\1190\
---------------------------------------------------------------------------
\1189\ Sec. 461(l). Section 461 was modified in 2017 by section
11012 of Public Law 115-97.
\1190\ See generally sec. 172. For a discussion of the changes made
in 2017 to section 172, see the description of section 13302 of Public
Law 115-97 (Modification of Net Operating Loss Deduction) in Joint
Committee on Taxation, General Explanation of Public Law 115-97 (JCS-1-
18), December 2018. Under section 461(l), excess business losses that
are not allowed are treated as an NOL arising in the taxable year.
Thus, such excess business losses are carried over to a subsequent
taxable year under the applicable NOL rules. For example, assume that
for 2018, H and W file a joint return on which they report a $1,150,000
loss from their farming business on Schedule F (Form 1040). H and W do
not have any other income or loss for 2018. After application of the
$500,000 threshold amount for joint filers (sec. 461(l)(3)(A)(ii)(II)),
the remaining $650,000 business loss is an excess business loss and is
not allowed for H and W's taxable year 2018 by reason of section
461(l)(1)(B). Under the provision, H and W have a $500,000 NOL for 2018
that is eligible for a two-year carryback under section 172(b)(1)(B),
and a $650,000 NOL (increased by any portion of the $500,000 NOL for
2018 remaining after application of the two-year carryback) eligible
for carryover to 2019. Because the $500,000 NOL for 2018 arises in a
taxable year beginning after December 31, 2017, it is subject to the
80-percent limitation under section 172(a)(2). Accordingly, the amount
of the taxpayer's $500,000 NOL carried back to 2016 and 2017 is limited
to 80 percent of the taxable income (determined without regard to the
NOL deduction) for the 2016 and 2017 taxable years, respectively.
---------------------------------------------------------------------------
An excess business loss for the taxable year is the excess
of aggregate deductions of the taxpayer attributable to trades
or businesses of the taxpayer (determined without regard to the
limitation of the provision) \1191\ over the sum of aggregate
gross income or gain attributable to trades or businesses of
the taxpayer plus a threshold amount. The threshold amount for
a taxable year beginning in 2018 is $250,000 (or, in the case
of a joint return, twice the otherwise applicable threshold
amount, i.e., $500,000). The threshold amount is indexed for
inflation for taxable years beginning after 2018.
---------------------------------------------------------------------------
\1191\ Aggregate deductions (for purposes of section 461(l)) do not
include the amount of any NOL carryback or carryover under section 172
that is attributable to such trades or businesses from a different
taxable year. For example, continuing the example in the preceding
footnote, none of the $650,000 excess business loss in taxable year
2018 is subject to section 461(l) in a subsequent taxable year. Thus,
any deduction with respect to any portion of the $650,000 that is
carried over to a subsequent taxable year under the rules of section
172 is governed by the rules of section 172 (not section 461(l)).
Similarly, any deduction with respect to any portion of the $500,000
remaining after carrybacks to 2016 and 2017 that is carried over to a
subsequent year is governed by the rules of section 172 (not section
461(l)).
---------------------------------------------------------------------------
The aggregate deductions taken into account to determine
the excess business loss of the taxpayer for the taxable year
that are attributable to trades or businesses of the taxpayer
are determined without regard to the deductions under section
172 or 199A. For example, assume that a taxpayer has an NOL
carryover from a prior taxable year to the current taxable
year. Such NOL carryover is not part of the taxpayer's
aggregate deductions attributable to the trade or business for
the current taxable year under section 461(l).
An excess business loss (the deduction for which is limited
by section 461(l)) does not take into account gross income or
gains or deductions attributable to the trade or business of
the performance of services as an employee.\1192\ For this
purpose, the trade or business of performance of services by
the taxpayer as an employee has the same meaning as it does
under section 62(a)(1). However, contrary to Congressional
intent, IRS Form 461, Limitation on Business Losses, and the
Instructions for Form 461 for 2018 and 2019, include wages and
salaries (amounts from the trade or business of being an
employee) in the determination of the taxpayer's excess
business loss amount.\1193\
---------------------------------------------------------------------------
\1192\ This rule expresses Congressional intent.
\1193\ See also the IRS explanation of ``Excess business losses''
available at https://www.irs.gov/newsroom/excess-business-losses.
---------------------------------------------------------------------------
In the case of a partnership or S corporation, the
provision applies at the partner or shareholder level. Each
partner's distributive share and each S corporation
shareholder's pro rata share of items of income, gain,
deduction, or loss of a partnership or S corporation are taken
into account in applying the limitation under the provision for
the taxable year of the partner or S corporation shareholder.
Regulatory authority is provided to require any additional
reporting as the Secretary determines is appropriate to carry
out the purposes of the provision (including with respect to
any other passthrough entity to the extent necessary to carry
out the purposes of the provision).
Section 461(l) applies after the application of certain
other limitations on losses, namely, the passive activity loss
limitation,\1194\ the at-risk limitation,\1195\ and in the case
of a taxpayer who is a partner or S corporation shareholder,
the rules limiting the taxpayer's distributive or pro rata
share of loss for the taxable year to the taxpayer's adjusted
basis in the partnership interest or in the S corporation stock
and debt.\1196\ Thus, for example, the amount of any income,
deduction, gain, or loss from a passive activity that is taken
into account for purposes of the passive activity loss
limitation is not taken into account in determining whether a
taxpayer has an excess business loss.
---------------------------------------------------------------------------
\1194\ Sec. 469.
\1195\ Sec. 465.
\1196\ Sec. 704(d) (for partners) and sec. 1366(d) (for S
corporation shareholders). See sec. 461(l)(6) (applying section 461(l)
after section 469), and Treas. Reg. sec. 1.469-2T(d)(6) (applying
section 469 after sections 704(d), 1366(d), and 465). Note that other
rules could potentially limit a taxpayer's loss (e.g., section 267). A
discussion of all potential loss limitation rules is beyond the scope
of the description of this provision.
---------------------------------------------------------------------------
Excess farm losses
For taxable years beginning before January 1, 2018, and
after December 31, 2025, a limitation on excess farm losses
applies to taxpayers other than C corporations.\1197\ Thus, for
taxable years beginning after December 31, 2017, and before
January 1, 2026, the limitation relating to excess farm losses
does not apply.
---------------------------------------------------------------------------
\1197\ Sec. 461(j).
---------------------------------------------------------------------------
Under the limitation relating to excess farm losses, if a
taxpayer other than a C corporation receives an applicable
subsidy \1198\ for the taxable year, the amount of the excess
farm loss is not allowed for the taxable year and is carried
forward and treated as a deduction attributable to farming
businesses in the next taxable year. An excess farm loss for a
taxable year means the excess of aggregate deductions that are
attributable to farming businesses over the sum of aggregate
gross income or gain attributable to farming businesses plus
the threshold amount. The threshold amount is the greater of
(1) $300,000 ($150,000 for married individuals filing
separately), or (2) for the five-consecutive-year period
preceding the taxable year, the excess of the aggregate gross
income or gain attributable to the taxpayer's farming
businesses over the aggregate deductions attributable to the
taxpayer's farming businesses.
---------------------------------------------------------------------------
\1198\ For this purpose, an applicable subsidy means (A) any direct
or counter-cyclical payment under title I of the Food, Conservation,
and Energy Act of 2008, or any payment elected to be received in lieu
of such payment, or (B) any Commodity Credit Corporation loan. Sec.
461(j)(3). Note that the Agricultural Act of 2014 repealed direct and
counter-cyclical payments under the Food, Conservation, and Energy Act
of 2008. See secs. 1101 and 1102 of Pub. L. No. 113-79, February 7,
2014. Thus, only Commodity Credit Corporation loans currently fall
within the definition of an applicable subsidy for purposes of section
461(j).
---------------------------------------------------------------------------
Treatment of capital losses
In the case of a taxpayer other than a corporation, section
1211(b) limits the deduction for losses from sales or exchanges
of capital assets to gains from such sales or exchanges plus up
to $3,000. Section 172(d)(2)(A), relating to NOLs, provides a
similar limitation but without regard to the $3,000 additional
amount. Thus, for purposes of determining the amount of an NOL,
the amount deductible on account of losses from sales or
exchanges of capital assets cannot exceed the amount includible
on account of gains from sales or exchanges of capital assets.
Explanation of Provision
The provision provides that the limitation on excess
business loss of a taxpayer other than a corporation (section
461(l)) does not apply for taxable years beginning in 2018,
2019, or 2020.\1199\ In addition, the limitation on excess farm
losses (section 461(j)) does not apply for taxable years
beginning after 2017 and before 2026. The provision does not
change the applicability of other loss limitation rules that
may affect a taxpayer for those taxable years, such as the
passive activity loss limitation, the at-risk limitation, and
in the case of a taxpayer who is a partner or S corporation
shareholder, the rules limiting the taxpayer's distributive or
pro rata share of loss for the taxable year to the taxpayer's
adjusted basis in the partnership interest or in the S
corporation stock and debt.
---------------------------------------------------------------------------
\1199\ An IRS explanation states that a taxpayer that filed a 2018
or 2019 return applying the 461(l) limitation for 2018 or 2019 may file
an amended return (the explanation was posted on line before the due
date for 2020 returns). See https://www.irs.gov/forms-pubs/limitation-
on-business-losses-for-certain-taxpayers-repealed-for-2018-2019-and-
2020.
---------------------------------------------------------------------------
The provision also makes technical amendments. The
provision clarifies the operation of the rule providing that,
for any taxable year beginning after 2020 and before 2026, any
excess business loss of a taxpayer other than a corporation is
not allowed for the taxable year and excess business loss not
allowed is carried forward and treated as part of the
taxpayer's NOL carryover in subsequent taxable years as
determined under the NOL rules.\1200\ The provision clarifies
this rule using statutory language consistent with the NOL
rules, providing that an excess business loss not allowed for a
taxable year is treated as an NOL for the taxable year that is
carried over to subsequent taxable years under the applicable
NOL carryover rules.
---------------------------------------------------------------------------
\1200\ Changes made by section 2303 of the Act to rules governing
NOLs (section 172) are described elsewhere in this document.
---------------------------------------------------------------------------
The provision clarifies that the aggregate business
deductions taken into account to determine the excess business
loss of the taxpayer for the taxable year that are attributable
to trades or businesses of the taxpayer are determined without
regard to any deduction under section 172 (relating to NOLs) or
199A (relating to the deduction for qualified business income).
This change clarifies the ordering rule for the calculation.
The provision clarifies the statutory language to provide
specifically that an excess business loss under section 461(l)
does not take into account any deductions, gross income, or
gains attributable to any trade or business of performing
services as an employee.\1201\ For this purpose, the trade or
business of performing services as an employee has the same
meaning as it does under section 62(a)(1). For example, assume
married taxpayers filing jointly for the taxable year have a
loss from a trade or business conducted by one spouse as a sole
proprietorship, as well as wage income of the other spouse from
employment. The wage income is not taken into account in
determining the amount of the deduction limited under section
461(l).
---------------------------------------------------------------------------
\1201\ Thus, the provision reverses the result that was previously
provided with respect to this issue on IRS Form 461, Limitation on
Business Losses, and the Instructions for Form 461 for 2018 and 2019,
and in the IRS explanation of ``Excess business losses'' at https://
www.irs.gov/newsroom/excess-business-losses.
---------------------------------------------------------------------------
The provision clarifies that, because capital losses cannot
offset ordinary income under the NOL rules, any capital loss
deductions are not taken into account in computing the section
461(l) limitation. The provision also clarifies that the amount
of capital gain taken into account in calculating the section
461(l) limitation cannot exceed the lesser of capital gain net
income from a trade or business or capital gain net income.
Effective Date
The provision suspending the application of section 461(l)
and (j) is effective for taxable years beginning after December
31, 2017. The technical amendments to section 461(l) made by
the provision are effective as if included in section 11012 of
Public Law 115-97.
5. Modification of credit for prior year minimum tax liability of
corporations (sec. 2305 of the Act and sec. 53 of the Code)
Present Law
Minimum tax credit
Section 12001 of Public Law 115-97 repealed the corporate
alternative minimum tax (``AMT'') for taxable years beginning
after December 31, 2017. If a corporation was subject to AMT in
a taxable year beginning before January 1, 2018, the amount of
AMT was allowed as a minimum tax credit in any subsequent
taxable year to the extent the corporation's regular tax
liability exceeded its tentative minimum tax in the subsequent
year. For taxable years beginning after December 31, 2017, a
minimum tax credit may offset a corporation's entire regular
tax liability for a taxable year. In addition, the minimum tax
credit is allowable and refundable for a taxable year beginning
after 2017 and before 2022 in an amount equal to 50 percent
(100 percent in the case of a taxable year beginning in 2021)
of the excess (if any) of the minimum tax credit for the
taxable year over the amount of the credit allowable for the
year against regular tax liability. Thus, in the case of a
corporation, the full amount of the minimum tax credit will be
allowed in taxable years beginning before 2022.
Tentative carryback and refund adjustments
Section 6411 provides a procedure under which taxpayers may
apply for tentative carryback and refund adjustments with
respect to net operating losses, net capital losses, and unused
business credits (but not unused minimum tax credits).\1202\
Such application generally must be filed within 12 months after
the end of the taxable year in which the net operating loss,
net capital loss, or unused business credit arose.\1203\ The
Secretary generally has 90 days to act on a claim for a
tentative carryback refund once filed.\1204\
---------------------------------------------------------------------------
\1202\ Taxpayers other than corporations file an application for a
tentative carryback adjustment on IRS Form 1045, Application for
Tentative Refund, and corporations file on IRS Form 1139, Corporation
Application for Tentative Refund. Treas. Reg. sec. 1.6411-1(b).
\1203\ See sec. 6411(a) and Treas. Reg. sec. 1.6411-1(c).
\1204\ See sec. 6411(b) and Treas. Reg. sec. 1.6411-3.
---------------------------------------------------------------------------
Explanation of Provision
The provision provides that a corporation's minimum tax
credit is allowable and refundable for a taxable year beginning
after 2017 and before 2020 in an amount equal to 50 percent
(100 percent in the case of a taxable year beginning in 2019)
of the excess (if any) of the minimum tax credit for the
taxable year over the amount of the credit allowable for the
year against regular tax liability. Thus, in the case of a
corporation, the full amount of the minimum tax credit is
allowed in taxable years beginning before 2020.
A corporation may elect instead to treat its minimum tax
credit as fully refundable for its first taxable year beginning
in 2018. A corporation making this election is eligible to file
an application for a tentative refund adjustment for its first
taxable year beginning in 2018 in such manner and form as the
Secretary (or the Secretary's delegate) may prescribe.\1205\
The application must be filed prior to December 31, 2020,\1206\
and set forth (i) the amount of refundable minimum tax credit
for such taxable year, (ii) the amount of refundable minimum
tax credit claimed for any previously filed return for such
taxable year, and (iii) the amount of the refund claimed. As
under present law with respect to tentative carryback and
refund adjustments, the Secretary (or the Secretary's delegate)
generally has 90 days to act on the refund claim once filed.
---------------------------------------------------------------------------
\1205\ The IRS temporarily accepted through December 31, 2020,
claims for refunds of the credit for prior year minimum tax liability
of corporations and net operating loss deductions made on Form 1139
that were submitted via fax to a designated number (in lieu of
mailing). See ``Temporary procedures to fax certain Forms 1139 and 1045
due to COVID-19'', available at https://www.irs.gov/newsroom/temporary-
procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19 (last
visited August 20, 2021).
\1206\ Note that if a corporation would like to file one
application for a tentative refund to claim both a net operating loss
(``NOL'') carryback and its minimum tax credit at the same time, it
must do so by the earlier of the due date for the NOL carryback claim
or the due date for the minimum tax credit claim. For example, if a
calendar year corporation wanted to file one Form 1139 to request a
tentative refund based on the carryback of its 2018 NOL and its minimum
tax credit for such year, it was required to do so by June 30, 2020.
See IRS Notice 2020-26, 2020-18 I.R.B. 744, which extended the deadline
for filing a tentative carryback claim under section 6411 with respect
to the carryback of an NOL that arose in any taxable year that began
during calendar year 2018 and ended on or before June 30, 2019. For a
discussion of the changes made by the Act to the NOL rules, see the
description above of section 2303 of the Act, ``Modifications for Net
Operating Losses.''
---------------------------------------------------------------------------
Effective Date
The provision applies to taxable years beginning after
December 31, 2017.
6. Modifications of limitation on business interest (sec. 2306 of the
Act and sec. 163(j) of the Code)
Present Law
Limitation on deduction of business interest expense
Interest paid or accrued by a business generally is
deductible in the computation of taxable income, subject to a
number of limitations.\1207\ In particular, the deduction for
business interest expense \1208\ is generally limited to the
sum of (1) business interest income of the taxpayer for the
taxable year,\1209\ (2) 30 percent of the adjusted taxable
income \1210\ of the taxpayer for the taxable year (not less
than zero), and (3) the floor plan financing interest of the
taxpayer for the taxable year.\1211\ Thus, other than floor
plan financing interest, business interest expense in excess of
business interest income is generally deductible only to the
extent of 30 percent of adjusted taxable income. The amount of
any business interest expense not allowed as a deduction for
any taxable year may be carried forward indefinitely.
---------------------------------------------------------------------------
\1207\ Sec. 163(a). In addition to the limitations discussed
herein, other limitations include: denial of the deduction for the
disqualified portion of the original issue discount on an applicable
high yield discount obligation (sec. 163(e)(5)), denial of deduction
for interest on certain obligations not in registered form (sec.
163(f)), reduction of the deduction for interest on indebtedness with
respect to which a mortgage credit certificate has been issued under
section 25 (sec. 163(g)), disallowance of deduction for interest on
debt with respect to certain life insurance contracts (sec. 264(a)),
and disallowance of deduction for interest relating to tax-exempt
income (sec. 265(a)(2)). Interest may also be subject to
capitalization. See, e.g., secs 263A(f) and 461(g).
\1208\ Business interest means any interest paid or accrued on
indebtedness properly allocable to a trade or business and does not
include investment interest (within the meaning of section 163(d)).
Sec. 163(j)(5). Section 163(j) applies only to business interest that
would otherwise be deductible in the current taxable year, absent the
application of section 163(j). Treas. Reg. sec. 1.163(j)-3(b)(1). Thus,
section 163(j) applies after the application of provisions that subject
interest to deferral, capitalization, or other limitation (e.g., secs.
163(e)(3), 163(e)(5)(A)(ii), 246A, 263A, 263(g), 267, 1277, and 1282),
but before application of sections 461(l), 465, and 469. See Treas.
Reg. secs. 1.163(j)-3(b)(2)-(6). Note that at the time the Act was
being considered by Congress, the Treasury Department had issued
proposed regulations under section 163(j) (as amended by P.L. 115-97)
but had not issued final regulations. In the period between enactment
of the Act and publication of this explanation, Treasury issued final
section 163(j) regulations, along with additional proposed regulations
under section 163(j). The citations in this explanation reflect the
final regulations, which are substantially unchanged from the proposed
regulations with regard to the points for which they are cited.
\1209\ Business interest income means the amount of interest
includible in the gross income of the taxpayer for the taxable year
that is properly allocable to a trade or business and does not include
investment income (within the meaning of section 163(d)). Sec.
163(j)(6).
\1210\ Adjusted taxable income means the taxable income of the
taxpayer computed without regard to: (1) any item of income, gain,
deduction, or loss that is not properly allocable to a trade or
business; (2) any business interest or business interest income; (3)
the amount of any net operating loss deduction; and (4) the amount of
any deduction allowed under section 199A. Additionally, for taxable
years beginning after December 31, 2017 and before January 1, 2022,
adjusted taxable income is computed without regard to any deduction
allowable for depreciation, amortization, or depletion. For taxable
years beginning after December 31, 2021, adjusted taxable income is
computed with regard to deductions allowable for depreciation,
amortization, or depletion. Sec. 163(j)(8)(A). Treasury regulations
provide other adjustments to the definition of adjusted taxable income.
Treas. Reg. sec. 1.163(j)-1(b)(1).
\1211\ Floor plan financing interest means interest paid or accrued
on floor plan financing indebtedness. Floor plan financing indebtedness
means indebtedness used to finance the acquisition of motor vehicles
held for sale or lease to retail customers and secured by the inventory
so acquired. A motor vehicle means a motor vehicle that is: (1) any
self-propelled vehicle designed for transporting person or property on
a public street, highway, or road; (2) a boat; or (3) farm machinery or
equipment. Sec. 163(j)(9).
---------------------------------------------------------------------------
The limitation generally applies at the taxpayer level
(although special carryforward rules apply in the case of
partnerships, described below). In the case of a group of
affiliated corporations that file a consolidated return, the
limitation applies at the consolidated tax return filing
level.\1212\
---------------------------------------------------------------------------
\1212\ See Treas. Reg. sec. 1.163(j)-4(d) (providing that a
consolidated group has a single section 163(j) limitation and generally
treating all members of the consolidated group as a single taxpayer for
section 163(j) purposes).
---------------------------------------------------------------------------
Carryforward of disallowed business interest
The amount of any business interest expense not allowed as
a deduction for any taxable year is generally treated as
business interest expense paid or accrued by the taxpayer in
the succeeding taxable year. Such business interest expense may
be carried forward indefinitely.\1213\
---------------------------------------------------------------------------
\1213\ Sec. 163(j)(2). With respect to corporations, any
carryforward of disallowed business interest of a corporation is an
item taken into account in the case of certain corporate acquisitions
described in section 381 and is subject to limitation under section
382. Secs. 381(c)(20) and 382(d)(3).
---------------------------------------------------------------------------
Application to passthrough entities
In general
In the case of a partnership, the section 163(j) interest
limitation is generally applied at the partnership level.\1214\
A partner must generally perform its own section 163(j)
calculation for business interest expense it incurs at the
partner level. To prevent double counting, the business
interest income and adjusted taxable income of each partner are
generally determined without regard to such partner's
distributive share of any items of income, gain, deduction, or
loss of the partnership.\1215\ However, in cases where the
partnership has an excess amount of business interest income,
an excess amount of adjusted taxable income, or both, section
163(j) may allow for partnership items to support additional
business interest expense deductions by the partnership's
partners. Specifically, a partner's business interest deduction
limitation is increased by the sum of the partner's
distributive share of the partnership's excess business
interest income and 30 percent of the partner's distributive
share of the partnership's excess taxable income.\1216\
---------------------------------------------------------------------------
\1214\ Sec. 163(j)(4)(A)(i).
\1215\ Sec. 163(j)(4)(A)(ii)(I); Treas. Reg. sec. 1.163(j)-6(e)(1).
\1216\ Sec. 163(j)(4)(A)(ii)(II); Treas. Reg. sec. 1.163(j)-
6(e)(1).
---------------------------------------------------------------------------
Similar rules apply with respect to any S corporation and
its shareholders.\1217\
---------------------------------------------------------------------------
\1217\ Sec. 163(j)(4)(D).
---------------------------------------------------------------------------
Carryforward rules for partnerships
Special rules for the carryforward of disallowed business
interest expense apply only to partnerships and their
partners.\1218\ In the case of a partnership, the general
taxpayer-level carryforward rule does not apply. Instead, any
business interest expense that is not allowed as a deduction to
the partnership for the taxable year (referred to as ``excess
business interest expense'') is allocated to the
partners.\1219\ A partner may not deduct excess business
interest expense in the year in which it is allocated to a
partner. A partner may deduct its share of the partnership's
excess business interest expense in any future year, but only
in an amount that is based on the partner's distributive share
of excess business interest income and excess taxable income of
the partnership the activities of which gave rise to the
disallowed business interest expense carryforward.\1220\ Any
amount that is not allowed as a deduction generally continues
to be carried forward.
---------------------------------------------------------------------------
\1218\ Sec. 163(j)(4)(B).
\1219\ Sec. 163(j)(4)(B)(i)(II).
\1220\ Sec. 163(j)(4)((B)(ii)(I); Treas. Reg. sec. 1.163(j)-
6(g)(2). See also Joint Committee on Taxation, General Explanation of
Public Law 115-97 (JCS-1-18), December 2018, pp. 175-178 (describing
section 163(j)(4) as it was intended to work).
---------------------------------------------------------------------------
When excess business interest expense is allocated to a
partner, the partner's basis in its partnership interest is
reduced (but not below zero) by the amount of such allocation,
even though the excess business interest expense does not give
rise to a deduction in the year of the basis reduction.\1221\
However, the partner's deduction in a subsequent year for
excess business interest expense does not reduce the partner's
basis in its partnership interest. In the event the partner
disposes of a partnership interest the basis of which has been
reduced by an allocation of excess business interest expense,
the partner's basis in such interest is increased, immediately
before such disposition, by the amount by which such basis
reductions exceed any amount of excess business interest
expense that has been treated as business interest expense paid
or accrued by the partner as a result of an allocation of
excess business interest income or excess taxable income by the
same partnership.\1222\ Under final Treasury regulations issued
after enactment of the Act, this rule applies to both total and
(on a proportionate basis) partial dispositions of a
partnership interest.\1223\
---------------------------------------------------------------------------
\1221\ Sec. 163(j)(4)(B)(iii)(I).
\1222\ Sec. 163(j)(4)(B)(iii)(II); Treas. Reg. 1.163(j)-6(h)(3).
The special rule for dispositions also applies to transfers of a
partnership interest (including by reason of death) in transactions in
which gain is not recognized in whole or in part. Id. No deduction is
allowed to the transferor or transferee for any disallowed business
interest resulting in a basis increase under this rule. Id.
\1223\ Treas. Reg. sec. 1.163(j)-6(h)(3). Under the proposed
regulations in effect at the time the Act was being considered by
Congress, the basis adjustment rule only applied to dispositions of all
or substantially all of a partnership interest. See Prop. Treas. Reg.
sec. 1.163(j)-6(h)(3)(i).
---------------------------------------------------------------------------
These special carryforward rules do not apply to S
corporations and their shareholders.\1224\
---------------------------------------------------------------------------
\1224\ Sec. 163(j)(4)(D).
---------------------------------------------------------------------------
Exceptions
The section 163(j) limitation does not apply to any
taxpayer (other than a tax shelter prohibited from using the
cash method under section 448(a)(3)) that meets the $25 million
gross receipts test of section 448(c).\1225\ Aggregation rules
apply to determine the amount of a taxpayer's gross receipts
under the gross receipts test of section 448(c).
---------------------------------------------------------------------------
\1225\ Sec. 163(j)(3). The $25 million amount is indexed for
inflation for taxable years beginning after 2018. For taxable years
beginning in 2020, the limitation is $26 million. See Rev. Proc. 2019-
44, 2019-47 I.R.B. 1093.
---------------------------------------------------------------------------
The trade or business of performing services as an employee
is not treated as a trade or business for purposes of the
limitation.\1226\ As a result, for example, the wages of an
employee are not counted in the adjusted taxable income of the
taxpayer for purposes of determining the limitation.
---------------------------------------------------------------------------
\1226\ Sec. 163(j)(7)(A)(i).
---------------------------------------------------------------------------
At the taxpayer's election, any real property development,
redevelopment, construction, reconstruction, acquisition,
conversion, rental, operation, management, leasing, or
brokerage trade or business (i.e., any electing real property
trade or business) is not treated as a trade or business for
purposes of the limitation, and therefore the limitation does
not apply to such trades or businesses.\1227\ Similarly, at the
taxpayer's election, any farming business or any business
engaged in the trade or business of a specified agricultural or
horticultural cooperative (collectively, any electing farming
business) is not treated as a trade or business for purposes of
the limitation, and therefore the limitation does not apply to
any such trade or business.\1228\ A taxpayer's election to be
an electing real property trade or business or an electing
farming business, once made, shall be irrevocable.\1229\
---------------------------------------------------------------------------
\1227\ Sec. 163(j)(7)(A)(ii) and (B).
\1228\ Sec. 163(j)(7)(A)(iii) and (C).
\1229\ Secs. 163(j)(7)(B) and (C). In Rev. Proc. 2020-22, 2020-18
I.R.B. 1, the IRS provided guidance for making an election to be an
electing real property trade or business or an electing farming
business. The revenue procedure allows certain taxpayers to make a late
election, or to withdraw an election, to be an electing real property
trade or business or electing farming on an amended Federal income tax
return, an amended Form 1065, or an administrative adjustment request
under section 6227. In Rev. Proc. 2020-23, 2020-18 I.R.B. 1, the IRS
provided guidance allowing certain partnerships to file an amended Form
1065, and to issue amended Schedules K-1, for taxable years beginning
in 2018 and 2019. As a result, the IRS, for example, will allow certain
partnerships to withdraw an election to be an electing real property
trade or business made on a statement attached to a 2018 Form 1065 by
filing an amended 2018 Form 1065.
---------------------------------------------------------------------------
The limitation does not apply to certain regulated public
utilities. Specifically, the trade or business of the
furnishing or sale of (1) electrical energy, water, or sewage
disposal services, (2) gas or steam through a local
distribution system, or (3) transportation of gas or steam by
pipeline, if the rates for such furnishing or sale, as the case
may be, have been established or approved by a State or
political subdivision thereof, by any agency or instrumentality
of the United States, by a public service or public utility
commission or other similar body of any State or political
subdivision thereof, or by the governing or ratemaking body of
an electric cooperative is not treated as a trade or business
for purposes of the limitation, and thus any interest paid or
accrued on indebtedness properly allocable to such trades or
businesses is not business interest.\1230\
---------------------------------------------------------------------------
\1230\ Sec. 163(j)(7)(A)(iv).
---------------------------------------------------------------------------
Explanation of Provision
The provision permits taxpayers to increase the limit on
the deduction of business interest expense paid or accrued in
taxable years beginning in 2019 or 2020 in two ways.
Increase to 50 percent of adjusted taxable income
For taxable years beginning in 2019 or 2020, the provision
generally increases the percentage of the taxpayer's adjusted
taxable income that factors into the calculation of the
limitation on deduction of business interest from 30 percent to
50 percent. For example, a corporation with $100 of adjusted
taxable income and $50 of business interest expense in its 2019
taxable year may deduct all $50 \1231\ of its 2019 business
interest expense on its 2019 return, including on an amended
return. If the corporation has $100 of adjusted taxable income
and $70 of business interest expense in its 2020 taxable year,
it may deduct $50 \1232\ of its 2020 business interest expense
on its 2020 return, and $20 \1233\ of its 2020 business
interest expense will carry forward.
---------------------------------------------------------------------------
\1231\ $100 * 50 percent = $50.
\1232\ $100 * 50 percent = $50.
\1233\ $70 - $50 = $20.
---------------------------------------------------------------------------
For partnership taxable years beginning in 2019, this rule
does not apply, and instead partners that were allocated excess
business interest expense of a partnership for any taxable year
of the partnership beginning in 2019 are permitted to deduct 50
percent of such excess business interest expense in the
partner's first taxable year beginning in 2020 (the other 50
percent of such excess business interest expense is subject to
the limitations of section 163(j)(4)(B)(ii) described
above).\1234\
---------------------------------------------------------------------------
\1234\ See Prop. Treas. Reg. sec. 1.163(j)-6(g)(4) for additional
guidance.
---------------------------------------------------------------------------
For example, assume a partnership has $100 of adjusted
taxable income and $70 of business interest expense in a
taxable year beginning in 2019. The partnership has $30 \1235\
of deductible business interest expense for its 2019 taxable
year and allocates $40 \1236\ in excess business interest
expense to its partners. A partner in the partnership that was
allocated $20 of excess business interest expense may deduct
$10 \1237\ of such excess business interest expense in the
partner's first taxable year beginning in 2020. The other $10
of such excess business interest expense remains subject to the
limitations of section 163(j)(4)(B)(ii).\1238\
---------------------------------------------------------------------------
\1235\ $100 * 30 percent = $30.
\1236\ $70 - $30 = $40.
\1237\ $20 * 50 percent = $10.
\1238\ This assumes that the partner does not sell its partnership
interest in 2019 or 2020. If the partner sells its partnership interest
in 2019 or 2020, the rules of section 163(j)(4)(B)(iii)(II), described
above, apply.
---------------------------------------------------------------------------
Taxpayers are permitted to elect out of application of the
increase in the adjusted taxable income percentage for any
taxable year to which the increase potentially applies,\1239\
and partners are permitted to elect out of the special rule for
2019 excess business interest.\1240\
---------------------------------------------------------------------------
\1239\ For partnership taxable years beginning in 2020, the
election out of the increase in the adjusted taxable income percentage
is made at the partnership level.
\1240\ In Treas. Reg. sec. 1.163(j)-2(b)(4) and Rev. Proc. 2020-22,
the IRS describes the time and manner in which certain taxpayers may
elect out of the 50 percent adjusted taxable income limitation for
taxable years beginning in 2019 and 2020. In Prop. Treas. Reg. sec.
1.163(j)-2(g)(4) and Rev. Proc. 2020-22, the IRS describes the time and
manner in which partners may elect out of deducting 50 percent of
excess business interest expense for taxable years beginning in 2020.
---------------------------------------------------------------------------
Election to substitute last taxable year beginning in 2019
The provision permits a taxpayer to elect to substitute the
adjusted taxable income for its last taxable year beginning in
2019 for its adjusted taxable income for any taxable year
beginning in 2020.\1241\ In the case of a partnership, the
election is made at the partnership level.\1242\ If the
election to substitute adjusted taxable income from a
taxpayer's last taxable year beginning in 2019 is made with
respect to a taxable year beginning in 2020 that is a short
taxable year, the 2019 adjusted taxable income amount that is
substituted is scaled down by multiplying the taxpayer's 2019
adjusted taxable income by the ratio of (1) the number of
months in the short taxable year beginning in 2020, to (2) 12.
---------------------------------------------------------------------------
\1241\ In Treas. Reg. sec. 1.163(j)-2(b)(4), Prop. Treas. Reg. sec.
1.163(j)-6(d)(5) and Rev. Proc. 2020-22, the IRS describes the time and
manner in which taxpayers may elect to use the taxpayer's adjusted
taxable income for its last taxable year beginning in 2019 for its
adjusted taxable income for any taxable year beginning in 2020.
\1242\ See Prop. Treas. Reg. sec. 1.163(j)-6(d)(5) for additional
guidance.
---------------------------------------------------------------------------
For example, assume a taxpayer has $200 of adjusted taxable
income in its last taxable year beginning in 2019, $10 of
adjusted taxable income in a short taxable year starting on
January 1, 2020, and ending on March 31, 2020, and $50 of
business interest expense in its short 2020 taxable year. If
the taxpayer makes the election to substitute its last taxable
year beginning in 2019 in determining adjusted taxable income
under the provision, the taxpayer may deduct $25 \1243\ of such
business interest expense.
---------------------------------------------------------------------------
\1243\ ($200 * 3/12) * 50 percent = $25.
---------------------------------------------------------------------------
Effective Date
The provision is effective for taxable years beginning
after December 31, 2018.
7. Technical amendments regarding qualified improvement property (sec.
2307 of the Act and sec. 168(e) 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.\1244\ The period
for depreciation or amortization generally begins when the
asset is placed in service by the taxpayer.\1245\ 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
placed in service convention.\1246\ For some assets, the
recovery period for the asset is provided in section 168.\1247\
In other cases, the recovery period of an asset is generally
set forth in Revenue Procedure 87-56.\1248\
---------------------------------------------------------------------------
\1244\ 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.
\1245\ 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).
\1246\ Sec. 168.
\1247\ See sec. 168(e) and (g).
\1248\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785). Exercising authority granted by Congress, the
Secretary issued Rev. Proc. 87-56, 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,\1249\ 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. The recovery periods
for most real property are 39 years for nonresidential real
property and 27.5 years for residential rental property. The
straight line depreciation method is required for the
aforementioned real property.
---------------------------------------------------------------------------
\1249\ Under the declining balance method, the depreciation rate is
determined by dividing the appropriate percentage (here, 150 or 200
percent) 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.
---------------------------------------------------------------------------
Depreciation of an asset begins when the asset is deemed to
be placed in service under the applicable convention.\1250\
Under MACRS, nonresidential real property, residential rental
property, and any railroad grading or tunnel bore generally are
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.\1251\ 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 to reflect the assumption that
assets are placed in service ratably throughout the year.\1252\
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,\1253\ designed to
prevent the recognition of disproportionately large amounts of
first-year depreciation as a result of the half-year
convention.
---------------------------------------------------------------------------
\1250\ Treas. Reg. sec. 1.167(a)-10(b).
\1251\ Sec. 168(d)(2) and (d)(4)(B).
\1252\ Sec. 168(d)(1) and (4)(A).
\1253\ The mid-quarter convention 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).
---------------------------------------------------------------------------
Depreciation of additions or improvements to property
The recovery period for any addition or improvement to real
or personal property begins on the later of (1) the date on
which the addition or improvement is placed in service, or (2)
the date on which the property with respect to which such
addition or improvement is made is placed in service.\1254\ Any
MACRS deduction for an addition or improvement to any property
is to be computed in the same manner as the deduction for the
underlying property would be if such property were placed in
service at the same time as such addition or improvement. Thus,
for example, the cost of an improvement to a building that
constitutes nonresidential real property is recovered over 39
years using the straight line method and mid-month convention.
However, an exception to the 39-year recovery period applies to
qualified improvement property, as described below.
---------------------------------------------------------------------------
\1254\ Sec. 168(i)(6).
---------------------------------------------------------------------------
Qualified improvement property
Qualified improvement property is any improvement made by
the taxpayer \1255\ to an interior portion of a building that
is nonresidential real property if such improvement is placed
in service by the taxpayer after the date such building was
first placed in service by any taxpayer.\1256\ Qualified
improvement property does not include any improvement for which
the expenditure is attributable to the enlargement of the
building, any elevator or escalator, or the internal structural
framework of the building.\1257\
---------------------------------------------------------------------------
\1255\ This rule expresses Congressional intent.
\1256\ Sec. 168(e)(6)(A).
\1257\ Sec. 168(e)(6)(B).
---------------------------------------------------------------------------
Qualified improvement property placed in service after
December 31, 2017, is generally depreciable using the straight
line method \1258\ and half-year convention, and Congressional
intent was for a 15-year recovery period to apply.\1259\
However, when the definition of qualified improvement property
was added to section 168(e) by section 13204 of Public Law 115-
97, language providing a 15-year recovery period for such
property was inadvertently omitted from the statute. As a
result, the IRS and Treasury have taken the position that such
property is recoverable over 39 years, rather than the intended
15 years.\1260\
---------------------------------------------------------------------------
\1258\ Sec. 168(b)(3)(G).
\1259\ Note that as 15-year property, qualified improvement
property is generally eligible for the additional first-year
depreciation deduction under section 168(k). Qualified improvement
property is also eligible for section 179 expensing. See sec.
179(e)(1). Note that the amount of the additional first-year
depreciation deduction is determined after basis adjustments for any
section 179 expensing. See Treas. Reg. sec. 1.168(k)-1(a)(2)(iii).
\1260\ See T.D. 9874, 84 Fed. Reg. 50109-50110, September 24, 2019.
Note that if treated as 39-year property, the property would not be
eligible for the additional first-year depreciation deduction under
section 168(k) as such property would not have a MACRS recovery period
of 20 years or less. See sec. 168(k)(2)(A)(i)(I).
---------------------------------------------------------------------------
Alternative depreciation system
The alternative depreciation system (``ADS'') is required
to be used for tangible property used predominantly outside the
United States, certain tax-exempt use property, tax-exempt bond
financed property, and certain imported property covered by an
Executive order.\1261\ In addition, ADS is required to be used
for certain property held by an electing real property trade or
business \1262\ and an electing farming business.\1263\ An
election to use ADS is available to taxpayers for any class of
property for any taxable year.\1264\ Under ADS, all property is
depreciated using the straight line method over recovery
periods that generally are equal to the class life of the
property, with certain exceptions.\1265\ For example,
nonresidential real property has a 40-year ADS recovery period,
and residential rental property placed in service after
December 31, 2017, has a 30-year ADS recovery period,\1266\
while qualified improvement property placed in service after
December 31, 2017, is intended to have a 20-year ADS recovery
period.\1267\
---------------------------------------------------------------------------
\1261\ Sec. 168(g)(1)(A)-(D).
\1262\ As defined in section 163(j)(7)(B). See sec. 168(g)(1)(F)
and (8). For a discussion of changes made to section 163(j) by the Act,
see the description of section 2306 of the Act (Modifications of
Limitation on Business Interest) in this document.
\1263\ As defined in section 163(j)(7)(C). See also sec.
168(g)(1)(G). For a discussion of changes made to section 163(j) by the
Act, see the description of section 2306 of the Act (Modifications of
Limitation on Business Interest) in this document.
\1264\ Sec. 168(g)(1)(E) and (7).
\1265\ Sec. 168(g)(2) and (3).
\1266\ See sec. 168(g)(3).
\1267\ This rule expresses Congressional intent.
---------------------------------------------------------------------------
Explanation of Provision
The provision clarifies that qualified improvement property
is 15-year property under MACRS and 20-year property under
ADS.\1268\
---------------------------------------------------------------------------
\1268\ Thus, the provision reverses the result in T.D. 9874, supra,
with the result that qualified improvement property may be eligible for
the additional first-year depreciation deduction under section 168(k).
See T.D. 9916, 85 Fed. Reg. 71734-71770, November 10, 2020, modifying
and clarifying T.D. 9874 to reflect these changes made by the Act. Note
that if qualified improvement property placed in service after 2017 was
improperly depreciated as 39-year property (or 40-year property under
ADS), the taxpayer may be eligible to file an amended return,
administrative adjustment request under section 6227, or IRS Form 3115,
Application for Change in Accounting Method, to change to properly
treat such property as 15-year property (or 20-year property under
ADS). Similarly, a taxpayer wishing to make, revoke, or withdraw an
election for such property under section 168(g)(7) (regarding an
election to use ADS), section 168(k)(7) (regarding an election out of
the additional first-year depreciation deduction under section 168(k)),
or section 168(k)(10) (regarding an election to use a 50-percent
allowance under section 168(k) for certain property placed in service
during certain periods) may be eligible to do so by filing an amended
return, administrative adjustment request, or IRS Form 3115. See sec.
446(e); Rev. Proc. 2020-50, 2020-48 I.R.B. 1122; Rev. Proc. 2020-25,
2020-19 I.R.B. 785, as modified by Rev. Proc. 2020-50, 2020-48 I.R.B.
1122; and sec. 6 of Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, as
modified by Rev. Proc. 2020-25, 2020-19 I.R.B. 785, and Rev. Proc.
2020-50, 2020-48 I.R.B. 1122.
---------------------------------------------------------------------------
The provision also clarifies that the 15-year MACRS (or 20-
year ADS) recovery period only applies if the qualified
improvement property is made by the taxpayer. Thus, for
example, if a taxpayer purchases a building in a taxable
transaction, any qualified improvement property previously
placed in service by the seller with respect to such building
does not qualify as qualified improvement property with respect
to the buyer.
Effective Date
The provision is effective as if included in section 13204
of Public Law 115-97 (i.e., for property placed in service
after December 31, 2017).
8. Temporary exception from excise tax for alcohol used to produce hand
sanitizer (sec. 2308 of the Act and sec. 5214 of the Code)
Present Law
Distilled spirits produced in or imported into the United
States generally are subject to Federal excise tax upon
withdrawal from the bonded premises of a distilled spirits
plant.\1269\ Under certain circumstances, however, distilled
spirits may be withdrawn from the bonded premises free of
Federal excise tax, such as when such spirits are denatured or
are withdrawn for use in hospitals, blood banks, sanitariums,
or nonprofit clinics for non-beverage purposes and not for
resale or use in the manufacture of any product for sale.\1270\
---------------------------------------------------------------------------
\1269\ Secs. 5001 and 5006.
\1270\ Sec. 5214(a).
---------------------------------------------------------------------------
The Secretary, in the event of a disaster, has broad
authority to temporarily exempt proprietors of distilled
spirits plants from any provision of the Code related to
distilled spirits, but such authority does not extend to those
Code provisions requiring payment of the Federal excise tax on
distilled spirits.\1271\
---------------------------------------------------------------------------
\1271\ Sec. 5562.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision,\1272\ distilled spirits that are
removed after December 31, 2019, and before January 1, 2021,
are free of Federal excise tax if they are withdrawn for use or
contained in hand sanitizer produced and distributed in a
manner consistent with any guidance issued by the Food and Drug
Administration (``FDA'') that is related to the outbreak of
virus SARS-CoV-2 or coronavirus disease 2019 (``COVID-
19'').\1273\
---------------------------------------------------------------------------
\1272\ The provision also exempts alcohol removed under the
provision from certain labeling and bulk sales requirements under
section 105 or 106 of the Federal Alcohol Administration Act (27 U.S.C.
sec. 205; 27 U.S.C. sec. 206) and section 204 of the Alcoholic Beverage
Labeling Act of 1988 (27 U.S.C. sec. 215).
\1273\ The FDA has issued temporary guidance for the preparation of
alcohol-based hand sanitizers with denatured ethanol by certain firms
and pharmacies during the outbreak of COVID-19. See FDA, ``Guidance for
Industry: Temporary Policy for Preparation of Certain Alcohol-Based
Hand Sanitizer Products During the Public Health Emergency (COVID-19)''
(March 2020), available at https://www.fda.gov/regulatory-information/
search-fda-guidance-documents/guidance-industry-temporary-policy-
preparation-certain-alcohol-based-hand-sanitizer-products-during (last
visited October 15, 2020); FDA, ``Policy for Temporary Compounding of
Certain Alcohol-Based Hand Sanitizer Products During the Public Health
Emergency'' (March 2020), available at https://www.fda.gov/regulatory-
information/search-fda-guidance-documents/policy-temporary-compounding-
certain-alcohol-based-hand-sanitizer-products-during-public-health
(last visited October 15, 2020); FDA, ``Temporary Policy for
Manufacture of Alcohol for Incorporation Into Alcohol-Based Hand
Sanitizer Products During the Public Health Emergency (COVID-19)
Guidance for Industry'' (March 2020), available at https://www.fda.gov/
regulatory-information/search-fda-guidance-documents/temporary-policy-
manufacture-alcohol-incorporation-alcohol-based-hand-sanitizer-
products-during (last visited October 15, 2020).
---------------------------------------------------------------------------
Effective Date
The provision applies to distilled spirits removed after
December 31, 2019.
TITLE III--SUPPORTING AMERICA'S HEALTH CARE SYSTEM IN THE FIGHT AGAINST
THE CORONAVIRUS
Subtitle B--Education Provisions
1. Technical and other amendments relating to the FUTURE Act (sec. 3516
of the Act and sec. 6103 of the Code)
Present Law
General rule of confidentiality and exception for certain disclosures
to administer certain student financial aid and loan programs
As a general rule, returns and return information are
confidential and cannot be disclosed unless authorized by Title
26 (the Code).\1274\ Among others, this general rule applies to
officers and employees of the United States and any person who
has or had access to returns or return information under
section 6103(l)(13). The Fostering Undergraduate Talent by
Unlocking Resources for Education (``FUTURE'') Act \1275\
amended and rewrote section 6103(l)(13) to authorize the
disclosure of certain return information for purposes of
administering student financial aid and loan programs.
---------------------------------------------------------------------------
\1274\ Sec. 6103(a).
\1275\ Pub. L. No. 116-91, December 19, 2019.
---------------------------------------------------------------------------
The provision requires the IRS to disclose certain return
information to the Department of Education and others for the
purpose of administering financial aid and loan programs. Upon
receiving a written request from the Secretary of
Education,\1276\ the IRS must disclose specified return
information to authorized persons for the purposes of (1)
determining eligibility for, and repayment obligations under,
income-contingent or income-based repayment plans; (2)
monitoring and reinstating loans that were discharged based on
a total and permanent disability; and (3) determining the
eligibility for, and the amount of, awards of Federal student
financial aid.
---------------------------------------------------------------------------
\1276\ The Secretary of Education can make a request for disclosure
under section 6103(l)(13) with respect to an individual only if the
Secretary of Education has obtained approval from the individual for
such disclosure.
---------------------------------------------------------------------------
Authorized persons may only use the disclosed information
for the purposes above and for three additional purposes
related to the programs. These additional purposes are (1)
reducing the net cost of improper payments under such plans,
relating to such awards, or relating to such discharges; (2)
oversight activities by the Office of Inspector General of the
Department of Education as authorized by the Inspector General
Act of 1978; and (3) conducting analyses and forecasts for
estimating costs related to such plans, discharges, or awards.
The additional purposes do not include conducting criminal
investigations or prosecutions.
An ``authorized person'' is any person who is an officer,
employee, or contractor of the Department of Education, and is
specifically authorized and designated by the Secretary of
Education for purposes of the specific disclosure authority
programs (income-contingent or income-based repayment plans,
loans discharged based on a total and permanent disability,
awards of Federal student financial aid (the designation is
applied separately with respect to each program)).
With the consent of the taxpayer, authorized persons may
redisclose the return information received from the IRS to
certain institutions of higher education, State higher
education agencies, and scholarship organizations solely for
use in financial aid programs.
Civil damage remedy for unauthorized disclosure or unauthorized
inspection of returns and return information
A taxpayer whose return or return information is disclosed
in violation of section 6103(a) may bring a lawsuit in a
district court of the United States for actual or statutory
damages, and in certain cases, punitive damages. If a Federal
employee makes knowingly or by reason of negligence, a
disclosure or inspection in violation of any provision of
section 6103, a taxpayer may sue the United States. If a person
other than a Federal employee knowingly or by reason of
negligence inspects or discloses any return or return
information with respect to a taxpayer in violation of any
provision of section 6103, suit may be brought directly against
such person.
No liability results from a disclosure based on a good
faith, but erroneous, interpretation of section 6103. A
disclosure or inspection requested by the taxpayer will also
relieve liability.
Upon a finding of liability, a taxpayer can recover the
greater of $1,000 per act of unauthorized disclosure (or
inspection) or, the sum of actual damages plus, in the case of
an inspection or disclosure that was willful or the result of
gross negligence, punitive damages. The taxpayer may also
recover the costs of the action and, if found to be a
prevailing party, reasonable attorney fees.
The taxpayer has two years from the date of the discovery
of the unauthorized inspection or disclosure to bring suit. The
IRS is required to notify a taxpayer of an unauthorized
inspection or disclosure as soon as practicable after any
person is criminally charged by indictment or information for
unlawful inspection or disclosure. In addition, the taxpayer is
to be notified if the IRS or a Federal or State agency (upon
notice to the Secretary by such Federal or State agency)
proposes an administrative determination as to disciplinary or
adverse action against an employee arising from the employee's
unauthorized inspection or disclosure of the taxpayer's return
or return information.
Safeguards and accountings
Unless specifically listed in the statute as excluded from
the accounting requirement, section 6103(p)(3) requires the IRS
to maintain a permanent system of standardized records or
accountings of all requests for inspection or disclosure of
returns and return information (including the reasons for and
dates of such requests) and of returns and return information
inspected or disclosed under section 6103 (and section
6104(c)). The IRS is required to account for all disclosures
made under section 6103(l)(13), including those made to the
Department of Education and its contractors, as well as
redisclosures made by authorized persons to institutions of
higher education, State higher education agencies, and
scholarship organizations. The Secretary of Education is
required to annually submit a written report to the Secretary
of the Treasury regarding: (1) redisclosures of return
information to institutions of higher education, State higher
education agencies, and scholarship organizations, including
the number of such redisclosures; and (2) any unauthorized use,
access, or disclosure of the return information under section
6103(l)(13).
Section 6103(p)(4) requires, as a condition of receiving
returns and return information, that Federal and State agencies
and specified other recipients provide safeguards to the
satisfaction of the Secretary of the Treasury as necessary or
appropriate to protect the confidentiality of returns or return
information.\1277\ It also requires that a report be furnished
to the Secretary at such time and containing such information
as prescribed by the Secretary, regarding the procedures
established and utilized for ensuring the confidentiality of
returns and return information. The Secretary, after an
administrative review, may take such actions as are necessary
to ensure these requirements are met, including the refusal to
disclose returns and return information.
---------------------------------------------------------------------------
\1277\ The IRS has published guidelines for safeguarding the
confidentiality of Federal tax information in IRS Publication 1075, Tax
Information Security Guidelines for Federal, State and Local Agencies
(2016).
---------------------------------------------------------------------------
All agencies and other persons described in section
6103(l)(13) as authorized to receive confidential return
information (i.e., the Department of Education, its
contractors, certain institutions of higher education, State
higher education agencies, and scholarship organizations) are
required to safeguard such information to the satisfaction of
the Secretary.
Explanation of Provision
General rule of confidentiality and civil actions for damages
Under the provision, a person who has or had access to
return information under section 6103(l)(13)(D)(iii) (i.e.,
certain institutions of higher education, State higher
education agencies, scholarship organizations, and the
authorized persons designated to the make redisclosures to such
entities) is no longer required to maintain the confidentiality
of that return information as provided by section 6103(a). As a
result, the general rule of confidentiality and nondisclosure
under section 6103(a) does not apply to these entities with
respect to the information redisclosed to them, and a civil
action for damages due to inspections and disclosures by such
entities in violation of section 6103(a) is no longer
available.
Accountings
Under the provision, the IRS is no longer required to
maintain a permanent system of standardized records to account
for disclosures the IRS makes to the Department of Education
and its contractors. The IRS is still required to account for
redisclosures made by authorized persons to institutions of
higher education, State higher education agencies, and
scholarship organizations.
Safeguards
For institutions of higher education, State higher
education agencies, scholarship organizations, and the
authorized persons designated to make redisclosures to such
entities, the provision eliminates the requirement that as a
condition of receiving return information such entities
establish safeguard requirements to the satisfaction of the
Secretary of the Treasury.
Technical amendment
The provision corrects an erroneous cross-reference
defining taxable income from a farming business.
Effective Date
The amendments made by the provision are effective as if
included in the FUTURE Act (Pub. L. No. 116-91).
Subtitle C--Labor Provisions
1. Advance refunding of credits (sec. 3606 of the Act)
Present Law
Federal employment taxes are imposed on wages paid to
employees with respect to employment and include Federal income
tax as well as taxes levied under the Federal Insurance
Contributions Act (``FICA'') and Federal Unemployment Tax Act
(``FUTA'').\1278\ In addition, tier 1 of the Railroad
Retirement Tax Act (``RRTA'') imposes a tax on compensation
paid to railroad employees and representatives.\1279\
---------------------------------------------------------------------------
\1278\ Secs. 3401, 3101, 3111, and 3301.
\1279\ Sec. 3221.
---------------------------------------------------------------------------
FICA taxes are comprised of two components: Old-Age,
Survivors, and Disability Insurance (``OASDI'') tax and
Medicare taxes.\1280\ With respect to OASDI tax, the applicable
rate is 12.4 percent with half of such rate (6.2 percent)
imposed on the employee and the remainder (6.2 percent) imposed
on the employer.\1281\ The tax is assessed on covered wages up
to the OASDI wage base ($137,700 in 2020). Generally, the OASDI
wage base rises based on increases in the national average wage
index.\1282\
---------------------------------------------------------------------------
\1280\ The Hospital Insurance (``HI'') tax has two components:
Medicare tax and Additional Medicare tax. Medicare tax is imposed on
wages, as defined in section 3121(a), with respect to employment, as
defined in section 3121(b), at a rate of 1.45 percent for the employer.
Sec. 3101(b)(1). An equivalent 1.45 percent is withheld from employee
wages. Sec. 3111(b)(1). For purposes of this description, Medicare tax
does not include Additional Medicare tax. Additional Medicare taxes are
withheld from employee wages in excess of $200,000 at a rate of 0.9
percent. Sec. 3101(b)(2). There is no equivalent employer's share of
Additional Medicare taxes.
\1281\ Sec. 3101.
\1282\ Sec. 230 of the Social Security Act (42 U.S.C. sec. 430).
---------------------------------------------------------------------------
Generally, the term ``wages'' for OASDI tax purposes means
all remuneration for ``employment,'' including the cash value
of all remuneration (including benefits) paid in any medium
other than cash, with certain exceptions.\1283\ The name given
to the remuneration for employment is immaterial. OASDI wages
includes salaries, vacation allowances, bonuses, deferred
compensation, commissions, and fringe benefits. The term
``employment'' is generally defined for FICA tax purposes as
any service, of whatever nature, performed by an employee for
the person employing him or her, with certain specific
exceptions.
---------------------------------------------------------------------------
\1283\ Sec. 3121(a).
---------------------------------------------------------------------------
Railroad retirement program
Railroad workers do not participate in the OASDI system.
Accordingly, compensation subject to RRTA tax is exempt from
FICA taxes.\1284\ The RRTA imposes a tax on compensation paid
by covered employers to employees in recognition for the
performance of services.\1285\ Employees whose compensation is
subject to RRTA are ultimately eligible for railroad retirement
benefits that fall under a two-tier structure. Rail employees
and employers pay tier 1 taxes at the same rate as FICA
taxes.\1286\ In addition, rail employees and employers both pay
tier 2 taxes that are used to finance railroad retirement
benefits over and above Social Security benefit levels.\1287\
Tier 2 benefits are similar to a private defined benefit
pension. Those taxes are funneled to the railroad retirement
system and used to fund basic retirement benefits for railroad
workers and an investment trust that generates returns for the
pension fund.
---------------------------------------------------------------------------
\1284\ Sec. 3121(b)(9).
\1285\ Secs. 3201 through 3233. Instead of FICA taxes, railroad
employers and employees are subject, under the RRTA, to taxes
equivalent to the OASDI and Medicare taxes under FICA. Under the RRTA,
employers and employees are also subject to an additional tax, referred
to as the ``tier 2'' tax, on compensation up to a certain amount.
\1286\ 7.65 percent, consisting of 6.2 percent for retirement on
earnings up to $137,700 in 2020, and 1.45 percent for Medicare tax on
all earnings.
\1287\ In 2020, the tier 2 tax rate on earnings up to $102,300 is
4.9 percent for employees and 13.1 percent for employers.
---------------------------------------------------------------------------
Self-employment taxes
The Self-Employment Contributions Act (``SECA'') imposes
tax on the self-employment income of an individual. SECA taxes
consist of OASDI tax and Medicare tax.\1288\ Under the OASDI
component, the first rate of tax is 12.4 percent on self-
employment income up to the OASDI wage base ($137,700 for
2020).\1289\ Under the basic Medicare tax component, the second
rate of tax is 2.9 percent of all self-employment income
(without regard to the OASDI wage base).\1290\ As is the case
with employees, an Additional Medicare tax applies to the
Medicare portion of SECA tax on self-employment income in
excess of a threshold amount.\1291\
---------------------------------------------------------------------------
\1288\ Sec. 1401(a) and (b).
\1289\ Sec. 1401(a). In calculating the SECA tax for OASDI, the
OASDI wage base taken into account is reduced by FICA wages paid to the
individual during the taxable year.
\1290\ Sec. 1401(b)(1).
\1291\ Sec. 1401(b)(2).
---------------------------------------------------------------------------
Self-employment income subject to SECA tax is determined as
the net earnings from self-employment derived by an individual
during any taxable year, subject to certain exceptions. Net
earnings from self-employment is the gross income derived by an
individual from any trade or business less allowed deductions
that are attributable to the trade or business and permitted
under the SECA rules. Certain passive income and related
deductions are not taken into account in determining net
earnings from self-employment, including rentals from real
estate (unless received in the course of a trade or business as
a real estate dealer),\1292\ dividends and interest (unless
such dividends and interest are received in the course of a
trade or business as a dealer in stocks or securities),\1293\
and sales or exchanges of capital assets and certain other
property (unless the property is stock in trade that would
properly be included in inventory or held primarily for sale to
customers in the ordinary course of the trade or
business).\1294\
---------------------------------------------------------------------------
\1292\ Sec. 1402(a)(1).
\1293\ Sec. 1402(a)(2).
\1294\ Sec. 1402(a)(3).
---------------------------------------------------------------------------
For purposes of computing net earnings from self-
employment, taxpayers are permitted a deduction equal to the
product of the taxpayer's net self-employment income
(determined without regard to this deduction) and one-half of
the sum of the rates for OASDI and Medicare taxes (i.e., 7.65
percent of net earnings).\1295\ This deduction is determined
without regard to the additional 0.9 percent Additional
Medicare tax that may apply to an individual. This deduction
reflects the fact that the FICA rates apply to an employee's
wages, which do not include FICA taxes paid by the employer,
whereas the self-employed individual's net earnings are
economically equivalent to an employee's wages plus the
employer share of FICA taxes.\1296\ This is generally referred
to as the ``regular method'' of determining net earnings from
self-employment, and in IRS forms and publications is expressed
as multiplying total net earnings from self-employment by 92.35
percent.
---------------------------------------------------------------------------
\1295\ Sec. 1402(a)(12).
\1296\ The deduction is intended to provide parity between FICA and
SECA taxes because the employer may deduct, as a business expense, its
share of the FICA taxes paid. As presently written, the deduction for
SECA taxes is not the exact economic equivalent to the deduction for
FICA taxes. See Joint Committee on Taxation, Options to Improve Tax
Compliance and Reform Tax Expenditures (JCS-2-05), January 27, 2005,
for a detailed description of this issue.
---------------------------------------------------------------------------
Division G of the Families First Coronavirus Response Act
Division G of the Families First Coronavirus Response Act
\1297\ (``FFCRA'') provided a tax credit for qualified sick
leave wages and qualified family leave wages mandated under the
FFCRA, as well as allocable qualified health plan
expenses.\1298\ Section 7001 of the FFCRA requires certain
employers to provide an employee with paid sick time to the
extent that the employee is unable to work or telework due to
enumerated conditions. Under the FFCRA, an employer is allowed
a corresponding credit against the OASDI tax or RRTA tax
imposed on the employer. The amount of the credit is equal to
100 percent of the qualified sick leave wages paid by the
employer with respect to that calendar quarter, subject to some
limitations. The provision limits the amount of qualified sick
leave wages taken into account for purposes of the credit.
---------------------------------------------------------------------------
\1297\ Families First Coronavirus Response Act, Pub. L. No. 116-
127, secs. 7001-7005, March 18, 2020.
\1298\ Joint Committee on Taxation, Technical Explanation of
Division G, ``Tax Credits for Paid Sick and Paid Family and Medical
Leave,'' of H.R. 6201, the ``Families First Coronavirus Response Act''
(JCX-10-20), March 2020.
---------------------------------------------------------------------------
Section 7003 of the FFCRA required certain employers to
provide qualified family leave wages to employees. Qualified
family leave wages include public health emergency leave
provided to employees under Family and Medical Leave Act.\1299\
Under the FFCRA, employers are allowed a credit against OASDI
or RRTA taxes in an amount equal to 100 percent of qualified
family leave wages paid by the employer during the quarter,
subject to the limitations prescribed in the FFCRA.
---------------------------------------------------------------------------
\1299\ Pub. L. No. 103-3 (February 3, 1993).
---------------------------------------------------------------------------
For both sections 7001 and 7003, the credit allowed is
increased by so much of the employer's qualified health plan
expenses as are properly allocable to the qualified sick leave
wages or qualified family leave wages for which the credit is
allowed. In addition, the amount of the credit is increased by
the amount of tax imposed by section 3111(b) \1300\ on
qualified sick leave wages or qualified family leave wages, for
which a credit is allowed under such section 7001 or 7003,
respectively.
---------------------------------------------------------------------------
\1300\ Section 3111(b) imposes on the employer a Medicare hospital
insurance excise tax of 1.45 percent on all earnings.
---------------------------------------------------------------------------
With respect to sections 7001 and 7003 of the FFCRA, the
credit allowed may not exceed the OASDI tax or RRTA tax imposed
on the employer, reduced by any credits allowed for the
employment of qualified veterans \1301\ and research
expenditures of qualified small businesses \1302\ for that
calendar quarter on the wages paid with respect to all the
employer's employees. However, if for any calendar quarter the
amount of the credit exceeds the OASDI tax or RRTA tax imposed
on the employer, subject to the foregoing reductions, such
excess is treated as a refundable overpayment.\1303\
---------------------------------------------------------------------------
\1301\ This credit is described in section 3111(e).
\1302\ This credit is described in section 3111(f).
\1303\ The excess is treated as an overpayment and refunded under
sections 6402(a) and 6413(b). In addition, any amount that is due to an
employer is treated in the same manner as a refund due from a credit
provision. 31 U.S.C. sec. 1324. Thus, amounts are appropriated to the
Secretary for refunding such excess amounts.
---------------------------------------------------------------------------
Explanation of Provision
The refundable portion of the credits allowed under the
FFCRA may be advanced during the calendar quarter in which the
qualified sick leave wages or qualified family leave wages are
paid. The provision allows employers to choose to receive an
offset, through a tax credit, of expenditures made for paid
sick leave and paid family and medical leave mandated under the
FFCRA at an earlier juncture during a calendar quarter rather
than at the end of a quarter upon the filing of a quarterly
employment tax return. The amount of the credit that may be
advanced, according to forms and instructions provided by the
Secretary (or the Secretary's delegate), is limited to the
amount of employer OASDI or RRTA taxes, reduced by any credits
allowed for qualified veterans or research expenditures on
qualified small businesses. The amount of the credit
advancement is calculated through the end of the most recent
payroll period in the quarter.
Penalties for the failure to timely deposit the employer
portion of OASDI tax or equivalent employer's share of RRTA tax
shall be waived if the Secretary (or the Secretary's delegate)
determines that the failure to make such deposits was due to
the anticipation of the credit allowed.\1304\ The provision
directed the Secretary (or the Secretary's delegate) to provide
regulations or other guidance as may be necessary to carry out
the purposes of the provision.\1305\
---------------------------------------------------------------------------
\1304\ Secs. 3111(a), 3221(a), and 6656.
\1305\ Notice 2020-22, 2020-17 I.R.B. 664, April 20, 2020. For
2020, the IRS provided Form 7200, Advance Payment of Employer Credits
Due to COVID-19, to allow taxpayers to request advance payment of the
credit. The instructions to Form 7200 for 2020 explain,
---------------------------------------------------------------------------
Employers will be allowed the full amount of this [FFCRA]
refundable credit even if it exceeds their employment tax
liability. If quarterly employment tax deposits that are
otherwise required are less than the amount of credit for
which the employer is eligible, the employer may receive
the remaining credit in advance, using this form. FFCRA
also provides similar credits for certain self-employed
persons in similar circumstances. However, advance payments
aren't available for the credit for self-employed
individuals.
See instructions to IRS Form 7200, revised March 2020, available at
https://www.irs.gov/pub/irs-prior/i7200--2020.pdf.
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment (March
27, 2020).
2. Expansion of DOL authority to postpone certain deadlines (sec. 3607
of the Act, sec. 518 of ERISA, and sec. 319 of the Public Health
Service Act)
Present Law
Employee benefit plans
Under the Employee Retirement Income Security Act of 1974,
as amended (``ERISA'') \1306\, the Secretary of Labor has the
authority to postpone certain deadlines with respect to actions
within its jurisdiction by reason of a Presidentially declared
disaster \1307\ or a terroristic or military action.\1308\ The
Secretary of Labor may, in the case of a pension or other
employee benefit plan, or any sponsor, administrator,
participant, beneficiary, or other person with respect to such
plan, affected by such a Presidentially declared disaster or a
terroristic or military action notwithstanding any other
provision of law, prescribe, by notice or otherwise, a period
of up to one year that may be disregarded in determining the
date by which any action is required or permitted to be
completed by such a plan or person under ERISA. A plan will not
be treated as failing to be operated in accordance with its
terms solely as the result of disregarding any such period.
---------------------------------------------------------------------------
\1306\ 29 U.S.C. 1001 et seq. In the past, questions had arisen
concerning the scope of section 7508A with respect to employee benefit
plans because a number of acts related to employee benefit plans may be
required or provided for under ERISA, or the terms of the plan, rather
than under the Code. For example, a plan sponsor or plan administrator
may be required to provide a notice to plan or participant or to make a
plan contribution.
\1307\ As defined in section 1033(h)(3), which provides that the
term ``Federally declared disaster'' has the same meaning as under
section 165(i)(5).
\1308\ Sec. 518 of ERISA. A terroristic or military action is
defined in section 692(c)(2).
---------------------------------------------------------------------------
Under the Code, the Secretary has the authority to postpone
certain tax deadlines affected by a Federally declared
disaster,\1309\ or a terroristic or military action.\1310\ In
the case of a pension or other employee benefit plan, or any
sponsor, administrator, participant, beneficiary, or other
person, the Secretary may prescribe a period of up to one year
that may be disregarded in determining the date by which any
action by a pension or other employee benefit plan, or by a
plan sponsor, administrator, participant, beneficiary or other
person would be required or permitted to be completed.\1311\
---------------------------------------------------------------------------
\1309\ A Federally declared disaster is defined in section
165(i)(5)(A) as ``any disaster subsequently determined by the President
of the United States to warrant assistance by the Federal Government
under the Robert T. Stafford Disaster Relief and Emergency Assistance
Act'' (the ``Stafford Act''). On March 13, 2020, President Trump
declared the COVID-19 pandemic an ``emergency'' under section 501(b) of
the Stafford Act. As part of that declaration, he instructed the
Secretary to provide relief from tax deadlines pursuant to section
7508(A)(a).
\1310\ Sec. 7508A.
\1311\ Sec. 7508A(b).
---------------------------------------------------------------------------
Section 319 of the Public Health Service Act
Under section 319 of the Public Health Service (``PHS'')
Act,\1312\ the Secretary of the Department of Health and Human
Services (``HHS'') can determine, after consulting with such
public health officials as may be necessary, that (1) a disease
or disorder presents a Public Health Emergency (``PHE'') or (2)
a PHE, including significant outbreaks of infectious diseases
or bioterrorist attacks, otherwise exists. A PHE declaration
allows the Secretary of HHS to take certain actions in response
to the PHE. In addition, the determination of a public health
emergency authorizes the Secretary of HHS to take a variety of
discretionary actions to respond to the PHE under the statutes
the Secretary of HHS administers.\1313\
---------------------------------------------------------------------------
\1312\ 42 U.S.C. 274(d).
\1313\ On January 31, 2020, the Secretary of HHS declared COVID-19
a public health emergency for the entire United States under section
319 of the PHS Act.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, the Secretary of Labor's authority to
postpone certain deadlines under ERISA is extended to include a
public health emergency declared by the Secretary of HHS
pursuant to section 319 of the PHS Act.
Effective Date
The provision is effective on the date of enactment (March
27, 2020).
3. Single-employer plan funding rules (sec. 3608 of the Act and secs.
430(j) and 436 of the Code)
Present Law
Minimum required contributions
Single-employer defined benefit pension plans are generally
subject to minimum funding requirements under the Employee
Retirement Income Security Act of 1974, as amended (``ERISA'')
\1314\ and the Code.
---------------------------------------------------------------------------
\1314\ 29 U.S.C. 1001 et seq.
---------------------------------------------------------------------------
For plan years beginning after December 31, 2007,\1315\ the
amount of the minimum required contribution \1316\ to a single-
employer defined benefit pension plan for a plan year generally
depends on a comparison of the value of the plan's assets with
the plan's funding target and target normal cost.
---------------------------------------------------------------------------
\1315\ Sec. 430(a). The Pension Protection Act of 2006 (``PPA''),
Pub. L. No. 109-280, August 17, 2006, repealed the funding rules that
were applicable for plan years beginning before December 31, 2007
(including the requirement that a funding standard account be
maintained) and provided a new set of rules for determining minimum
required contributions. A delayed effective date applies to certain
plans such as certain CSEC plans. Governmental plans and church plans
are exempt from the funding rules to the extent provided under law.
\1316\ As determined under section 430(a) and section 303(a) of
ERISA.
---------------------------------------------------------------------------
A plan's funding target is the present value of all
benefits accrued or earned as of the beginning of the plan
year.\1317\ A plan's target normal cost for a plan year is
generally the present value of benefits expected to accrue or
be earned during the plan year plus the plan-related expenses
expected to be paid from plan assets during the plan
year.\1318\ A shortfall amortization charge is generally the
sum of the amounts required to amortize any shortfall
amortization bases for the plan year and the six preceding plan
years.\1319\ A shortfall amortization base is generally
required to be established for a plan year if the plan has a
funding shortfall for a plan year.\1320\ A shortfall
amortization base may be positive or negative (i.e., an
offsetting amortization base is established for gains). In
general, a plan has a funding shortfall if the plan's funding
target for the year exceeds the value of the plan's assets
(reduced by any prefunding balance and funding standard
carryover balance).\1321\ A waiver amortization charge is the
amount required to amortize a waived funding deficiency.\1322\
---------------------------------------------------------------------------
\1317\ Special rules apply for determining the funding target for
plans in ``at-risk'' status. See sec. 430(d) and (i)(1).
\1318\ Sec. 430(b).
\1319\ Sec. 430(c).
\1320\ Sec. 430(c)(3). A shortfall amortization base does not have
to be established if the value of a plan's assets (reduced by any
prefunding balance, but only if the employer elects to use any portion
of the prefunding balance to reduce required contributions for the
year) is at least equal to the plan's funding target for the plan year.
\1321\ Sec. 430(c)(4). Contributions in excess of the minimum
contributions required under the provision for plan years beginning
after 2007 generally are credited to a prefunding balance that may be
used in certain circumstances to reduce otherwise required minimum
contributions. Credit balances determined under pre-PPA law are carried
over into a funding standard carryover balance and generally may also
be used (in certain circumstances) to reduce otherwise required minimum
contributions. For example, a credit balance would have resulted where
contributions in excess of minimum required contributions were made or
from large net experience gains.
\1322\ Sec. 430(e).
---------------------------------------------------------------------------
The interest rates and mortality table that must be used in
determining a plan's target normal cost and funding target, as
well as certain other actuarial assumptions, are specified,
including special assumptions (``at-risk'' assumptions) for a
plan in at-risk status. A plan is generally in at-risk status
for a year if the value of the plan's assets (reduced by any
prefunding and funding standard carryover balances) for the
preceding year was less than (1) 80 percent of the plan's
funding target determined without regard to the at-risk
assumptions and (2) 70 percent of the plan's funding target
determined using the at-risk assumptions.\1323\
---------------------------------------------------------------------------
\1323\ Sec. 430(i).
---------------------------------------------------------------------------
Timing rules for contributions
The due date for the payment of a minimum required
contribution for a plan year is generally 8 months after the
end of the plan year.\1324\ Any payment made on a date other
than the valuation date for the plan year must be adjusted for
interest accruing at the plan's effective interest rate for the
plan year for the period between the valuation date and the
payment date. Quarterly contributions must be made during a
plan year if the plan had a funding shortfall for the preceding
plan year (i.e., if the value of the plan's assets, reduced by
the funding standard carryover balance and prefunding balance,
was less than the plan's funding target for the preceding plan
year).\1325\ If a quarterly installment is not made, interest
applies for the period of underpayment at the rate of interest
otherwise applicable (i.e., the plan's effective interest rate)
plus five percentage points.
---------------------------------------------------------------------------
\1324\ Sec. 430(j).
\1325\ The amount of any quarterly installment must be sufficient
to cover any liquidity shortfall.
---------------------------------------------------------------------------
Excise tax on failure to make minimum required contributions
An employer is generally subject to an excise tax if it
fails to make minimum required contributions and fails to
obtain a waiver from the IRS.\1326\ The excise tax is 10
percent of the aggregate unpaid minimum required contributions
for all plan years remaining unpaid as of the end of any plan
year. In addition, a tax of 100 percent of such unpaid required
minimum contributions may be imposed if any unpaid minimum
required contributions remain unpaid after a certain period.
---------------------------------------------------------------------------
\1326\ Sec. 4971. A lien in favor of the plan with respect to
property of the employer (and members of the employer's controlled
group) arises in certain circumstances in which the employer fails to
make required contributions.
---------------------------------------------------------------------------
Benefit restrictions
With respect to plan years beginning after December 31,
2007, the Code imposes the following funding-based limits on
benefits and benefit accruals under single-employer
plans.\1327\
---------------------------------------------------------------------------
\1327\ Sec. 436.
---------------------------------------------------------------------------
Plan shutdown and other unpredictable contingent event
benefits
If a participant is entitled to an unpredictable contingent
event benefit payable with respect to any event occurring
during any plan year, the plan must provide that such benefits
may not be provided if the plan's adjusted funding target
attainment percentage for that plan year: (1) is less than 60
percent or (2) would be less than 60 percent taking into
account the occurrence of the event. For this purpose, the term
unpredictable contingent event benefit means any benefit
payable solely by reason of: (1) a plant shutdown (or similar
event, as determined by the Secretary) or (2) any event other
than attainment of any age, performance of any service, receipt
or derivation of any compensation, or the occurrence of death
or disability.\1328\
---------------------------------------------------------------------------
\1328\ Sec. 436(b).
---------------------------------------------------------------------------
The determination of whether the limitation applies is made
in the year the unpredictable contingent event occurs. For
example, suppose a plan provides for benefits upon the
occurrence of a plant shutdown, and a plant shutdown occurs in
2019. Taking into account the plant shutdown, the plan's
adjusted funding target attainment percentage is less than 60
percent. Thus, the limitation applies, and benefits payable
solely by reason of the plant shutdown may not be paid (unless
the employer makes contributions to the plan as described
below), regardless of whether the benefits will be paid in the
2019 plan year or a later plan year.\1329\
---------------------------------------------------------------------------
\1329\ Benefits already being paid as a result of a plant shutdown
or other event that occurred in a preceding year are not affected by
the limitation.
---------------------------------------------------------------------------
The limitation ceases to apply with respect to any plan
year, effective as of the first day of the plan year, if the
plan sponsor makes a contribution (in addition to any minimum
required contribution for the plan year) equal to: (1) if the
plan's adjusted funding target attainment percentage is less
than 60 percent, the amount of the increase in the plan's
funding target for the plan year attributable to the occurrence
of the event; or (2) if the plan's adjusted funding target
attainment percentage would be less than 60 percent taking into
account the occurrence of the event, the amount sufficient to
result in an adjusted funding target attainment percentage of
60 percent.
The limitation does not apply for the first five years a
plan (or a predecessor plan) is in effect.
Plan amendments increasing benefit liabilities
Certain plan amendments may not take effect during a plan
year if the plan's adjusted funding target attainment
percentage for the plan year (1) is less than 80 percent or (2)
would be less than 80 percent taking into account the
amendment.\1330\ In such a case, no amendment may take effect
if it has the effect of increasing the liabilities of the plan
by reason of any increase in benefits, the establishment of new
benefits, any change in the rate of benefit accrual, or any
change in the rate at which benefits vest under the plan. The
limitation does not apply to an amendment that provides for an
increase in benefits under a formula that is not based on
compensation, but only if the rate of increase does not exceed
the contemporaneous rate of increase in average wages of the
participants covered by the amendment.
---------------------------------------------------------------------------
\1330\ Sec. 436(c). The pre-PPA rules limiting benefit increases
while an employer is in bankruptcy continue to apply.
---------------------------------------------------------------------------
The limitation ceases to apply with respect to any plan
year, effective as of the first day of the plan year (or, if
later, the effective date of the amendment), if the plan
sponsor makes a contribution (in addition to any minimum
required contribution for the plan year) equal to: (1) if the
plan's adjusted funding target attainment percentage is less
than 80 percent, the amount of the increase in the plan's
funding target for the plan year attributable to the amendment;
or (2) if the plan's adjusted funding target attainment
percentage would be less than 80 percent taking into account
the amendment, the amount sufficient to result in an adjusted
funding target attainment percentage of 80 percent.
The limitation does not apply for the first five years a
plan (or a predecessor plan) is in effect.
Prohibited payments
A plan must provide that, if the plan's adjusted funding
target attainment percentage for a plan year is less than 60
percent, the plan will not make any prohibited payments after
the valuation date for the plan year.\1331\
---------------------------------------------------------------------------
\1331\ Sec. 436(d).
---------------------------------------------------------------------------
A plan must also provide that, if the plan's adjusted
funding target attainment percentage for a plan year is 60
percent or greater, but less than 80 percent, the plan may not
pay any prohibited payments exceeding the lesser of: (1) 50
percent of the amount otherwise payable under the plan and (2)
the present value of the maximum Pension Benefit Guaranty
Corporation (``PBGC'') guarantee with respect to the
participant (determined under guidance prescribed by the PBGC,
using the interest rates and mortality table applicable in
determining minimum lump-sum benefits). The plan must provide
that only one payment under this exception may be made with
respect to any participant during any period of consecutive
plan years to which the limitation applies. For this purpose, a
participant and any beneficiary of the participant (including
an alternate payee) is treated as one participant. If the
participant's accrued benefit is allocated to an alternate
payee and one or more other persons, the amount that may be
distributed is allocated in the same manner unless the
applicable qualified domestic relations order provides
otherwise.
In addition, a plan must provide that, during any period in
which the plan sponsor is in bankruptcy proceedings, the plan
may not pay any prohibited payment. However, this limitation
does not apply on or after the date the plan's enrolled actuary
certifies that the adjusted funding target attainment
percentage of the plan is not less than 100 percent.
For purposes of these limitations, ``prohibited payment''
is defined as (1) any payment in excess of the monthly amount
paid under a single life annuity (plus any Social Security
supplement provided under the plan) to a participant or
beneficiary whose annuity starting date occurs during the
period, (2) any payment for the purchase of an irrevocable
commitment from an insurer to pay benefits (e.g., an annuity
contract), or (3) any other payment specified by the Secretary
by regulations.\1332\
---------------------------------------------------------------------------
\1332\ Sec. 436(d)(5).
---------------------------------------------------------------------------
The prohibited payment limitation does not apply to a plan
for any plan year if the terms of the plan (as in effect for
the period beginning on September 1, 2005 and ending with the
plan year) provide for no benefit accruals with respect to any
participant during the period.
Cessation of benefit accruals
A plan must provide that, if the plan's adjusted funding
target attainment percentage is less than 60 percent for a plan
year, all future benefit accruals under the plan must cease as
of the valuation date for the plan year.\1333\ The limitation
applies only for purposes of the accrual of benefits; service
during the freeze period is counted for other purposes. For
example, if accruals are frozen under the plan, service earned
during the freeze period still counts for vesting purposes. As
another example, suppose a plan provides that payment of
benefits begins when a participant terminates employment after
age 55 and with 25 years of service. Under this example, if a
participant who is age 55 and has 23 years of service when the
freeze on accruals becomes applicable terminates employment two
years later, the participant has 25 years of service for this
purpose and thus can begin receiving benefits. However
(assuming the freeze on accruals is still in effect), the
amount of the benefit is based on the benefit accrued before
the freeze (i.e., counting only 23 years of service).
---------------------------------------------------------------------------
\1333\ Sec. 436(e).
---------------------------------------------------------------------------
The limitation ceases to apply with respect to any plan
year, effective as of the first day of the plan year, if the
plan sponsor makes a contribution (in addition to any minimum
required contribution for the plan year) equal to the amount
sufficient to result in an adjusted funding target attainment
percentage of 60 percent.
The limitation does not apply for the first five years a
plan (or a predecessor plan) is in effect.
Adjusted funding target attainment percentage
In general
The term ``funding target attainment percentage'' is
defined as under the minimum funding rules, that is, the ratio,
expressed as a percentage, that the value of the plan's assets
(reduced by any funding standard carryover balance and
prefunding balance) bears to the plan's funding target for the
year (determined without regard to at-risk status). A plan's
adjusted funding target attainment percentage is determined in
the same way, except that the value of the plan's assets and
the plan's funding target are both increased by the aggregate
amount of purchases of annuities for employees, other than
highly compensated employees, made by the plan during the two
preceding plan years.\1334\
---------------------------------------------------------------------------
\1334\ Sec. 436(j)(2).
---------------------------------------------------------------------------
Special rule for fully funded plans
Under a special rule, if a plan's funding target attainment
percentage is at least 100 percent, determined without reducing
the value of the plan's assets by any funding standard
carryover balance or prefunding balance, the value of the
plan's assets is not so reduced in determining the plan's
funding target attainment percentage for purposes of whether
the benefit limitations apply.
Presumptions as to funded status
Certain presumptions apply in determining whether
limitations apply with respect to a plan, subject to
certification of the plan's adjusted funding target attainment
percentage by the plan's enrolled actuary.
If a plan was subject to a limitation for the preceding
year, the plan's adjusted funding target attainment percentage
for the current year is presumed to be the same as for the
preceding year until the plan actuary certifies the plan's
actual adjusted funding target attainment percentage for the
current year.
If (1) a plan was not subject to a limitation for the
preceding year, but its adjusted funding target attainment
percentage for the preceding year was not more than 10
percentage points greater than the threshold for a limitation,
and (2) as of the first day of the fourth month of the current
plan year, the plan actuary has not certified the plan's actual
adjusted funding target attainment percentage for the current
year, the plan's funding target attainment percentage is
presumed to be reduced by 10 percentage points as of that day
and that day is deemed to be the plan's valuation date for
purposes of applying the benefit limitation. As a result, the
limitation applies as of that date until the actuary certifies
the plan's actual adjusted funding target attainment
percentage.
In any other case, if the plan actuary has not certified
the plan's actual adjusted funding target attainment percentage
by the first day of the tenth month of the current plan year,
for purposes of the limitations, the plan's adjusted funding
target attainment percentage is conclusively presumed to be
less than 60 percent as of that day and that day is deemed to
be the valuation date for purposes of applying the benefit
limitations.
Reduction of funding standard carryover and prefunding balances
The value of plan assets is generally reduced by any
funding standard carryover or prefunding amounts in determining
a plan's funding target attainment percentage. As provided for
under the funding rules applicable to single-employer plans, a
plan sponsor may elect to reduce a funding standard carryover
balance or prefunding balance, so that the value of plan assets
is not required to be reduced by that amount in determining the
plan's funding target attainment percentage.
Contributions made to avoid a benefit limitation
An employer may make contributions (in addition to any
minimum required contribution) in an amount sufficient to
increase the plan's adjusted funding target attainment
percentage to a level to avoid a limitation on unpredictable
contingent event benefits, a plan amendment increasing
benefits, or additional accruals. An employer may not use a
prefunding balance or funding standard carryover balance in
lieu of such a contribution, and such a contribution does not
result in an increase in any prefunding balance.
Instead of making additional contributions to avoid a
benefit limitation, an employer may provide security in the
form of a surety bond, cash, certain U.S. government
obligations, or such other form as is satisfactory to the
Secretary and the parties involved. In such a case, the plan's
adjusted funding target attainment percentage is determined by
treating the security as a plan asset. Any such security may be
perfected and enforced at any time after the earlier of (1) the
date on which the plan terminates; (2) if the plan sponsor
fails to make a required contribution for any subsequent plan
year, the due date for the contribution; or (3) if the plan's
adjusted funding target attainment percentage is less than 60
percent for a consecutive period of seven years, the valuation
date for the last year in the period. The security will be
released (and any related amounts will be refunded with any
accrued interest) at such time as the Secretary may prescribe
in regulations (including partial releases by reason of
increases in the plan's funding target attainment percentage).
Treatment of plan as of close of prohibited or cessation period
If a limitation on prohibited payments or future benefit
accruals ceases to apply to a plan, all such payments and
benefit accruals resume, effective as of the day following the
close of the period for which the limitation applies.\1335\
Nothing in this rule is to be construed as affecting a plan's
treatment of benefits, which would have been paid or accrued
but for the limitation.
---------------------------------------------------------------------------
\1335\ This rule does not apply to limitations on unpredictable
contingent event benefits and plan amendments increasing liabilities.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, in the case of any minimum required
contribution which, but for this provision, would have been due
\1336\ during calendar year 2020, such contribution is due on
January 1, 2021, and the amount of each such contribution must
be increased by interest accruing between the original due date
for the contribution (determined without regard to this
provision) and the payment date (as determined under this
provision), at the effective rate of interest for the plan for
the plan year that includes such payment date.
---------------------------------------------------------------------------
\1336\ Under section 430(j) (including quarterly contributions
under section 430(j)(3)) and section 303(j) of ERISA.
---------------------------------------------------------------------------
Additionally, under the provision, for purposes of
determining whether benefit restrictions \1337\ apply to a plan
for a plan year that includes calendar year 2020, a plan
sponsor may elect to treat the plan's adjusted funding target
attainment percentage for the last plan year ending before
January 1, 2020, as the adjusted funding target attainment
percentage for plan years that include calendar year 2020.
---------------------------------------------------------------------------
\1337\ Determined under section 436.
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment (March
27, 2020).
4. Application of cooperative and small employer charity pension plan
rules to certain charitable employers whose primary exempt purpose is
providing services with respect to mothers and children (sec. 3609 of
the Act, sec. 210(f) of ERISA, and sec. 414(y) of the Code)
Present Law
Defined benefit plans maintained by private employers are
generally subject to minimum funding requirements under the
Code and ERISA.\1338\ Different minimum funding rules apply to
(1) single employer plans and most multiple employer plans, (2)
multiple-employer plans that are cooperative and small employer
charity (``CSEC'') plans, and (3) multiemployer plans. For
purposes of the minimum funding rules, businesses and
organizations that are members of a controlled group, a group
under common control, or an affiliated service group are
treated as one employer (referred to as ``aggregation'').\1339\
---------------------------------------------------------------------------
\1338\ Secs. 412 and 430-433 and secs. 301-306 of the Employee
Retirement Income Security Act of 1974, as amended (``ERISA''). If the
funding requirements are not met, an employer may be subject to a two-
tier excise tax under section 4971 unless a funding waiver is obtained.
The minimum funding requirements do not apply to most governmental or
church plans.
\1339\ Sec. 414(b), (c), (m), and (o).
---------------------------------------------------------------------------
A single-employer plan is a plan maintained by one
employer. A single-employer plan may cover employees who are
also covered by a collective bargaining agreement
(``collectively bargained employees''), pursuant to which the
plan is maintained (a ``collectively bargained plan'').\1340\
An employer may maintain separate single-employer plans for
collectively and non-collectively bargained employees, or they
may be covered by the same plan.
---------------------------------------------------------------------------
\1340\ Treas. Reg. sec. 1.410(b)-6(d).
---------------------------------------------------------------------------
A multiple-employer plan is a single plan maintained by two
or more unrelated employers (i.e., employers that are not
treated as a single employer under the aggregation rules) and
that is not a multiemployer plan (as defined below).\1341\
Multiple-employer plans are commonly maintained by employers in
the same industry. A multiple-employer plan may cover
collectively bargained employees or non-collectively bargained
employees.
---------------------------------------------------------------------------
\1341\ Sec. 413(c) and ERISA sec. 210(a).
---------------------------------------------------------------------------
Multiemployer plans (also known as ``Taft-Hartley'' plans
and distinct from multiple-employer plans) are plans maintained
pursuant to one or more collective bargaining agreements with
two or more unrelated employers and to which the employers are
required to contribute under the collective bargaining
agreement(s).\1342\ Multiemployer plans commonly cover
collectively bargained employees in a particular industry.
---------------------------------------------------------------------------
\1342\ Sec. 414(f) and ERISA sec. 2(37).
---------------------------------------------------------------------------
Minimum funding requirements
Before the Pension Protection Act of 2006 (``PPA''),\1343\
the basic funding rules applicable to single-employer plans,
multiple-employer plans, and multiemployer plans were similar,
with an additional contribution requirement, referred to as the
``deficit reduction contribution'' (``DRC'') requirement, for
single-employer and multiple-employer plans.\1344\ PPA replaced
the funding rules for single-employer plans and multiple-
employer plans with new rules, effective for plan years
beginning after December 31, 2007. However, PPA provided a
delayed effective date (the ``PPA delayed effective date'') for
certain multiple-employer plans, under which the PPA funding
rules apply as of the earlier of (1) the first plan year for
which the plan ceases to be an eligible cooperative plan
(described below) or (2) January 1, 2017.\1345\ In the interim,
as discussed below, these plans continue to be subject to the
minimum funding rules in effect before PPA, with certain
modifications.
---------------------------------------------------------------------------
\1343\ Pub. L. No. 109-280, August 17, 2006.
\1344\ Single-employer plans and multiple-employer plans have
generally been subject to the same funding rules. Under section
413(c)(4), in the case of a multiple-employer plan established by
December 31, 1988, the minimum funding requirement is generally
determined as if all plan participants are employed by a single
employer, and, in the case of a multiple-employer plan established
after December 31, 1988, each employer is treated as maintaining a
separate plan for purposes of the funding requirements unless the plan
uses a method for determining required contributions that provides for
any employer to contribute not less than the amount that would be
required if the employer maintained a separate plan. ERISA section
210(a)(3) provides that the minimum funding requirement for a multiple-
employer plan is determined as if all plan participants are employed by
a single employer.
\1345\ Sec. 104 of PPA.
---------------------------------------------------------------------------
The PPA delayed effective date applies to a plan that was
in existence on July 26, 2005 and was an eligible cooperative
plan for the plan year including that date. A plan is treated
as an eligible cooperative plan for a plan year if it is
maintained by more than one employer and at least 85 percent of
the employers are (1) certain rural cooperatives or (2) certain
cooperative organizations that are more than 50-percent owned
by agricultural producers or by cooperatives owned by
agricultural producers, or organizations that are more than 50-
percent owned, or controlled by, one or more of these
cooperative organizations.\1346\ A plan is also treated as an
eligible cooperative plan for any plan year for which it is
maintained by more than one employer and is maintained by a
rural telephone cooperative association.
---------------------------------------------------------------------------
\1346\ The definition of a CSEC plan was further amended by the
Consolidated and Further Continuing Appropriations Act, 2015, Pub. L.
No. 113-235, December 16, 2014, to include a plan that, as of June 25,
2010, was maintained by an employer (1) that is a tax-exempt charitable
organization and a Federally chartered patriotic organization, (2) that
has employees in at least 40 States, and (3) the primary exempt purpose
of which is to provide services with respect to children. For purposes
of determining the employer maintaining the plan, the aggregation rules
for controlled groups and groups under common control employers apply.
---------------------------------------------------------------------------
Funding rules for CSEC plans
Funding rules for CSEC plans were enacted by the
Cooperative and Small Employer Charity Pension Flexibility
Act.\1347\ For this purpose, a CSEC plan is a defined benefit
plan (other than a multiemployer plan) that (1) is an eligible
cooperative plan to which the PPA delayed effective date for
funding rules applies (without regard to the January 1, 2017
end of the delayed effective date),\1348\ or (2) was maintained
by more than one employer (taking into account the aggregation
rules for controlled groups and groups under common control)
and all the employers were tax-exempt charitable organizations
as of June 25, 2010.\1349\
---------------------------------------------------------------------------
\1347\ Pub. L. No. 113-97, April 7, 2014.
\1348\ Sec. 104 of PPA.
\1349\ June 25, 2010 is the date of enactment of the Preservation
of Access to Care for Medicare Beneficiaries and Pension Relief Act of
2010 (``PRA 2010''), Pub. L. No. 111-192, which expanded the
applicability of the delayed effective date. A tax-exempt charitable
organization is an organization exempt from tax under section
501(c)(3).
---------------------------------------------------------------------------
If a plan is treated as a CSEC plan, the PPA delayed
effective date ceases to apply to the plan as of the first date
the plan is treated as a CSEC plan.\1350\ However, a plan
described in (1) or (2) in the preceding paragraph is not a
CSEC plan if the plan sponsor elects, not later than the close
of the first plan year beginning after December 31, 2013, not
to be treated as a CSEC plan.\1351\ An election takes effect
for the first plan year beginning after December 31, 2013, and,
once made, may be revoked only with the consent of the
Secretary.
---------------------------------------------------------------------------
\1350\ A plan maintained by employers treated as a single employer
under the aggregation rules is not a CSEC plan. Thus, not all eligible
charity plans as defined for purposes of the PPA delayed effective date
come within the definition of a CSEC plan. Those that do not may
continue to be covered by the PPA delayed effective date.
\1351\ If an election not to be treated as a CSEC plan is made with
respect to a plan eligible for the PPA delayed effective date, the plan
may continue to be covered by the PPA delayed effective date unless
making the required election.
---------------------------------------------------------------------------
In general
CSEC plans are permanently exempted from the PPA funding
rules generally applicable to single-employer plans and
multiple-employer plans. New minimum funding rules for CSEC
plans are established that are similar to the rules applicable
to eligible cooperative and eligible charity plans under the
PPA delayed effective date, with the following
modifications:\1352\
---------------------------------------------------------------------------
\1352\ A CSEC plan's amortization bases for plan years beginning
before January 1, 2014, and related charges and credits continue to
apply. In addition, the minimum funding requirement for a CSEC plan is
determined as if all plan participants are employed by a single
employer.
---------------------------------------------------------------------------
The deficit reduction contribution rules are
repealed with respect to CSEC plans,
New rules apply to a CSEC plan in ``funding
restoration status,'' as discussed below,
Supplemental cost attributable to past
service liability and a reduction in unfunded past
service liability as a result of a plan amendment
decreasing plan benefits are amortized over 15 years
(rather than 30 years) (any funding method available to
a CSEC plan under the funding rules in effect before
PPA continues to be available under the CSEC
rules),\1353\
---------------------------------------------------------------------------
\1353\ IRS approval is required for a change in funding method.
---------------------------------------------------------------------------
All costs, liabilities, interest rates, and
other factors are required to be determined on the
basis of actuarial assumptions and methods (each of
which is reasonable taking into account the experience
of the plan and reasonable expectations),\1354\ and
---------------------------------------------------------------------------
\1354\ The assumptions are also required to offer the actuary's
best estimate of anticipated experience under the plan.
---------------------------------------------------------------------------
The IRS may grant an amortization period
extension to a CSEC plan if it determines that (1) the
extension would carry out the purposes of ERISA and
would provide adequate protection for participants and
beneficiaries under the plan and (2) the failure to
permit the extension would result in a substantial risk
to the voluntary continuation of the plan or a
substantial curtailment of pension benefit levels or
employee compensation.
Rules relating to funding restoration status
If a CSEC plan is in funding restoration status for a plan
year, as discussed below, a special minimum contribution
requirement applies, the plan sponsor must adopt a funding
restoration plan, and the plan generally may not be amended to
increase benefits. Not later than the 90th day of a CSEC plan's
plan year, the plan actuary of a CSEC plan must certify to the
plan sponsor whether or not the plan is in funding restoration
status for the plan year, based on the plan's funded percentage
as of the beginning of the plan year.
A CSEC plan is in funding restoration status for a plan
year if the plan's funded percentage as of the beginning of the
plan year is less than 80 percent. For this purpose, funded
percentage means the ratio (expressed as a percentage) that the
value of the plan's assets bears to the plan's funding
liability. A plan's funding liability for a plan year is the
present value of all benefits accrued or earned under the plan
as of the beginning of the plan year, determined using the
assumptions, including interest and mortality, used in other
funding computations with respect to plan. In making the
certification described above, the plan actuary may
conclusively rely on an estimate of (1) the plan's funding
liability, based on the funding liability of the plan for the
preceding plan year and on reasonable actuarial estimates,
assumptions, and methods and (2) the amount of any
contributions reasonably anticipated to be made for the
preceding plan year.\1355\ Reasonably anticipated contributions
for the preceding year are taken into account in determining
the plan's funded percentage as of the beginning of the plan
year.
---------------------------------------------------------------------------
\1355\ Because contributions for a plan year may be made up to 8\1/
2\ months after the end of the plan year, some contributions for the
preceding year might not have been made by the time of the
certification.
---------------------------------------------------------------------------
If a plan is in funding restoration status for a plan year,
the minimum required contribution is the greater of (1) the
amount otherwise required without regard to restoration status
and (2) the normal cost of the plan for the plan year.\1356\
Thus, an accumulated funding deficiency will result if
contributions are less than normal cost.
---------------------------------------------------------------------------
\1356\ In certain cases, a specific funding method (i.e., the entry
age normal funding method) must be used in determining normal cost for
this purpose.
---------------------------------------------------------------------------
If a CSEC plan is certified as being in funding restoration
status, within 180 days after receipt of the certification, the
plan sponsor must establish a written funding restoration plan.
If a CSEC plan remains in funding restoration status for more
than a year, the plan sponsor must update the funding
restoration plan each year within 180 days after receipt of the
certification of funding restoration status. If a plan sponsor
fails to adopt or update a funding restoration plan as
required, the plan sponsor may be subject to an excise tax
under the Code or an ERISA penalty of up to $100 per day.
A funding restoration plan must consist of actions that are
calculated, based on reasonably anticipated experience and
reasonable actuarial assumptions, to increase the plan's funded
percentage to 100 percent over seven years, or, if sooner, the
shortest amount of time practicable. The funding restoration
plan is to take into account contributions required under the
minimum funding requirements (determined without regard to the
funding restoration plan).
If a CSEC plan is in funding restoration status for a plan
year, no plan amendment may take effect during the plan year if
it has the effect of increasing plan liabilities by means of
increases in benefits, establishment of new benefits, changing
the rate of benefit accrual, or changing the rate at which
benefits vest under the plan. However, this prohibition does
not apply to any plan amendment required to comply with any
applicable law. The prohibition ceases to apply with respect to
any plan year, effective as of the first day of the plan year
(or if later, the effective date of the amendment), if a plan
contribution is made, in addition to any contribution otherwise
required under the funding rules, in an amount equal to the
increase in the plan's funding liability as a result of the
plan amendment.
Funding-related benefit restrictions
CSEC plans are permanently exempted from the PPA funding-
related benefit restrictions. CSEC plans are also exempted from
(1) the restrictions on benefit increases when an employer
maintaining a plan is involved in bankruptcy proceedings and
(2) the ERISA restriction on prohibited payments if a plan has
a liquidity shortfall, and a quarterly installment is less than
the amount required to cover the liquidity shortfall.
Explanation of Provision
The provision amends the definition of CSEC plan to include
a plan that, as of January 1, 2000, was maintained by an
employer (1) that is a tax-exempt charitable organization, (2)
has been in existence since at least 1938, (3) that conducts
medical research directly or indirectly through grant making,
and (4) whose primary exempt purpose is to provide services
with respect to mothers and children.
Effective Date
The provision is applicable to plan years beginning after
December 31, 2018.
Subtitle D--Finance Committee
1. Exemption for telehealth services (sec. 3701 of the Act and sec. 223
of the Code)
Present Law
Health savings accounts
An individual may establish a health savings account (an
``HSA'') only if the individual is covered under a plan that
meets the requirements for a high deductible health plan, as
described below. In general, HSAs provide tax-favored treatment
for current medical expenses, as well as the ability to save on
a tax-favored basis for future medical expenses. In general, an
HSA is a tax-exempt trust or custodial account created
exclusively to pay for the qualified medical expenses of the
account holder and his or her spouse and dependents.
Within limits,\1357\ contributions to an HSA made by or on
behalf of an eligible individual are deductible by the
individual. Contributions to an HSA are excludible from income
and employment taxes if made by the employer. Earnings in HSAs
are not taxable. Distributions from an HSA for qualified
medical expenses are not includible in gross income.
Distributions from an HSA that are not used for qualified
medical expenses are includible in gross income and are subject
to an additional tax of 20 percent. The 20-percent additional
tax does not apply if the distribution is made after death,
disability, or the individual attains the age of Medicare
eligibility (age 65).
---------------------------------------------------------------------------
\1357\ For 2020, the basic limit on annual contributions that can
be made to an HSA is $3,550 ($3,600 for 2021) in the case of self-only
coverage and $7,100 ($7,200 for 2021) in the case of family coverage.
The basic annual contributions limits are increased by $1,000 for
individuals who have attained age 55 by the end of the taxable year
(referred to as ``catch-up'' contributions).
---------------------------------------------------------------------------
High deductible health plans
A high deductible health plan is a health plan that has an
annual deductible which is not less than $1,400 (for 2020 and
2021) for self-only coverage (twice this amount for family
coverage), and for which the sum of the annual deductible and
other annual out-of-pocket expenses (other than premiums) for
covered benefits does not exceed $6,900 (for 2020) and $7,000
(for 2021) for self-only coverage (twice this amount for family
coverage).\1358\ These dollar thresholds are subject to
inflation adjustment, based on chained CPI.\1359\
---------------------------------------------------------------------------
\1358\ Sec. 223(c)(2).
\1359\ Sec. 223(g).
---------------------------------------------------------------------------
An individual who is covered under a high deductible health
plan is eligible to establish an HSA, provided that while such
individual is covered under the high deductible health plan,
the individual is not covered under any health plan that (1) is
not a high deductible health plan and (2) provides coverage for
any benefit (subject to certain exceptions) covered under the
high deductible health plan.\1360\
---------------------------------------------------------------------------
\1360\ Sec. 223(c)(1).
---------------------------------------------------------------------------
Various types of coverage are disregarded for this purpose,
including coverage of any benefit provided by permitted
insurance, coverage (whether through insurance or otherwise)
for accidents, disability, dental care, vision care, or long-
term care, as well as certain limited coverage through health
flexible savings accounts.\1361\ Permitted insurance means
insurance under which substantially all of the coverage
provided relates to liabilities incurred under workers'
compensation laws, tort liabilities, liabilities relating to
ownership or use of property, or such other similar liabilities
as specified by the Secretary under regulations. Permitted
insurance also means insurance for a specified disease or
illness and insurance paying a fixed amount per day (or other
period) of hospitalization.\1362\
---------------------------------------------------------------------------
\1361\ Sec. 223(c)(1)(B).
\1362\ Sec. 223(c)(3).
---------------------------------------------------------------------------
Under a safe harbor, a high deductible health plan is
permitted to provide coverage for preventive care (within the
meaning of section 1861 of the Social Security Act, except as
otherwise provided by the Secretary) before satisfaction of the
minimum deductible.\1363\ IRS guidance provides a safe harbor
of the types of coverage that constitute preventive care for
this purpose.\1364\
---------------------------------------------------------------------------
\1363\ Sec. 223(c)(2)(C).
\1364\ Notice 2004-23, 2004-15 I.R.B. 725, April 12, 2004. See also
Notice 2004-50, 2004-33 I.R.B. 1, August 9, 2004; Notice 2008-59, 2008-
29 I.R.B. 123, July 21, 2008; Notice 2013-37, 2013-40 I.R.B. 293,
September 30, 2013; and Notice 2019-45, 2019-32 I.R.B. 593, August 5,
2019.
---------------------------------------------------------------------------
Explanation of Provision
The provision provides that for plan years beginning on or
before December 31, 2021, a high deductible health plan is
permitted to provide telehealth and other remote care services
without satisfaction of the plan's minimum deductible. Thus,
under the provision, a health plan will not fail to be treated
as a high deductible health plan merely by reason of failing to
require a deductible for telehealth and other remote care
services for plan years beginning on or before December 31,
2021, and an individual who is covered under such a plan may
contribute to an HSA.
Effective Date
The provision is effective on the date of enactment (March
27, 2020).
2. Inclusion of certain over-the-counter medical products as qualified
medical expenses (sec. 3702 of the Act and secs. 106, 220, and 223 of
the Code)
Present Law
Individual deduction for medical expenses
Under the rules relating to itemized deductions, an
individual may deduct expenses for medical care, not reimbursed
by insurance or otherwise, to the extent the expenses exceed
7.5 percent of AGI (10 percent for taxable years beginning on
or after January 1, 2021).\1365\ Medical care is defined
broadly as amounts paid for the diagnoses, cure, mitigation,
treatment or prevention of disease, or for the purpose of
affecting any structure of the body.\1366\
---------------------------------------------------------------------------
\1365\ Secs. 213(a) and (f).
\1366\ Sec. 213(d). There are certain limitations on the general
definition including a rule that cosmetic surgery or similar procedures
are generally not medical care.
---------------------------------------------------------------------------
Any amount paid during a taxable year for medicine or drugs
is deductible as a medical expense only if the medicine or drug
is a prescribed drug or insulin.\1367\ The term prescribed drug
means a drug or biological that requires a prescription of a
physician for its use by an individual.\1368\ Thus, any amount
paid for a medicine or drug available without a prescription
(``over-the-counter medicine'') is not deductible as a medical
expense, including any medicine or drug prescribed or
recommended by a physician.\1369\
---------------------------------------------------------------------------
\1367\ Sec. 213(b).
\1368\ Sec. 213(d)(3).
\1369\ Rev. Rul. 2003-58, 2003-1 CB 959.
---------------------------------------------------------------------------
Exclusion for employer-provided health care
Employees generally may exclude from gross income the value
of employer-provided health coverage under an accident or
health plan.\1370\ In addition, any reimbursements paid by an
employer under an accident or health plan for medical care
expenses for employees, their spouses, and their dependents
generally are excluded from gross income and employment
taxes.\1371\ An employer may reimburse expenses for medical
care of its employees (and their spouses and dependents) not
covered by a health insurance plan through a health flexible
spending arrangement (an ``FSA'') up to a specified dollar
amount.\1372\ An employer may also reimburse these expenses
under a health reimbursement arrangement (an ``HRA'').
Reimbursements under these arrangements are also excludible
from gross income as reimbursements for medical care under
employer-provided health coverage.
---------------------------------------------------------------------------
\1370\ Sec. 106.
\1371\ Sec. 105(b).
\1372\ Sec. 125(i). For 2020 and 2021, this limit is $2,750.
---------------------------------------------------------------------------
Health savings accounts
An individual may establish a health savings account (an
``HSA'') only if the individual is covered under a plan that
meets the requirements for a high deductible health plan and
the individual is not covered under any other health plan
(other than a plan that provides certain permitted insurance or
permitted coverage).\1373\ In general, an HSA is a tax-exempt
trust or custodial account created exclusively to pay for the
qualified medical expenses of the account holder and his or her
spouse and dependents. Accordingly, HSAs provide tax-favored
treatment for current medical expenses as well as the ability
to save on a tax-favored basis for future medical expenses.
---------------------------------------------------------------------------
\1373\ A high deductible health plan is a health plan that has an
annual deductible which is not less than $1,400 (for 2020 and 2021) for
self-only coverage and twice this amount for family coverage, and for
which the sum of the annual deductible and other annual out-of-pocket
expenses (other than premiums) for covered benefits does not exceed
$6,900 (for 2020; $7,000 for 2021) for self-only coverage and twice
this amount for family coverage. Sec. 223(c)(2).
---------------------------------------------------------------------------
Within limits,\1374\ contributions to an HSA made by or on
behalf of an eligible individual are deductible by the
individual. Contributions to an HSA made by the employer are
excludable from income and exempt from employment taxes.
Earnings in HSAs are not taxable.
---------------------------------------------------------------------------
\1374\ For 2020, the basic limit on annual contributions that can
be made to an HSA is $3,550 in the case of self-only coverage and
$7,100 in the case of family coverage. (These amounts increased to
$3,600 and $7,200 for 2021). The basic annual contributions limits are
increased by $1,000 for individuals who have attained age 55 by the end
of the taxable year (referred to as ``catch-up'' contributions).
---------------------------------------------------------------------------
Distributions from an HSA for qualified medical expenses
are excludable from gross income. Distributions from an HSA
that are not used for qualified medical expenses are includible
in gross income and are subject to an additional tax of 20
percent. The 20 percent additional tax does not apply if the
distribution is made after death or disability, or the
individual attains the age of Medicare eligibility (age 65).
Similar rules apply for another type of medical savings
arrangement called an Archer MSA.\1375\
---------------------------------------------------------------------------
\1375\ Sec. 220.
---------------------------------------------------------------------------
Medical care for excludable reimbursements and distributions
For purposes of the exclusion for reimbursements under
employer-provided accident and health plans (including under
health FSAs and HRAs), and for distributions from HSAs and
Archer MSAs used for qualified medical expenses, the definition
of medical care is generally the same as the definition that
applies for the itemized deduction for the cost of medical
care. However, prior to the enactment of the Patient Protection
and Affordable Care Act (the ``PPACA''),\1376\ the limitation
(applicable to the itemized deduction) that only prescription
medicines or drugs and insulin are taken into account did not
apply. Thus, for example, reimbursements from a health FSA or
HRA or funds distributed from an HSA for expenses of
nonprescription drugs, such as nonprescription aspirin, allergy
medicine, antacids, or pain relievers, were excludable from
income even though, if the taxpayer paid for such amounts
directly, the expenses could not be taken into account in
determining the itemized deduction for medical expenses.\1377\
---------------------------------------------------------------------------
\1376\ Pub. L. No 111-148, March 23, 2010.
\1377\ Rev. Rul. 2003-102, 2993-2 C.B. 559, now obsoleted by Rev.
Rul. 2010-23, 2010-39 I.R.B. 388, September 3, 2010.
---------------------------------------------------------------------------
For years beginning after December 31, 2010, the PPACA
changed the definition of medical care for purposes of the
exclusion for reimbursements for medical care under employer-
provided accident and health plans and for distributions from
HSAs and Archer MSAs used for qualified medical expenses. The
revised definition required that over-the-counter medicine
(other than insulin) be prescribed by a physician in order for
the medicine to be medical care for these purposes.\1378\ Thus,
a health FSA or an HRA is only permitted to treat a
reimbursement for the cost of over-the-counter medicine as a
qualified medical expense if the medicine or drug is prescribed
by a physician, and a distribution from an HSA or an Archer MSA
used to purchase over-the-counter medicine is not a qualified
medical expense unless the medicine or drug is prescribed by a
physician.
---------------------------------------------------------------------------
\1378\ Sec. 9003 of the PPACA. Notice 2010-59, 2010-39 I.R.B. 388,
provides guidance on this change to the definition of medical care for
these purposes.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, qualified medical expenses for
purposes of distributions from an HSA are no longer limited to
those medicines and drugs that are prescribed, allowing over-
the-counter medicines and drugs to be paid for with HSA funds.
In addition, qualified medical expenses include amounts paid
for menstrual care products (defined as tampons, pads, liners,
cups, sponges, or similar products used by individuals with
respect to menstruation or other genital-tract secretions).
The provision similarly amends the definition of qualified
medical expense for Archer MSAs to permit distributions for
over-the-counter medicine and drugs and menstrual care
products.
The provision also similarly amends the definition of
qualified medical expense for health FSAs and HRAs to permit
reimbursements for expenses incurred for over-the-counter
medicine and drugs and for menstrual care products.
Effective Date
The provision applies to distributions from HSAs and MSAs
for amounts paid after December 31, 2019.
The provision applies to reimbursements from health FSAs
and HRAs for expenses incurred after December 31, 2019.
TITLE IV--ECONOMIC STABILIZATION AND ASSISTANCE
TO SEVERELY DISTRESSED SECTORS OF THE UNITED STATES ECONOMY
Subtitle A--Coronavirus Economic Stabilization Act of 2020
1. Suspension of certain aviation excise taxes (sec. 4007 of the Act)
Present Law
In general
Excise taxes are imposed on amounts paid for commercial air
passenger and freight transportation and on fuels used in
commercial and noncommercial aviation to fund the Airport and
Airway Trust Fund.\1379\ The aviation excise taxes are as
follows:
---------------------------------------------------------------------------
\1379\ The Airport and Airway Trust Fund excise taxes (except for
4.3 cents per gallon of the taxes on aviation fuels) are scheduled to
expire after September 30, 2023. The 4.3-cents-per-gallon fuels tax
rate is permanent.
\1380\ A segment consists of a single takeoff and a single landing.
which is taxable transportation. The domestic flight segment portion of
the tax is adjusted annually (effective each January 1) for inflation.
Rev. Proc. 19-44, sec. 3.45 (2019).
\1381\ The international arrival and departure tax rate is adjusted
annually for inflation. For a domestic segment that begins or ends in
Alaska or Hawaii, a reduced tax per person applies only to departures.
For calendar year 2020, that reduced rate is $9.50 per departure (to/
from mainland United States). Ibid.
\1382\ 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 Trust Fund.
------------------------------------------------------------------------
Tax (and code section) Tax rates
------------------------------------------------------------------------
a. Domestic air passengers (sec. 4261).... 7.5 percent of fare, plus
$4.30 (2020) per domestic
flight segment generally
\1380\
b. International air passengers (sec. $18.90 (2020) per arrival or
4261). departure \1381\
c. Amounts paid for right to award free or 7.5 percent of amount paid
reduced rate passenger air transportation
(sec. 4261).
d. Air cargo (freight) transportation 6.25 percent of amount
(sec. 4271). charged for domestic
transportation; no tax on
international cargo
transportation
e. Aviation fuels (sec. 4081): \1382\.....
i. Commercial aviation................ 4.3 cents per gallon
ii. Non-commercial (general) aviation:
Aviation gasoline................. 19.3 cents per gallon
Jet fuel.......................... 21.8 cents per gallon
f. Surtax on fuel used in fractional 14.1 cents per gallon
ownership program aircraft (sec. 4043).
------------------------------------------------------------------------
Commercial aviation
``Commercial aviation'' is defined as any use of an
aircraft in the business of transporting persons or property by
air for compensation or hire. It does not include aircraft used
for skydiving, small aircraft on nonestablished lines,
transportation for affiliated group members, transportation by
seaplanes, or transportation when the fuel is subject to the
surtax on fuel used in fractional ownership program
aircraft.\1383\ Whether the transportation by air is
``commercial aviation'' for Code purposes is determined on a
flight-by-flight basis and is not determined by Federal
Aviation Administration classifications.
---------------------------------------------------------------------------
\1383\ Sec. 4083(b).
---------------------------------------------------------------------------
The Code imposes tax on certain removals, entries, and
sales of taxable fuel, including kerosene. In general, kerosene
is taxed at 24.3 cents per gallon. However, a reduced rate of
4.3 cents per gallon is imposed on kerosene removed from any
refinery or terminal directly into the fuel tank of an aircraft
for use in commercial aviation. As noted above, an additional
0.1-cent-per-gallon excise tax is imposed to fund the Leaking
Underground Storage Tank Trust Fund. In the case of kerosene
removed directly into the fuel tank of an aircraft for use in
commercial aviation, the operator of the aircraft is liable on
the removal at the reduced tax rate of 4.3 cents per
gallon.\1384\
---------------------------------------------------------------------------
\1384\ Sec. 4081(a)(4).
---------------------------------------------------------------------------
If kerosene is taxed at the 24.3-cents-per-gallon rate and
later used in commercial aviation, the reduced rate is
effectuated through claims filed for the difference.\1385\ The
0.1-cent-per-gallon excise tax for the Leaking Underground
Storage Tank Trust Fund is not refundable. A claim may be made
by the ultimate purchaser (the operator) for taxed kerosene
used in commercial aviation (other than foreign trade). The
registered ultimate vendor of kerosene for use in commercial
aviation (other than foreign trade) may make this claim if the
ultimate purchaser waives its right to the credit or payment by
providing the registered ultimate vendor with a waiver.
---------------------------------------------------------------------------
\1385\ Sec. 6427(l)(4).
---------------------------------------------------------------------------
Explanation of Provision
The provision suspends the imposition of certain aviation
excise taxes from March 28, 2020, through December 31, 2020
(the ``excise tax holiday period'').\1386\
---------------------------------------------------------------------------
\1386\ The CARES Act was signed by the President on March 27, 2020.
The ``excise tax holiday period'' is the period beginning after the
date of enactment and before January 1, 2021.
---------------------------------------------------------------------------
For commercial aviation only, the provision suspends
certain excise taxes during the excise tax holiday period. For
fuel used in commercial aviation, the 4.3 cents-per-gallon rate
for commercial aviation is reduced to zero during the excise
tax holiday period only when fuel is removed from a terminal
directly into the fuel tank of an aircraft. If kerosene removed
from the terminal rack at a higher rate is later used in
commercial aviation, a claim for the difference can be made
under section 6427(l). The provision does not affect the
imposition of the 0.1-cent-per-gallon excise tax to fund the
Leaking Underground Storage Tank Trust Fund.
The provision also suspends the excise taxes imposed under
sections 4261 and 4271 on amounts paid during the excise tax
holiday period for the transportation by air of persons or
property. The suspension only applies to amounts actually paid
during the excise tax holiday period. The excise tax holiday
does not apply to amounts paid before March 28, 2020, even if
the travel occurs during the excise tax holiday period.
Effective Date
The provision is effective on the date of enactment (March
27, 2020).
OTHER PROVISIONS
1. Loan forgiveness (sec. 1106 of the Act)
Explanation of Provision
In general
Under the provision, a recipient of a covered loan is
eligible for forgiveness of indebtedness on the loan in an
amount generally equal to the sum of certain costs incurred and
payments made during the eight-week period beginning on the
date of the origination of the covered loan, including payroll
costs, certain mortgage interest payments, certain rent
payments, and certain utility payments. For this purpose, a
covered loan is a loan guaranteed under paragraph (36) of
section 7(a) of the Small Business Act,\1387\ as added by
section 1102 of the Act, the ``Paycheck Protection Program.''
\1388\
---------------------------------------------------------------------------
\1387\ 15 U.S.C. 636(a).
\1388\ Treasury and the Small Business Administration have issued
FAQs on the Paycheck Protection Program, including answers to common
questions regarding the determination of the amount of loan
forgiveness. See ``Paycheck Protection Program Loans Frequently Asked
Questions (FAQs)'', available at https://home.treasury.gov/system/
files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf
(last visited April 22, 2020).
---------------------------------------------------------------------------
The amount forgiven may be reduced (by an amount not to
exceed the principal amount of the covered loan) if the
recipient reduces the number of the recipient's employees, or
the amount of salaries and wages paid, by a specified amount
during the covered period.
A covered loan recipient must apply for loan forgiveness.
Once an application is submitted to the lender with the
required documentation, the lender must issue a decision on the
loan forgiveness within 60 days.
Amounts that have been forgiven under the provision are
considered canceled indebtedness by a lender authorized under
section 7(a) of the Small Business Act (15 U.S.C. 636(a)). The
provision requires the Administrator of the Small Business
Administration to remit to the lender, no later than 90 days
after the date on which the amount of forgiveness under the
provision is determined, an amount equal to the amount of
forgiveness, plus any interest accrued through the date of
payment.
Federal tax consequences
For Federal tax purposes, any amount which (but for the
provision) would be includible in gross income of the recipient
of a covered loan by reason of forgiveness pursuant to the
provision is excluded from gross income.
Effective Date
The provision is effective on the date of enactment (March
27, 2020).
2. Emergency relief and taxpayer protections (sec. 4003 of the Act)
Explanation of Provision
In general
The provision authorizes the Secretary, notwithstanding any
other provision of law, to provide liquidity to eligible
businesses, States, and municipalities related to losses
incurred as a result of coronavirus. The Secretary is
authorized (1) to make loans, loan guarantees, and other
investments in support of eligible businesses, States, and
municipalities that do not, in the aggregate, exceed $500
billion and (2) to provide the subsidy amounts necessary for
the loans, loan guarantees, and other investments in accordance
with the provisions of the Federal Credit Reform Act of 1990 (2
U.S.C. 661 et seq.).
Under the provision, the Secretary must make a loan, loan
guarantee, or other investment in such form and on such terms
and conditions and with such covenants, representations,
warranties, and requirements (including requirements for
audits) as the Secretary determines appropriate. The provision
requires that any loans made by the Secretary under the
provision be at a rate that the Secretary determines based on
the risk and the current average yield on outstanding
marketable obligations of the United States of comparable
maturity.
Federal tax consequences
Any loan made by or guaranteed by the Treasury under the
provision is treated as indebtedness for Federal tax purposes
and as issued for its stated principal amount. Any stated
interest on any such loan is treated as qualified stated
interest.
The provision directs the Secretary (or the Secretary's
delegate) to prescribe such regulations or guidance as may be
necessary or appropriate to carry out the purposes of the
provision, including guidance providing that the acquisition of
warrants, stock options, common or preferred stock or other
equity under the provision does not result in an ownership
change for purposes of section 382.
Effective Date
The provision is effective on the date of enactment (March
27, 2020).
PART SEVEN: CONTINUING APPROPRIATIONS ACT, 2021 AND OTHER EXTENSIONS
ACT (PUBLIC LAW 116-159) \1389\
---------------------------------------------------------------------------
\1389\ H.R. 8337. The bill was introduced in the House of
Representatives on September 22, 2020 and was passed by the House the
same day. The Senate passed the bill without amendment on September 30,
2020. The President signed the bill on October 1, 2020.
---------------------------------------------------------------------------
DIVISION B--SURFACE TRANSPORTATION PROGRAM EXTENSION
TITLE II--TRUST FUNDS
1. Extension of expenditure and contract liquidation authority for the
Highway Trust Fund, the Sport Fish Restoration and Boating
Trust Fund, and the Leaking Underground Storage Tank Trust Fund
(secs. 1201, 1202, and 1203 of the Act and secs. 9503, 9504,
and 9508 of the Code)
Present Law
The Highway Trust Fund, the Sport Fish Restoration and
Boating Trust Fund, and the Leaking Underground Storage Tank
Trust Fund serve as dedicated trust fund sources for certain
program expenditures. Current expenditure authority is
scheduled to expire on October 1, 2020. After that date,
expenditures are only permitted to liquidate contracts entered
into prior to that date.
Explanation of Provisions
The provisions extend expenditure and contract liquidation
authority for an additional year, through October 1, 2021.
Effective Date
The provisions are effective on the date of enactment
(October 1, 2020).
2. Further additional transfers to the Highway Trust Fund and
additional transfer to the Airport and Airway Trust Fund (secs. 1204
and 1205 of the Act and secs. 9502 and 9503 of the Code)
Present Law
On several occasions, money has been transferred from the
General Fund to the Highway Trust Fund to address revenue
shortfalls. The most recent transfer occurred under the FAST
Act, which transferred $51,900,000,000 to the Highway Account
and $18,100,000,000 to the Mass Transit account.\1390\
---------------------------------------------------------------------------
\1390\ Pub. L. No. 114-94. An additional $300,000,000 also was
transferred from the Leaking Underground Storage Tank Trust Fund to the
Highway Trust Fund in three $100 million installments. See sec.
9508(c)(4).
---------------------------------------------------------------------------
Explanation of Provisions
The provision provides that out of money in the Treasury
that is not otherwise appropriated, the following transfers are
to be made from the General Fund to the Highway Trust Fund:
$10,400,000,000 to the Highway Account and $3,200,000,000 to
the Mass Transit account.
The provision provides that out of money in the Treasury
that is not otherwise appropriated, $14,000,000,000 is
appropriated to the Airport and Airway Trust Fund.
Effective Date
The provisions are effective on the date of enactment
(October 1, 2020).
PART EIGHT: CONSOLIDATED APPROPRIATIONS ACT, 2021 (PUBLIC LAW 116-260)
\1391\
---------------------------------------------------------------------------
\1391\ H.R. 133. On January 15, 2020, the Senate passed an
amendment in the nature of a substitute to a House bill introduced and
passed in January 2019. The House passed the Senate amendment with an
amendment on December 21, 2020. The Senate passed the House amendment
the same day. The President signed the bill on December 27, 2020.
---------------------------------------------------------------------------
DIVISION N--ADDITIONAL CORONAVIRUS RESPONSE AND RELIEF
TITLE II--ASSISTANCE TO INDIVIDUALS, FAMILIES, AND BUSINESSES
Subtitle B--COVID-Related Tax Relief Act of 2020
1. Additional 2020 recovery rebates for individuals (sec. 272 of the
Act and sec. 6428A of the Code)
Present Law
Background for the provision and a description of the 2020
recovery rebates for individuals that the provision relates to
may be found above in the section describing section 2201 of
the CARES Act (Pub. L. No. 116-136) in Part Six of this
document.
Explanation of Provision
In general
The provision provides an additional one-year refundable
income tax credit for 2020, referred to as the additional 2020
recovery rebate. Like the first 2020 recovery rebate, the
additional 2020 recovery rebate includes rules, described
below, under which the Secretary makes an advance payment to a
taxpayer for the amount of the credit (determined based on
prior year filing characteristics or other information) before
the taxpayer files a 2020 Federal income tax return. Such
additional advance payments are also known as the second round
of economic impact payments. The additional 2020 recovery
rebate has many of the same features as the first recovery
rebate.
An eligible individual is allowed a refundable income tax
credit for the first taxable year beginning in 2020 equal to
the sum of:
$600 ($1,200 in the case of a joint return),
and
$600 for each qualifying child of such
individual.\1392\
---------------------------------------------------------------------------
\1392\ Sec. 6428A(a).
---------------------------------------------------------------------------
An eligible individual is any individual other than: (1) a
nonresident alien; (2) an estate or trust; or (3) a
dependent.\1393\ For these purposes, the child tax credit
definition of a qualifying child applies (generally, a
qualifying child as defined in section 152 who is under the age
of 17).
---------------------------------------------------------------------------
\1393\ Sec. 6428A(d).
---------------------------------------------------------------------------
The amount of the credit is phased out at a rate of five
percent of AGI above certain threshold amounts.\1394\ The
threshold amount at which the credit begins phasing out is
$150,000 of AGI for joint filers or a surviving spouse,
$112,500 of AGI for head of household filers, and $75,000 of
AGI for all other filers.\1395\ Thus, the credit is fully
phased out (i.e., reduced to zero) for joint filers with no
children at $174,000 of AGI and for a single filer at $87,000
of AGI.
---------------------------------------------------------------------------
\1394\ Sec. 6428A(c).
\1395\ For example, a married couple that files jointly with two
qualifying children and has an AGI below the phaseout range would be
entitled to an additional recovery rebate of $2,400 ($1,200 + $600 +
$600). If that couples AGI was $175,000, the additional recovery rebate
would be $1,150 ($2,400 - .05 * ($175,000 - $150,000)). The credit
would be fully phased out for this couple at $198,000 of AGI.
---------------------------------------------------------------------------
Identification number requirement
No credit is allowed to an individual who does not include
a valid identification number on the individual's income tax
return.\1396\ In the case of a joint return that does not
include a valid identification number for either spouse, no
credit is allowed. Unlike the first recovery rebate, in the
case of a joint return that includes a valid identification
number for only one spouse, a $600 credit is allowed (rather
than no credit under the first recovery rebate). A qualifying
child shall not be taken into account in determining the amount
of the credit unless a valid identification number (i) for the
taxpayer (or for at least one spouse in the case of a joint
return) and (ii) for the child are included on the return.
---------------------------------------------------------------------------
\1396\ Sec. 6428A(g).
---------------------------------------------------------------------------
For purposes of this requirement, a valid identification
number is an SSN as defined for purposes of the child tax
credit,\1397\ which means that it must be issued by the Social
Security Administration before the due date of the return
(including extensions) to a citizen of the United States or
pursuant to a provision of the Social Security Act relating to
the lawful admission for employment in the United States.\1398\
Two exceptions to the identification number requirement are
provided. First, an adoption identification number is
considered a valid identification number in the case of a
qualifying child who is adopted or placed for adoption. Second,
when a married couple files a joint return and at least one
spouse was a member of the Armed Forces of the United States
during the taxable year for which the return is filed, only one
spouse is required to provide a valid identification number to
receive the full $1,200 credit (subject to the income-based
phaseout).
---------------------------------------------------------------------------
\1397\ Sec. 24(h)(7).
\1398\ See also sec. 205(c)(2)(B)(i)(I) (or that portion of
subclause (III) that relates to subclause (I)) of the Social Security
Act.
---------------------------------------------------------------------------
The failure to provide a correct valid identification
number is treated as a mathematical or clerical error. If a
taxpayer claims an individual as a qualifying child, but based
on the SSN provided the individual is too old to be a
qualifying child, the provision of the SSN is treated as a
mathematical or clerical error.
Advance payments of the additional recovery rebate
Many taxpayers received the additional recovery rebate
automatically as an advance refund in the form of a direct
deposit to their bank account or as a check or prepaid debit
card issued by the Secretary.\1399\ The amount of the
additional advance refund is computed in the same manner as the
additional recovery rebate, except that the calculation is made
on the basis of the income tax return filed for 2019 (instead
of 2020), if available.\1400\ Accordingly, the additional
advance refund amount generally is based on a taxpayer's filing
status, number of qualifying children, and AGI as reported for
2019. The Secretary is directed to issue additional advance
refunds as rapidly as possible, and no advance refund is to be
made or allowed after January 15, 2021.\1401\
---------------------------------------------------------------------------
\1399\ Payments started during the last week of December 2020 and
continued into January 2021. Direct deposit payments were issued to
individuals with valid routing and account information on file with the
IRS. IRS, ``Questions and Answers about the Second Economic Impact
Payment,'' available at https://www.irs.gov/coronavirus/second-eip-faqs
(last visited January 24, 2021). As of January 8, 2021, over 100
million advance refunds had been direct deposited into eligible
recipients' bank accounts. IRS, ``IRS Statement--Update on Economic
Impact Payments,'' January 11, 2021, available at https://www.irs.gov/
newsroom/irs-statement-update-on-economic-impact-payments.
\1400\ Sec. 6428A(f).
\1401\ In the case of a mirror Code territory, the additional
recovery rebate credit payments can be made or allowed until September
30, 2021.
---------------------------------------------------------------------------
If a taxpayer did not file an income tax return for 2019 at
the time the Secretary makes a determination regarding
payments, the Secretary may use information to administer the
additional advance refund with respect to that taxpayer that is
provided (1) in the case of a specified Social Security or
Supplemental Security Income (SSI) recipient, by the Social
Security Administration, (2) in the case of a specified
railroad retirement beneficiary, by the Railroad Retirement
Board, and (3) in the case of a specified veterans beneficiary,
by the Department of Veterans Affairs (VA).\1402\ Payments for
such specified individuals may be provided to the individual's
representative payee or fiduciary. The entire payment must be
provided to the individual or used for the benefit of the
individual. Enforcement provisions apply to prevent the misuse
of the payment.\1403\
---------------------------------------------------------------------------
\1402\ Sec. 6428A(f)(5).
\1403\ See 42 U.S.C. sec. 1320a-8(a)(3) (for Social Security
Administration payees), 45 U.S.C. sec. 231l (for Railroad Retirement
Board payees), 38 U.S.C. secs. 5502, 6106, and 6108 (for Department of
Veterans Affairs payees).
---------------------------------------------------------------------------
For other individuals who did not have a return-filing
obligation, the Secretary could utilize information provided by
such individuals who successfully registered for the first
advance refund by filing a simplified tax return using the
``non-filer portal,'' a web tool developed by the IRS, or who
submitted a simplified Federal income tax return to receive the
first advance refund.\1404\
---------------------------------------------------------------------------
\1404\ IRS, ``Treasury and IRS begin delivering second round of
Economic Impact Payments to millions of Americans, IR-2020-280,
December 29, 2020, available at https://www.irs.gov/news
room/treasury-and-irs-begin-delivering-second-round-of-economic-impact-
payments-to-millions-of-americans.
---------------------------------------------------------------------------
An individual who died before January 1, 2020, is not
eligible to receive the additional advance refund. If a married
couple files a joint return and one spouse died before January
1, 2020, the surviving spouse is allowed (subject to other
requirements) a $600 payment. No payment may be issued with
respect to qualifying children of a taxpayer who died before
January 1, 2020 (or, in the case of joint return, if both
taxpayers died before January 1, 2020).
The amount of the additional recovery rebate credit allowed
on a taxpayer's 2020 income tax return (based on 2020
information) must be reduced (but not below zero) by any
additional advance refund received (based on 2019
information).\1405\ If the additional recovery rebate less the
additional advance refund is a positive number (because, for
example, a qualifying child was born to the taxpayer during
2020), the taxpayer is allowed that difference as a refundable
credit against 2020 income tax liability. If, however, the
result is negative (because, for example, the taxpayer's AGI
was higher in 2020 and was in the phaseout range), the
taxpayer's 2020 tax liability is not increased by that negative
amount. In addition, an eligible taxpayer who does not receive
an additional advance refund may claim the additional recovery
rebate on his or her 2020 income tax return. A taxpayer's
failure to reduce the additional recovery rebate by any
additional advance refund is treated as a mathematical or
clerical error. The additional advance refund is not includible
in gross income.\1406\
---------------------------------------------------------------------------
\1405\ Sec. 6428A(e).
\1406\ Under section 6409, the additional recovery rebate is
disregarded in the administration of Federal programs and Federally
assisted programs. Any refund due to the credit, including any advance
payment of the credit, is not taken into account as income and is not
taken into account as resources for a period of 12 months from receipt
for purposes of determining eligibility for benefits or assistance
under any Federal program or under any State or local program financed
with Federal funds.
---------------------------------------------------------------------------
As soon as practicable after the distribution of the
additional advance refund, the Secretary is required to send a
notice by mail to the taxpayer's last known address that
indicates the method by which the payment was made, the amount
of such payment, and a phone number at the IRS to report any
failure to receive such payment. The Secretary is also required
to carry out a public awareness campaign regarding the
availability of the additional recovery rebate credit and the
additional advance refund, including with regard to individuals
who may not have filed a tax return for taxable year 2019.
Treatment of the U.S. territories
The provision directs the Secretary to make payments to
each mirror Code territory (Guam, the Commonwealth of the
Northern Mariana Islands, and the U.S. Virgin Islands) that
relate to the cost (if any) of each territory's additional
recovery rebate. The Secretary is further directed to make
similar payments to each non-mirror Code territory (American
Samoa and Puerto Rico).
The provision directs the Secretary to pay to each mirror
Code territory amounts equal to the aggregate amount of the
credits allowable by reason of the provision to that
territory's residents against its income tax. Such amounts are
determined by the Secretary based on information provided by
the government of the respective territory.
To each non-mirror Code territory, the provision requires
the Secretary to pay amounts estimated by the Secretary as
being equal to the aggregate credits that would have been
allowed to residents of that territory if a mirror Code tax
system had been in effect in that territory. Accordingly, the
amount of each payment to a non-mirror Code territory is an
estimate of the aggregate amount of the credits that would be
allowed to the territory's residents if the credit provided by
the provision to U.S. residents were provided by the territory
to its residents. This payment will not be made to any U.S.
territory unless it has a plan that has been approved by the
Secretary under which the territory will promptly distribute
the payment to its residents.
No credit against U.S. income taxes is permitted under the
provision for any person to whom a credit is allowed against
territory income taxes as a result of the provision (for
example, under that territory's mirror income tax). Similarly,
no credit against U.S. income taxes is permitted for any person
who is eligible for a payment under a non-mirror Code
territory's plan for distributing to its residents the payment
described above from the U.S. Treasury.
Exception from reduction or offset
Any refund payable as an additional advance refund or any
similar payment to a resident of the U.S. territories is not
subject to reduction or offset by other assessed Federal taxes
that would otherwise be subject to levy or collection. In
addition, the overpayments resulting from these credits
generally are not subject to offset for other taxes or non-tax
debts owed to the Federal government or State governments.
Unlike the first advance refund, the additional advance
refund is not subject to reduction or offset for past-due child
support. The additional advance refund also is not subject to
transfer, assignment, execution, levy, attachment, garnishment,
or other legal process, or the operation of any bankruptcy or
insolvency law. The provision directs the Secretary to encode
payments that are paid electronically as a result of any
applicable payment with a unique identifier that allows the
financial institution maintaining the account to identify the
payment as protected.
Effective Date
The provision is effective on the date of enactment
(December 27, 2020).
2. Amendments to recovery rebates under the CARES Act (sec. 273 of the
Act and sec. 6428 of the Code)
Present Law
Background for the provision and a description of the 2020
recovery rebates for individuals that the provision modifies
may be found in the section describing section 2201 of the
CARES Act (Pub. L. No. 116-136) in Part Six of this document.
Explanation of Provision
The provision makes several modifications to the 2020
recovery rebate credit.
The provision provides that surviving spouses are subject
to phase out of the credit at $150,000 of AGI, rather than
$75,000 of AGI. Surviving spouses, therefore, have the same AGI
phase out threshold as joint filers.
The provision provides that in the case of an individual
for which information to make an advance refund was provided by
the Social Security Administration, the Railroad Retirement
Board, or the Department of Veterans Affairs, such payment may
be made to the individual's representative payee or fiduciary.
The entire payment must be provided to the individual or used
for the benefit of the individual. Enforcement provisions apply
to prevent the misuse of the payment.\1407\
---------------------------------------------------------------------------
\1407\ See 42 U.S.C. sec. 1320a-8(a)(3) (for Social Security
Administration payees), 45 U.S.C. sec. 231l (for Railroad Retirement
Board payees), 38 U.S.C. secs. 5502, 6106, and 6108 (for Department of
Veterans Affairs payees).
---------------------------------------------------------------------------
The provision modifies the identification number
requirements for the recovery rebate credit to provide that in
the case of a joint return that includes a valid identification
number for only one spouse, a $1,200 credit is allowed (subject
to income-based phaseouts). Under prior law, no credit was
allowed. In addition, in the case of a joint return, the
provision allows an additional amount for a qualifying child if
a valid identification number for at least one spouse and for
the child are included on the return. Under prior law, a valid
identification number for both spouses was required. The
provision does not modify the identification number
requirements for the first round of advance refunds, so no
additional amounts of advance refunds are to be made on the
basis of the modified identification number requirements. Any
additional amount owed as a result of the modified
identification number requirements may be claimed on the 2020
Federal income tax return.
The provision provides that the restrictions against
reduction or offset of the recovery rebate credit by other
assessed Federal taxes, other taxes, and non-tax debts owed to
the Federal government or States governments apply to the
advance refunds only. Thus any recovery rebate credit claimed
on a 2020 Federal income tax return may be subject to reduction
or offset.
Effective Date
The provision applies as if included in section 2201 of the
CARES Act (Pub. L. No. 116-136), which was effective on the
date of enactment of the CARES Act, March 27, 2020.
3. Extension of certain deferred payroll taxes (sec. 274 of the Act)
Present Law
Federal employment taxes are imposed on wages paid to
employees with respect to employment and include Federal income
tax as well as taxes levied under the Federal Insurance
Contributions Act (``FICA'') and Federal Unemployment Tax Act
(``FUTA'').\1408\ In addition, tier 1 of the Railroad
Retirement Tax Act (``RRTA'') imposes a tax on compensation
paid to railroad employees and representatives.\1409\
---------------------------------------------------------------------------
\1408\ Secs. 3401, 3101, 3111, and 3301.
\1409\ Sec. 3221.
---------------------------------------------------------------------------
FICA taxes are comprised of two components: Old-Age,
Survivors, and Disability Insurance (``OASDI'') and Hospital
Insurance (``HI'') taxes.\1410\ With respect to OASDI taxes,
the applicable rate is 12.4 percent with half of such rate (6.2
percent) imposed on employee wages and the remainder (6.2
percent) imposed on the employer.\1411\ The tax is assessed on
covered wages up to the OASDI wage base ($142,800 in 2021).
Generally, the OASDI wage base rises based on increases in the
national average wage index.\1412\
---------------------------------------------------------------------------
\1410\ The Hospital Insurance (``HI'') tax has two components:
Medicare tax and Additional Medicare tax. Medicare tax is imposed on
wages, as defined in Section 3121(a), with respect to employment, as
defined in Section 3121(b), at a rate of 1.45 percent for the employer.
Sec. 3101(b)(1). An equivalent 1.45 percent is withheld from employee
wages. Sec. 3111(b)(1). For purposes of this description, Medicare tax
does not include Additional Medicare tax. Additional Medicare taxes are
withheld from employee wages in excess of $200,000 at a rate of 0.9
percent. Sec. 3101(b)(2). There is no equivalent employer's share of
Additional Medicare taxes.
\1411\ Sec. 3101.
\1412\ Sec. 230 of the Social Security Act (42 U.S.C. sec. 430).
---------------------------------------------------------------------------
Generally, the term ``wages'' for OASDI tax purposes means
all remuneration for ``employment,'' including the cash value
of all remuneration (including benefits) paid in any medium
other than cash, with certain exceptions.\1413\ The name given
to the remuneration for employment is immaterial. OASDI wages
includes remuneration such as salaries, vacation allowances,
bonuses, deferred compensation, commissions, and fringe
benefits. The term ``employment'' is generally defined for FICA
tax purposes as any service, of whatever nature, performed by
an employee for the person employing him or her, with certain
specific exceptions.
---------------------------------------------------------------------------
\1413\ Sec. 3121(a).
---------------------------------------------------------------------------
Railroad retirement program
Railroad workers do not participate in the OASDI system.
Accordingly, compensation subject to RRTA tax is exempt from
FICA taxes.\1414\ The RRTA imposes a tax on compensation paid
by covered employers to employees in recognition for the
performance of services.\1415\ Employees whose compensation is
subject to RRTA taxes are ultimately eligible for railroad
retirement benefits that fall under a two-tier structure.
Railroad employees and employers pay tier 1 taxes at the same
rate as FICA taxes.\1416\ In addition, rail employees and
employers both pay tier 2 taxes that are used to finance
railroad retirement benefits over and above Social Security
benefit levels.\1417\ Tier 2 benefits are similar to benefits
under a defined benefit plan. Those taxes are funneled to the
railroad retirement system and used to fund basic retirement
benefits for railroad workers and an investment trust that
generates returns for the pension fund.
---------------------------------------------------------------------------
\1414\ Sec. 3121(b)(9).
\1415\ Secs. 3201 through 3233. Instead of FICA taxes, railroad
employers and employees are subject, under the RRTA, to taxes
equivalent to the Social Security and Medicare taxes under FICA. Under
the RRTA, employers and employees are also subject to an additional
tax, referred to as the ``tier 2'' tax, on compensation up to a certain
amount.
\1416\ 7.65 percent, consisting of 6.2 percent for retirement on
earnings up to $142,800 in 2021, and 1.45 percent for Medicare hospital
insurance on all earnings. An additional 0.9 percent in Medicare taxes
are withheld from employees on earnings above $200,000.
\1417\ In 2021, the tier 2 tax rate on earnings up to $106,200 is
4.9 percent for employees and 13.1 percent for employers. Tier 2 tax
rates are based on an average account benefits ration that take into
account railroad retirement funding levels.
---------------------------------------------------------------------------
Self-employment taxes
The Self-Employment Contributions Act (``SECA'') imposes
tax on the self-employment income of an individual. SECA taxes
consist of OASDI tax and HI tax.\1418\ Under the OASDI
component, the first rate of tax is 12.4 percent on self-
employment income up to the OASDI wage base ($142,8/00 for
2021).\1419\ Under the basic HI tax component, the second rate
of tax is 2.9 percent of all self-employment income (without
regard to the OASDI wage base).\1420\ As is the case with
employees, an Additional Medicare tax applies to the HI portion
of SECA tax on self-employment income in excess of a threshold
amount.\1421\
---------------------------------------------------------------------------
\1418\ Sec. 1401(a) and (b).
\1419\ Sec. 1401(a). In calculating the SECA tax for OASDI, the
OASDI wage base taken into account is reduced by FICA wages paid to the
individual during the taxable year.
\1420\ Sec. 1401(b)(1).
\1421\ Sec. 1401(b)(2).
---------------------------------------------------------------------------
Self-employment income subject to SECA tax is determined as
the net earnings from self-employment derived by an individual
during any taxable year, subject to certain exceptions. Net
earnings from self-employment are equal to the gross income
derived by an individual from any trade or business less
allowed deductions that are attributable to the trade or
business and permitted under the SECA rules. Certain passive
income and related deductions are not taken into account in
determining net earnings from self-employment, including
rentals from real estate unless received in the course of a
trade or business as a real estate dealer,\1422\ dividends and
interest unless such dividends and interest are received in the
course of a trade or business as a dealer in stocks or
securities,\1423\ and sales or exchanges of capital assets and
certain other property unless the property is stock in trade
that would properly be included in inventory or held primarily
for sale to customers in the ordinary course of the trade or
business.\1424\
---------------------------------------------------------------------------
\1422\ Sec. 1402(a)(1).
\1423\ Sec. 1402(a)(2).
\1424\ Sec. 1402(a)(3).
---------------------------------------------------------------------------
For purposes of computing net earnings from self-
employment, taxpayers are permitted a deduction equal to the
product of the taxpayer's net self-employment income
(determined without regard to this deduction) and one-half of
the sum of the rates for OASDI and HI, i.e., 7.65 percent of
net earnings.\1425\ This deduction is determined without regard
to the additional 0.9 percent Additional Medicare tax that may
apply to an individual. This deduction reflects the fact that
the FICA rates apply to an employee's wages, which do not
include FICA taxes paid by the employer, whereas the self-
employed individual's net earnings are economically equivalent
to an employee's wages plus the employer's share of FICA
taxes.\1426\ This is generally referred to as the ``regular
method'' of determining net earnings from self-employment, and
in Internal Revenue Service (``IRS'') forms and publications it
is expressed as multiplying total net earnings from self-
employment by 92.35 percent.
---------------------------------------------------------------------------
\1425\ Sec. 1402(a)(12).
\1426\ The deduction is intended to provide parity between FICA and
SECA taxes because the employer may deduct, as a business expense, its
share of the FICA taxes paid. As presently written, the deduction for
SECA taxes is not the exact economic equivalent to the deduction for
FICA taxes. See Joint Committee on Taxation, Options to Improve Tax
Compliance and Reform Tax Expenditures, (JCS-2-05), January 27, 2005,
for a detailed description of this issue.
---------------------------------------------------------------------------
Deposit requirements
The employee portion of OASDI taxes must be withheld and
remitted to the Federal government by the employer during the
quarter, as required by the applicable deposit rules.\1427\ The
employer is liable for the employee portion of OASDI taxes, in
addition to its own share, whether or not the employer withheld
the amount from the employee's wages.\1428\ Employers that make
payments of wages and withhold Federal income and FICA taxes
are required to make deposits of those taxes in a timely
manner.
---------------------------------------------------------------------------
\1427\ Sec. 3102(a) and Treas. Reg. sec. 31.3121(a)-2. Sec. 6302.
\1428\ Sec. 3102(b).
---------------------------------------------------------------------------
Employers generally must deposit employment taxes under a
monthly or semi-weekly schedule, with certain exceptions.\1429\
The applicable deposit schedule is determined based on the
total tax liability reported on an employer's quarterly
employment tax return during a lookback period. In general, an
employer is a monthly depositor if the total Federal income and
FICA tax liability for the four quarters in the lookback period
was $50,000 or less. A semiweekly depositor is an employer for
which the total tax liability reported during the lookback
period was more than $50,000. Employers that accumulate
$100,000 or more of employment tax liability on any day are
required to make deposits of those taxes by the close of the
next banking day.\1430\
---------------------------------------------------------------------------
\1429\ Treas. Reg. sec. 31.6302-1. In certain circumstances,
employers may make employment tax payments with the filing of a return
instead of periodic deposits under a monthly or semiweekly schedule.
For example, to the extent an employer's total employment tax liability
for the current or prior quarter is less than $2,500, the employer may
make a payment with a timely filed IRS Form 944, Employer's ANNUAL
Federal Tax Return, or IRS Form 941, Employer's QUARTERLY Federal Tax
Return.
\1430\ Treas. Reg. sec. 31.6302-1(c).
---------------------------------------------------------------------------
If the aggregate amount of tax reported on an employment
tax return exceeds the total amount of deposits made by the
employer for the same quarter, the balance due must be remitted
in accordance with the applicable form and instructions.\1431\
---------------------------------------------------------------------------
\1431\ Treas. Reg. secs. 31.6302-1(h)(7) and 31.6302-1(i)(2).
---------------------------------------------------------------------------
A penalty may be imposed for the failure to deposit
employment taxes by the prescribed date.\1432\ The amount of
the penalty varies depending on when the deposit is made in
relation to the applicable deadline. The penalty is two percent
of the unpaid amount if the payment is made within five days of
the deadline, five percent if the payment is made within six to
15 days of the due date, 10 percent if the payment is made more
than 15 days after the due date, and 15 percent for taxes still
unpaid after the 10th day following a notice and demand from
the IRS. The failure to deposit penalty may be waived if the
taxpayer demonstrates the failure was due to reasonable cause
and not willful neglect.\1433\
---------------------------------------------------------------------------
\1432\ Sec. 6656.
\1433\ Sec. 6656(a).
---------------------------------------------------------------------------
A penalty may also apply in the event that a taxpayer fails
to make a payment of tax due on a tax return with the return
absent a showing that the failure to pay was due to reasonable
cause and not due to willful neglect.\1434\ The amount of the
penalty is equal to one-half percent of the net amount of tax
due for each month that the return is not filed. This penalty
is coordinated with the penalty for the failure to timely file
a tax return, by reducing the failure to file penalty by the
amount of the failure to pay penalty for that month.\1435\ The
maximum amount of the failure to pay penalty is 25 percent of
the tax due.
---------------------------------------------------------------------------
\1434\ Secs. 6151(a) and 6651(a)(2).
\1435\ Sec. 6651(a)(1).
---------------------------------------------------------------------------
With respect to self-employed individuals, estimated tax
payments at least equal to (1) 90 percent of the current year's
tax liability or (2) 100 percent of the prior year's tax
liability, must be made by the applicable deadlines.\1436\ A
penalty is imposed by applying the underpayment interest rate
to the amount of the underpayment for the period of
underpayment. The penalty does not apply if the tax shown on
the return is less than $1,000. There is no general reasonable
cause waiver for the failure to pay estimated tax, but a waiver
is available to the extent the Secretary determines that a
taxpayer suffered a casualty or other unusual circumstance if
imposition of a penalty would be against equity and good
conscience.\1437\
---------------------------------------------------------------------------
\1436\ Sec. 6654.
\1437\ Sec. 6654(e)(3).
---------------------------------------------------------------------------
Third-party arrangements
Responsibility for employment tax obligations generally
rests with the person who is the employer of an employee under
a common-law test that has been incorporated into Treasury
regulations.\1438\ An employer-employee relationship exists if
the person for whom the services are performed has the right to
direct and control the performance of services by an
individual, not only to the result to be accomplished by the
work but also the details and means by which that result is
accomplished. In some cases, however, a person other than the
common-law employer may be responsible for effectuating the
employer's employment tax obligations.
---------------------------------------------------------------------------
\1438\ Treas. Reg. secs. 31.3401(c)-1, 31.3121(d)-1(c)(1) and
31.3306(i)-1(a). A similar concept for RRTA purposes applies under
Treas. Reg. sec. 31.3231(b)-1(a)(1)(i).
---------------------------------------------------------------------------
An employer may designate a third-party agent to be
responsible for employment tax withholding, depositing, and
reporting requirements on behalf of that employer.\1439\ The
reporting functions undertaken by this third party, a ``section
3504 agent,'' may include filing employment tax returns and
furnishing and filing Forms W-2, Wage and Tax Statement, to the
employer's employees. An employer remains jointly and severally
liable with the section 3504 agent for satisfaction of the
employer's employment tax obligations.\1440\
---------------------------------------------------------------------------
\1439\ Sec. 3504. Treas. Reg. sec. 31-3504-1 provides the criteria
for the designation by an employer of an agent by application to the
IRS. IRS Form 2678 is used for this purpose. In addition, under Treas.
Reg. sec. 31-3504-2, designation of an agent may result from the
payment of wages or compensation by a payor to an individual performing
services for a client of the payor pursuant to a services agreement
meeting certain criteria. The rules for designating an agent is a
departure from the general principle that a taxpayer has a nondelegable
duty with respect to employment tax obligations. See U.S. v. Boyle, 469
U.S. 241 (1985).
\1440\ Treas. Reg. sec. 31.3405-1(a).
---------------------------------------------------------------------------
Another type of third-party entity is a professional
employer organization (``PEO''), which provides employees to
perform services in the business of the PEO's customers,
including small and medium-sized businesses.\1441\ In many
cases, before the PEO arrangement is finalized, the employees
already work in the customer's business as employees of the
customer. Depending on the facts and circumstances, the
customer may be the common law employer ultimately liable for
the satisfaction of employment tax obligations with respect to
its work-site employees under the PEO arrangement.
---------------------------------------------------------------------------
\1441\ ``Professional employer organization'' is not a legal term
with a specific definition. The term ``employee leasing company'' is
also occasionally used to describe the same or similar relationship
between service provider and customer in this context, but both terms
can be used to describe a variety of arrangements.
---------------------------------------------------------------------------
A ``certified professional employer organization''
(``CPEO'') is a PEO that has applied to the Secretary to be
treated as a CPEO and has been certified to meet certain
requirements. A CPEO is treated as the employer of any work-
site employee performing services for any customer of the CPEO
but only with respect to remuneration remitted by the CPEO to a
work-site employee.\1442\ A CPEO is subject to employment tax
withholding, depositing, and reporting requirements and
associated liability with respect to the work-site employees
performing services for a customer of the CPEO, subject to the
limitations and requirements of section 3511.
---------------------------------------------------------------------------
\1442\ Sec. 3511.
---------------------------------------------------------------------------
Delay of employment tax deadlines
The President of the United States issued a Presidential
Memorandum on August 8, 2020, which directed the Secretary to
defer the withholding, deposit, and payment of certain payroll
tax obligations pursuant to section 7508A.\1443\ The IRS
subsequently implemented this provision.\1444\ In Notice 2020-
65, the due date for the withholding and payment of the
employee's share of OASDI tax, and the equivalent amount of
RRTA tax, on applicable wages by affected taxpayers was
postponed until the period beginning January 1, 2021 and ending
on April 30, 2021. Affected taxpayers includes employers that
were impacted by COVID-19 and that were required to withhold
and pay the employee's share of OASDI tax or the equivalent
amount of RRTA tax.
---------------------------------------------------------------------------
\1443\ Exec. Order, 85 Fed. Reg. 49587 (August 8, 2020).
\1444\ Notice 2020-65, 2020-38 I.R.B. 567, September 14, 2020.
---------------------------------------------------------------------------
The delay of withholding, deposit, and payment of
applicable employment taxes applied to wages, as defined in
section 3121(a) for OASDI tax purposes, or compensation, as
defined in section 3231(e)(3) for RRTA tax purposes, paid to an
employee on a pay date during the period beginning on September
1, 2020, and ending on December 31, 2020. This delay only
applies if the amount of such wages or compensation paid for a
bi-weekly pay period is less than the threshold amount of
$4,000, or the equivalent threshold amount with respect to
other pay periods. The IRS provided that affected taxpayers
must deposit the deferred employment taxes on applicable wages
between January 1, 2021 and April 30, 2021; otherwise, or
interest, penalties, and additions to tax would begin to accrue
with respect to unpaid taxes on May 1, 2021.
Explanation of Provision
The provision directs the Secretary (or the Secretary's
delegate) to extend the relief provided in IRS Notice 2020-65.
First, the date April 30, 2021 is replaced with December 31,
2021 in each place that it appeared in the notice. The result
is that affected taxpayers may delay the withholding, deposit,
and payment of applicable employment taxes on wages and
compensation paid to employees until December 31, 2021. Second,
the date May 1, 2021 is replaced with January 1, 2022 in each
place that it appeared. In effect, penalties and interest will
not begin to accrue on amounts to be repaid until January 1,
2022.
Effective Date
The provision is effective on the date of enactment
(December 27, 2020).
4. Regulations or guidance clarifying application of educator expense
tax deduction (sec. 275 of the Act and sec. 62 of the Code)
Present Law
Educator expense deduction
In general, ordinary and necessary business expenses are
deductible. However, unreimbursed employee business expenses
that are miscellaneous itemized deductions are not deductible
for taxable years beginning before January 1, 2026.
Certain expenses of eligible educators are allowed as an
above-the-line deduction from gross income to determine
adjusted gross income. Specifically, an above-the-line
deduction is allowed for up to $250 annually of expenses paid
or incurred by an eligible educator for (1) participation in
professional development courses related to the curriculum in
which he or she provides instruction to students; and (2)
books, supplies (other than nonathletic supplies for courses of
instruction in health or physical education), computer
equipment (including related software and services) and other
equipment, and supplementary materials used by the eligible
educator in the classroom.\1445\ The $250 maximum deduction
amount is indexed for inflation. To be eligible for this
deduction, the expenses must be otherwise deductible under
section 162 as a trade or business expense. A deduction is
allowed only to the extent the amount of expenses exceeds the
amount excludable from income under section 135 (relating to
education savings bonds), section 529(c)(1) (relating to
qualified tuition programs), and section 530(d)(2) (relating to
Coverdell education savings accounts).
---------------------------------------------------------------------------
\1445\ Sec. 62(a)(2)(D).
---------------------------------------------------------------------------
An eligible educator is a kindergarten through grade twelve
teacher, instructor, counselor, principal, or aide in a school
for at least 900 hours during a school year. A school means any
school that provides elementary education or secondary
education (kindergarten through grade 12), as determined under
State law.
COVID-19 expenses
In response to a Congressional inquiry, the IRS advised
that cleaning supplies, air purifiers, personal protective
equipment (including face masks), and similar items purchased
during the COVID-19 pandemic are not deductible as an above-
the-line educator expense deduction because they are not
otherwise deductible under section 162.\1446\ Specifically,
such expenses are not deductible under section 162 because they
are not customary and directly related to the subject matter
that the educator may teach, even though the expenses may be
helpful or appropriate.
---------------------------------------------------------------------------
\1446\ Letter from John P. Moriarty, Associate Chief Counsel
(Income Tax & Accounting), IRS, to Representative Stephanie Murphy,
September 18, 2020, available at https://murphy.house.gov/
uploadedfiles/2020-25551_murphy_response_final_signed--091820.pdf.
---------------------------------------------------------------------------
Explanation of Provision
The provision directs the Secretary to issue regulations or
other guidance clarifying that personal protective equipment,
disinfectant, and other supplies used for the prevention of the
spread of COIVD-19 are treated as deductible expenses for
purposes of the above-the-line educator expense deduction. Such
regulations or other guidance shall apply to expenses paid or
incurred after March 12, 2020.
The IRS subsequently has implemented this provision.\1447\
---------------------------------------------------------------------------
\1447\ In Revenue Procedure 2021-15, the IRS provides a safe harbor
for eligible educators to treat unreimbursed expenses paid or incurred
after March 12, 2020 for personal protective equipment, disinfectant,
and other supplies used for the prevention of the spread of COVID-19 in
the classroom as deductible expenses for purposes of the above-the-line
educator expense deduction. See also IRS, Instructions for Form 1040
and Form 1040-SR, January 6, 2021, at 89.
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment
(December 27, 2020).
5. Clarification of tax treatment of forgiveness of covered loans,
clarification of tax treatment of certain loan forgiveness and other
business financial assistance, and authority to waive certain
information reporting requirements (secs. 276, 278, and 279 of the Act)
Present Law
Tax treatment relating to amounts excluded from income
Exclusions from income
Gross income means all income from whatever source
derived.\1448\ Specific exclusions from income apply to certain
otherwise includable amounts and payments, however. For
example, income exclusions apply to qualified disaster relief
payments and qualified disaster mitigation payments.\1449\
---------------------------------------------------------------------------
\1448\ Sec. 61; U.S. v. Kirby Lumber Co., 284 U.S. 1 (1931).
\1449\ Sec. 139.
---------------------------------------------------------------------------
Tax treatment of forgiveness of loans
The forgiveness of a loan is generally treated as income
from discharge of indebtedness.\1450\ As a simple example, if a
taxpayer borrows $1,000 from a lender, and if the lender
subsequently forgives the loan so the taxpayer does not repay
it, the taxpayer has discharge of indebtedness income of $1,000
that is taken into account in determining income tax. However,
limited exclusions apply to income from a discharge of
indebtedness that occurs in a Title 11 case (generally, a
bankruptcy case), or that occurs when the taxpayer is insolvent
to the extent of the insolvency amount, or arises from the
discharge of qualified farm indebtedness.\1451\
---------------------------------------------------------------------------
\1450\ Sec. 61(a)(11).
\1451\ Sec. 108(a).
---------------------------------------------------------------------------
Effect of income exclusion on deductions, tax attributes,
and basis
In general.--Several provisions limit deductions, tax
attributes, or basis increases associated with excluded income.
These provisions maintain accurate income measurement by
preventing the reduction of taxable income for costs associated
with untaxed income.
Limitations on deductions.--One such rule, section 265,
disallows deductions that are allocable to a class of income
wholly exempt from income tax.\1452\ Similarly, a pro rata
limitation on interest deductions applies in the case of a
financial institution with tax-exempt interest income.\1453\ An
interest deduction limitation rule applies in the case of a
life insurance contract, the death benefit under which is
excludable from income by section 101(a).\1454\
---------------------------------------------------------------------------
\1452\ Sec. 265(a)(1). This rule applies with respect to exempt
income other than interest; section 265 also disallows the deduction
for interest expense on debt incurred or continued to purchase or carry
obligations the interest income on which is wholly exempt from income
tax (sec. 265(a)(2)), and disallows deductions otherwise allowable
under section 212 for expenses for the production of interest income
wholly exempt from income tax.
\1453\ The limitation ratio is (1) the average adjusted bases of
certain types of tax-exempt obligations, to (2) average adjusted bases
for all assets of the taxpayer (sec. 265(b)).
\1454\ Sec. 264(f). This pro rata interest deduction limitation
permits no deduction for that portion of the taxpayer's interest
expense determined by applying the ratio of (1) unborrowed policy cash
values, to (2) the sum of all the taxpayer's average unborrowed policy
cash values and average adjusted bases of all other assets (sec.
264(f)(1) and (2)).
---------------------------------------------------------------------------
Reductions in tax attributes.--In the case of discharge of
indebtedness income that is excluded from income,\1455\ rules
for reduction of tax attributes apply.\1456\ The excluded
amount is applied to reduce the tax attributes of the taxpayer
in the order prescribed by statute: (1) net operating losses,
(2) general business credit, (3) minimum tax credit, (4)
capital loss carryovers, (5) basis of the taxpayer's property,
(6) passive activity loss and credit carryovers, and (7)
foreign tax credit carryovers.
---------------------------------------------------------------------------
\1455\ Sec. 108.
\1456\ Secs. 108(b) and 1017.
---------------------------------------------------------------------------
Limitations on basis increases.--Limitations apply to
otherwise allowable increases in the basis of property
associated with excluded income. For example, in the case of
qualified disaster mitigation payments that are excluded from
income, no increase in the basis or adjusted basis of property
is allowed for any amount so excluded.\1457\
---------------------------------------------------------------------------
\1457\ Sec. 139(g)(3). See also section 139(h) (denial of double
benefit rule). As another example, the basis of property is reduced to
the extent of contributions to capital of a corporation excludable from
gross income under section 118 (see sec. 362).
---------------------------------------------------------------------------
Circumstances in which limitations not imposed.--
Limitations on deductions, tax attributes, or basis increases
are not imposed in certain situations in which the policy of
the exclusion may outweigh the income tax policy of accurate
income measurement. For example, in the case of excludable
parsonage and military housing allowances, no deduction is
denied for mortgage interest or real property taxes on the
taxpayer's home under the section 265 deduction limitation by
reason of the receipt of the excludable amount.\1458\ As
another example, the pro rata interest deduction limitation for
financial institutions with exempt income generally does not
apply in the case of tax-exempt obligations issued in 2009 or
2010.\1459\
---------------------------------------------------------------------------
\1458\ Sec. 265(a)(6).
\1459\ Sec. 265(b)(7). This rule is subject to the proviso that the
amount of such tax-exempt obligations does not exceed two percent of
the taxpayer's average adjusted bases of tax-exempt obligations to
which the interest limitation does apply. The years 2009 and 2010
followed the financial crisis of 2008.
---------------------------------------------------------------------------
Tax treatment of partnerships.--A partnership generally is
not subject to Federal income tax, but rather, income and gain
of the partnership are generally taxed to partners. Items of
partnership income (including tax exempt income), gain, loss,
deduction, and credit pass through to partners.\1460\ Although
loss (including capital loss) and deductions of the partnership
pass through to partners, a partner is allowed a loss or
deduction only to the extent of the adjusted basis of the
partnership interest, generally measured at the end of the
partnership year in which the loss occurs or the deduction
arises.\1461\
---------------------------------------------------------------------------
\1460\ Secs. 701 and 702.
\1461\ Sec. 704(d). Other limitations may apply. See e.g., secs.
465 and 469.
---------------------------------------------------------------------------
Tax exempt or excluded income items of the partnership can
affect the partner's basis in the partnership interest.
Adjustments are made to the basis of a partner's interest to
account for the partner's distributive share of partnership
items.\1462\ The basis in the partnership interest is increased
by the partner's distributive share of partnership income,
including income that is exempt from tax.\1463\ A partner's
basis in the partnership interest generally is increased by an
increase in the partner's share of partnership liabilities and
is decreased by a decrease in the partner's share of
liabilities.\1464\
---------------------------------------------------------------------------
\1462\ The basis of a partner's interest that is acquired by
contribution to the partnership is generally the amount of money and
the adjusted basis of property contributed (sec. 722) and is adjusted
under section 705. Section 705 provides that the basis of the
partnership interest in increased by the sum of the partner's
distributive share of taxable income, income exempt from tax, and the
excess of depletion deductions over the basis of the depletable
property. The basis of the partnership interest is decreased by
distributions from the partnership and by the sum of the partner's
distributive share of losses, expenditures that are not deductible in
computing taxable income and not properly chargeable to capital
account, and certain depletion deductions.
\1463\ Sec. 705(a)(1)(B).
\1464\ Sec. 752. An increase in a partner's share of partnership
liabilities is treated as a contribution to the partnership (sec.
752(a)), and a decrease in a partner's share of partnership liabilities
is treated as a distribution from the partnership (sec. 752(b)).
---------------------------------------------------------------------------
Tax treatment of S corporations.--Income of an S
corporation is taxed to the S corporation shareholders. Each S
corporation shareholder's pro rata share of S corporation
income (including tax exempt income), gain, loss, deduction and
credit is passed through to the shareholder.\1465\ The basis of
an S corporation shareholder's stock is adjusted to account for
the shareholder's pro rata share of S corporation income
(including tax exempt income \1466\), loss, deduction or
credit. An S corporation shareholder's stock basis is not
adjusted to take account of S corporation-level debt (unlike a
partner's basis in its partnership interest).
---------------------------------------------------------------------------
\1465\ Secs. 1363(a) and 1366.
\1466\ Secs. 1367(a)(1)(A) and 1366(a)(1)(A).
---------------------------------------------------------------------------
Certain loans, advances, and payments made under the CARES Act \1467\
---------------------------------------------------------------------------
\1467\ Pub. L. No. 116-36.
---------------------------------------------------------------------------
Paycheck Protection Program loan forgiveness
The CARES Act established the Paycheck Protection Program
and provided rules for covered loans.\1468\ A recipient of a
covered loan is eligible for forgiveness of indebtedness on the
loan in an amount generally equal to the sum of certain costs
incurred and payments made during the eight-week period
beginning on the date of the origination of the covered loan,
including payroll costs, certain mortgage interest payments,
certain rent payments, and certain utility payments.\1469\
---------------------------------------------------------------------------
\1468\ For this purpose, a covered loan is a loan guaranteed under
paragraph (36) of section 7(a) of the Small Business Act (15 U.S.C.
636(a)) (elsewhere in this Act redesignated to another statutory
location), as added by section 1102 of the CARES Act.
\1469\ CARES Act sec. 1106. Treasury and the Small Business
Administration issued FAQs on the Paycheck Protection Program,
including answers to common questions regarding the determination of
the amount of loan forgiveness. See ``Paycheck Protection Program Loans
Frequently Asked Questions (FAQs)'', available at https://
home.treasury.gov/system/files/136/Paycheck-Protection-Program-
Frequently-Asked-Questions.pdf (last visited January 13, 2021).
---------------------------------------------------------------------------
The amount forgiven may be reduced (by an amount not to
exceed the principal amount of the covered loan) if the
recipient reduces the number of the recipient's employees, or
the amount of salaries and wages paid, by a specified amount
during the covered period. A covered loan recipient must apply
for loan forgiveness. Once an application is submitted to the
lender with the required documentation, the lender must issue a
decision on the loan forgiveness within 60 days.
Amounts that have been forgiven under the provision are
considered as canceled indebtedness. The provision requires the
Administrator of the Small Business Administration to remit to
the lender, no later than 90 days after the date on which the
amount of forgiveness under the provision is determined, an
amount equal to the amount of forgiveness, plus any interest
accrued through the date of payment.
The CARES Act provides that for Federal tax purposes, any
amount which (but for the provision) would be includible in
gross income of the recipient of a covered loan by reason of
forgiveness pursuant to the provision is excluded from gross
income.\1470\
---------------------------------------------------------------------------
\1470\ CARES Act sec. 1106(i).
---------------------------------------------------------------------------
Treasury program management authority loan forgiveness
The CARES Act provides authority to the Treasury Department
to establish criteria for additional lenders to participate in
the Paycheck Protection Program.\1471\ Requirements for lenders
generally provide that the rate of interest may not exceed the
maximum permissible rate for Paycheck Protection Program loans,
and that, to the maximum extent practicable, terms and
conditions are consistent with those applicable to Paycheck
Protection Program loans.\1472\
---------------------------------------------------------------------------
\1471\ CARES Act sec. 1109.
\1472\ CARES Act sec. 1109(d)(2)(A) and (B).
---------------------------------------------------------------------------
The provision requires that loans under the authority
provide for loan forgiveness under terms and conditions that
are consistent with forgiveness under the Paycheck Protection
Program.\1473\ As a condition of receiving loan under this
provision, the borrower must certify that the borrower does not
have an application pending for a loan under the Paycheck
Protection Program \1474\ for the same purpose, and has not
received such a loan during the period beginning February 15,
2020 and ending on December 31, 2020.
---------------------------------------------------------------------------
\1473\ CARES Act secs. 1109(d)(2)(D) and 1106.
\1474\ CARES Act sec. 1109(f).
---------------------------------------------------------------------------
Targeted EIDL advances that are not required to be repaid
An eligible entity that applies for a specified type of
Small Business Act loan \1475\ may request an advance.\1476\
The advance generally may not exceed $10,000. The applicant is
not required to repay the advance, even if the loan for which
the applicant applied is subsequently denied.\1477\
---------------------------------------------------------------------------
\1475\ Economic Injury Disaster Loan (``EIDL''). This is a loan
under section 7(b)(2) of the Small Business Act, 15 U.S.C. 636(b)(2)
(elsewhere in this Act redesignated to another statutory location).
\1476\ CARES Act sec. 1110(e).
\1477\ CARES Act sec. 1110(e)(5).
---------------------------------------------------------------------------
Subsidy for certain loan payments
The Small Business Administration (rather than the
borrower) must pay principal, interest, and fees for a
specified six-month period on certain loans guaranteed through
the Small Business Administration.\1478\ Thus, the borrower is
relieved of the obligation to make these payments. The
provision generally applies to loans guaranteed by the Small
Business Administration and made under the Community Advantage
Pilot Program or under title V of the Small Business Investment
Act.\1479\
---------------------------------------------------------------------------
\1478\ CARES Act sec. 1112(c).
\1479\ These loans are defined in CARES Act section 1112(a)(1) and
(2) as loans ``guaranteed by the Administration under (A) section 7(a)
of the Small Business Act (15 U.S.C. 636(a) (elsewhere in this Act
redesignated to another statutory location))--(i) including a loan made
under the Community Advantage Pilot Program of the Administration; and
(ii) excluding a loan made under paragraph (36) of such section 7(a),
as added by section 1102; or (B) title V of the Small Business
Investment Act of 1958 (15 U.S.C. 695 et seq.); or (2) made by an
intermediary to a small business concern using loans or grants received
under section 7(m) of the Small Business Act (15 U.S.C. 636(m)).'' The
six-month period for which the payments are made on the borrower's
behalf depends on when the loan is made, as set forth in CARES Act
section 1112(c)(1).
---------------------------------------------------------------------------
Treasury guidance regarding deductibility of costs relating to excluded
income from forgiven loans under the Paycheck Protection
Program
After the CARES Act was enacted on March 27, 2020, the
Treasury Department issued Notice 2020-32 providing that no
deduction is allowed for an expense that is otherwise
deductible if the payment of the expense results in the
forgiveness of a covered loan under the Paycheck Protection
Program and the income associated with the forgiveness is
excluded from gross income.\1480\
---------------------------------------------------------------------------
\1480\ IRS Notice 2020-32, April 30, 2020, https://www.irs.gov/pub/
irs-drop/n-20-32.pdf. See also Rev. Rul. 2020-27, 2020-50 I.R.B. 1552,
December 7, 2020.
---------------------------------------------------------------------------
Notice 2020-32 describes the CARES Act rules regarding what
the recipient of the loan must do to obtain loan forgiveness in
an amount equal to the sum of payments for certain eligible
section 1106 expenses. Such CARES Act section 1106 eligible
expenses are payroll costs, certain interest on mortgage
obligations, certain rent obligations, and certain utility
payments. The Notice points to the exclusion from gross income
under CARES Act section 1106(i) for any amount otherwise
includable in gross income by reason of the loan forgiveness
under CARES Act section 1106(b). Because the income exclusion
results in a class of exempt income, Notice 2020-32 states,
Code section 265 disallows any otherwise allowable deduction
for the amount of any payment of an eligible CARES Act section
1106 expense to the extent of the resulting loan forgiveness
because the payment is allocable to tax-exempt income.
Reporting requirements
Information returns and payee statements in general
Information returns are required to be filed concerning a
variety of transactions and payments.\1481\ A person that is
required to file an information return generally is also
required to furnish a statement to the other party to the
transaction or the recipient of the payment.
---------------------------------------------------------------------------
\1481\ See Chapter 61 of the Code, relating to information and
returns, which includes sections 6001-6117.
---------------------------------------------------------------------------
Reporting of cancellation of indebtedness income
Reporting of cancellation of indebtedness income on Form
1099-C or 1099-A generally is required if debt is discharged in
whole or in part. A person required to report such income
includes certain financial institutions and their affiliates
and organizations engaged in a significant trade or business of
lending, as well as certain governmental entities (and quasi-
governmental entities, such as the FDIC, and their
affiliates).\1482\
---------------------------------------------------------------------------
\1482\ Sec. 6050P. The reporting requirement applies when a debt is
cancelled or when an identifiable event (described in guidance) occurs.
Treas. Reg. 1.6050P-1 and-2; and see Instructions for Forms 1099-A and
1099-C, https://www.irs.gov/pub/irs-pdf/i1099ac.pdf, page 4 (``When a
Debt is Cancelled'').
---------------------------------------------------------------------------
Explanation of Provision
Paycheck Protection Program loans
Tax treatment of forgiveness in general
In the case of a Paycheck Protection Program loan that is
forgiven in whole or in part, the provision clarifies that for
Federal income tax purposes no amount is included in the income
of an eligible recipient of such a loan by reason of the
forgiveness.\1483\ Similarly, no amount is included in the
income of an eligible entity by reason of such forgiveness in a
taxable year ending after December 27, 2020.\1484\
---------------------------------------------------------------------------
\1483\ Sec. 276 of the Act.
\1484\ Elsewhere in this Act, these rules regarding Paycheck
Protection Program loans are transferred to section 7A of the Small
Business Act, and the Paycheck Protection Program is expanded and
extended. The transfer and redesignation is made in section 304 of the
``Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues
Act,'' Title III of Division N of the Consolidated Appropriations Act,
2021; that section and following sections of Title III of Division N
modify the rules for the Paycheck Protection Program. In particular,
section 311 of Title III of Division N expands the costs that may
result in forgiveness to include, for example, ``covered worker
protection expenditures'' and ``covered supplier costs.'' The transfer
and redesignation of rules regarding Paycheck Protection Program loans
also modify the term ``eligible recipient'' to refer to an ``eligible
entity.''
---------------------------------------------------------------------------
Further, no deduction is denied, no tax attribute is
reduced, and no basis increase is denied, by reason of the
exclusion from income.\1485\ As a result, otherwise deductible
costs remain deductible if the costs are paid with proceeds of
the forgiven loan, or are associated with the forgiven loan,
even though the forgiven amount is excluded from income.
Similarly, because section 108 does not apply, no tax attribute
is reduced by reason of the exclusion from income.\1486\
Further, an otherwise allowable increase in the basis of
property remains allowable even if the expenditure giving rise
to the basis increase is paid with proceeds of the forgiven
loan or is associated with the forgiven loan that is excluded
from income.
---------------------------------------------------------------------------
\1485\ This rule reverses IRS Notice 2020-32, April 30, 2020,
https://www.irs.gov/pub/irs-drop/n-20-32.pdf. The IRS announced that
IRS Notice 2020-32 is obsolete in Rev. Rul. 2021-2, January 6, 2021,
https://www.irs.gov/pub/irs-drop/rr-21-02.pdf.
\1486\ By removing the parenthetical in CARES Act section 1106(i)
as originally enacted, the provision clarifies that the exclusion in
Act section 276 operates independently of any exclusion provided by
Code section 108. Thus, the exclusion is allowed under Act section 276
and not under Internal Revenue Code section 108, so the tax attribute
reduction requirements that relate to the income exclusion under
section 108 do not apply.
---------------------------------------------------------------------------
For example, if a taxpayer that is engaged in a trade or
business receives a Paycheck Protection Program loan and uses
the proceeds to pay deductible wages of employees of the
business, the section 162 deduction for the wages is not
disallowed even though the loan is forgiven and the amount of
the forgiveness is excluded from income.\1487\ If that taxpayer
uses the proceeds to pay wages that are properly capitalized
into inventory, the taxpayer may increase the basis of such
inventory even though the amount of the forgiveness is excluded
from income.
---------------------------------------------------------------------------
\1487\ Separate rules provide for coordination between use of
proceeds of Paycheck Protection Program loans, and expenditure
requirements for employee retention tax credit; see section 206(b) of
Division N of this Act.
---------------------------------------------------------------------------
Partnerships and S corporations
In the case of an eligible recipient (or eligible entity)
that is a partnership or S corporation, any amount excluded
from income by reason of the provision is treated as tax exempt
income for purposes of sections 705 (the determination of a
partner's basis in the partnership interest) and 1366 (the
passthrough of items to an S corporation shareholder). In
general, this allows for an owner of an eligible recipient (or
eligible entity) that is a partnership or S corporation to
increase its basis in the interest in, or the stock of, the
entity so that the deduction allowable under the provision may
be allowed.\1488\
---------------------------------------------------------------------------
\1488\ Subchapter K and Subchapter S each provide analogous rules
that the partner's, or shareholder's, share of deductions of the entity
is limited to the adjusted basis of the partnership interest or of the
stock and debt of the S corporation (secs. 704(d) and 1366(d)), and
that tax exempt income gives rise to a basis increase under these rules
(secs. 705(a)(1)(B) and 1366(a)(1)(A)). Thus, a basis increase
(correlating to the deduction allowed) in the partner's adjusted basis
in the partnership interest, or in the shareholder's adjusted basis in
the S corporation stock, allows the owner to utilize the deduction that
is allowable under the Act.
---------------------------------------------------------------------------
For example, assume that an S corporation has two
shareholders (A and B). Each of A and B owns 50 percent of the
stock of the S corporation. A's stock basis is $50. B's stock
basis is $0. The S corporation is an eligible recipient and
receives a $100 Paycheck Protection Program loan in 2020, pays
$100 in amounts giving rise to forgiveness in 2020; and the
Paycheck Protection Program loan is forgiven in 2021. The S
corporation has no other items of income, gain, loss or
deduction in 2021. While the S corporation (and thus each of A
and B) does not have income as a result of the forgiveness, the
S corporation is treated as having $100 of tax-exempt income
for purposes of section 1366. Thus, each of A and B's basis in
S corporation stock is increased by $50.\1489\ Assuming that
the $100 is used to pay wages that are properly deductible,
each of A and B may deduct $50.\1490\ A's basis in S
corporation stock is sufficient for A to claim the deduction in
2020 \1491\ and, by reason of the provision, B's basis in S
corporation stock is sufficient for B to claim the deduction
generally in 2021.
---------------------------------------------------------------------------
\1489\ Secs. 1367(a)(1)(A) and 1366(a)(1)(A).
\1490\ Secs. 1363(a) and 1366.
\1491\ With respect to A, the provision ensures that the benefit of
the exclusion is not later reversed when, for example, A later claims a
deduction or loss of the S corporation or A sells its interests in the
S corporation.
---------------------------------------------------------------------------
An additional rule applies when the eligible recipient (or
eligible entity) is a partnership. Except as provided by the
Secretary of the Treasury (or the Secretary's delegate), any
increase in the adjusted basis of a partner's interest in a
partnership under section 705 (the determination of the basis
of a partner's interest) with respect to any amount excluded
from income under the provision equals the partner's
distributive share of deductions resulting from costs giving
rise to forgiveness. This rule addresses the allocation of the
amount treated as tax exempt income for purposes of determining
a partner's basis in its partnership interest. It generally
ensures that the benefit of deductions and basis increases not
denied are allowed at the partner level.\1492\ The grant of
authority allows the Secretary of the Treasury (or the
Secretary's delegate) to, for example, address situations in
which the costs giving rise to excluded amounts are capitalized
or are nondeductible amounts.\1493\
---------------------------------------------------------------------------
\1492\ Furthermore, the provision ensures that the benefit of the
exclusion is not later reversed when, for example, the partnership
later allocates a deduction or loss to the partner or the partner sells
its interests in the partnership.
\1493\ The grant of authority also, for example, allows the
Secretary of the Treasury (or the Secretary's delegate) to address
situations in which specific rules are needed to carry out the purposes
of the provision, for example, if interests in a partnership are
transferred or redeemed while a Paycheck Protection Program loan is
outstanding.
---------------------------------------------------------------------------
For example, assume that a partnership has two partners (A
and B). A and B are each entitled to 50 percent of the
partnership's income and gain. A is entitled to 100 percent of
the partnership's losses. B is entitled to 100 percent of the
partnership's deductions. A's basis in its partnership interest
is $50. B's basis in its partnership interest is $0. The
partnership is an eligible recipient and receives a $100
Paycheck Protection Program loan in 2020, and in 2020 pays $100
in payroll costs, rent payments, and utility payments that
qualify for loan forgiveness, and the loan is forgiven in 2020.
The partnership (and thus each of A and B) exclude from income
the forgiven amount. Assuming that the $100 of costs paid are
otherwise deductible and are all properly allocated to B, B's
basis in the partnership is increased by $100 as a result of
the provision. That is, the adjusted basis of B's partnership
is increased by the $100 forgiven loan amount that is excluded
from income and that is treated as tax exempt income so that B
may claim the $100 deduction for the costs.\1494\
---------------------------------------------------------------------------
\1494\ That is, the section 704(d) limitation does not prevent B
from claiming the deduction.
---------------------------------------------------------------------------
Treasury Department guidance
Guidance issued on January 6, 2021, by the Treasury
Department provides that IRS Notice 2020-32 (applying section
265 to deny deductions for certain expenses relating to
Paycheck Protection Program loans for which a forgiven amount
is excluded from income) is obsolete.\1495\
---------------------------------------------------------------------------
\1495\ Rev. Rul. 2021-2, https://www.irs.gov/pub/irs-drop/rr-21-
02.pdf. And see the IRS explanation at https://www.irs.gov/newsroom/
eligible-paycheck-protection-program-expenses-now-deductible.
---------------------------------------------------------------------------
Effective Date
These provisions of the Act apply both to original loans
issued under the Paycheck Protection Program under the terms of
the CARES Act (effective for taxable years ending after the
date of enactment of the CARES Act (March 27, 2020)), and to
subsequent Paycheck Protection Program loans (effective for
taxable years ending after the date of enactment of this Act
(December 27, 2020)).
Treasury program management authority loans
Tax treatment of forgiveness in general
In the case of a loan made under Treasury program
management authority \1496\ that is forgiven \1497\ in whole or
in part, the provision provides that, for Federal income tax
purposes, no amount is included in the income of a borrower by
reason of the forgiveness.\1498\
---------------------------------------------------------------------------
\1496\ CARES Act sec. 1109.
\1497\ CARES Act sec. 1109(d)(2)(D) provides for forgiveness.
\1498\ Sec. 278(a) of Division N of the Act.
---------------------------------------------------------------------------
Further, no deduction is denied, no tax attribute is
reduced, and no basis increase is denied, by reason of the
exclusion from income of the forgiven amount. As a result,
otherwise deductible costs remain deductible if the costs are
paid with proceeds of the forgiven loan or are associated with
the forgiven loan, even though the amount of the forgiveness is
excluded from income. Similarly, because section 108 does not
apply to the forgiveness provided under the provision, no tax
attribute is reduced by reason of the exclusion from
income.\1499\ Further, an otherwise allowable increase in the
basis of property remains allowable even though the expenditure
giving rise to the basis increase is paid with proceeds of the
forgiven loan or is associated with the forgiven loan that is
excluded from income.
---------------------------------------------------------------------------
\1499\ Because the exclusion from income is allowed under section
278(a) of Division N of the Act, and not under Internal Revenue Code
section 108, the tax attribute reduction requirements that relate to
the income exclusion under section 108 do not apply.
---------------------------------------------------------------------------
For example, if a taxpayer that is engaged in a trade or
business receives a loan under the Treasury program management
authority and uses the proceeds to pay deductible wages of
employees of the business, the section 162 deduction for the
wages is not disallowed even though the loan is forgiven and
the amount of the forgiveness is excluded from income.\1500\
---------------------------------------------------------------------------
\1500\ Separate rules provide for coordination between use of
proceeds of Paycheck Protection Program loans and the expenditure
requirements for employee retention tax credit; see section 206(b) of
Division N of the Act, and see IRS Notice 2021-20, Guidance on the
Employee Retention Credit under Section 2301 of the Coronavirus Aid,
Relief, and Economic Security Act, March 1, 2021.
---------------------------------------------------------------------------
Partnerships and S corporations
In the case of a borrower that is a partnership or S
corporation, any amount excluded from income by reason of the
provision is treated as tax exempt income for purposes of
sections 705 (the determination of a partner's basis in the
partnership interest) and 1366 (the passthrough of items to an
S corporation shareholder).
An additional rule applies when a borrower is a
partnership. Except as provided by the Secretary of the
Treasury (or the Secretary's delegate), any increase in the
adjusted basis of a partner's interest in a partnership under
section 705 with respect to any amount excluded from income
under the provision equals the partner's distributive share of
deductions resulting from costs giving rise to forgiveness.
Effective Date
These rules apply to taxable years ending after the date of
enactment of the CARES Act (March 27, 2020).
Emergency EIDL grants and targeted EIDL advances
Tax treatment of advance or funding in general
An EIDL advance \1501\ that is not repaid \1502\ in whole
or in part is not included in the income of the person that
receives the advance, for Federal income tax purposes.\1503\ In
the case of funding that is received relating to small business
continuity, adaptation, and resiliency,\1504\ the funding is
not included in the income of the person that receives the
funding.\1505\
---------------------------------------------------------------------------
\1501\ CARES Act sec. 1110(e).
\1502\ CARES Act sec. 1110(e)(5) provides that the advance is not
required to be repaid.
\1503\ Sec. 278(b) of Division N of the Act. And see Treasury
guidance mentioning the exclusion in IRS Publication 525, Taxable and
Nontaxable Income, ``What's New,'' pages 1-2, rev. April 6, 2021,
https://www.irs.gov/pub/irs-pdf/p525.pdf.
\1504\ This funding is provided in section 331 of the Economic Aid
to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which is in
Division N of this Act. The total amount of such funding that a covered
entity may receive is $10,000, and if a covered entity received an EIDL
grant (advance) under section 1110(e) of the CARES Act, the amount of
the grant under this section 331 is the difference between $10,000 and
the amount of the previously received grant (sec. 331(b)). A covered
entity for this purpose is generally defined as an entity that is
eligible for a specified type of Small Business Administration loan,
applies for such a loan during the period January 31, 2020 and ending
December 31, 2021, is located in a low-income community, has suffered
an economic loss of greater than 30 percent, and employs no more than
300 employees (sec. 331(a)(2)).
\1505\ Sec. 278(b) of Division N of the Act.
---------------------------------------------------------------------------
Further, no deduction is denied, no tax attribute is
reduced, and no basis increase is denied, by reason of the
exclusion from income. As a result, otherwise deductible costs
remain deductible even though the costs are paid with the
excluded income or are associated with the excluded amount.
Similarly, because section 108 does not apply to the exclusion
from income provided under the provision, no tax attribute is
reduced by reason of the exclusion.\1506\ Further, an otherwise
allowable increase in the basis of property remains allowable
even if the expenditure giving rise to the basis increase is
paid with the excluded income or is associated with the
excluded amount.
---------------------------------------------------------------------------
\1506\ Because the exclusion from income is allowed under section
278(b) of Division N of the Act, and not under Internal Revenue Code
section 108, the tax attribute reduction requirements that relate to
the income exclusion under section 108 do not apply.
---------------------------------------------------------------------------
For example, if a person engaged in a trade or business
receives an EIDL advance or funding described in the provision
and uses the proceeds to pay deductible wages of employees of
the business, the section 162 deduction for the wages is not
disallowed even though the advance or funding is excluded from
income.
Partnerships and S corporations If the person that receives
the advance or funding is a partnership or S corporation, any
amount excluded from income by reason of the provision is
treated as tax exempt income for purposes of sections 705 (the
determination of a partner's basis in the partnership interest)
and 1366 (the passthrough of items to an S corporation
shareholder). The provision also requires the Secretary of the
Treasury (or the Secretary's delegate) to prescribe rules for
determining a partner's distributive share of any amount
treated as tax exempt income under the provision.
For example, assume that a partnership has two partners (A
and B). The partnership is engaged in a trade or business,
receives an EIDL advance of $10,000, and uses the proceeds to
pay deductible wages of employees of the business. The section
162 deduction for the wages is not disallowed even though the
advance is excluded from income. A's and B's aggregate basis in
the partnership is increased by $10,000. Treasury guidance will
determine by how much each of A's and B's basis in their
partnership interests, respectively, is increased.
Effective Date
The rules governing EIDL advances apply to taxable years
ending after the date of enactment of the CARES Act (March 27,
2020). The rules governing funding relating to small business
continuity, adaptation, and resiliency apply to taxable years
ending after the date of enactment of this Act (December 27,
2020).
Subsidy for certain loan repayments
Tax effects of payments by Small Business Administrator of
loan principal, interest, and fees
In the case of a payment made on behalf of a person by the
Small Business Administrator of principal, interest, and fees
with respect to on certain loans guaranteed through the Small
Business Administration,\1507\ the payment is not included in
the gross income of the person on whose behalf the payment is
made.\1508\
---------------------------------------------------------------------------
\1507\ CARES Act section 1112(a) defines covered loans in more
detail. Section 325 of this Act provides additional rules relating to
the extension of the debt relief program originally enacted in CARES
Act section 1112.
\1508\ Sec. 278(c) of Division N of the Act. And see Treasury
guidance mentioning the exclusion in IRS Publication 525, Taxable and
Nontaxable Income, ``What's New,'' pages 1-2, rev. April 6, 2021,
https://www.irs.gov/pub/irs-pdf/p525.pdf.
---------------------------------------------------------------------------
Further, no deduction is denied, no tax attribute is
reduced, and no basis increase is denied, by reason of the
exclusion from income. As a result, otherwise deductible costs
remain deductible even though the costs are paid with funds
made available by reason of the payment on the person's behalf
that is excluded from income, or are associated with the
excluded amount. Similarly, because section 108 does not apply
to the exclusion from income provided under the provision, no
tax attribute is reduced by reason of the exclusion.\1509\
Further, an otherwise allowable increase in the basis of
property remains allowable even though the expenditure giving
rise to the basis increase is associated with the excluded
income.
---------------------------------------------------------------------------
\1509\ Because the exclusion from income is allowed under section
278(c) of Division N of the Act, and not under Internal Revenue Code
section 108, the tax attribute reduction requirements that relate to
the income exclusion under section 108 do not apply.
---------------------------------------------------------------------------
For example, assume a person is engaged in a trade or
business, and payments of principal, interest, or fees with
respect to certain loans are made by the Small Business
Administrator on the person's behalf. If the person (in lieu of
making those payments of principal, interest, or fees) pays
deductible wages of employees of the business, the section 162
deduction for the wages is not disallowed even though the
payments of principal, interest, or fees made on behalf of the
person that were excluded from income permitted the person to
pay the wages.
Partnerships and S corporations
If the person on whose behalf the loan payment is made is a
partnership or S corporation, any amount excluded from income
by reason of the provision is treated as tax exempt income for
purposes of sections 705 (the determination of a partner's
basis in the partnership interest) and 1366 (the passthrough of
items to an S corporation shareholder).
An additional rule applies if the person on whose behalf
the loan payment is made is a partnership. In such a case,
except as provided by the Secretary of the Treasury (or the
Secretary's delegate), any increase in the adjusted basis of a
partner's interest in a partnership under section 705 equals
the sum of the partner's distributive share of deductions
resulting from interest and fees paid by the Small Business
Administrator on the partnership's behalf and the partner's
share, as determined under section 752 (the treatment of
liabilities of a partnership), of principal paid by the Small
Business Administrator on the partnership's behalf.
For example, assume that a partnership has two partners (A
and B). A and B are each entitled to 50 percent of partnership
income and gain. B is entitled to 100 percent of the
deductions. Ignoring partnership liabilities, each of A and B's
adjusted basis in its partnership interest is $0. But assume
that the partnership has a $50 outstanding loan described in
section 1112(c) of the CARES Act that is wholly allocated to A
under the rules of section 752. Thus, A's basis in its
partnership interest is $50 and B's basis in its partnership
interest is $0. Assume that the Small Business Administrator
pays, on behalf of the partnership, all $50 in loan principal.
After the payment is made, A's basis in its partnership
interest remains $50 and B's basis in its partnership interest
remains $0.
Effective Date
The rules governing emergency payments made on behalf of a
person by the Small Business Administrator of principal,
interest, and fees with respect to certain loans guaranteed
through the Small Business Administration apply to taxable
years ending after the date of enactment of the CARES Act
(March 27, 2020).
Shuttered venue grants
In general
The Act provides authority for the Office of Disaster
Assistance to coordinate and formulate policies relating to the
administration of grants for certain shuttered venues.\1510\ A
person eligible for such a grant is generally a live venue
operator or promoter, a theatrical producer, a live performing
arts organization operator, a relevant museum operator, a
motion picture theatre operator, or a talent representative
that meets statutory requirements.\1511\ Amounts received under
such a grant are to be used for specified costs incurred during
the period beginning March 1, 2020, and ending December 31,
2021 (ending June 30, 2022 for certain supplemental
grants).\1512\ The total amount of initial and supplemental
grants received by any one person may not exceed
$10,000,000.\1513\
---------------------------------------------------------------------------
\1510\ Sec. 324(b) of Division N of the Act.
\1511\ Sec. 324(a) of Division N of the Act. The requirements
relate to, among other criteria, a reduction in revenue in 2020 over
2019.
\1512\ Sec. 324(d) of Division N of the Act. Permitted costs
include certain defined expenditures relating to payroll, rent,
utilities, principal or interest on business debt incurred before
February 2020 and mortgage debt, worker protection expenditures, and
specified ordinary and necessary business expenses such as maintenance,
insurance, or advertising. Prohibited costs include those to purchase
real estate, to invest or re-lend funds, or to make political
contributions.
\1513\ Sec. 324(c)(3) of Division N of the Act.
---------------------------------------------------------------------------
Tax treatment of shuttered venue grants
For Federal income tax purposes, any such grant \1514\ is
not included in the income of the person that receives the
grant.\1515\
---------------------------------------------------------------------------
\1514\ That is, a grant made under section 324 of the Hard-Hit
Small Businesses, Nonprofits, and Venues Act (in Division N).
\1515\ Sec. 278(d) of the Act. And see Treasury guidance mentioning
the exclusion in IRS Publication 525, Taxable and Nontaxable Income,
``What's New,'' pages 1-2, rev. April 6, 2021, https://www.irs.gov/pub/
irs-pdf/p525.pdf.
---------------------------------------------------------------------------
Further, no deduction is denied, no tax attribute is
reduced, and no basis increase is denied, by reason of the
exclusion from income. As a result, otherwise deductible costs
remain deductible if the costs are paid with grant proceeds
that are excluded from income, or are associated with grant
proceeds that are excluded. Similarly, because section 108 does
not apply to the exclusion provided under the provision, no tax
attribute is reduced by reason of the exclusion from
income.\1516\ Further, an otherwise allowable increase in the
basis of property remains allowable even though the expenditure
giving rise to the basis increase is paid with grant proceeds
that are excluded from income, or are associated with grant
proceeds that are excluded.
---------------------------------------------------------------------------
\1516\ Because the exclusion from income is allowed under section
278(d) of Division N of the Act, and not under Internal Revenue Code
section 108, the tax attribute reduction requirements that relate to
the income exclusion under section 108 do not apply.
---------------------------------------------------------------------------
For example, if a taxpayer that is engaged in a trade or
business receives a grant that is excluded from income under
the provision and uses the proceeds to pay deductible wages of
employees of the business, the section 162 deduction for the
wages is not disallowed even though the grant is excluded from
income.
Partnerships and S corporations
If the person that receives the grant is a partnership or S
corporation, any amount excluded from income by reason of the
provision is treated as tax exempt income for purposes of
sections 705 (the determination of a partner's basis in the
partnership interest) and 1366 (the passthrough of items to an
S corporation shareholder).
The provision requires the Secretary of the Treasury (or
the Secretary's delegate) to prescribe rules for determining a
partner's distributive share of any amount treated as tax
exempt income under the provision.
Effective Date
The rules governing the grants apply to taxable years
ending after the date of enactment of this Act (December 27,
2020).
Treasury may waive reporting requirements
The Secretary of the Treasury (or the Secretary's delegate)
may provide an exception from the requirement to file an
information return by the rules of Chapter 61 of the
Code,\1517\ relating to information and returns, with respect
to any amount excluded from gross income by reason of the
provisions of the Act that are described above. Implementing
this authority, IRS Notice 2021-06 \1518\ waives the
requirement to file certain information returns or furnish
certain payee statements otherwise required by Chapter 61 of
the Code with respect to certain amounts excluded from income
by reason of the provisions of the Act that are described
above.
---------------------------------------------------------------------------
\1517\ For example, Chapter 61 of the Code includes section 6050P,
which requires returns relating to the cancellation of indebtedness by
certain entities.
\1518\ IRS Notice 2021-06, Waiver of Information Reporting
Requirements with respect to Certain Amounts Excluded from Gross
Income, January 19, 2021, https://www.irs.gov/pub/irs-drop/n-21-06.pdf.
---------------------------------------------------------------------------
6. Emergency financial aid grants (sec. 277 of the Act and secs. 25A,
117, and 139 of the Code)
Present Law
Higher education grants and qualified scholarships
Gross income includes all income from whatever source
derived unless a specific exception applies. In general, grants
received for higher education are includible in gross income
unless such amounts constitute qualified scholarships.\1519\
Qualified scholarships are amounts received as a scholarship or
fellowship grant to the extent that the individual establishes
that such amounts are used for qualified tuition and related
expenses. The exclusion for qualified scholarships does not
apply to any amount received by a student that represents
payment for teaching, research, or other services by the
student required as a condition for receiving the scholarship.
---------------------------------------------------------------------------
\1519\ Sec. 117.
---------------------------------------------------------------------------
Sections 3504, 18004, and 18008 of the CARES Act, allow
higher education institutions to use certain funds allocated by
the Department of Education to support students and higher
education institutions with expenses and financial needs
related to the COVID-19 pandemic. These provisions allow higher
education institutions to use additional grant funds to award
emergency financial aid grants to students for expenses related
to the COVID-19 pandemic. Such expenses are not limited to
qualified tuition and related expenses and may including living
expenses.
Disaster relief payments
Gross income does not include amounts received by
individuals as qualified disaster relief payments under section
139. Qualified disaster relief payments include amounts paid to
or for the benefit of an individual: (1) to reimburse or pay
reasonable and necessary personal, family, living, or funeral
expenses incurred as a result of a qualified disaster; (2) to
reimburse or pay reasonable and necessary expenses incurred for
the repair or rehabilitation of a personal residence or repair
or replacement of its contents to the extent that the need for
such repair, rehabilitation, or replacement is attributable to
a qualified disaster; (3) by a person engaged in the furnishing
or sale of transportation by reason of death or personal
injuries as a result of a qualified disaster; or (4) by a
Federal, State, or local government, or agency or
instrumentality thereof, in connection with a qualified
disaster in order to promote the general welfare.
Pursuant to Frequently Asked Questions released by the IRS,
a student who receives an emergency financial aid grant under
sections 3504, 18004, or 18008 of the CARES Act for unexpected
expenses, unmet financial need, or expenses related to the
disruption of campus operations on account of the COVID-19
pandemic may exclude such grants from gross income because the
grants are qualified disaster relief payments under section
139.\1520\ Unexpected expenses may include expenses for food,
housing course materials, technology, health care, or child
care. However, qualified tuition and related expenses paid with
emergency financial aid grant money may not be used to claim
any deduction or credit for such expenses, including the
American Opportunity Tax Credit, the Lifetime Learning Credit,
or the tuition and fees deduction.
---------------------------------------------------------------------------
\1520\ IRS, ``FAQs: Higher Education Emergency Relief Fund and
Emergency Financial Aid Grants under the CARES Act,'' December 14,
2020, available at https://www.irs.gov/newsroom/faqs-higher-education-
emergency-relief-fund-and-emergency-financial-aid-grants-under-the-
cares-act.
---------------------------------------------------------------------------
American Opportunity Tax Credit
The American Opportunity Tax Credit (``AOTC'') is a
partially refundable income tax credit for certain costs
associated with postsecondary education. The amount of the AOTC
is 100 percent of the first $2,000 of qualifying expenses and
25 percent of the next $2,000 of these expenses.
Expenses for which the credit are allowed are qualified
tuition and related expenses that an individual pays in the
taxable year for education furnished in any academic period
that begins in that year to an eligible student for whom an
election is in effect for the year.\1521\
---------------------------------------------------------------------------
\1521\ Sec. 25A(a)(1), (b)(1).
---------------------------------------------------------------------------
Qualified tuition and related expenses are tuition, fees,
and course materials required for the taxpayer's, the
taxpayer's spouse's, or the taxpayer's dependent's enrollment
or attendance at an eligible educational institution for
courses of instruction.\1522\ Qualified tuition and related
expenses do not, however, include (1) expenses for any course
or other education involving sports, games, or hobbies unless
the course or other education is part of the individual's
degree program or (2) student activity fees, athletic fees,
insurance expenses, or other expenses unrelated to an
individual's academic course of instruction.\1523\ Examples of
non-qualifying expenses are room and board and transportation
expenses.\1524\
---------------------------------------------------------------------------
\1522\ Sec. 25A(f)(1)(A), (D).
\1523\ Sec. 25A(f)(1)(B), (C).
\1524\ See Treas. Reg. sec. 1.25A-2(d)(3).
---------------------------------------------------------------------------
The AOTC is determined on a per-student basis, with a
maximum credit of $2,500 for any single eligible student.\1525\
As an example of the per-student calculation, a taxpayer who
pays $4,000 or more of qualified expenses for each of two
eligible students may, subject to other AOTC rules, be allowed
a credit of $5,000.
---------------------------------------------------------------------------
\1525\ See Treas. Reg. sec. 1.25A-3(b).
---------------------------------------------------------------------------
The Lifetime Learning Credit (also in section 25A)
generally allows a taxpayer a 20-percent credit for up to
$10,0000 in qualified tuition and related expenses that the
taxpayer pays during a taxable year for education furnished in
an academic period beginning that year.\1526\ Qualified tuition
and related expenses taken into account for the AOTC may not be
taken into account for determining the Lifetime Learning
Credit.\1527\
---------------------------------------------------------------------------
\1526\ Sec. 25A(a)(2), (c). In contrast with the AOTC, the Lifetime
Learning Credit is a per-taxpayer (rather than per-student) credit. As
a consequence, the maximum Lifetime Learning Credit is $2,000. In
contrast with the AOTC scope of qualifying expenses, qualified tuition
and related expenses for the Lifetime Learning Credit does not include
course materials. See sec. 25A(f)(1)(D). By contrast, for the Lifetime
Learning Credit, solely for purposes of the Lifetime Learning Credit,
qualified tuition and related expenses includes required tuition and
fees with respect to any course of instruction at an eligible
educational institution to acquire or improve job skills of the
individual. Sec. 25A(c)(2)(B).
\1527\ Sec. 25A(c)(2)(A).
---------------------------------------------------------------------------
For the purpose of determining the amount of the AOTC, the
Lifetime Learning Credit, and the tuition and fees deduction,
qualified tuition and related expenses that may be taken into
account for an individual for any academic period must be
reduced by the amount of tax-free educational assistance that
is paid for the benefit of that individual and is allocable to
that period.\1528\ For this purpose, tax-free educational
assistance means a qualified scholarship that is excludable
from gross income under section 117; a veterans or member-of-
the-armed-forces educational assistance allowance under certain
provisions of the U.S. Code; employer-provided educational
assistance that is excludable from income under section 127; or
any other educational assistance that is excludable from gross
income (other than as a gift, bequest, devise, or inheritance
within the meaning of section 102(a)).\1529\
---------------------------------------------------------------------------
\1528\ Secs. 25A(g)(2) and 222(d)(1); Treas. Reg. sec. 1.25A-5(c).
\1529\ Treas. Reg. sec. 1.25A-5(c)(1).
---------------------------------------------------------------------------
Explanation of Provision
The provision follows the IRS Frequently Asked Questions in
stating that amounts received as a qualified emergency
financial aid grants shall not be included in gross income. In
addition, such amounts shall not be treated as reducing
qualified tuition and related expenses that may be taken into
account for purposes of claiming the AOTC, the Lifetime
Learning Credit, or the tuition and fees deduction.\1530\
---------------------------------------------------------------------------
\1530\ See also IRS, ``Higher Education Emergency Grants Frequently
Asked Questions,'' May 19, 2021, available at https://www.irs.gov/
newsroom/higher-education-emergency-grants-frequently-asked-questions.
---------------------------------------------------------------------------
A qualified emergency financial aid grant is defined as an
emergency financial aid grant awarded under sections 3504 and
18004 of the CARES Act and any other emergency financial aid
grant made to a student from a Federal agency, a State, an
Indian tribe, an institution of higher education, or a
scholarship-granting organization for the purpose of providing
financial relief to students enrolled at institutions of higher
education in response to a qualifying emergency.\1531\
---------------------------------------------------------------------------
\1531\ A qualifying emergency is defined in section 3502(a)(4) of
the CARES Act is (i) a public health emergency related to the
coronavirus declared by the Secretary of Health and Human Services
pursuant to section 319 of the Public Health Service Act (42 U.S.C.
247d), (ii) an event related to the coronavirus for which the President
declared a major disaster or an emergency under section 401 or 501 of
the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42
U.S.C. 5170 and 5191), or (iii) a national emergency related to the
coronavirus declared by the President under section 201 of the National
Emergencies Act (50 U.S.C. 1601 et seq.).
---------------------------------------------------------------------------
The provision does not apply to any amount received that
represents payment for teaching, research, or other services
required as a condition for receiving the emergency financial
aid grant.
Effective Date
The provision is shall apply to qualified emergency
financial aid grants made after March 26, 2020.
7. Application of special rules to money purchase pension plans (sec.
280 of the Act and sec. 401 of the Code)
Present Law
Distributions from tax-favored retirement plans
In general
A distribution from a tax-qualified plan described in
section 401(a) (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.\1532\ These plans
are referred to collectively as ``eligible retirement plans.''
\1533\ 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.\1534\
---------------------------------------------------------------------------
\1532\ 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.
\1533\ Sec. 402(c)(8)(B). Eligible retirement plans also include
annuity plans described in section 403(a).
\1534\ Sec. 72(t). The 10-percent early withdrawal tax does not
apply to distributions from a governmental section 457(b) plan.
---------------------------------------------------------------------------
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 IRS 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.\1535\
---------------------------------------------------------------------------
\1535\ Rev. Proc. 2020-46, 2020-45 I.R.B. 995, provides for a self-
certification procedure (subject to verification on audit) that may be
used by a taxpayer claiming eligibility for a waiver of the 60-day
requirement with respect to a rollover into a plan or IRA in certain
specified circumstances.
---------------------------------------------------------------------------
The terms of a qualified retirement plan, section 403(b)
plan, or governmental section 457(b) plan generally determine
when distributions are permitted. However, for many types of
plans, restrictions apply to distributions before an employee's
termination of employment, referred to as ``in-service''
distributions or withdrawals. Despite such restrictions, an in-
service distribution from a qualified retirement plan that
includes a qualified cash-or-deferred arrangement (a ``section
401(k) plan'') or a section 403(b) plan may be permitted in the
case of financial hardship. Similarly, a governmental section
457(b) plan may permit distributions in the case of an
unforeseeable emergency. Under a qualified retirement plan that
is a pension plan (i.e., defined benefit pension plan or money
purchase pension plan), distributions generally may be made
only in the event of retirement, death, disability, or other
separation from service, although in-service distributions may
be permitted after age 59\1/2\.\1536\
---------------------------------------------------------------------------
\1536\ Sec. 401(a)(36); Treas. Reg. secs. 1.401-1(b)(1)(i) and
1.401(a)-1(b)(1)(i). Section 401(k) plans, section 403(b) plans, and
governmental section 457(b) plans also may permit in-service
distributions after age 59\1/2\.
---------------------------------------------------------------------------
Coronavirus-related distributions
Section 2202 of the CARES Act \1537\ allows an exception to
the 10-percent early withdrawal tax for a ``coronavirus-related
distribution'' from a qualified retirement plan, a section
403(b) plan, or an IRA.\1538\ The provision also allows a
taxpayer to include income attributable to a coronavirus-
related distribution ratably over three years and to
recontribute the amount of the distribution to an eligible
retirement plan within three years.
---------------------------------------------------------------------------
\1537\ Pub. L. No. 116-136.
\1538\ This exception also applies to an annuity plan described in
section 403(a). The 10-percent early withdrawal tax generally does not
apply to section 457 plans. Sec. 72(t)(1).
---------------------------------------------------------------------------
A ``coronavirus-related distribution'' is any distribution
from a qualified retirement plan, section 403(b) plan,
governmental section 457(b) plan, or an IRA, made on or after
January 1, 2020, and before December 31, 2020, to an individual
(1) who was diagnosed with the virus SARS-CoV-2 or with
coronavirus disease 2019 (``COVID-19'') by a test approved by
the Centers for Disease Control and Prevention; (2) whose
spouse or dependent \1539\ is diagnosed with such virus or
disease by such a test; or (3) who experiences adverse
financial consequences as a result of being quarantined, being
furloughed or laid off, or having work hours reduced due to
such virus or disease, being unable to work due to lack of
child care due to such virus or disease, closing or reducing
hours of a business owned or operated by the individual due to
such virus or disease, or other factors as determined by the
Secretary (or the Secretary's delegate).\1540\ The
administrator of the plan may rely on the individual's
certification that he or she satisfies the conditions described
in clauses (1), (2), or (3) in determining whether any
distribution is a coronavirus-related distribution.
---------------------------------------------------------------------------
\1539\ Dependent is defined in section 152.
\1540\ A coronavirus-related distribution is subject to income tax
withholding unless the recipient elects otherwise. Mandatory 20-percent
withholding does not apply.
---------------------------------------------------------------------------
A plan is not treated as violating any Code requirement
merely because it treats a distribution as a coronavirus-
related 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. A plan is not required to treat a
distribution as a coronavirus-related distribution.
A coronavirus-related distribution is treated as meeting
certain requirements relating to the timing of distributions
under a section 401(k) plan, section 403(b) plan, governmental
section 457(b) plan, and the Thrift Savings Plan.\1541\
However, it is not treated as meeting requirements relating to
the timing of distributions under a pension plan (including a
money purchase pension plan).\1542\
---------------------------------------------------------------------------
\1541\ Secs. 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and
457(d)(1)(A), and 5 U.S.C. 8433(h)(1).
\1542\ See Notice 2020-50, 2020-28 I.R.B. 35, June 19, 2020.
---------------------------------------------------------------------------
Any amount required to be included in income as a result of
a coronavirus-related 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 coronavirus-related distribution may, at
any time during the three-year period beginning the day after
the date on which the distribution was received, be
recontributed in one or more contributions 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 coronavirus-
related distribution in 2020, that amount is included in
income, generally ratably over the year of the distribution and
the following two years and is not subject to the 10-percent
early withdrawal tax. If, in 2022, the amount of the
coronavirus-related distribution is recontributed to an
eligible retirement plan, the individual may file amended
returns to claim a refund of the tax attributable to the
amounts previously included in income. In addition, if 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.
Explanation of Provision
The provision amends section 2202(a) of the CARES Act to
provide that, in the case of a money purchase pension plan, a
coronavirus-related distribution that is an in-service
withdrawal is treated as meeting the distribution requirements
applicable to qualified retirement plans.\1543\
---------------------------------------------------------------------------
\1543\ Sec. 401(a).
---------------------------------------------------------------------------
Effective Date
The provision is effective as if included in the enactment
of section 2202 of the CARES Act.
8. Election to waive application of certain modifications to farming
losses (sec. 281 of the Act and sec. 172 of the Code)
Present Law
A taxpayer generally may deduct in a taxable year a net
operating loss (``NOL'') \1544\ carried to such year.\1545\
Special rules apply with respect to NOLs arising in certain
circumstances. These include a special rule generally providing
a two-year carryback in the case of certain farming
losses.\1546\
---------------------------------------------------------------------------
\1544\ A net operating loss generally means the amount by which a
taxpayer's business deductions exceed its gross income. Sec. 172(c).
\1545\ Sec. 172(a). Certain additional limitations apply to NOLs
claimed by taxpayers other than a corporation. See sec. 172(d)(4).
\1546\ Sec. 172(b)(1)(B). For this purpose, the term ``farming
loss'' means the lesser of (1) the amount that would be the NOL for the
taxable year if only income and deductions attributable to farming
businesses (as defined in section 263A(e)(4)) are taken into account,
or (2) the amount of the NOL for such taxable year. For any loss year,
a farming business may irrevocably elect out of the two-year carryback.
The election must be made in the manner as prescribed by the Secretary
by the due date (including extensions) of the taxpayer's return for the
taxable year of the NOL.
---------------------------------------------------------------------------
The CARES Act made several changes with respect to NOLs
arising in taxable years beginning after December 31, 2017, and
before January 1, 2021.\1547\ For example, the limitation of
the NOL deduction to 80 percent of taxable income determined
without regard to the NOL deduction (the ``80-percent taxable
income limitation'') is suspended for taxable years beginning
after December 31, 2017, and before January 1, 2021.\1548\
However, in the case of any taxable year beginning after
December 31, 2020, and with respect to NOLs arising in taxable
years beginning after December 31, 2017, carried to such a
taxable year, the 80-percent taxable income limitation
applies.\1549\
---------------------------------------------------------------------------
\1547\ Background for the provision and a description of the net
operating loss rules that the provision modifies may be found above in
the section describing section 2303 of the CARES Act (Pub. L. No. 116-
136) in Part Six of this document.
\1548\ Sec. 172(a).
\1549\ Sec. 172(a)(2). Section 172(a)(2)(A) provides that NOLs
arising in taxable years beginning before January 1, 2018, carried to a
taxable year beginning after December 31, 2020, are not subject to the
80-percent taxable income limitation.
---------------------------------------------------------------------------
In addition, any NOL arising in a taxable year beginning
after December 31, 2017, and before January 1, 2021, may be
carried to the five taxable years preceding the taxable year of
such loss (the ``five-year carryback period'').\1550\ NOLs
eligible for the five-year carryback period include, for
example, those arising with respect to farming losses, which
would otherwise be subject to a two-year carryback
period.\1551\ For any loss year, a farming business may
irrevocably elect out of a carryback. The election must be made
in the manner as prescribed by the Secretary by the due date
(including extensions) of the taxpayer's return for the taxable
year of the NOL.\1552\
---------------------------------------------------------------------------
\1550\ See sec. 172(b)(1)(D)(i). Pursuant to section 172(b)(2), any
NOL carryback must be carried to the earliest taxable years to which
such loss may be carried.
\1551\ See sec. 172(b)(1)(B). For this purpose, the term ``farming
loss'' means the lesser of (1) the amount that would be the NOL for the
taxable year if only income and deductions attributable to farming
businesses (as defined in section 263A(e)(4)) are taken into account,
or (2) the amount of the NOL for such taxable year.
\1552\ See sec. 172(b)(1)(B) and (3).
---------------------------------------------------------------------------
Special rules also apply to NOL carrybacks to years to
which section 965 applies.
Explanation of Provision
In the case of farming losses arising in taxable years
beginning in 2018, 2019, or 2020, the provision allows a
taxpayer to elect out of the modifications made by the CARES
Act to the 80-percent taxable income limitation and the rules
relating to NOL carrybacks. Thus, a farming business that
previously claimed a two-year carryback (after application of
the 80-percent taxable income limitation) may elect to keep
such carryback without having to amend any applicable returns
to reflect a five-year carryback period after suspension of the
80-percent taxable income limitation. If such an election is
made, it applies to all of the taxpayer's taxable years
beginning in 2018, 2019, and 2020 (i.e., farming losses arising
in all such years will only be eligible for a two-year
carryback period after application of the 80-percent taxable
income limitation).
The election is made (under rules prescribed by the
Secretary) by the due date (including extensions) for filing
the taxpayer's return for the taxpayer's first taxable year
ending after December 27, 2020. Once made, the election is
irrevocable. A taxpayer who previously claimed a two-year
carryback of a farming loss after application of the 80-percent
taxable income limitation and does not amend the applicable
returns to reflect the suspension of the 80-percent taxable
income limitation and a five-year carryback period by the due
date (including extensions) for filing the taxpayer's return
for the taxpayer's first taxable year ending after December 27,
2020, is deemed to have made the election to disregard such
modifications. Authority is provided to promulgate regulations
or other guidance necessary to carry out the purposes of the
provision, including regulations or other guidance relating to
the application of section 172(a) as in effect before March 27,
2020, to taxpayers making the election.\1553\
---------------------------------------------------------------------------
\1553\ See Rev. Proc. 2021-14, 2021-30 I.R.B. 158.
---------------------------------------------------------------------------
In addition, the provision provides that any election to
forgo any carryback of a farming loss arising in a taxable year
beginning in 2018 or 2019 that was made before December 27,
2020, may be revoked.
Effective Date
The provision is effective as if included in section 2303
of the CARES Act.
9. Oversight and audit reporting (sec. 282 of the Act and sec. 19010 of
the CARES Act)
Present Law
The Comptroller General monitors and oversees the exercise
of authorities, or the receipt, disbursement, and use of funds
made available under the CARES Act or any other Act to prepare
for, respond to, and recover from the Coronavirus 2019
pandemic.\1554\ In conducting monitoring and oversight, the
Comptroller General offers regular briefings to the appropriate
congressional committees regarding Federal public health and
homeland security efforts and publishes reports regarding the
monitoring and oversight efforts (which, along with any audits
and investigations conducted by the Comptroller General are
submitted to the appropriate congressional committees and
posted on the website of the Government Accountability Office).
---------------------------------------------------------------------------
\1554\ Sec. 19010 of the CARES Act, Pub. L. No. 116-136.
---------------------------------------------------------------------------
Appropriate congressional committees include: the Committee
on Appropriations of the Senate; the Committee on Homeland
Security and Governmental Affairs of the Senate; the Committee
on Health, Education, Labor, and Pensions of the Senate; the
Committee on Appropriations of the House of Representatives;
the Committee on Homeland Security of the House of
Representatives; the Committee on Oversight and Reform of the
House of Representatives; and the Committee on Energy and
Commerce of the House of Representatives.
Explanation of Provision
The provision amends section 19010 of the CARES Act to add
the Committee on Finance of the Senate and the Committee on
Ways and Means of the House of Representatives to the list of
appropriate congressional committees.
Effective Date
The provision is effective as of the date of enactment
(December 27, 2020).
10. Disclosures to identify tax receivables not eligible for collection
pursuant to qualified tax collection contracts (sec. 283 of the Act and
new sec. 6103(k)(15) and current sec. 6306 of the Code)
Present Law
Under the Code, the IRS is permitted to use private debt
collection companies to locate and contact taxpayers owing
outstanding Federal tax liabilities of any type and to arrange
payment of those taxes by the taxpayers.\1555\ Specifically,
the Code requires the Secretary to enter into qualified tax
collection contracts for the collection of inactive tax
receivables.\1556\ Inactive tax receivables are defined as any
tax receivable (i) removed from the active inventory for lack
of resources or inability to locate the taxpayer, (ii) for
which more than 1/3 of the applicable limitations period has
lapsed and no IRS employee has been assigned to collect the
receivable (and for tax receivables identified by the Secretary
or the Secretary's delegate after December 31, 2020, more than
two years have passed since assessment and receivable has not
been assigned for collection to any employee of the IRS), or
(iii) for which a receivable has been assigned for collection
but more than 365 days have passed without interaction with the
taxpayer or a third party for purposes of furthering the
collection.\1557\ Tax receivables are defined as any
outstanding assessment which the IRS includes in potentially
collectible inventory.
---------------------------------------------------------------------------
\1555\ Sec. 6306(a).
\1556\ Sec. 6306(c).
\1557\ Sec. 6306(c)(2).
---------------------------------------------------------------------------
Certain tax receivables are not eligible for collection
under qualified tax collection contracts. A receivable is not
eligible if the receivable: (i) is subject to a pending or
active offer-in-compromise or installment agreement; (ii) is
classified as an innocent spouse case; (iii) involves a
taxpayer identified by the Secretary as being (a) deceased, (b)
under the age of 18, (c) in a designated combat zone, (d) a
victim of identity theft; (iv) is currently under examination,
litigation, criminal investigation, or levy; or (v) is
currently subject to a proper exercise of a right of appeal
under Title 26.\1558\
---------------------------------------------------------------------------
\1558\ Sec. 6306(d).
---------------------------------------------------------------------------
In addition, certain tax receivables identified by the
Secretary (or the Secretary's delegate) after December 31, 2020
are not eligible for collection under qualified tax collection
contracts. In this category, a receivable is not eligible if
the receivable involves a taxpayer identified by the Secretary
as being (a) a taxpayer substantially all of whose income
consists of Social Security disability insurance or
supplemental security income benefits, or (b) a taxpayer who is
an individual with adjusted gross income (as determined for the
most recent taxable year for which such information is
available) which does not exceed 200 percent of the poverty
level as determined by the Secretary.\1559\
---------------------------------------------------------------------------
\1559\ Sec. 6306(d)(3)(E), (F).
---------------------------------------------------------------------------
Under the Code, returns and return information are
confidential, and no officer or employee of the United States,
and certain other persons, can disclose such information unless
a specific Title 26 exception allowing the disclosure
applies.\1560\ Civil and criminal penalties apply to the
unauthorized disclosure or inspection of a return or return
information. Return information includes, among other items, a
taxpayer's identity, tax payments, and any data collected by
the Secretary with respect to the determination of the
existence or possible existence of liability for any tax,
penalty, interest, fine, forfeiture, or other imposition or
offense.\1561\ The term ``taxpayer identity'' means the name of
a person with respect to whom a return is filed, their mailing
address, their taxpayer identification number, or a combination
of these items.\1562\
---------------------------------------------------------------------------
\1560\ Sec. 6103(a).
\1561\ Sec. 6103(b)(2)(A).
\1562\ Sec. 6103(b)(6).
---------------------------------------------------------------------------
Explanation of Provision
The provision amends the Code to allow the Secretary of the
Treasury to disclose taxpayer identities (within the meaning of
the Code) and dates of birth to the Social Security
Administration (``SSA'') and contractors of the SSA to
determine if tax receivables involving such individuals are
ineligible for collection. The provision requires the
Commissioner of Social Security to respond to the Secretary's
inquiry with an indication as to whether the individual
receives Social Security disability insurance or supplemental
security income benefits. The provision restricts the IRS's use
of this information to determining whether the individual's tax
receivables are eligible for collection pursuant to a qualified
tax collection contract. The Secretary is required to pay for
the full costs (including administrative and system costs) of
SSA providing the indication.
The provision subjects SSA contractors to the general rule
of confidentiality for information SSA contractors receive and
to civil and criminal penalties for unauthorized inspection or
disclosure of the information. Disclosures to SSA and its
contractors under the provision are subject to recordkeeping,
reporting, and safeguarding requirements for the information
received.
Effective Date
The provision applies to disclosures made on or after the
date of enactment (December 27, 2020).
11. Modification of certain protections for taxpayer return information
(sec. 284 of the Act and sec. 6103(l)(13) of the Code)
Present Law
As discussed below, the Fostering Undergraduate Talent by
Unlocking Resources for Education (``FUTURE'') Act \1563\
amended and rewrote section 6103(l)(13) to authorize the
disclosure of certain return information for purposes of
administering student financial aid and loan programs. Further
revisions were made by the CARES Act.\1564\
---------------------------------------------------------------------------
\1563\ Pub. L. No. 116-91, sec. 3, December 19, 2019.
\1564\ Pub. L. No. 116-136, sec. 3516, March 27, 2020.
---------------------------------------------------------------------------
General rule of confidentiality and exception for certain disclosures
to administer certain student financial aid and loan programs
As a general rule, returns and return information are
confidential and cannot be disclosed unless authorized by Title
26 (the Code).\1565\ Among others, this general rule applies to
officers and employees of the United States and to any person
who has or had access to returns or return information under
section 6103(l)(13). The FUTURE Act substantially revised
section 6103(l)(13) to authorize the disclosure of certain
return information for purposes of administering student
financial aid and loan programs.
---------------------------------------------------------------------------
\1565\ Sec. 6103(a).
---------------------------------------------------------------------------
The provision requires the IRS to disclose certain return
information to the Department of Education and others for the
purpose of administering financial aid and loan programs. Upon
receiving a written request from the Secretary of
Education,\1566\ the IRS must disclose specified return
information to authorized persons for the purposes of (1)
determining eligibility for, and repayment obligations under,
income-contingent or income-based repayment plans; (2)
monitoring and reinstating loans that were discharged based on
a total and permanent disability; and (3) determining the
eligibility for, and the amount of, awards of Federal student
financial aid.
---------------------------------------------------------------------------
\1566\ The Secretary of Education can make a request for disclosure
under section 6103(l)(13) with respect to an individual only if the
Secretary of Education has obtained approval from the individual for
such disclosure.
---------------------------------------------------------------------------
Authorized persons may only use the disclosed information
for the purposes above and for three additional purposes
related to the programs. These additional purposes are (1)
reducing the net cost of improper payments under such plans,
relating to such awards, or relating to such discharges; (2)
oversight activities by the Office of Inspector General of the
Department of Education as authorized by the Inspector General
Act of 1978; and (3) conducting analyses and forecasts for
estimating costs related to such plans, discharges, or awards.
The additional purposes do not include conducting criminal
investigations or prosecutions.
An ``authorized person'' is any person who is an officer,
employee, or contractor of the Department of Education, and is
specifically authorized and designated by the Secretary of
Education for purposes of the specific disclosure authority
programs (income-contingent or income-based repayment plans,
loans discharged based on a total and permanent disability, and
awards of Federal student financial aid (the designation is
applied separately with respect to each program)).
With the approval of the taxpayer, authorized persons may
redisclose the return information received from the IRS to
certain institutions of higher education, State higher
education agencies, and scholarship organizations solely for
use in financial aid programs.
Civil damage remedy for unauthorized disclosure or unauthorized
inspection of returns and return information
A taxpayer whose return or return information is disclosed
in violation of section 6103(a) may bring a lawsuit in a
district court of the United States for actual or statutory
damages and, in certain cases, punitive damages. If a Federal
employee makes knowingly or by reason of negligence, a
disclosure or inspection in violation of any provision of
section 6103, a taxpayer may sue the United States. If a person
other than a Federal employee knowingly or by reason of
negligence inspects or discloses any return or return
information with respect to a taxpayer in violation of any
provision of section 6103, suit may be brought directly against
such person.
No liability results from a disclosure based on a good
faith, but erroneous, interpretation of section 6103. A
disclosure or inspection requested by the taxpayer will also
relieve liability.
Upon a finding of liability, a taxpayer can recover the
greater of $1,000 per act of unauthorized disclosure (or
inspection) or the sum of actual damages plus, in the case of
an inspection or disclosure that was willful or the result of
gross negligence, punitive damages. The taxpayer may also
recover the costs of the action and, if found to be a
prevailing party, reasonable attorney fees.
The taxpayer has two years from the date of the discovery
of the unauthorized inspection or disclosure to bring suit. The
IRS is required to notify a taxpayer of an unauthorized
inspection or disclosure as soon as practicable after any
person is criminally charged by indictment or information for
unlawful inspection or disclosure. In addition, the taxpayer is
to be notified if the IRS or a Federal or State agency (upon
notice to the Secretary by such Federal or State agency)
proposes an administrative determination as to disciplinary or
adverse action against an employee arising from the employee's
unauthorized inspection or disclosure of the taxpayer's return
or return information.
Safeguards and accountings
Unless specifically listed in the statute as excluded from
the accounting requirement, section 6103(p)(3) requires the IRS
to maintain a permanent system of standardized records or
accountings of all requests for inspection or disclosure of
returns and return information (including the reasons for and
dates of such requests) and of returns and return information
inspected or disclosed under section 6103 (and section
6104(c)). Pursuant to the FUTURE Act, prior to amendment by the
CARES Act as described below, the IRS was required to account
for all disclosures made under section 6103(l)(13), including
those made to the Department of Education and its contractors,
as well as redisclosures made by authorized persons to
institutions of higher education, State higher education
agencies, and scholarship organizations. The Secretary of
Education is required to annually submit a written report to
the Secretary of the Treasury regarding: (1) redisclosures of
return information to institutions of higher education, State
higher education agencies, and scholarship organizations,
including the number of such redisclosures; and (2) any
unauthorized use, access, or disclosure of the return
information under section 6103(l)(13).
Section 6103(p)(4) requires, as a condition of receiving
returns and return information, that Federal and State agencies
and specified other recipients provide safeguards to the
satisfaction of the Secretary of the Treasury as necessary or
appropriate to protect the confidentiality of returns or return
information.\1567\ It also requires that a report be furnished
to the Secretary at such time and containing such information
as prescribed by the Secretary, regarding the procedures
established and utilized for ensuring the confidentiality of
returns and return information. The Secretary, after an
administrative review, may take such actions as are necessary
to ensure these requirements are met, including the refusal to
disclose returns and return information.
---------------------------------------------------------------------------
\1567\ The IRS has published guidelines for safeguarding the
confidentiality of Federal tax information in IRS Publication 1075, Tax
Information Security Guidelines for Federal, State and Local Agencies
(2016), https://www.irs.gov/pub/irs-pdf/p1075.pdf.
---------------------------------------------------------------------------
Pursuant to the FUTURE Act, prior to amendment by the CARES
Act as described below, all agencies and other persons
described in section 6103(l)(13) as authorized to receive
confidential return information (i.e., the Department of
Education, its contractors, certain institutions of higher
education, State higher education agencies, and scholarship
organizations) were required to safeguard such information to
the satisfaction of the Secretary.
CARES Act amendments to confidentiality, accounting, and safeguard
provisions
The CARES Act amended section 6103(l)(13) to remove certain
confidentiality, accounting, and safeguard requirements.
Specifically, pursuant to the CARES Act, a person who has
or had access to return information under section
6103(l)(13)(D)(iii) (i.e., certain institutions of higher
education, State higher education agencies, scholarship
organizations, and the authorized persons designated to the
make redisclosures to such entities) is no longer required to
maintain the confidentiality of that return information as
provided by section 6103(a). As a result, the general rule of
confidentiality and nondisclosure under section 6103(a) does
not apply to these entities with respect to the information
redisclosed to them, and a civil action for damages due to
inspections and disclosures by such entities in violation of
section 6103(a) is no longer available.
In addition, pursuant to the CARES Act, the IRS is no
longer required to maintain a permanent system of standardized
records to account for disclosures the IRS makes to the
Department of Education and its contractors. The IRS is still
required to account for redisclosures made by authorized
persons to institutions of higher education, State higher
education agencies, and scholarship organizations.
Finally, for institutions of higher education, State higher
education agencies, scholarship organizations, and the
authorized persons designated to make redisclosures to such
entities, the CARES Act eliminated the requirement that as a
condition of receiving return information such entities
establish safeguard requirements to the satisfaction of the
Secretary of the Treasury.
Explanation of Provision
Redisclosure to contractors of institutions of higher education or
State higher education agencies
The provision allows an institution of higher education or
a State higher education agency to designate a contractor to
receive directly return information on such entity's behalf
pursuant to section 6103(l)(13)(D)(iii) for the purposes of
administering aspects of the entity's activities for the
application, award, and administration of financial aid. The
designation must occur under such terms and conditions as may
be prescribed by the Secretary after consultation with the
Department of Education.
Additional redisclosure authority
The provision extends authority to disclose return
information to additional persons in three situations.
First, any return information redisclosed pursuant to
section 6103(l)(13)(D)(iii) (that is, disclosed from the IRS to
the Department of Education and redisclosed to certain
institutions of higher education, State higher education
agencies, designated scholarship organizations, or contractors
on behalf of institutions of higher education and State higher
education agencies) may be further disclosed by such entities
to the Office of the Inspector General of the Department of
Education and independent auditors conducting audits of the
entity's administration of the programs for which return
information was received.\1568\ An institution of higher
education, a State higher education agency, or designated
scholarship organization also may further disclose return
information it has received to its contractors. These further
disclosures are allowed only to the extent necessary for
purposes of the application, award, and administration of
financial aid.
---------------------------------------------------------------------------
\1568\ Sec. 6103(l)(13)(D)(iv).
---------------------------------------------------------------------------
Second, any return information that has been disclosed and
used for purposes of (1) determining eligibility for, and
repayment obligations under, income-contingent or income-based
repayment plans or (2) determining the eligibility for, and the
amount of, awards of Federal student financial aid, or has been
redisclosed pursuant to section 6103(l)(13)(D)(iii), may be
further disclosed to certain family members that have provided
approval for such disclosure and redisclosure of their return
information.\1569\ For disclosures related to income-contingent
or income-based repayment plans, such family members are the
plan applicant and the applicant's spouse. For disclosures
related to Federal student financial aid, such family members
are the plan applicant, the applicant's parent, and the
applicant's spouse.
---------------------------------------------------------------------------
\1569\ Sec. 6103(l)(13)(D)(v).
---------------------------------------------------------------------------
Third, any return information received for purposes of
determining the eligibility for, and the amount of, awards of
Federal student financial aid may be redisclosed in the form of
a complete, unredacted Student Aid Report to the aid applicant
and, with the written consent of the applicant, directly from
an institution of higher education to a scholarship granting
organization or an organization assisting the applicant in
applying for and receiving Federal, State, local, or tribal
assistance, as designated by the applicant.\1570\ The
redisclosure must be for the purposes of assisting the
applicant in applying for and receiving financial assistance as
specified in section 494(c) of the Higher Education Act of 1965
\1571\ (as in effect on the date of enactment of the
provision).
---------------------------------------------------------------------------
\1570\ Sec. 6103(l)(13)(D)(vi).
\1571\ 20 U.S.C. 1098h.
---------------------------------------------------------------------------
Reinstating confidentiality, accounting, and safeguard provisions
The provision reinstates certain requirements that were
removed by the CARES Act.
First, the provision reinstates the requirement that a
person who has or had access to return information under
section 6103(l)(13)(D)(iii) (i.e., certain institutions of
higher education, State higher education agencies, scholarship
organizations, and contractors of institutions of higher
education and State higher education agencies) must maintain
the confidentiality of that return information as provided by
section 6103(a). Accordingly, the general rules of
confidentiality and nondisclosure under section 6103(a) apply
to these entities with respect to information redisclosed to
them, and a civil action for damages may be pursued against
such entities in violation of section 6103(a). The general
rules of confidentiality and nondisclosure are also extended to
redisclosures to the Office of the Inspector General of the
Department of Education and independent auditors. The general
rules of confidentiality and nondisclosure are not extended to
disclosures or redisclosures to family members or to
scholarship granting organizations or organizations assisting
the applicant in applying for financial assistance.\1572\
---------------------------------------------------------------------------
\1572\ See secs. 6103(l)(13)(D)(v) and (vi).
---------------------------------------------------------------------------
Second, the provision reinstates the requirement that the
IRS maintain a permanent system of standardized records to
account for disclosures the IRS makes to the Department of
Education and its contractors. The IRS is not required to
account for certain redisclosures. Specifically, the IRS is not
required to account for redisclosures made by institutions of
higher education, State higher education agencies, or
designated scholarship organizations to: their contractors, or,
when such entity is under audit, the Office of the Inspector
General of the Department of Education or independent auditors.
The IRS is not required to account for redisclosures of return
information to family members, nor of financial aid information
provided pursuant to an applicant's consent to scholarship
granting organizations or organizations assisting the applicant
in applying for financial assistance as described in section
494(c) of the Higher Education Act as added by the
provision.\1573\
---------------------------------------------------------------------------
\1573\ See secs. 6103(l)(13)(D)(iv), (v), and (vi).
---------------------------------------------------------------------------
Effective Date
The amendments made by the provision apply to disclosures
made after the date of enactment of the FUTURE Act (Pub. L. No.
116-91) (December 19, 2019).
12. 2020 election to terminate transfer period for qualified transfers
from pension plan for covering future retiree costs (sec. 285
of the Act and sec. 420 of the Code)
Present Law
Defined benefit pension plan reversions
Defined benefit plan assets generally may not revert to an
employer prior to termination of the plan and satisfaction of
all plan liabilities.\1574\ Upon plan termination, the accrued
benefits of all plan participants are required to be 100-
percent vested. A reversion prior to plan termination may
constitute a prohibited transaction and may result in plan
disqualification. Any assets that revert to the employer upon
plan termination are includible in the gross income of the
employer and subject to an excise tax. The excise tax rate is
20 percent if the employer maintains a replacement plan or
makes certain benefit increases in connection with the
termination; if not, the excise tax rate is 50 percent.
---------------------------------------------------------------------------
\1574\ In addition, a reversion may occur only if the terms of the
plan so provide.
---------------------------------------------------------------------------
Retiree medical accounts
A defined benefit plan may provide medical benefits to
retired employees through a separate account that is part of
the plan (``retiree medical accounts'').\1575\ Medical benefits
provided through a retiree medical account are generally not
includible in the retired employee's gross income.\1576\
---------------------------------------------------------------------------
\1575\ Sec. 401(h) and Treas. Reg. sec. 1.401-1(b).
\1576\ Treas. Reg. sec. 1.72-15(h).
---------------------------------------------------------------------------
Transfers of excess pension assets
In general
A qualified transfer of excess assets of a defined benefit
plan, including a multiemployer plan, may be made to a retiree
medical account or life insurance account within the plan to
fund retiree health benefits and group term life insurance
coverage (``applicable retiree benefits'').\1577\ A qualified
transfer does not result in plan disqualification, is not a
prohibited transaction, and is not treated as a reversion.
Thus, transferred assets are not includible in the gross income
of the employer and are not subject to the excise tax on
reversions. No more than one qualified transfer may be made in
any taxable year. For this purpose, a transfer to a retiree
medical account and a transfer to a retiree life insurance
account in the same year are treated as one transfer. No
qualified transfer may be made after December 31, 2025.
---------------------------------------------------------------------------
\1577\ Sec. 420.
---------------------------------------------------------------------------
Excess assets generally means the excess, if any, of the
value of the plan's assets \1578\ over 125 percent of the sum
of the plan's funding target and target normal cost for the
plan year. In addition, excess assets transferred in a
qualified transfer may not exceed the amount reasonably
estimated to be the amount that the employer will pay out of
such account during the taxable year of the transfer for
qualified current retiree liabilities.\1579\ No deduction is
allowed to the employer for (1) a qualified transfer, or (2)
the payment of applicable retiree benefits out of transferred
funds (and any income thereon). In addition, no deduction is
allowed for amounts paid other than from transferred funds for
qualified current retiree liabilities to the extent such
amounts are not greater than the excess of (1) the amount
transferred (and any income thereon), over (2) qualified
current retiree liabilities paid out of transferred assets (and
any income thereon). An employer may not contribute any amount
to a health benefits account or welfare benefit fund with
respect to qualified current retiree liabilities for which
transferred assets are required to be used.
---------------------------------------------------------------------------
\1578\ The value of plan assets for this purpose is the lesser of
fair market value or actuarial value, reduced by any prefunding balance
or standard carryover balance.
\1579\ ``Qualified current retiree liabilities'' means, with
respect to any taxable year, the aggregate amounts (including
administrative expenses) which would have been allowable as a deduction
to the employer for such taxable year with respect to applicable health
benefits and applicable life insurance benefits provided during such
taxable year if (i) such benefits were provided directly by the
employer, and (ii) the employer used the cash receipts and
disbursements method of accounting. Sec. 420(e)(1).
---------------------------------------------------------------------------
Transferred assets (and any income thereon) must be used to
pay qualified current retiree liabilities for the taxable year
of the transfer. Transferred amounts generally must benefit
pension plan participants, other than key employees, who are
entitled upon retirement to receive applicable retiree benefits
through the separate account or accounts.\1580\ Applicable
retiree benefits of key employees may not be paid out of
transferred assets.
---------------------------------------------------------------------------
\1580\ In the case of group term life insurance coverage, the
transfer may be provided only to the extent that coverage is provided
under a policy for retired employees and the cost of such coverage is
excludable from the retired employee's gross income under section 79.
Thus, generally, only group term life insurance coverage not in excess
of $50,000 may be purchased with such transferred assets.
---------------------------------------------------------------------------
Amounts not used to pay qualified current retiree
liabilities for the taxable year of the transfer are to be
returned to the general assets of the plan. These amounts are
not includible in the gross income of the employer, but are
treated as an employer reversion and are subject to a 20-
percent excise tax.
In order for the transfer to be qualified, accrued
retirement benefits under the pension plan generally must be
100-percent vested as if the plan terminated immediately before
the transfer (or in the case of a participant who separated in
the one-year period ending on the date of the transfer,
immediately before the separation). A maintenance of effort
requirement also applies (separately to transfers to retiree
medical accounts and the life insurance accounts), under which
the employer generally must maintain applicable retiree
benefits at the same cost level for the taxable year of the
transfer and the following four years.
In addition, the Employee Retirement Income Security Act of
1974 (``ERISA'') \1581\ provides that, at least 60 days before
the date of a qualified transfer, the employer must notify the
Secretary of Labor, the Secretary of the Treasury, employee
representatives, and the plan administrator of the transfer,
and the plan administrator must notify each plan participant
and beneficiary of the transfer.\1582\
---------------------------------------------------------------------------
\1581\ Pub. L. No. 93-406.
\1582\ ERISA sec. 101(e). ERISA also provides that a qualified
transfer is not a prohibited transaction under ERISA or a prohibited
reversion.
---------------------------------------------------------------------------
Qualified future transfers and collectively bargained
transfers
If certain requirements are satisfied, transfers of excess
pension assets under a single-employer plan to retiree medical
accounts and life insurance accounts to fund the expected cost
of applicable retiree benefits are permitted for the current
and future years (a ``qualified future transfer'') and such
transfers are also allowed in the case of benefits provided
under a collective bargaining agreement (a ``collectively
bargained transfer'').\1583\ Transfers must be made for at
least a two-year period, and for no more than a 10-year period.
An employer can elect to make a qualified future transfer or a
collectively bargained transfer rather than a qualified
transfer. A qualified future transfer or collectively bargained
transfer must meet the requirements applicable to qualified
transfers with modifications related to: (1) the determination
of excess pension assets; (2) the limitation on the amount
transferred; and (3) the maintenance of effort requirement.
---------------------------------------------------------------------------
\1583\ Sec. 420(f). The rules for qualified future transfers and
collectively bargained transfers were added by the PPA and apply to
transfers after the date of enactment (August 17, 2006).
---------------------------------------------------------------------------
With respect to the determination of excess pension assets,
in the case of a qualified future transfer or a collectively
bargained transfer, excess assets generally means the excess,
if any, of (i) the value of the plan's assets \1584\ over (ii)
120 percent (rather than 125 percent) of the sum of the plan's
funding target and target normal cost for the plan year. In
addition, a special rule applies relating to the maintenance of
a plan's funded status. If, as of any valuation date of any
plan year in the transfer period, the amount described in
clause (ii) above exceeds the amount described in clause (i),
than an amount not less than the amount required to reduce such
excess to zero as of such date must either be contributed to
the plan by the employer maintaining the plan, or must be
transferred to the plan from the retiree medical account or
life insurance account (as applicable).\1585\
---------------------------------------------------------------------------
\1584\ The value of plan assets for this purpose is the lesser of
fair market value or actuarial value, reduced by any prefunding balance
or standard carryover balance.
\1585\ Sec. 420(f)(2)(B)(ii).
---------------------------------------------------------------------------
With respect to the limitation on the amount transferred,
in the case of a qualified future transfer, the amount of
excess pension assets that may be transferred may not exceed
the sum of (i) if the transfer period includes the taxable year
of the transfer, the amount reasonably estimated to be the
amount that the employer will pay out of the retiree medical
account or life insurance account during the taxable year of
the transfer for qualified current retiree liabilities, and
(ii) in the case of all other taxable years in the transfer
period, the sum of the qualified current retiree liabilities
that the plan reasonably estimates (in accordance with guidance
issued by the Secretary) will be incurred for each of such
years. In the case of a collectively bargained transfer, the
amount of excess pension assets that may be transferred may not
exceed the amount that is reasonably estimated, in accordance
with the provisions of the collective bargaining agreement and
generally accepted accounting principles, to be the amount the
employer maintaining the plan will pay (whether directly or
through reimbursement) out of such account during the
collectively bargained cost maintenance period \1586\ for
collectively bargained retiree liabilities. Any assets
transferred to a retiree medical account or life insurance
account in a qualified future transfer or collectively
bargained transfer that are not used as described in this
paragraph must be returned to the general assets of the
plan.\1587\
---------------------------------------------------------------------------
\1586\ As defined in section 420(f)(6)(A).
\1587\ Sec. 420(c)(1).
---------------------------------------------------------------------------
The general sunset applicable to qualified transfers
applies in this context (i.e., no transfers can be made after
December 31, 2025).
Explanation of Provision
The provision provides a special rule for 2021 for plans
that have made qualified future transfers. Under the provision,
the employer of such a plan may, not later than December 31,
2021, elect to terminate the transfer period with respect to
the qualified future transfer effective as of any taxable year
specified by the taxpayer that begins after the date of the
election.
Under the provision, certain requirements apply to plans
that elect to terminate the transfer period. Any assets
transferred to a retiree medical account or life insurance
account in a qualified future transfer (and any income
allocable thereto) that are not used as of the effective date
of the election must be transferred to the transferor plan
within a reasonable period of time. Such a transfer is treated
as an employer reversion unless, before the end of the five-
year period beginning after the original transfer period,\1588\
an equivalent amount is transferred back to such retiree
medical account or life insurance account (as
applicable).\1589\
---------------------------------------------------------------------------
\1588\ The original transfer period is the transfer period under
section 420(f) with respect to a qualified future transfer determined
without regard to an election to terminate the transfer period.
\1589\ The provision provides that any transfers back may be made
without regard to section 401(h)(1) (providing that benefits under a
pension or annuity plan for sickness, accident, hospitalization, and
medical expenses for retired employees, their spouses, and their
dependents must be subordinate to the retirement benefits provided by
the plan).
---------------------------------------------------------------------------
In addition, modifications apply to the rules relating to
the determination of excess assets and the maintenance of a
plan's funded status during the transfer period. Under the
provision, these rules apply to the plan without regard to the
plan's election to terminate the transfer period, and in
applying such rules during the original transfer period, the
value of the plan's assets is compared to 100 percent of the
sum of the plan's funding target and target normal cost for the
plan year, rather than 120 percent.\1590\ If, as of the
valuation date of the plan year in the last year of the
original transfer period, the required funding level of the
plan exceeds the value of the plan's assets,\1591\ the rules
relating to the determination of excess assets for a qualified
future transfer and the maintenance of a plan's funded status
apply for five years after the end of the original transfer
period, except that the ``applicable percentage'' is
substituted for 120 percent. The ``applicable percentage'' is
determined, under the provision, according to the table below.
---------------------------------------------------------------------------
\1590\ The provision also provides that the minimum cost
requirements under section 420(c)(3) and (f)(2)(D) apply with respect
to a qualified future transfer without regard to any election to
terminate the transfer period.
\1591\ As determined under section 420(f)(2)(B)(ii) (when 120
percent of the sum of the plan's funding target and target normal cost
for the plan year exceeds the value of the plan's assets).
---------------------------------------------------------------------------
For the valuation of the plan year in the following:
The applicable percentage is: year after the original
transfer period:
1st--104 percent
2nd--108 percent
3rd--112 percent
4th--116 percent
5th--120 percent
However, this rule (relating to the five years after the
original transfer period) ceases to apply if, as of the
valuation date of any plan year in the first four years after
the original transfer period, the plan's required funding level
would not exceed the value of the plan's assets if the
applicable percentage were 120 percent.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2019.
13. Extension of credits for paid sick and family leave (sec. 286 of
the Act)
Present Law
In general
Federal employment taxes are imposed on wages paid to
employees with respect to employment and include Federal income
tax as well as taxes levied under Federal Insurance
Contributions Act (``FICA'') and Federal Unemployment Tax Act
(``FUTA'').\1592\ In addition, tier 1 of the Railroad
Retirement Tax Act (``RRTA'') imposes a tax on compensation
paid to railroad employees and representatives.\1593\
---------------------------------------------------------------------------
\1592\ Secs. 3401, 3101, 3111, and 3301.
\1593\ Sec. 3221.
---------------------------------------------------------------------------
FICA taxes are comprised of two components: the Old-Age,
Survivors, and Disability Insurance (``OASDI'') taxes and
Medicare taxes.\1594\ With respect to OASDI taxes, the
applicable rate is 12.4 percent with half of such rate (6.2
percent) imposed on the employee and the remainder (6.2
percent) imposed on the employer.\1595\ The tax is assessed on
covered wages up to the OASDI wage base ($137,700 in
2020).\1596\ Generally, the OASDI wage base rises based on
increases in the national average wage index.\1597\
---------------------------------------------------------------------------
\1594\ The Hospital Insurance (``HI'') tax has two components:
Medicare tax and Additional Medicare tax. Medicare tax is imposed on
wages, as defined in Section 3121(a), with respect to employment, as
defined in Section 3121(b), at a rate of 1.45 percent for the employer.
Sec. 3101(b)(1). An equivalent 1.45 percent is withheld from employee
wages. Sec. 3111(b)(1). For purposes of this description, Medicare tax
does not include Additional Medicare tax. Additional Medicare taxes are
withheld from employee wages in excess of $200,000 at a rate of 0.9
percent. Sec. 3101(b)(2). There is no equivalent employer's share of
Additional Medicare taxes.
\1595\ Sec. 3101.
\1596\ Indexed for inflation, the OASDI wage base for 2021 is
$142,800.
\1597\ Sec. 230 of the Social Security Act (42 U.S.C. sec. 430).
---------------------------------------------------------------------------
Generally, the term ``wages'' for OASDI tax purposes means
all remuneration for ``employment,'' including the cash value
of all remuneration (including benefits) paid in any medium
other than cash, with certain exceptions.\1598\ The name given
to the remuneration for employment is immaterial. OASDI wages
includes salaries, vacation allowances, bonuses, deferred
compensation, commissions, and fringe benefits. The term
``employment'' is generally defined for FICA tax purposes as
any service, of whatever nature, performed by an employee for
the person employing him or her, with certain specific
exceptions.
---------------------------------------------------------------------------
\1598\ Sec. 3121(a).
---------------------------------------------------------------------------
Railroad retirement program
Railroad workers do not participate in the OASDI system.
Accordingly, compensation subject to RRTA tax is exempt from
FICA taxes.\1599\ The RRTA imposes a tax on compensation paid
by covered employers to employees in recognition for the
performance of services.\1600\ Employees whose compensation is
subject to RRTA are ultimately eligible for railroad retirement
benefits that fall under a two-tier structure. Rail employees
and employers pay tier 1 taxes at the same rate as FICA
taxes.\1601\ In addition, rail employees and employers both pay
tier 2 taxes that are used to finance railroad retirement
benefits over and above Social Security benefit levels.\1602\
Tier 2 benefits are similar to benefits under a defined benefit
plan. Those taxes are funneled to the railroad retirement
system and used to fund basic retirement benefits for railroad
workers and an investment trust that generates returns for the
pension fund.
---------------------------------------------------------------------------
\1599\ Sec. 3121(b)(9).
\1600\ Secs. 3201 through 3233. Instead of FICA taxes, railroad
employers and employees are subject, under the RRTA, to taxes
equivalent to the Social Security and Medicare taxes under FICA. Under
the RRTA, employers and employees are also subject to an additional
tax, referred to as the ``tier 2'' tax, on compensation up to a certain
amount.
\1601\ 7.65 percent, consisting of 6.2 percent for retirement on
earnings up to $137,700 in 2020 and $142,800 in 2021, and 1.45 percent
for Medicare hospital insurance on all earnings. An additional 0.9
percent in Medicare taxes are withheld from employees on earnings above
$200,000.
\1602\ In 2020, the tier 2 tax rate on earnings up to $102,300 is
4.9 percent for employees and 13.1 percent for employers. In 2021, the
tier 2 tax rates remain the same with an increase in taxable earnings
to $106,200.
---------------------------------------------------------------------------
Self-employment taxes
The Self-Employed Contributions Act (``SECA'') imposes tax
on the self-employment income of an individual. SECA taxes
consist of OASDI tax and Medicare tax.\1603\ Under the OASDI
component, the first rate of tax is 12.4 percent on self-
employment income up to the OASDI wage base ($137,700 for
2020).\1604\ Under the basic Medicare tax component, the second
rate of tax is 2.9 percent of all self-employment income
(without regard to the OASDI wage base).\1605\ As is the case
with employees, an Additional Medicare tax applies to the
Medicare portion of SECA tax on self-employment income in
excess of a threshold amount.\1606\
---------------------------------------------------------------------------
\1603\ Sec. 1401(a) and (b).
\1604\ Sec. 1401(a). In calculating the SECA tax for OASDI, the
OASDI wage base taken into account is reduced by FICA wages paid to the
individual during the taxable year.
\1605\ Sec. 1401(b)(1).
\1606\ Sec. 1401(b)(2).
---------------------------------------------------------------------------
Self-employment income subject to SECA tax is determined as
the net earnings from self-employment derived by an individual
during any taxable year, subject to certain exceptions. Net
earnings from self-employment are equal to the gross income
derived by an individual from any trade or business less
allowed deductions that are attributable to the trade or
business and permitted under the SECA rules. Certain passive
income and related deductions are not taken into account in
determining net earnings from self-employment, including
rentals from real estate (unless received in the course of a
trade or business as a real estate dealer),\1607\ dividends and
interest (unless such dividends and interest are received in
the course of a trade or business as a dealer in stocks or
securities),\1608\ and sales or exchanges of capital assets and
certain other property (unless the property is stock in trade
that would properly be included in inventory or held primarily
for sale to customers in the ordinary course of the trade or
business).\1609\
---------------------------------------------------------------------------
\1607\ Sec. 1402(a)(1).
\1608\ Sec. 1402(a)(2).
\1609\ Sec. 1402(a)(3).
---------------------------------------------------------------------------
For purposes of computing net earnings from self-
employment, taxpayers are permitted a deduction equal to the
product of the taxpayer's net self-employment income
(determined without regard to this deduction) and one-half of
the sum of the rates for OASDI and Medicare (i.e., 7.65 percent
of net earnings).\1610\ This deduction is determined without
regard to the additional 0.9 percent Additional Medicare tax
that may apply to an individual. This deduction reflects the
fact that the FICA rates apply to an employee's wages, which do
not include FICA taxes paid by the employer, whereas the self-
employed individual's net earnings are economically equivalent
to an employee's wages plus the employer's share of FICA
taxes.\1611\ This is generally referred to as the ``regular
method'' of determining net earnings from self-employment, and
in Internal Revenue Service forms and publications it is
expressed as multiplying total net earnings from self-
employment by 92.35 percent.
---------------------------------------------------------------------------
\1610\ Sec. 1402(a)(12).
\1611\ The deduction is intended to provide parity between FICA and
SECA taxes because the employer may deduct, as a business expense, its
share of the FICA taxes paid. As presently written, the deduction for
SECA taxes is not the exact economic equivalent to the deduction for
FICA taxes. See Joint Committee on Taxation, Options to Improve Tax
Compliance and Reform Tax Expenditures (JCS-2-05), January 2005, for a
detailed description of this issue.
---------------------------------------------------------------------------
Paid sick and family leave for employees
The Families First Coronavirus Response Act (``FFCRA'')
\1612\ required certain employers with fewer than 500 employees
to provide paid sick and expanded family and medical leave to
employees unable to work or telework for specified reasons
related to COVID-19. The paid sick leave requirements in the
Emergency Paid Sick Leave Act (``EPSLA''),\1613\ and the
expanded family and medical leave requirements in the Emergency
Family and Medical Leave Expansion Act (``EFMLEA''),\1614\
expired on December 31, 2020.
---------------------------------------------------------------------------
\1612\ Pub. L. No. 116-127 (March 18, 2020).
\1613\ Division E, FFCRA, Pub. L. No. 116-127.
\1614\ Division C, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
An employer is allowed a credit against the OASDI tax
\1615\ or the equivalent amount of tax under the Railroad
Retirement Tax Act (``RRTA'') imposed on the employer for each
calendar quarter in an amount equal to 100 percent of the
qualified sick leave wages and qualified family leave wages
paid by the employer with respect to that calendar quarter,
subject to limitations.\1616\ Qualified sick leave wages are
defined as wages \1617\ and compensation \1618\ paid by an
employer which are required to be paid by reason of the EPSLA.
---------------------------------------------------------------------------
\1615\ The Federal Insurance Contributions Act (``FICA'') imposes
taxes on ``wages,'' as defined in Section 3121(a), with respect to
``employment,'' as defined in Section 3121(b). The term wages is
defined for FICA purposes as all remuneration for employment, with
certain specific exceptions. Employment is defined as any service, of
whatever nature, performed by an employee for the person employing him,
with certain specific exceptions. FICA taxes consist of the OASDI tax
and the HI tax. HI tax includes an employer's share imposed on wages at
a rate of 1.45 percent under Section 3111(b). The employee's share of
HI tax is imposed on wages at a rate of 1.45 percent under Section
3101(b). Unlike OASDI, there is no contribution limit on wages subject
to HI tax.
\1616\ Notice 2020-21, 2020-16 I.R.B. 660 (April 13, 2020).
\1617\ Sec. 3121(a).
\1618\ Sec. 3231(e).
---------------------------------------------------------------------------
Qualified family leave wages are wages \1619\ and
compensation \1620\ paid by an employer which are required to
be paid by reason of the EFMLEA.\1621\ In addition to qualified
sick leave wages and qualified family leave wages, the credit
could be increased by certain health plan expenses of the
employer.
---------------------------------------------------------------------------
\1619\ Sec. 3121(a).
\1620\ Sec. 3231(e).
\1621\ See Notice 2020-54, 2020-31 I.R.B. 226 (July 27, 2020).
---------------------------------------------------------------------------
Amount of credit for paid sick leave
Certain employers must provide an employee with up to 80
hours of paid sick time to the extent that: (1) the employee is
subject to a Federal, State, or local quarantine or isolation
order related to COVID-19; (2) the employee has been advised by
a health care provider to self-quarantine due to concerns
related to COVID-19; (3) the employee is experiencing symptoms
of COVID-19 and is seeking a medical diagnosis; (4) the
employee is caring for an individual who is subject to a
quarantine or isolation order or has been advised by a health
care provider to self-quarantine; (5) the employee is caring
for the employee's son or daughter if the school or place of
care of the son or daughter has been closed, or the child care
provider of such son or daughter is unavailable due to COVID-19
precautions; or (6) the employee is experiencing any other
substantially similar condition specified by the Secretary of
Health and Human Services in consultation with the Secretary of
Treasury and the Secretary of Labor.\1622\
---------------------------------------------------------------------------
\1622\ Sec. 5102(a), Division E, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The amount of qualified sick leave wages that may be taken
into account for an employee for purposes of the credit is
limited based on the circumstances under which qualified sick
leave wages are paid. In the case of paid sick time qualifying
under categories (1), (2), or (3) above, the amount of
qualified sick leave wages taken into account for purposes of
the credit may not exceed $511 for any day (or portion thereof)
when the individual is paid such sick time. In the case of paid
sick time qualifying under categories (4), (5), or (6) above,
the amount of qualified sick leave wages taken into account may
not exceed $200 for any day (or portion thereof) for which the
individual is paid such sick time. In addition, the aggregate
number of days that may be taken into account with respect to
an individual under all six circumstances may not exceed the
excess (if any) of 10 days over the aggregate number of days
taken into account for all preceding calendar quarters.
Amount of credit for expanded family and medical leave
Certain employers must provide public health emergency
leave to employees under the Family and Medical Leave Act of
1993 (``FMLA''), as amended by EFMLEA.\1623\ This requirement
generally applies when an employee is unable to work or
telework due to a need for leave to care for a son or daughter
under age 18 because the school or place of care has been
closed, or the child care provider is unavailable, due to a
public health emergency. An employer with employees who are
health care providers or emergency responders may elect to
exclude such employees from this requirement to provide paid
family leave. A public health emergency for this purpose is an
emergency with respect to COVID-19 declared by a Federal,
State, or local authority.
---------------------------------------------------------------------------
\1623\ Sec. 3102, Division C, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The first 10 days of public health emergency leave required
under the EFMLEA may consist of unpaid leave, after which paid
leave is required for ten weeks until December 31, 2020. The
amount of required paid leave is calculated based on: (a) an
amount that is not less than two-thirds of an employee's
regular rate of pay; and (b) the number of hours the employee
would otherwise be normally scheduled to work. The paid leave
mandated by the EFMLEA does not exceed $200 per day and $10,000
in the aggregate.
Employers are allowed a credit against OASDI taxes or the
equivalent amount of RRTA taxes in an amount equal to 100
percent of qualified family leave wages paid by the employer
during the quarter. Consistent with the mandate, the maximum
amount of the qualified family leave wages eligible for the
credit is $200 for any day (or portion thereof) for which the
employee is paid qualified family leave wages, and in the
aggregate with respect to all quarters, $10,000. Employers are
not allowed the credit in respect of unpaid leave.
Additional rules
The credit allowed for paid sick or paid family leave is
increased by the employer's qualified health plan expenses as
are properly allocable to the qualified sick leave wages for
which the credit is allowed. Qualified health plan expenses are
amounts paid or incurred by the employer to provide and
maintain a group health plan,\1624\ but only to the extent such
amounts are excluded from the employees' income as coverage
under an accident or health plan.\1625\ Qualified health plan
expenses are allocated to qualified sick leave wages in such
manner as the Secretary of Treasury (or the Secretary's
delegate) may prescribe. Except as otherwise provided by the
Secretary, such allocations are treated as properly made if
they are pro rata among covered employees and pro rata on the
basis of periods of coverage (relative to the time periods of
leave to which such wages relate).
---------------------------------------------------------------------------
\1624\ Sec. 5000(b)(1).
\1625\ Sec. 106(a).
---------------------------------------------------------------------------
The credit allowed may not exceed the OASDI tax or
equivalent amount of RRTA tax imposed on the employer, reduced
by any credits allowed for the employment of qualified veterans
\1626\ and research expenditures of qualified small businesses
\1627\ for that calendar quarter on the wages paid with respect
to all the employer's employees. However, if for any calendar
quarter the amount of the credit exceeds the OASDI tax or RRTA
tax imposed on the employer, reduced as described in the prior
sentence, such excess is treated as a refundable
overpayment.\1628\
---------------------------------------------------------------------------
\1626\ Sec. 3111(e).
\1627\ Sec. 3111(f).
\1628\ The excess is treated as an overpayment and refunded under
sections 6402(a) and 6413(b). In addition, any amount that is due to an
employer is treated in the same manner as a refund due from a credit
provision. 31 U.S.C. 1324. Thus, amounts are appropriated to the
Secretary of Treasury for refunding such excess amounts.
---------------------------------------------------------------------------
If a taxpayer claims a credit, the amount so claimed is
included in gross income. Thus, the credit is not taken into
account for purposes of determining any amount allowable as a
payroll tax deduction or deduction for qualified sick leave
wages or qualified family leave wages (or any amount
capitalizable to basis).
Any qualified sick leave wages taken into account for
purposes of a credit are not taken into account for purposes of
determining the section 45S general business credit for
employer paid family and medical leave. Thus, the employer may
not claim a credit under section 45S with respect to the
qualified sick leave wages or qualified family leave wages paid
but may be allowed a credit under section 45S with respect to
any additional wages paid.
An employer may elect not to claim a tax credit for a
calendar quarter for qualified sick leave wages or qualified
family leave wages. Further, the credit allowed does not apply
to the government of the United States, the government of any
State or political subdivision thereof, or any agency or
instrumentality of any of those entities. Employers in the U.S.
territories may claim the credit by filing their quarterly
Federal employment tax returns.
Any wages or compensation required to be paid to employees
pursuant to the EPSLA or EFMLEA before December 31, 2020, are
not considered wages for purposes of OASDI tax or compensation
for purposes of RRTA tax. In addition, or, in the case of wages
or compensation paid after December, 31, 2020 and before April
1, 2021, any wages or compensation with respect to which a
credit is allowed, are not considered wages for purposes of
OASDI tax or compensation for purposes of RRTA tax. As a
result, no taxes are collected on these amounts from employers
or employees.\1629\
---------------------------------------------------------------------------
\1629\ An amount equal to the reduction in revenues to the Treasury
by reason of the FFCRA is appropriated to the OASDI Trust Funds and the
Social Security Equivalent Benefit Account established under the
Railroad Retirement Act of 1974. This amount is transferred from the
general fund at such times and in such manner as to replicate to the
extent possible the transfers that would have occurred to the OASDI
Trust Funds or Social Security Equivalent Benefit Account had this
provision not been enacted.
---------------------------------------------------------------------------
Paid sick leave and expanded family and medical leave for self-employed
individuals
An eligible self-employed individual may claim an income
tax credit for any taxable year for a qualified sick leave
equivalent amount or qualified family leave equivalent amount.
An eligible self-employed individual is defined as an
individual who regularly carries on any trade or business
\1630\ and who would be entitled to receive paid leave during
the taxable year under the EPSLA or EFMLEA.
---------------------------------------------------------------------------
\1630\ Within the meaning of sec. 1402.
---------------------------------------------------------------------------
The qualified sick leave equivalent amount with respect to
an eligible self-employed individual is an amount equal to the
number of days during the taxable year that the self-employed
individual cannot perform services for which that individual
would have been entitled to sick leave pursuant to the EPSLA
\1631\ (if the individual were employed by an employer),
multiplied by the lesser of two amounts: (1) $511 in the case
of paid sick time described in categories (1), (2), or (3)
above with respect to section 5102(a) of the EPSLA ($200 in the
case of paid sick time described in categories (4), (5), or (6)
above); or (2) 100 percent of the average daily self-employment
income of the individual for the taxable year in the case of
any day of paid sick time described in categories (1), (2), or
(3) above (67 percent in the case of paid sick time described
in categories (4), (5), or (6) above).
---------------------------------------------------------------------------
\1631\ Division E and C, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The number of days taken into account in determining the
qualified sick leave equivalent amount may not exceed, with
respect to any taxable year, 10 days, taking into account any
days taken in all preceding taxable years. The individual's
average daily self-employment income under the provision is an
amount equal to the net earnings from self-employment for the
taxable year divided by 260.
If an eligible self-employed individual receives qualified
sick leave wages,\1632\ the individual's qualified sick leave
equivalent amount determined under the provision is reduced
(but not below zero) to the extent that the sum of the
qualified sick leave equivalent amount and the qualified sick
leave wages received exceeds $2,000 ($5,110 in the case of any
day any portion of which is paid sick time described in
category (1), (2), or (3) above).
---------------------------------------------------------------------------
\1632\ As defined by sec. 7001(c) of FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The qualified family leave equivalent amount with respect
to an eligible self-employed individual is an amount equal to
the number of days (up to 50) during the taxable year that the
self-employed individual cannot perform services for which that
individual would be entitled to paid leave pursuant to the
EFMLEA \1633\ (if the individual were employed by an employer),
multiplied by the lesser of two amounts: (1) 67 percent of the
average daily self-employment income of the individual for the
taxable year, or (2) $200. The individual's average daily self-
employment income under the provision is an amount equal to the
individual's net earnings from self-employment for the year
divided by 260.
---------------------------------------------------------------------------
\1633\ Division C, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The credit allowed for the qualified sick leave equivalent
amount or qualified family leave equivalent amount is applied
against federal income taxes and is a refundable credit.\1634\
---------------------------------------------------------------------------
\1634\ Any refund due to an individual is treated in the same
manner as a refund due from a credit provision. 31 U.S.C. sec. 1324.
Thus, amounts are appropriated to the Secretary (or the Secretary's
delegate) for refunding such amounts.
---------------------------------------------------------------------------
If an eligible self-employed individual receives qualified
family leave wages,\1635\ the individual's qualified family
leave equivalent amount determined under the provision is
reduced (but not below zero) to the extent that the sum of the
qualified family leave equivalent amount and the qualified
family leave wages received exceeds $10,000.
---------------------------------------------------------------------------
\1635\ As defined by sec. 7003(c) of the FFCRA, Pub. L. No. 116-
127.
---------------------------------------------------------------------------
Application of credit in certain territories
The Secretary of Treasury is directed to make payments to
each territory with a mirror Code tax system that relate to the
cost (if any) of each territory's credits for sick leave or
expanded family and medical leave for certain self-employed
individuals. The Secretary is further directed to make similar
payments to each non-mirror Code territory.
With respect to mirror Code territories, the Secretary is
required to make payments equal to the loss in revenue by
reason of the application of the credit for sick leave or
expanded family and medical leave for certain self-employed
individuals to the territory's mirror Code. This amount is
determined by the Secretary based on information provided by
the governments of the respective territories.
With respect to Puerto Rico and American Samoa (non-mirror
Code territories), the Secretary is directed to make payments
in an amount estimated by the Secretary as being equal to the
aggregate benefits that would have been provided to the
residents of each territory from the credit for sick leave or
expanded family and medical leave for certain self-employed
individuals if a mirror Code tax system had been in effect in
such territory. The Secretary must not make these payments
unless the territory has a plan approved by the Secretary to
promptly distribute the payments to its residents.
The Secretary of Treasury is directed to prescribe such
regulations or other guidance as may be necessary to carry out
the purposes of the provision, including (1) to effectuate the
purposes of this Act, and (2) to minimize compliance and
record-keeping burdens under the provision.\1636\
---------------------------------------------------------------------------
\1636\ Notice 2020-54, 2020-31 I.R.B. 226 (July 27, 2020).
---------------------------------------------------------------------------
Explanation of Provision
The provision allows eligible employers to continue to
receive tax credits for qualifying wages paid to employees on
paid sick or expanded family leave until March 31, 2021. The
EPSLA and EFMLEA, which were the provisions requiring certain
employers to provide paid sick and expanded family and medical
leave as noted above, expired on December 31, 2020. This
mandate was not extended. However, the provision modifies
qualified sick leave wages to include wages and compensation
that would have been required to be paid if the EPSLA had been
effective until March 31, 2021.\1637\ Qualified family leave
wages also includes wages and compensation that would have been
required to be paid if the EFMLEA had been effective until
March 31, 2021.\1638\ Employers that provide qualified sick
leave wages and qualified family leave wages in the first
quarter of 2021 may receive a tax credit.
---------------------------------------------------------------------------
\1637\ Sec. 7001 of Pub. L. No. 116-127.
\1638\ Sec. 7001 of Pub. L. No. 116-127.
---------------------------------------------------------------------------
An eligible self-employed individual may also claim an
income tax credit for any taxable year for a qualified sick
leave equivalent amount or qualified family leave equivalent
amount. Under the provision, an eligible self-employed
individual is defined as an individual who regularly carries on
any trade or business \1639\ and who would be entitled to
receive paid leave during the taxable year under the EPSLA or
EFMLEA, if the individual were an employee of an employer
(other than himself or herself) that would be subject to the
requirements of the Acts and as if the Acts were in effect
through March 31, 2021.
---------------------------------------------------------------------------
\1639\ Within the meaning of sec. 1402.
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment
(December 27, 2020) as if included in the provisions of the
FFCRA to which they relate.
14. Election to use prior year net earnings from self-employment in
determining average daily self-employment income for purposes
of credits for paid sick and family leave (sec. 287 of the Act)
Present Law
In general
The Self-Employed Contributions Act (``SECA'') imposes tax
on the self-employment income of an individual. SECA taxes
consist of the Old-Age, Survivors, and Disability Insurance
(``OASDI'') tax and Medicare tax.\1640\ Under the OASDI
component, the first rate of tax is 12.4 percent on self-
employment income up to the OASDI wage base ($137,700 for
2020).\1641\ Under the basic Medicare tax component, the second
rate of tax is 2.9 percent of all self-employment income
(without regard to the OASDI wage base).\1642\ As is the case
with employees, an Additional Medicare tax applies to the
Medicare portion of SECA tax on self-employment income in
excess of a threshold amount.\1643\
---------------------------------------------------------------------------
\1640\ Sec. 1401(a) and (b).
\1641\ Sec. 1401(a). In calculating the SECA tax for OASDI, the
OASDI wage base taken into account is reduced by FICA wages paid to the
individual during the taxable year. Indexed for inflation, the OASDI
wage base for 2021 is $142,800.
\1642\ Sec. 1401(b)(1).
\1643\ Sec. 1401(b)(2).
---------------------------------------------------------------------------
Self-employment income subject to SECA tax is determined as
the net earnings from self-employment derived by an individual
during any taxable year, subject to certain exceptions. Net
earnings from self-employment are equal to the gross income
derived by an individual from any trade or business less
allowed deductions that are attributable to the trade or
business and are permitted under the SECA rules. Certain
passive income and related deductions are not taken into
account in determining net earnings from self-employment,
including rentals from real estate (unless received in the
course of a trade or business as a real estate dealer),\1644\
dividends and interest (unless such dividends and interest are
received in the course of a trade or business as a dealer in
stocks or securities),\1645\ and sales or exchanges of capital
assets and certain other property (unless the property is stock
in trade that would properly be included in inventory or held
primarily for sale to customers in the ordinary course of the
trade or business).\1646\
---------------------------------------------------------------------------
\1644\ Sec. 1402(a)(1).
\1645\ Sec. 1402(a)(2).
\1646\ Sec. 1402(a)(3).
---------------------------------------------------------------------------
For purposes of computing net earnings from self-
employment, taxpayers are permitted a deduction equal to the
product of the taxpayer's net self-employment income
(determined without regard to this deduction) and one-half of
the sum of the rates for OASDI and Medicare (i.e., 7.65 percent
of net earnings).\1647\ This deduction is determined without
regard to the additional 0.9 percent Additional Medicare tax
that may apply to an individual. This deduction reflects the
fact that the FICA rates apply to an employee's wages, which do
not include FICA taxes paid by the employer, whereas the self-
employed individual's net earnings are economically equivalent
to an employee's wages plus the employer's share of FICA
taxes.\1648\
---------------------------------------------------------------------------
\1647\ Sec. 1402(a)(12).
\1648\ The deduction is intended to provide parity between FICA and
SECA taxes because the employer may deduct, as a business expense, its
share of the FICA taxes paid.s presently written, the
deduction for SECA taxes is not the exact economic equivalent to the
deduction for FICA taxes. See Joint Committee on Taxation, Options to
Improve Tax Compliance and Reform Tax Expenditures (JCS-2-05), January
2005, for a detailed description of this issue. This is generally
referred to as the ``regular method'' of determining net earnings from
self-employment, and in Internal Revenue Service forms and publications
it is expressed as multiplying total net earnings from self-employment
by 92.35 percent.
---------------------------------------------------------------------------
Paid sick leave and expanded family and medical leave for self-employed
individuals
An eligible self-employed individual may claim an income
tax credit for any taxable year for a qualified sick leave
equivalent amount or qualified family leave equivalent amount.
An eligible self-employed individual is defined as an
individual who regularly carries on any trade or business
\1649\ and who would be entitled to receive paid leave during
the taxable year under the Emergency Paid Sick Leave Act
(``EPSLA'') or Emergency Family and Medical Leave Expansion Act
(``EFMLEA'').
---------------------------------------------------------------------------
\1649\ Within the meaning of sec. 1402.
---------------------------------------------------------------------------
The qualified sick leave equivalent amount with respect to
an eligible self-employed individual is an amount equal to the
number of days during the taxable year that the self-employed
individual cannot perform services for which that individual
would have been entitled to sick leave pursuant to the EPSLA
\1650\ (if the individual were employed by an employer),
multiplied by the lesser of two amounts: (1) $511 in the case
of paid sick time described in categories (1), (2), or (3) with
respect to section 5102(a) of the EPSLA ($200 in the case of
paid sick time described in categories (4), (5), or (6)); or
(2) 100 percent of the average daily self-employment income of
the individual for the taxable year in the case of any day of
paid sick time described in categories (1), (2), or (3) (67
percent in the case of paid sick time described in categories
(4), (5), or (6)).\1651\
---------------------------------------------------------------------------
\1650\ Division E and C, FFCRA, Pub. L. No. 116-127.
\1651\ Certain employers must provide an employee with up to 80
hours of paid sick time to the extent that (1) the employee is subject
to a Federal, State, or local quarantine or isolation order related to
COVID-19; (2) the employee has been advised by a health care provider
to self-quarantine due to concerns related to COVID-19; (3) the
employee is experiencing symptoms of COVID-19 and is seeking a medical
diagnosis; (4) the employee is caring for an individual who is subject
to a quarantine or isolation order or has been advised by a health care
provider to self-quarantine; (5) the employee is caring for the
employee's son or daughter if the school or place of care of the son or
daughter has been closed, or the child care provider of such son or
daughter is unavailable due to COVID-19 precautions; or (6) the
employee is experiencing any other substantially similar condition
specified by the Secretary of Health and Human Services in consultation
with the Secretary of Treasury and the Secretary of Labor. Sec.
5102(a), Division E, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The number of days taken into account in determining the
qualified sick leave equivalent amount may not exceed, with
respect to any taxable year, 10 days, taking into account any
days taken in all preceding taxable years. The individual's
average daily self-employment income under the provision is an
amount equal to the net earnings from self-employment for the
taxable year divided by 260.
If an eligible self-employed individual receives qualified
sick leave wages,\1652\ the individual's qualified sick leave
equivalent amount determined under the provision is reduced
(but not below zero) to the extent that the sum of the
qualified sick leave equivalent amount and the qualified sick
leave wages received exceeds $2,000 ($5,110 in the case of any
day any portion of which is paid sick time described in
category (1), (2), or (3) above).
---------------------------------------------------------------------------
\1652\ As defined by sec. 7001(c) of FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The qualified family leave equivalent amount with respect
to an eligible self-employed individual is an amount equal to
the number of days (up to 50) during the taxable year that the
self-employed individual cannot perform services for which that
individual would be entitled to paid leave pursuant to the
EFMLEA1A\1653\ (if the individual were employed by an
employer), multiplied by the lesser of two amounts: (1) 67
percent of the average daily self-employment income of the
individual for the taxable year; or (2) $200. The individual's
average daily self-employment income under the provision is an
amount equal to the individual's net earnings from self-
employment for the year divided by 260.
---------------------------------------------------------------------------
\1653\ Division C, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The credit allowed for the qualified sick leave equivalent
amount or qualified family leave equivalent amount is applied
against federal income taxes and is a refundable credit.\1654\
---------------------------------------------------------------------------
\1654\ Any refund due to an individual is treated in the same
manner as a refund due from a credit provision. 31 U.S.C. sec. 1324.
Thus, amounts are appropriated to the Secretary (or the Secretary's
delegate) for refunding such amounts.
---------------------------------------------------------------------------
If an eligible self-employed individual receives qualified
family leave wages,\1655\ the individual's qualified family
leave equivalent amount determined under the provision is
reduced (but not below zero) to the extent that the sum of the
qualified family leave equivalent amount and the qualified
family leave wages received exceeds $10,000.
---------------------------------------------------------------------------
\1655\ As defined by sec. 7003(c) of the FFCRA, Pub. L. No. 116-
127.
---------------------------------------------------------------------------
Explanation of Provision
The provision modifies the definition of the qualified sick
leave equivalent amount and qualified family leave equivalent
amount. For purposes of determining the qualified sick leave
equivalent amount and qualified family leave equivalent amount,
self-employed individuals may elect to calculate the average
daily self-employment income by dividing the net earnings from
self-employment of the individual for 2019 (rather than 2020)
by 260.
Effective Date
The provision is effective on the date of enactment
(December 27, 2020) as if included in the provisions of the
Families First Coronavirus Response Act to which they relate.
15. Certain technical improvements to credits for paid sick and family
leave (sec. 288 of the Act)
Present Law
In general
Federal employment taxes are imposed on wages paid to
employees with respect to employment and include Federal income
taxes as well as taxes levied under Federal Insurance
Contributions Act (``FICA'') and Federal Unemployment Tax Act
(``FUTA'').\1656\ In addition, tier 1 of the Railroad
Retirement Tax Act (``RRTA'') imposes a tax on compensation
paid to railroad employees and representatives.\1657\
---------------------------------------------------------------------------
\1656\ Secs. 3401, 3101, 3111, and 3301.
\1657\ Sec. 3221.
---------------------------------------------------------------------------
FICA taxes are comprised of two components: Old-Age,
Survivors, and Disability Insurance (``OASDI'') taxes and
Medicare taxes.\1658\ With respect to OASDI taxes, the
applicable rate is 12.4 percent with half of such rate (6.2
percent) imposed on the employee and the remainder (6.2
percent) imposed on the employer.\1659\ The tax is assessed on
covered wages up to the OASDI wage base ($137,700 in
2020).\1660\ Generally, the OASDI wage base rises based on
increases in the national average wage index.\1661\
---------------------------------------------------------------------------
\1658\ The Hospital Insurance (``HI'') tax has two components:
Medicare tax and Additional Medicare tax. Medicare tax is imposed on
wages, as defined in Section 3121(a), with respect to employment, as
defined in Section 3121(b), at a rate of 1.45 percent for the employer.
Sec. 3101(b)(1). An equivalent 1.45 percent is withheld from employee
wages. Sec. 3111(b)(1). For purposes of this description, Medicare tax
does not include Additional Medicare tax. Additional Medicare taxes are
withheld from employee wages in excess of $200,000 at a rate of 0.9
percent. Sec. 3101(b)(2). There is no equivalent employer's share of
Additional Medicare taxes.
\1659\ Sec. 3101.
\1660\ Indexed for inflation, the OASDI wage base is $142,800 in
2021.
\1661\ Sec. 230 of the Social Security Act (42 U.S.C. sec. 430).
---------------------------------------------------------------------------
Generally, the term ``wages'' for OASDI tax purposes means
all remuneration for ``employment,'' including the cash value
of all remuneration (including benefits) paid in any medium
other than cash, with certain exceptions.\1662\ The name given
to the remuneration for employment is immaterial. OASDI wages
includes salaries, vacation allowances, bonuses, deferred
compensation, commissions, and fringe benefits. The term
``employment'' is generally defined for FICA tax purposes as
any service, of whatever nature, performed by an employee for
the person employing him or her, with certain specific
exceptions.
---------------------------------------------------------------------------
\1662\ Sec. 3121(a).
---------------------------------------------------------------------------
Railroad retirement program
Railroad workers do not participate in the OASDI system.
Accordingly, compensation subject to RRTA tax is exempt from
FICA taxes.\1663\ The RRTA imposes a tax on compensation paid
by covered employers to employees in recognition for the
performance of services.\1664\ Employees whose compensation is
subject to RRTA are ultimately eligible for railroad retirement
benefits that fall under a two-tier structure. Rail employees
and employers pay tier 1 taxes at the same rate as FICA
taxes.\1665\ In addition, rail employees and employers both pay
tier 2 taxes that are used to finance railroad retirement
benefits over and above Social Security benefit levels.\1666\
Tier 2 benefits are similar to benefits under a defined benefit
plan. Those taxes are funneled to the railroad retirement
system and used to fund basic retirement benefits for railroad
workers and an investment trust that generates returns for the
pension fund.
---------------------------------------------------------------------------
\1663\ Sec. 3121(b)(9).
\1664\ Secs. 3201 through 3233. Instead of FICA taxes, railroad
employers and employees are subject, under the RRTA, to taxes
equivalent to the Social Security and Medicare taxes under FICA. Under
the RRTA, employers and employees are also subject to an additional
tax, referred to as the ``tier 2'' tax, on compensation up to a certain
amount.
\1665\ 7.65 percent, consisting of 6.2 percent for retirement on
earnings up to $137,700 in 2020, and 1.45 percent for Medicare hospital
insurance on all earnings. An additional 0.9 percent in Medicare taxes
are withheld from employees on earnings above $200,000.
\1666\ In 2020, the tier 2 tax rate on earnings up to $102,300 is
4.9 percent for employees and 13.1 percent for employers. In 2021, the
tier 2 tax rates remain the same with an increase in taxable earnings
to $106,200.
---------------------------------------------------------------------------
Self-employment taxes
The Self-Employed Contributions Act (``SECA'') imposes tax
on the self-employment income of an individual. SECA taxes
consist of OASDI tax and Medicare tax.\1667\ Under the OASDI
component, the first rate of tax is 12.4 percent on self-
employment income up to the OASDI wage base ($137,700 for
2020).\1668\ Under the basic Medicare tax component, the second
rate of tax is 2.9 percent of all self-employment income
(without regard to the OASDI wage base).\1669\ As is the case
with employees, an Additional Medicare tax applies to the
Medicare portion of SECA tax on self-employment income in
excess of a threshold amount.\1670\
---------------------------------------------------------------------------
\1667\ Sec. 1401(a) and (b).
\1668\ Sec. 1401(a). In calculating the SECA tax for OASDI, the
OASDI wage base taken into account is reduced by FICA wages paid to the
individual during the taxable year.
\1669\ Sec. 1401(b)(1).
\1670\ Sec. 1401(b)(2).
---------------------------------------------------------------------------
Self-employment income subject to SECA tax is determined as
the net earnings from self-employment derived by an individual
during any taxable year, subject to certain exceptions. Net
earnings from self-employment are equal to the gross income
derived by an individual from any trade or business less
allowed deductions that are attributable to the trade or
business and permitted under the SECA rules. Certain passive
income and related deductions are not taken into account in
determining net earnings from self-employment, including
rentals from real estate (unless received in the course of a
trade or business as a real estate dealer),\1671\ dividends and
interest (unless such dividends and interest are received in
the course of a trade or business as a dealer in stocks or
securities),\1672\ and sales or exchanges of capital assets and
certain other property (unless the property is stock in trade
that would properly be included in inventory or held primarily
for sale to customers in the ordinary course of the trade or
business).\1673\
---------------------------------------------------------------------------
\1671\ Sec. 1402(a)(1).
\1672\ Sec. 1402(a)(2).
\1673\ Sec. 1402(a)(3).
---------------------------------------------------------------------------
For purposes of computing net earnings from self-
employment, taxpayers are permitted a deduction equal to the
product of the taxpayer's net self-employment income
(determined without regard to this deduction) and one-half of
the sum of the rates for OASDI and Medicare (i.e., 7.65 percent
of net earnings).\1674\ This deduction is determined without
regard to the additional 0.9 percent Additional Medicare tax
that may apply to an individual. This deduction reflects the
fact that the FICA rates apply to an employee's wages, which do
not include FICA taxes paid by the employer, whereas the self-
employed individual's net earnings are economically equivalent
to an employee's wages plus the employer's share of FICA
taxes.\1675\ This is generally referred to as the ``regular
method'' of determining net earnings from self-employment, and
in Internal Revenue Service forms and publications it is
expressed as multiplying total net earnings from self-
employment by 92.35 percent.
---------------------------------------------------------------------------
\1674\ Sec. 1402(a)(12).
\1675\ The deduction is intended to provide parity between FICA and
SECA taxes because the employer may deduct, as a business expense, its
share of the FICA taxes paid. As presently written, the deduction for
SECA taxes is not the exact economic equivalent to the deduction for
FICA taxes. See Joint Committee on Taxation, Options to Improve Tax
Compliance and Reform Tax Expenditures (JCS-2-05), January 2005, for a
detailed description of this issue.
---------------------------------------------------------------------------
Paid sick and family leave for employees
The Families First Coronavirus Response Act (``FFCRA'')
\1676\ required certain employers with fewer than 500 employees
to provide paid sick and expanded family and medical leave to
employees unable to work or telework for specified reasons
related to COVID-19. The paid sick leave requirements in the
Emergency Paid Sick Leave Act (``EPSLA''),\1677\ and the
expanded family and medical leave requirements in the Emergency
Family and Medical Leave Expansion Act (``EFMLEA''),\1678\
expired on December 31, 2020.
---------------------------------------------------------------------------
\1676\ Pub. L. No. 116-127 (March 18, 2020).
\1677\ Division E, FFCRA, Pub. L. No. 116-127.
\1678\ Division C, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
An employer is allowed a credit against the Old-Age,
Survivors and Disability Insurance (``OASDI'') tax \1679\ or
the equivalent amount of tax under the Railroad Retirement Tax
Act (``RRTA'') imposed on the employer for each calendar
quarter in an amount equal to 100 percent of the qualified sick
leave wages and qualified family leave wages paid by the
employer with respect to that calendar quarter, subject to
limitations.\1680\ Qualified sick leave wages are defined as
wages \1681\ and compensation \1682\ paid by an employer which
are required to be paid by reason of the EPSLA.
---------------------------------------------------------------------------
\1679\ The Federal Insurance Contributions Act (``FICA'') imposes
taxes on ``wages,'' as defined in Section 3121(a), with respect to
``employment,'' as defined in Section 3121(b). The term wages is
defined for FICA purposes as all remuneration for employment, with
certain specific exceptions. Employment is defined as any service, of
whatever nature, performed by an employee for the person employing him,
with certain specific exceptions. FICA taxes consist of the OASDI tax
and the HI tax. HI tax includes an employer's share imposed on wages at
a rate of 1.45 percent under Section 3111(b). The employee's share of
HI tax is imposed on wages at a rate of 1.45 percent under Section
3101(b). Unlike OASDI, there is no contribution limit on wages subject
to HI tax.
\1680\ Notice 2020-21, 2020-16 I.R.B. 660, April 13, 2020.
\1681\ Sec. 3121(a).
\1682\ Sec. 3231(e).
---------------------------------------------------------------------------
Qualified family leave wages are wages \1683\ and
compensation \1684\ paid by an employer which are required to
be paid by reason of the EFMLEA.\1685\ In addition to qualified
sick leave wages and qualified family leave wages, the credit
could be increased by certain health plan expenses of the
employer.
---------------------------------------------------------------------------
\1683\ Sec. 3121(a).
\1684\ Sec. 3231(e).
\1685\ See Notice 2020-54, 2020-31 I.R.B. 226, July 27, 2020.
---------------------------------------------------------------------------
Amount of credit for paid sick leave
Certain employers must provide an employee with up to 80
hours of paid sick time to the extent that (1) the employee is
subject to a Federal, State, or local quarantine or isolation
order related to COVID-19; (2) the employee has been advised by
a health care provider to self-quarantine due to concerns
related to COVID-19; (3) the employee is experiencing symptoms
of COVID-19 and is seeking a medical diagnosis; (4) the
employee is caring for an individual who is subject to a
quarantine or isolation order or has been advised by a health
care provider to self-quarantine; (5) the employee is caring
for the employee's son or daughter if the school or place of
care of the son or daughter has been closed, or the child care
provider of such son or daughter is unavailable due to COVID-19
precautions; or (6) the employee is experiencing any other
substantially similar condition specified by the Secretary of
Health and Human Services in consultation with the Secretary of
Treasury and the Secretary of Labor.\1686\
---------------------------------------------------------------------------
\1686\ Sec. 5102(a), Division E, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The amount of qualified sick leave wages that may be taken
into account for an employee for purposes of the credit is
limited based on the circumstances under which qualified sick
leave wages are paid. In the case of paid sick time qualifying
under categories (1), (2), or (3) above, the amount of
qualified sick leave wages taken into account for purposes of
the credit may not exceed $511 for any day (or portion thereof)
when the individual is paid such sick time. In the case of paid
sick time qualifying under categories (4), (5), or (6) above,
the amount of qualified sick leave wages taken into account may
not exceed $200 for any day (or portion thereof) for which the
individual is paid such sick time. In addition, the aggregate
number of days that may be taken into account with respect to
an individual under all six circumstances may not exceed the
excess (if any) of 10 days over the aggregate number of days
taken into account for all preceding calendar quarters.
Amount of credit for expanded family and medical leave
Certain employers must provide public health emergency
leave to employees under the Family and Medical Leave Act of
1993 (``FMLA''), as amended by the EFMLEA.\1687\ This
requirement generally applies when an employee is unable to
work or telework due to a need for leave to care for a son or
daughter under age 18 because the school or place of care has
been closed, or the child care provider is unavailable, due to
a public health emergency. An employer with employees who are
health care providers or emergency responders may elect to
exclude such employees from this requirement to provide paid
family leave. A public health emergency for this purpose is an
emergency with respect to COVID-19 declared by a Federal,
State, or local authority.
---------------------------------------------------------------------------
\1687\ Sec. 3102, Division C, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The first 10 days of public health emergency leave required
under the EFMLEA may consist of unpaid leave, after which paid
leave is required for ten weeks until December 31, 2020. The
amount of required paid leave is calculated based on: (a) an
amount that is not less than two-thirds of an employee's
regular rate of pay; and (b) the number of hours the employee
would otherwise be normally scheduled to work. The paid leave
mandated by the EFMLEA does not exceed $200 per day and $10,000
in the aggregate.
Employers are allowed a credit against OASDI taxes or the
equivalent amount of RRTA taxes in an amount equal to 100
percent of qualified family leave wages paid by the employer
during the quarter. Consistent with the mandate, the maximum
amount of the qualified family leave wages eligible for the
credit is $200 for any day (or portion thereof) for which the
employee is paid qualified family leave wages, and in the
aggregate with respect to all quarters, $10,000. Employers are
not allowed the credit in respect of unpaid leave.
Additional rules
The credit allowed for paid sick or paid family leave is
increased by the employer's qualified health plan expenses as
are properly allocable to the qualified sick leave wages for
which the credit is allowed. Qualified health plan expenses are
amounts paid or incurred by the employer to provide and
maintain a group health plan,\1688\ but only to the extent such
amounts are excluded from the employees' income as coverage
under an accident or health plan.\1689\ Qualified health plan
expenses are allocated to qualified sick leave wages in such
manner as the Secretary of Treasury (or the Secretary's
delegate) may prescribe. Except as otherwise provided by the
Secretary, such allocations are treated as properly made if
they are pro rata among covered employees and pro rata on the
basis of periods of coverage (relative to the time periods of
leave to which such wages relate).
---------------------------------------------------------------------------
\1688\ Sec. 5000(b)(1).
\1689\ Sec. 106(a).
---------------------------------------------------------------------------
The credit allowed may not exceed the OASDI tax or
equivalent amount of RRTA tax imposed on the employer, reduced
by any credits allowed for the employment of qualified veterans
\1690\ and research expenditures of qualified small businesses
\1691\ for that calendar quarter on the wages paid with respect
to all the employer's employees. However, if for any calendar
quarter the amount of the credit exceeds the OASDI tax or RRTA
tax imposed on the employer, reduced as described in the prior
sentence, such excess is treated as a refundable
overpayment.\1692\
---------------------------------------------------------------------------
\1690\ Sec. 3111(e).
\1691\ Sec. 3111(f).
\1692\ The excess is treated as an overpayment and refunded under
sections 6402(a) and 6413(b). In addition, any amount that is due to an
employer is treated in the same manner as a refund due from a credit
provision. 31 U.S.C. 1324. Thus, amounts are appropriated to the
Secretary of Treasury for refunding such excess amounts.
---------------------------------------------------------------------------
If a taxpayer claims a credit, the amount so claimed is
included in gross income. Thus, the credit is not taken into
account for purposes of determining any amount allowable as a
payroll tax deduction or deduction for qualified sick leave
wages or qualified family leave wages (or any amount
capitalizable to basis).
Any qualified sick leave wages taken into account for
purposes of a credit are not taken into account for purposes of
determining the section 45S general business credit for
employer paid family and medical leave. Thus, the employer may
not claim a credit under section 45S with respect to the
qualified sick leave wages or qualified family leave wages paid
but may be allowed a credit under section 45S with respect to
any additional wages paid.
An employer may elect not to claim a tax credit for a
calendar quarter for qualified sick leave wages or qualified
family leave wages. Further, the credit allowed does not apply
to the government of the United States, the government of any
State or political subdivision thereof, or any agency or
instrumentality of any of those entities. Employers in the U.S.
territories may claim the credit by filing their quarterly
Federal employment tax returns.
Any wages or compensation required to be paid to employees
pursuant to the EPSLA or EFMLEA before December 31, 2020, are
not considered wages for purposes of OASDI tax or compensation
for purposes of RRTA tax. In addition, or, in the case of wages
or compensation paid after December, 31, 2020 and before April
1, 2021, any wages or compensation with respect to which a
credit is allowed, are not considered wages for purposes of
OASDI tax or compensation for purposes of RRTA tax. As a
result, no taxes are collected on these amounts from employers
or employees.\1693\
---------------------------------------------------------------------------
\1693\ An amount equal to the reduction in revenues to the Treasury
by reason of the FFCRA is appropriated to the OASDI Trust Funds and the
Social Security Equivalent Benefit Account established under the
Railroad Retirement Act of 1974.\1693\ This amount is transferred from
the general fund at such times and in such manner as to replicate to
the extent possible the transfers that would have occurred to the OASDI
Trust Funds or Social Security Equivalent Benefit Account had this
provision not been enacted.
---------------------------------------------------------------------------
Paid sick leave and expanded family and medical leave for self-employed
individuals
An eligible self-employed individual may claim an income
tax credit for any taxable year for a qualified sick leave
equivalent amount or qualified family leave equivalent amount.
An eligible self-employed individual is defined as an
individual who regularly carries on any trade or business
\1694\ and who would be entitled to receive paid leave during
the taxable year under the EPSLA or EFMLEA.
---------------------------------------------------------------------------
\1694\ Within the meaning of sec. 1402.
---------------------------------------------------------------------------
The qualified sick leave equivalent amount with respect to
an eligible self-employed individual is an amount equal to the
number of days during the taxable year that the self-employed
individual cannot perform services for which that individual
would have been entitled to sick leave pursuant to the EPSLA
\1695\ (if the individual were employed by an employer),
multiplied by the lesser of two amounts: (1) $511 in the case
of paid sick time described in categories (1), (2), or (3)
above with respect to section 5102(a) of the EPSLA ($200 in the
case of paid sick time described in categories (4), (5), or (6)
above); or (2) 100 percent of the average daily self-employment
income of the individual for the taxable year in the case of
any day of paid sick time described in categories (1), (2), or
(3) above (67 percent in the case of paid sick time described
in categories (4), (5), or (6) above).
---------------------------------------------------------------------------
\1695\ Division E and C, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The number of days taken into account in determining the
qualified sick leave equivalent amount may not exceed, with
respect to any taxable year, 10 days, taking into account any
days taken in all preceding taxable years. The individual's
average daily self-employment income under the provision is an
amount equal to the net earnings from self-employment for the
taxable year divided by 260.
If an eligible self-employed individual receives qualified
sick leave wages,\1696\ the individual's qualified sick leave
equivalent amount determined under the provision is reduced
(but not below zero) to the extent that the sum of the
qualified sick leave equivalent amount and the qualified sick
leave wages received exceeds $2,000 ($5,110 in the case of any
day any portion of which is paid sick time described in
category (1), (2), or (3) above).
---------------------------------------------------------------------------
\1696\ As defined by sec. 7001(c) of FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The qualified family leave equivalent amount with respect
to an eligible self-employed individual is an amount equal to
the number of days (up to 50) during the taxable year that the
self-employed individual cannot perform services for which that
individual would be entitled to paid leave pursuant to the
EFMLEA \1697\ (if the individual were employed by an employer),
multiplied by the lesser of two amounts: (1) 67 percent of the
average daily self-employment income of the individual for the
taxable year; or (2) $200. The individual's average daily self-
employment income under the provision is an amount equal to the
individual's net earnings from self-employment for the year
divided by 260.
---------------------------------------------------------------------------
\1697\ Division C, FFCRA, Pub. L. No. 116-127.
---------------------------------------------------------------------------
The credit allowed for the qualified sick leave equivalent
amount or qualified family leave equivalent amount is applied
against federal income taxes and is a refundable credit.\1698\
---------------------------------------------------------------------------
\1698\ Any refund due to an individual is treated in the same
manner as a refund due from a credit provision. 31 U.S.C. sec. 1324.
Thus, amounts are appropriated to the Secretary (or the Secretary's
delegate) for refunding such amounts.
---------------------------------------------------------------------------
If an eligible self-employed individual receives qualified
family leave wages,\1699\ the individual's qualified family
leave equivalent amount determined under the provision is
reduced (but not below zero) to the extent that the sum of the
qualified family leave equivalent amount and the qualified
family leave wages received exceeds $10,000.
---------------------------------------------------------------------------
\1699\ As defined by sec. 7003(c) of the FFCRA, Pub. L. No. 116-
127.
---------------------------------------------------------------------------
Application of credit in certain territories
The Secretary of Treasury is directed to make payments to
each territory with a mirror Code tax system that relate to the
cost (if any) of each territory's credits for sick leave or
expanded family and medical leave for certain self-employed
individuals. The Secretary is further directed to make similar
payments to each non-mirror Code territory.
With respect to mirror Code territories, the Secretary is
required to make payments equal to the loss in revenue by
reason of the application of the credit for sick leave or
expanded family and medical leave for certain self-employed
individuals to the territory's mirror Code. This amount is
determined by the Secretary based on information provided by
the governments of the respective territories.
With respect to Puerto Rico and American Samoa (non-mirror
Code territories), the Secretary is directed to make payments
in an amount estimated by the Secretary as being equal to the
aggregate benefits that would have been provided to the
residents of each territory from the credit for sick leave or
expanded family and medical leave for certain self-employed
individuals if a mirror Code tax system had been in effect in
such territory. The Secretary must not make these payments
unless the territory has a plan approved by the Secretary to
promptly distribute the payments to its residents.
The Secretary of Treasury is directed to prescribe such
regulations or other guidance as may be necessary to carry out
the purposes of the provision, including (1) to effectuate the
purposes of this Act, and (2) to minimize compliance and
record-keeping burdens under the provision.\1700\
---------------------------------------------------------------------------
\1700\ Notice 2020-54, 2020-31 I.R.B. 226. July 27, 2020.
---------------------------------------------------------------------------
Explanation of Provision
Generally, the term ``wages'' for OASDI tax purposes means
all remuneration for ``employment,'' including the cash value
of all remuneration (including benefits) paid in any medium
other than cash, with certain exceptions.\1701\ The provision
amends the definitions of qualified sick leave wages and
qualified family leave wages to define such wages without
regard to the exceptions in paragraphs (1) through (22) of
section 3121(b), which define wages for OASDI purposes. In
addition, the definition of qualified sick leave wages and
qualified family leave wages for RRTA purposes does not include
the exceptions to the definition of compensation for RRTA
purposes outlined in section 3231(e). The provision provides
that paid sick and family leave wages and compensation which
may be otherwise excluded from OASDI or RRTA tax may be
eligible for the credit.
---------------------------------------------------------------------------
\1701\ Sec. 3121(a).
---------------------------------------------------------------------------
The provision also clarifies that the amount of the credit
allowed for qualified sick leave wages and qualified family
leave wages is increased by the amount of Medicare taxes on
such wages for which a credit is allowed as well as so much of
the RRTA tax as is attributable to the Medicare tax rate in
effect.
Effective Date
The provision is effective on the date of enactment
(December 27, 2020) as if included in the provisions of the
Families First Coronavirus Response Act to which they relate.
DIVISION Y--AMERICAN MINER BENEFITS IMPROVEMENT ACT OF 2020
1. Transfers to 1974 UMWA pension plan (sec. 2 of the Act and sec. 402
of the Surface of Mining Control and Reclamation Act of 1977)
Present Law
United Mineworkers of America (``UMWA'') retiree health benefits
In general
Three multiemployer plans provide retiree health benefits
for employees in the coal industry (and their beneficiaries):
the UMWA Combined Benefit Fund (``Combined Fund''), the UMWA
1992 Benefit Plan (``1992 Benefit Plan''), and the UMWA 1993
Benefit Plan (``1993 Benefit Plan''). In addition, retiree
health benefits are provided to some retirees through plans
maintained by their particular employers (``individual employer
plans''). Moreover, pension benefits are provided by the UMWA
1974 Pension Plan (the ``Pension Plan'').\1702\
---------------------------------------------------------------------------
\1702\ Another plan, the UMWA 1950 Pension Plan, generally covering
employees who retired before 1976, was merged into the Pension Plan on
June 30, 2007. Section 9701(a)(3) refers to the Pension Plan as the
``1974 UMWA Pension Plan'' and describes participation in the Pension
Plan as being substantially limited to individuals who retired in 1976
and thereafter.
---------------------------------------------------------------------------
The Combined Fund and the 1992 Benefit Plan were
established under the Coal Industry Retiree Health Benefit Act
of 1992 (the ``Coal Act'').\1703\ The Combined Fund provides
health benefits with respect to retirees (and related
beneficiaries) who, on July 20, 1992, were receiving health
benefits under previous UMWA plans.\1704\ The 1992 Benefit Plan
provides benefits with respect to participants (and related
beneficiaries) who were eligible for health benefits under
previous UMWA plans based on age and service earned as of
February 1, 1993, or to whom coverage was required to be
provided by an individual employer plan but who does not
receive coverage,\1705\ provided that the participant retired
from the coal industry by September 30, 1994.
---------------------------------------------------------------------------
\1703\ Pub. L. No. 102-486, which enacted Chapter 99 of the Code
(secs. 9701-9722). Section 9702 provides for the establishment of the
Combined Fund, and section 9712 provides for the establishment of the
1992 Plan. Chapter 99 also contains provisions relating to benefits
under the plans and funding of the plans.
\1704\ The previous plans were the UMWA 1950 Benefit Plan and the
UMWA 1974 Benefit Plan.
\1705\ Section 9711 requires coverage under individual employer
plans to be provided to participants (and related beneficiaries)
receiving benefits as of February 1, 1993, or with respect to whom the
age and service requirements for eligibility were met as of that date
and who retired by September 30, 1994.
---------------------------------------------------------------------------
The 1993 Benefit Plan was established under the National
Bituminous Coal Wage Agreement of 1993. Generally, the 1993
Benefit Plan provides health benefits to certain retired and
disabled mine workers who are not eligible for benefits under
the Combined Fund or the 1992 Benefit Plan and would have been
eligible for benefits under the previous UMWA plans, but for
enactment of the Coal Act. The UMWA 1993 Benefit Plan also
provides benefits to certain retirees under the Pension Plan
whose last employer contributed to the 1993 Benefit Plan and
whose retiree health benefits would end because, inter alia,
the employer is no longer engaged in mining operations, is
financially unable to provide the benefits, and has no related
entity that is financially able to provide the benefits.
Retiree health plan funding
The Combined Fund and the 1992 Benefit Plan are funded in
part by premiums required under the Code to be paid by coal
mining operators.\1706\ The 1993 Benefit Plan is funded in part
by contributions by employers that are bargaining agreement
signatories. The three plans (collectively, the ``UMWA Health
Plans'') are funded also in part by transfers under the Surface
Mining Control and Reclamation Act of 1977 (``SMCRA'').\1707\
---------------------------------------------------------------------------
\1706\ Secs. 9704 and 9712(d). Failure to pay the required premiums
under section 9704 may result in the imposition of a penalty under
section 9707. In addition, under section 9721, a civil action may be
brought by a plan fiduciary, employer, or plan participant or
beneficiary with respect to an obligation to pay the required premiums,
in the same manner as a claim arising from an employer's obligation to
pay withdrawal liability under section 4301 of the Employee Retirement
Income Security Act of 1974 (``ERISA'').
\1707\ Sec. 402 of Pub. L. No. 95-87; 30 U.S.C. sec. 1232.
---------------------------------------------------------------------------
Under SMCRA, coal mining operators are required to pay
certain fees to the Secretary of the Interior, which are
deposited in the Abandoned Mine Reclamation Fund (commonly
referred to as the ``Abandoned Mine Land Fund'' or the ``AML
Fund''). In addition to transfers to States and Indian tribes
relating to mining reclamation, the Secretary of the Treasury
(``Secretary'') is authorized to transfer interest earned on
the AML Fund to the UMWA Health Plans for financial assistance.
To the extent interest transferred from the AML Fund is not
sufficient to provide benefits under the UMWA Health Plans, the
Secretary is authorized under SMCRA to make supplemental
payments on an annual basis from the General Fund of the U.S.
Treasury. The supplemental payments to the UMWA Health Plans,
together with payments from the General Fund for certain States
and Indian Tribes, are subject to a combined annual limit of
$750 million.\1708\
---------------------------------------------------------------------------
\1708\ Sec. 402(i)(3) of SMCRA; 30 U.S.C sec. 1232(i)(3). Amounts
to be transferred to the recipients are adjusted as needed to come
within this limit.
---------------------------------------------------------------------------
In the case of transfers of interest from the AML Fund to
the 1993 Benefit Plan,\1709\ the benefits due under the plan
are determined by taking into account those retirees (and
related beneficiaries) who were actually enrolled in the plan
as of December 31, 2006, and who are eligible for benefits on
the first day of the calendar year for which the transfer is
made, even though those benefits were provided to the
individual pursuant to a settlement agreement approved by order
of a bankruptcy court entered on or before September 30, 2004;
in other words, those individuals are considered to be actually
enrolled in the Plan and receive benefits under the Plan
beginning on December 31, 2006.
---------------------------------------------------------------------------
\1709\ Under SMCRA, the 1993 Benefit Plan is referred to as the
``Multiemployer Health Benefit Plan.''
---------------------------------------------------------------------------
In 2016 \1710\, SMCRA was amended to authorize the transfer
of federal funds to the 1993 Benefit Plan through April 30,
2017, for an expanded group, including (1) retirees (and
related beneficiaries) actually enrolled in the 1993 Benefit
Plan as of the date of enactment of the Continued Health
Benefits for Miners Act (the ``2016 Act''), and who are
eligible for benefits on the first day of the calendar year for
which the transfer is made,\1711\ and (2) retirees (and related
beneficiaries) whose health benefits would be denied or reduced
as a result of a bankruptcy proceeding commenced in 2012 or
2015.\1712\ In 2017 \1713\, SMCRA was further amended to
permanently authorize the annual transfer of funds to the 1993
Plan for those retirees. In 2019, SMCRA was amended to
authorize additional transfers from the General Fund to the
1993 Benefit Plan to also cover beneficiaries whose health
benefits, which are payable following death or retirement or
upon a finding of disability directly by an employer in the
bituminous coal industry under a coal wage agreement,\1714\
would otherwise be denied or reduced as a result of a coal
industry bankruptcy in 2018 or 2019.\1715\ In determining the
amount of the excess that may be transferred to the 1993
Benefit Plan, the costs of administering the dispute resolution
process (as of December 31, 2019) by the Trustees of the plan
are to be taken into account.
---------------------------------------------------------------------------
\1710\ See Further Continuing and Security Assistance
Appropriations Act, 2017, Pub. L. No. 114-254, December 10, 2016.
\1711\ However, this group does not include individuals (and
related beneficiaries) enrolled in the 1993 Benefit Plan under the
terms of a participation agreement with the current or former employer
of the individuals.
\1712\ The Act further provides that individuals described in (2)
are to be treated as eligible to receive health benefits under the 1993
Benefit Plan for the plan year that includes April 1, 2017.
\1713\ See Health Benefits for Miners Act of 2017, Pub. L. No. 115-
31, May 5, 2017.
\1714\ Defined in sec. 9701(b)(3).
\1715\ Sec. 102 of Div. M, the Bipartisan American Miners Act of
2019, Pub. L. No. 116-94.
---------------------------------------------------------------------------
The 2016 Act also contains additional rules with respect to
a voluntary employees' beneficiary association (``VEBA'')
\1716\ established as a result of a bankruptcy proceeding
described in (2). The administrator of the VEBA is directed to
transfer to the 1993 Benefit Plan any amounts received as a
result of the bankruptcy proceeding, reduced by the amount of
the VEBA's administrative costs. Further, the amount that would
otherwise be transferred by the Secretary to the 1993 Benefit
Plan under SMCRA, as amended by the 2016 Act, is reduced by any
amount transferred to the 1993 Benefit Plan by the VEBA.
---------------------------------------------------------------------------
\1716\ A VEBA is an organization exempt from tax under section
501(c)(9).
---------------------------------------------------------------------------
UMWA 1974 Pension Plan
The Pension Plan is a multiemployer defined benefit plan
established by the National Bituminous Coal Wage Agreement of
1974 between the United Mine Workers of America (``UMWA'') and
the Bituminous Coal Operators Association (``BCOA''), effective
December 6, 1974.\1717\ The Pension Plan provides retirement,
disability, and survivors' benefits to employees in the coal
industry and their beneficiaries in accordance with plan terms.
Prior to the enactment of the Bipartisan American Miners
Act,\1718\ SMCRA did not provide for funds to be transferred to
the Pension Plan.
---------------------------------------------------------------------------
\1717\ In a multiemployer defined benefit pension, participants
typically receive a monthly payment in retirement that is based on a
formula that uses the participant's length of service and a benefit
rate.
\1718\ Div. M. of Pub. L. No. 116-94.
---------------------------------------------------------------------------
For fiscal years beginning after September 30, 2016, if
amounts available for transfer under the $750 million annual
limit exceed the amounts required to be transferred for other
purposes (including to the UMWA Health Plans), the Secretary is
to transfer the excess to the Pension Plan to pay plan
benefits.\1719\ Transfers are to end as of the first fiscal
year beginning after the first plan year for which the Pension
Plan's funded percentage (as defined under the Code's funding
rules) \1720\ is at least 100 percent. Until that time, the
Pension Plan will be treated as if it is in critical status
\1721\ and will maintain and comply with its rehabilitation
plan (including any updates).\1722\
---------------------------------------------------------------------------
\1719\ The provision describes the Pension Plan as the 1974 UMWA
Pension Plan under section 9701(a)(3), but without regard to the
limitation on participation to individuals who retired in 1976 and
thereafter, thereby reflecting the merger of the UMWA 1950 Pension Plan
into the Pension Plan.
\1720\ See sec. 432(j)(2).
\1721\ For purposes of secs. 412(b)(3), 432(e)(3) and 4971(g) and
secs. 302(b)(3) and 305(e)(3) of ERISA.
\1722\ However, the provisions of section 432(c) and (d) and
section 305(c) and (d) of ERISA will not apply.
---------------------------------------------------------------------------
During any fiscal year in which the Pension Plan receives a
transfer, no plan amendment may be adopted that increases plan
liabilities by reason of a benefit increase, a change in the
accrual of benefits, or a change in the rate at which benefits
vest under the plan unless the amendment is required as a
condition for qualified retirement plan status under the Code.
In addition, a transfer is not to be made for a fiscal year
unless the persons obligated to contribute to the Pension Plan
on the date of the transfer are obligated to make contributions
at rates that are not less than those in effect on the date 30
days before the date of enactment of the provision (December
20, 2019). Any amounts transferred to the Pension Plan are
disregarded in determining the unfunded vested benefits of the
Pension Plan and the allocation of unfunded vested benefits to
an employer for withdrawal liability purposes.
Like other pension plans, the Pension Plan is subject to
various annual reporting and notice requirements under the Code
and ERISA.\1723\ Some of these reporting requirements are met
by the filing of Form 5500, Annual Return/Report of Employee
Benefit Plan. Additional requirements apply in the case of an
underfunded multiemployer defined benefit plan in endangered or
critical status, including with respect to a funding
improvement or rehabilitation plan.\1724\
---------------------------------------------------------------------------
\1723\ See, for example, secs. 6057-6059 and ERISA secs. 101(f),
103 and 104.
\1724\ For a discussion of the rules relating to plans in
endangered or critical status, see Part I.D.3 of Joint Committee on
Taxation, Present Law, Data, and Selected Proposals Relating to
Multiemployer Defined Benefit Plans (JCX-9-16), February 26, 2016,
available at www.jct.gov.
---------------------------------------------------------------------------
Not later than the 90th day of each plan year beginning
after December 20, 2019, the Pension Plan trustees must also
file with the Secretary \1725\ and the Pension Benefit Guaranty
Corporation (``PBGC'') a report (including appropriate
documentation and actuarial certifications from the plan
actuary, as required by the Secretary) that provides--
---------------------------------------------------------------------------
\1725\ References in this description to ``Secretary'' include the
Secretary's delegate, for this purpose, the Internal Revenue Service.
---------------------------------------------------------------------------
Whether the Pension Plan is in endangered or
critical status;
The Pension Plan's funded percentage as of
the first day of the plan year and the underlying
actuarial value of assets and liabilities taken into
account in determining the funded percentage;
The market value of plan assets as of the
last day of the preceding plan year;
The total of all plan contributions made
during the preceding plan year;
The total benefits paid during the preceding
plan year;
Cash flow projections for the plan year and
either the six or 10 succeeding plan years, at the
election of the trustees, and the assumptions relied on
in making the projections;
Funding standard account projections for the
plan year and the nine succeeding plan years, and the
assumptions relied on in making the projections;
The total investment gains or losses during
the preceding plan year;
Any significant reduction in the number of
active participants during the preceding plan year and
the reason for the reduction;
A list of employers that withdrew from the
Pension Plan in the preceding plan year and the
resulting reduction in contributions;
A list of employers that paid withdrawal
liability to the Pension Plan during the preceding plan
year and, for each employer, a total assessment of the
withdrawal liability paid, the annual payment amount,
and the number of years remaining in the payment
schedule with respect to the withdrawal liability;
Any material changes to benefits, accrual
rates, or contribution rates during the preceding plan
year;
Any scheduled benefit increase or decrease
in the preceding plan year having a material effect on
plan liabilities;
Details of any funding improvement plan or
rehabilitation plan and updates;
The number of participants and beneficiaries
during the preceding plan year who are active
participants, the number of participants and
beneficiaries in pay status, and the number of
terminated vested participants and beneficiaries;
The information contained in the Pension
Plan's most recent annual funding notice;
The information contained in the Pension
Plan's most recent Form 5500; and
Copies of the plan document and amendments,
other retirement benefit or ancillary benefit plans
relating to the Pension Plan and contribution
obligations under those plans, a breakdown of the
Pension Plan's administrative expenses, participant
census data and distribution of benefits, the most
recent actuarial valuation report as of the plan year,
copies of collective bargaining agreements, and
financial reports, and such other information as the
Secretary may require, in consultation with the
Secretary of Labor and the Director of the PBGC.
This report must be submitted electronically, and the
Secretary is directed to share the information in the report
with the Secretary of Labor. A failure to file the report on or
before the date required results in a tax reporting penalty of
$100 per day while the failure continues unless the Secretary
determines that reasonable diligence was exercised by the plan
sponsor in attempting to timely file the report.
Explanation of Provision
Under the provision, transfers from the General Fund to the
1993 Benefit Plan are expanded to cover beneficiaries who are
enrolled in the plan as of the date of enactment of the Act
(December 27, 2020),\1726\ as well as beneficiaries whose
health benefits, which are payable following death or
retirement or upon a finding of disability directly by an
employer in the bituminous coal industry under a coal wage
agreement,\1727\ or a related coal wage agreement, would
otherwise be denied or reduced as a result of a coal industry
bankruptcy in 2018 or 2019, or any year thereafter (or, in the
case of any such health benefits confirmed in any bankruptcy
proceeding, would be subsequently denied or reduced).\1728\
---------------------------------------------------------------------------
\1726\ These beneficiaries must also be eligible to receive health
benefits under the 1993 Benefits Plan on the first day of the calendar
year for which the transfer is made, other than those beneficiaries
enrolled in the plan under the terms of a participation agreement with
the current or former employer of such beneficiaries.
\1727\ Defined in sec. 9701(b)(1).
\1728\ In addition, for the purposes of SMCRA section
402(h)(2)(C)(ii)(I), the provision states that a beneficiary enrolled
in the 1993 Benefit Plan as of December 27, 2020, is deemed to have
been eligible to receive benefits under that plan on January 1, 2020.
---------------------------------------------------------------------------
The provision also states that the $750 million dollar cap
on the combined annual limit on supplemental payments to the
UMWA Health Plans, together with payments from the General Fund
for certain States and Indian Tribes, is to be increased by the
amount of the cost to provide benefits which are taken into
account as described in the preceding paragraph.\1729\
---------------------------------------------------------------------------
\1729\ Those benefits taken into account under subsection
402(h)(2)(c)(ii) of SMCRA solely by reason of the American Miner
Benefits Improvement Act of 2020.
---------------------------------------------------------------------------
Effective Date
The provision is generally effective on the date of
enactment of the Act.\1730\
---------------------------------------------------------------------------
\1730\ The amendment to section 402(h)(2)(C)(ii)(II) of SMCRA which
provides that in calculating the amount to be transferred to the 1993
Benefit Plan, health benefits confirmed in any bankruptcy proceeding
which would have been subsequently denied or reduced are taken into
account, applies to such denials and reductions after December 31,
2019.
---------------------------------------------------------------------------
DIVISION BB--PRIVATE HEALTH INSURANCE AND PUBLIC HEALTH PROVISIONS
TITLE I--NO SURPRISES ACT
1. Health savings accounts and the No Surprises Act (sec. 102 of the
Act and sec. 223 of the Code)
Present Law
Requirements for group health plans
A group health plan is a plan of, or contributed to by, an
employer or employee organization to provide health care to the
employees, former employees, the employer, others associated or
formerly associated with the employer in a business
relationship, or their families.\1731\ Self-insured plans
managed by an employer are included in the definition of group
health plan.
---------------------------------------------------------------------------
\1731\ Sec. 5000(b)(1). By definition, a group health plan is a
plan providing employment-related health benefits.
---------------------------------------------------------------------------
Various requirements generally apply to group health plans,
including limitations on exclusions on benefits for preexisting
conditions, a prohibition on discrimination against individuals
based on health status or genetic information, guaranteed
renewability of an employer's participation in a multiemployer
plan (generally, a plan providing benefits under collective
bargaining agreements to employees of two or more unrelated
employers) or in a multiple-employer welfare arrangement
(generally, a plan providing benefits to employees of two or
more unrelated employers, but not under collective bargaining
agreements), specified benefits for mothers and newborns,
mental health parity, and coverage for students on a medical
leave of absence from school.\1732\ Compliance with these
requirements is enforced through an excise tax.\1733\
---------------------------------------------------------------------------
\1732\ These requirements for group health plans are contained in
Chapter 100 of the Code, sections 9801, et seq. Certain group health
plans (e.g., governmental plans and plans covering fewer than two
active employees) and certain types of coverage are exempt from these
Code requirements.
\1733\ Sec. 4980D.
---------------------------------------------------------------------------
The excise tax generally is $100 per day imposed on the
employer or the plan (in the case of a multiple-employer
welfare arrangement for certain guaranteed renewability
failures or in the case of a multiemployer plan) for any
failure of a group health plan to meet certain group health
plan requirements beginning on the date the failure first
occurs and ending on the date the failure is corrected with
respect to each individual to whom the failure relates. The
excise tax does not apply to failures not discovered where
reasonable diligence was exercised, to failures (due to
reasonable cause and not willful neglect) corrected within
certain time periods, or to failures waived by the Secretary in
specified circumstances. The excise tax also does not apply to
certain insured small employer plans.
Parallel requirements generally apply to group health plans
of private employers under the Employee Retirement Income
Security Act of 1974 (``ERISA''), to group health plans of
State and local government employers under the Public Health
Service Act (the ``PHSA''), and to health insurance issued in
connection with group health plans subject to ERISA and the
PHSA.\1734\ Some requirements apply also to individual health
insurance under the PHSA.
---------------------------------------------------------------------------
\1734\ Part 7 of Title I of ERISA, 29 U.S.C. 1181 et seq., and
Title XXVII of the PHSA, 42 U.S.C. 300gg et seq. Similar requirements
apply also under the Federal Employees Health Benefits Program.
---------------------------------------------------------------------------
Health savings accounts
An individual may establish a health savings account (an
``HSA'') only if the individual is covered under a plan that
meets the requirements for a high deductible health plan and
the individual is not covered under any other health plan
(other than a plan that provides certain permitted insurance or
permitted coverage).\1735\ In general, an HSA is a tax-exempt
trust or custodial account created exclusively to pay for the
qualified medical expenses of the account holder and his or her
spouse and dependents. Accordingly, HSAs provide tax-favored
treatment for current medical expenses as well as the ability
to save on a tax-favored basis for future medical expenses.
---------------------------------------------------------------------------
\1735\ A high deductible health plan is a health plan that has an
annual deductible which is not less than $1,400 (for 2021) for self-
only coverage and twice this amount for family coverage, and for which
the sum of the annual deductible and other annual out-of-pocket
expenses (other than premiums) for covered benefits does not exceed
$7,000 (for 2021) for self-only coverage and twice this amount for
family coverage. Sec. 223(c)(2).
---------------------------------------------------------------------------
Within limits,\1736\ contributions to an HSA made by or on
behalf of an eligible individual are deductible by the
individual. Contributions to an HSA made by the employer are
excludable from income and exempt from employment taxes.
Earnings in HSAs are not taxable.
---------------------------------------------------------------------------
\1736\ For 2021, the basic limit on annual contributions that can
be made to an HSA is $3,600 in the case of self-only coverage and
$7,200 in the case of family coverage. The basic annual contributions
limits are increased by $1,000 for individuals who have attained age 55
by the end of the taxable year (referred to as ``catch-up''
contributions).
---------------------------------------------------------------------------
Distributions from an HSA for qualified medical expenses
are excludable from gross income. Distributions from an HSA
that are not used for qualified medical expenses are includible
in gross income and are subject to an additional tax of 20
percent. The 20-percent additional tax does not apply if the
distribution is made after death or disability, or the
individual attains the age of Medicare eligibility (age 65).
Similar rules apply for another type of medical savings
arrangement called an Archer MSA.\1737\
---------------------------------------------------------------------------
\1737\ Sec. 220.
---------------------------------------------------------------------------
High deductible health plans
A high deductible health plan is a health plan that has an
annual deductible which is not less than $1,400 (for 2021) for
self-only coverage and twice this amount for family coverage,
and for which the sum of the annual deductible and other annual
out-of-pocket expenses (other than premiums) for covered
benefits does not exceed $7,000 (for 2021) for self-only
coverage and twice this amount for family coverage.\1738\ These
dollar thresholds are subject to inflation adjustment, based on
chained CPI.\1739\
---------------------------------------------------------------------------
\1738\ Sec. 223(c)(2).
\1739\ Sec. 223(g).
---------------------------------------------------------------------------
Various types of coverage are disregarded for this purpose,
including coverage of any benefit provided by permitted
insurance; coverage (whether through insurance or otherwise)
for accidents, disability, dental care, vision care, or long-
term; and certain limited coverage through health flexible
savings arrangements.\1740\ Permitted insurance means insurance
under which substantially all of the coverage provided relates
to liabilities incurred under workers' compensation laws, tort
liabilities, liabilities relating to ownership or use of
property, or such other similar liabilities as specified by the
Secretary under regulations. Permitted insurance also means
insurance for a specified disease or illness, and insurance
paying a fixed amount per day (or other period) of
hospitalization.\1741\
---------------------------------------------------------------------------
\1740\ Sec. 223(c)(1)(B).
\1741\ Sec. 223(c)(3).
---------------------------------------------------------------------------
Individuals eligible
Individuals eligible for HSAs are individuals who are
covered by a high deductible health plan and no other health
plan that (1) is not a high deductible health plan and (2)
provides coverage for any benefit which is covered under the
high deductible health plan.\1742\ After an individual has
attained age 65 and becomes enrolled in Medicare, contributions
cannot be made to the individual's HSA.\1743\
---------------------------------------------------------------------------
\1742\ Sec. 223(c)(1).
\1743\ See sec. 223(b)(7), as interpreted by Notice 2004-2, 2004-2
I.R.B. 269 (December 22, 2003), corrected by Announcement 2004-67,
2004-36 I.R.B. 459 (September 7, 2004).
---------------------------------------------------------------------------
Explanation of Provision
No Surprises Act
The No Surprises Act (the ``Act'') \1744\ amends the PHSA,
ERISA, and the Code to provide generally that if a group health
plan provides or covers benefits with respect to services in an
emergency department of a hospital or with respect to emergency
services in a freestanding emergency department, the plan or
issuer must cover emergency services in accordance with certain
requirements.\1745\ The Act generally expands restrictions on
certain billing and charging practices.
---------------------------------------------------------------------------
\1744\ Title I of Div. BB of Pub. L. No. 116-260.
\1745\ In accordance with section 2799A-1 of the PHSA; section 9816
of the Code; and section 716 of ERISA, as added by this Act.
---------------------------------------------------------------------------
In addition, the Act provides certain requirements related
to the provision of emergency services. For example:
The plan or coverage must cover emergency
services (as defined) whether the health care provider
is a participating provider or a participating
emergency facility, with respect to such services;
Emergency services provided by a
nonparticipating provider must be provided without
imposing any pre-authorization requirement on services
or any limitation in coverage that is more restrictive
than the requirements or limitations that apply to
emergency services provided by participating providers;
The cost-sharing requirement must not be
greater for a non-participating provider (or emergency
facility) than would apply if a participating provider
(or emergency facility) were providing the service;
Any cost-sharing payments made by the
participant or beneficiary with respect to such
emergency services must be counted toward any in-
network deductible or out-of-pocket maximums applied
under the plan or coverage, respectively, (and such in-
network deductible and out-of-pocket maximums must be
applied) in the same manner as if such cost-sharing
payments were made with respect to emergency services
furnished by a participating provider or a
participating emergency facility; and
The plan or coverage must provide such
emergency services without regard to any other term or
condition of such plan or coverage (other than
exclusion or coordination of benefits, or an
affiliation or waiting period, otherwise
permitted,\1746\ and other than applicable cost-
sharing).
---------------------------------------------------------------------------
\1746\ Under section 2704 of the Act, including as incorporated
pursuant to section 715 of ERISA and section 9815 of the Code.
---------------------------------------------------------------------------
The Act also imposes certain requirements related to the
provision of non-emergency services covered by a group health
plan furnished to a participant or beneficiary of such plan
performed by nonparticipating providers at certain
participating facilities. For example:
The plan may not impose a cost-sharing
requirement for non-emergency items or services that is
greater than the cost-sharing requirement that would
apply under the plan had those items or services been
furnished by a participating provider;
The plan must calculate the cost-sharing
requirement as if the total amount that would have been
charged for the items and services by the participating
provider were equal to the recognized amount for such
items and services, plan, and year;
Not later than 30 calendar days after the
bill for such items or services is transmitted by the
provider, the plan must send the provider an initial
payment or notice of denial of the payment;
The plan must pay a total plan payment
directly, in accordance with the applicable timing
requirement, to the provider furnishing such items and
services to the participant or beneficiary that is,
with application of the initial payment described
above, equal to the amount by which the out-of-network
rate for such items and services exceeds the cost
sharing amount imposed under the plan for such items
and services; and
The plan must count any cost-sharing
payments made by the participant or beneficiary (and
must apply any in-network deductible and out-of-pocket
maximum) with respect to such items and services that
are furnished in the same manner as if the cost-sharing
payments were with respect to items and services
furnished by a participating provider.
Health savings accounts
Under the provision, an individual does not fail to be
treated as an individual eligible to participate in an HSA
merely because the individual receives benefits for medical
care subject to and in accordance with the applicable
provisions of the Code, the PHSA \1747\ or ERISA,\1748\
relating to preventing surprise medical billing, or any State
law providing similar protections to such individual.
---------------------------------------------------------------------------
\1747\ Sec. 9816 or 9817, or sec. 2799A-1 or 2799A-2 of the PHSA.
\1748\ Sec. 716 or 717 of ERISA.
---------------------------------------------------------------------------
High deductible health plan
Under the provision, a plan does not fail to be treated as
a high deductible health plan by reason of providing benefits
for medical care in accordance with the applicable provisions
of the Code, the PHSA \1749\ or ERISA \1750\ or any State law
providing similar protections to individuals, prior to the
satisfaction of the annual deductible.\1751\
---------------------------------------------------------------------------
\1749\ Sec. 9816 or 9817, or sec. 2799A-1 or 2799A-2 of the PHSA.
\1750\ Sec. 716 or 717 of ERISA.
\1751\ The annual deductible is defined in section 223(c)(2)(A)(i).
---------------------------------------------------------------------------
Effective Date
The amendments relating to health savings accounts and high
deductible health plans apply for plan years beginning on or
after January 1, 2022.
DIVISION EE--TAXPAYER CERTAINTY AND DISASTER TAX RELIEF ACT OF 2020
TITLE I--EXTENSION OF CERTAIN EXPIRING PROVISIONS
Subtitle A--Certain Provisions Made Permanent
1. Reduction in medical expense deduction floor (sec. 101 of the Act
and sec. 213 of the Code)
Present Law
For taxable years beginning before January 1, 2021,
individuals may claim an itemized deduction for unreimbursed
medical expenses paid during the taxable year, but only to the
extent that the expenses exceed 7.5 percent of adjusted gross
income (``AGI'') for purposes of regular tax and the
alternative minimum tax (``AMT'').\1752\ For taxable years
beginning after December 31, 2020, the 7.5-percent threshold is
increased to 10 percent.
---------------------------------------------------------------------------
\1752\ Sec. 213. The threshold was amended by the Patient
Protection and Affordable Care Act (Pub. L. No. 111-148). For taxable
years beginning after December 31, 2012, the threshold was 10 percent
for regular tax purposes and AMT purposes. A temporary special rule
applied in the case of a taxpayer who attained age 65 (or, in the case
of a married taxpayer, if either the taxpayer or the taxpayer's spouse
attained age 65) before the close of the taxable year, in which case
the threshold was 7.5 percent for regular tax purposes. The 2017 Tax
Act (Pub. L. No. 115-97) reduced the floor to 7.5 percent for all
taxpayers for taxable years beginning after December 31, 2016, and
ending before January 1, 2019. The Taxpayer Certainty and Disaster Tax
Relief Act of 2019 (Pub. L. No. 116-94) extended the reduction of the
floor to 7.5 percent for all taxpayers for taxable years ending after
December 31, 2018 and beginning before January 1, 2021.
---------------------------------------------------------------------------
Explanation of Provision
The provision permanently reduces the threshold for
deducting medical expenses to 7.5 percent of AGI. The 7.5-
percent threshold applies for purposes of regular tax as well
as the AMT.
Effective Date
The provision applies to taxable years beginning after
December 31, 2020.
2. Energy efficient commercial buildings deduction (sec. 102 of the Act
and sec. 179D of the Code)
Present Law
In general
Section 179D permits a taxpayer an immediate deduction
equal to energy-efficient commercial building property
expenditures made by the taxpayer. Energy-efficient commercial
building property is defined as property (1) which is 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) which is 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) which is 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 which
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). For each building, 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.\1753\ Individuals qualified to determine
compliance shall only be those recognized by one or more
organizations certified by the Secretary for such
purposes.\1754\
---------------------------------------------------------------------------
\1753\ 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.
\1754\ The IRS has specified that only a ``qualified individual''
(as defined in section 5.05 of IRS Notice 2008-52) can certify that
energy efficient building property has met the requirements of the
section 179D deduction. A qualified individual is an individual who (1)
is not related (within the meaning of section 45(e)(4)) to the taxpayer
claiming the deduction under section 179D; (2) is an engineer or
contractor that is properly licensed as a professional engineer or
contractor in the jurisdiction in which the building is located; and
(3) has represented in writing to the taxpayer that the qualified
individual has the requisite qualifications to provide the
certification required or to perform the inspection and testing
required by IRS Notice 2008-40.
---------------------------------------------------------------------------
For energy-efficient commercial building property
expenditures made by a Federal, state, or local government or a
political subdivision thereof, such as a public school, the
deduction may be allocated to the person primarily responsible
for designing the energy efficient commercial building property
in lieu of the government or political subdivision thereof.
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, 2018.
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 which is
certified by a qualified individual \1755\ 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.
---------------------------------------------------------------------------
\1755\ Ibid.
---------------------------------------------------------------------------
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.\1756\ 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.
---------------------------------------------------------------------------
\1756\ IRS Notice 2008-40, supra, 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.
---------------------------------------------------------------------------
Explanation of Provision
The provision adds an inflation adjustment, updates the
standards, and makes the energy efficient commercial buildings
deduction permanent. The inflation adjustment uses calendar
year 2019 as the base year.
The building standard is updated from ASHRAE/IESNA standard
90.1-2007 to the most recent ASHRAE/IESNA standard 90.1 that
has been published, and affirmed by the Secretary in
consultation with Secretary of Energy, at least two years prior
to the date that construction begins on the property for which
the deduction will be claimed. Similarly, the provision
requires that the Treasury regulations based on the provisions
of the 2005 California Nonresidential Alternative Calculation
Method Approval Manual be updated to conform with the most
recent such manual as in effect, and affirmed by the Secretary
in consultation with the Secretary of Energy, at least two
years prior to the date that construction begins on the
property for which the deduction will be claimed.
Effective Date
The provision applies to property placed in service after
December 31, 2020.
3. Benefits provided to volunteer firefighters and emergency medical
responders (sec. 103 of the Act and sec. 139B of the Code)
Present Law
Background for this provision may be found above in the
section describing section 301 of the SECURE Act (Division O of
Pub. L. No. 116-94) in Part Three of this document.
Explanation of Provision
The provision makes permanent the income exclusions for
qualified State or local tax benefits and qualified payments
provided to members of qualified volunteer emergency response
organizations.
Effective Date
The provision is effective for taxable years beginning
after December 31, 2020.
4. Lifetime learning credit (sec. 104 of the Act and secs. 25A and 222
of the Code)
Present Law
A variety of provisions offer tax benefits to taxpayers for
education expenses. These provisions include tax benefits for
current expenses, such as the American Opportunity credit and
the Lifetime Learning credit \1757\, as well as the above-the-
line deduction for certain higher education expenses.\1758\ For
each taxable year, a taxpayer may claim either the American
Opportunity credit and the Lifetime Learning credit or an
above-the-line deduction for qualified higher education
expenses.
---------------------------------------------------------------------------
\1757\ Sec. 25A.
\1758\ Sec. 222.
---------------------------------------------------------------------------
American Opportunity credit
The American Opportunity credit is a credit of up to $2,500
per eligible student per year for qualified tuition and related
expenses paid for each of the first four years of the student's
post-secondary education in a degree or certificate program.
The amount of the credit is 100 percent on the first $2,000 of
qualified tuition and related expenses, and 25 percent on the
next $2,000 of qualified tuition and related expenses.
Qualified tuition and related expenses generally include
tuition, fees, and course materials required for enrollment or
attendance of the taxpayer, the taxpayer's spouse, or any
dependent of the taxpayer at an eligible institution. They do
not include student activity fees, other fees and expenses
unrelated to an individual's academic course of instruction, or
expenses with respect to a course of education involving
sports, games, or hobbies that is not part of the individual's
degree program. In addition, an eligible student must be
carrying at least half the normal work load for the course of
study being pursued.
The credit that a taxpayer may otherwise claim is phased
out ratably for taxpayers with modified AGI between $80,000 and
$90,000 ($160,000 and $180,000 for married taxpayers filing a
joint return). The credit may be claimed against a taxpayer's
AMT liability.
Forty percent of a taxpayer's otherwise allowable modified
credit is refundable. A refundable credit is a credit which, if
the amount of the credit exceeds the taxpayer's Federal income
tax liability, the excess is payable to the taxpayer.
Lifetime Learning credit
Taxpayers may be eligible to claim a nonrefundable credit,
the Lifetime Learning credit, against Federal income taxes
equal to 20 percent of qualified tuition and related expenses
\1759\ incurred during the taxable year on behalf of the
taxpayer, the taxpayer's spouse, or any dependents.\1760\ Up to
$10,000 of qualified tuition and related expenses per taxpayer
return are eligible for the Lifetime Learning credit (i.e., the
maximum credit per taxpayer return is $2,000).
---------------------------------------------------------------------------
\1759\ Qualified tuition and related expenses for the lifetime
learning credit generally include tuition and fees required for
enrollment or attendance of the taxpayer, the taxpayer's spouse, or any
dependent of the taxpayer at an eligible institution. However, unlike
the American opportunity credit, they do not include course materials.
\1760\ Sec. 25A. The Lifetime Learning credit may be claimed
against a taxpayer's AMT liability.
---------------------------------------------------------------------------
A taxpayer may claim the Lifetime Learning credit for an
unlimited number of taxable years and the maximum amount of the
Lifetime Learning credit that may be claimed on a taxpayer's
return does not vary based on the number of students in the
taxpayer's family. The Lifetime Learning credit amount that a
taxpayer may otherwise claim is phased out ratably for
taxpayers with modified AGI between $59,000 and $69,000
($118,000 and $138,000 for married taxpayers filing a joint
return) in 2020.\1761\
---------------------------------------------------------------------------
\1761\ For tax year 2021, the AGI amount used by joint filers to
determine the reduction in the Lifetime Learning Credit is $119,000.
---------------------------------------------------------------------------
The Lifetime Learning credit is available in the taxable
year the expenses are paid, subject to the requirement that the
education is furnished to the student during that year or
during an academic period beginning during the first three
months of the next taxable year. Qualified tuition and related
expenses paid with the proceeds of a loan generally are
eligible for the Lifetime Learning credit. However, repayment
of a loan is not a qualified tuition expense.
A taxpayer may claim the Lifetime Learning credit with
respect to a student who is not the taxpayer or the taxpayer's
spouse (e.g., in cases in which the student is the taxpayer's
child) only if the taxpayer claims the student as a dependent
for the taxable year for which the credit is claimed. If a
student is claimed as a dependent by a parent or other
taxpayer, the student may not claim the Lifetime Learning
credit for that taxable year on the student's own tax return.
If a parent (or other taxpayer) claims a student as a
dependent, any qualified tuition and related expenses paid by
the student are treated as paid by the parent (or other
taxpayer) for purposes of the provision.
A taxpayer may claim the Lifetime Learning credit for a
taxable year with respect to one or more students, even though
the taxpayer also claims an American Opportunity tax credit for
that same taxable year with respect to other students. If, for
a taxable year, a taxpayer claims an American Opportunity tax
credit with respect to a student, then the Lifetime Learning
credit is not available with respect to that same student for
that year (although the Lifetime Learning credit may be
available with respect to that same student for other taxable
years). As with the American Opportunity tax credit, a taxpayer
may not claim the Lifetime Learning credit and also claim a
deduction for qualified tuition and related expenses.
Deduction for qualified tuition and related expenses
A taxpayer is allowed a deduction for qualified tuition and
related expenses for higher education paid by the taxpayer
during the taxable year.\1762\ The deduction is allowed in
computing AGI. The term qualified tuition and related expenses
is defined in the same manner as for the American Opportunity
and Lifetime Learning credits, 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,\1763\ at an eligible institution of higher
education for courses of instruction of such individual at such
institution.\1764\ 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.
---------------------------------------------------------------------------
\1762\ Sec. 222.
\1763\ 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).
\1764\ 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).
---------------------------------------------------------------------------
The maximum deduction is $4,000 for a taxpayer whose AGI
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 AGI
does not exceed $80,000 ($160,000 in the case of a joint
return). No deduction is allowed for a taxpayer whose AGI
exceeds the relevant AGI 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. Generally, no deduction
is allowed unless the taxpayer receives a payee statement
furnished by the eligible institution of higher education or
other entity subject to reporting that reports qualified
tuition and related expenses.\1765\
---------------------------------------------------------------------------
\1765\ Secs. 222(d)(6) and 6050S.
---------------------------------------------------------------------------
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,\1766\ 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.\1767\ 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 a student for
whom an American Opportunity credit or a Lifetime Learning
credit is elected for such taxable year.
---------------------------------------------------------------------------
\1766\ Secs. 222(d)(1) and 25A(g)(2).
\1767\ Sec. 222(c). These reductions are the same as those that
apply to the American Opportunity and Lifetime Learning credits.
---------------------------------------------------------------------------
The deduction for qualified tuition and expenses is not
available for taxable years beginning after December 31, 2020.
Explanation of Provision
The provision increases the income threshold for claiming
the Lifetime Learning credit to $80,000 of modified AGI (or
$160,000 for married taxpayers filing jointly). The credit
phases out between $80,000 and $90,000 of modified AGI (or
$160,000 and $180,000 for married taxpayers filing jointly).
The provision also repeals the deduction for qualified
tuition and related expenses for higher education paid by the
individual during the taxable year.\1768\
---------------------------------------------------------------------------
\1768\ Sec. 222.
---------------------------------------------------------------------------
Effective Date
The provision applies to taxable years beginning after
December 31, 2020.
5. Railroad track maintenance credit (sec. 105 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, 2023 (the ``railroad track maintenance
credit'' or ``credit'').\1769\ 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.\1770\ The credit may
reduce a taxpayer's tax liability below its tentative minimum
tax.\1771\
---------------------------------------------------------------------------
\1769\ 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).
\1770\ 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.
\1771\ Sec. 38(c)(4).
---------------------------------------------------------------------------
Limitation
The railroad track maintenance credit is limited to the
product of $3,500 times the number of miles of railroad track
\1772\ (1) owned or leased by an eligible taxpayer as of the
close of its taxable year,\1773\ 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.\1774\
Amounts that exceed the limitation are not carried over to
another taxable year.\1775\
---------------------------------------------------------------------------
\1772\ 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).
\1773\ 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).
\1774\ Sec. 45G(b)(1).
\1775\ Treas. Reg. sec. 1.45G-1(c)(2)(iii).
---------------------------------------------------------------------------
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.\1776\ 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.\1777\ Such
assignment is taken into account for the taxable year of the
assignee that includes the date that such assignment is treated
as effective. However, assignments, including related
expenditures paid or incurred, for a taxable year beginning on
or after January 1, 2018, and ending before January 1, 2020,
are treated as effective as of the close of such taxable year
if made pursuant to a written agreement entered into no later
than March 19, 2020.\1778\
---------------------------------------------------------------------------
\1776\ Sec. 45G(b)(2). See also Treas. Reg. sec. 1.45G-1(d).
\1777\ 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).
\1778\ Further Consolidated Appropriates Act of 2020, Pub. L. No.
116-94, Division Q, Title I, Subtitle B, sec. 112(b), December 20,
2019.
---------------------------------------------------------------------------
Eligible taxpayer
An eligible taxpayer means any Class II or Class III
railroad, and any person (including a Class I railroad \1779\)
who transports property using the rail facilities \1780\ of a
Class II or Class III railroad or who furnishes railroad-
related property \1781\ or services \1782\ 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.\1783\
---------------------------------------------------------------------------
\1779\ The Surface Transportation Board currently classifies a
Class I railroad as a carrier with annual operating revenue of
$504,803,294 or more ($489,935,956 or more for 2018). See the Surface
Transportation Board Railroad Revenue Deflator Factors, available at
https://prod.stb.gov/reports-data/economic-data/railroad-revenue-
deflator-factors/. The seven Class I railroads are BNSF Railway
Company, Canadian National Railway (Grand Trunk Corporation), Canadian
Pacific (Soo Line Corporation), CSX Transportation, Kansas City
Southern Railway Company, Norfolk Southern Combined Railroad
Subsidiaries, and Union Pacific Railroad Company. See the U.S.
Department of Transportation Federal Railroad Administration Freight
Rail Overview, available at https://railroads.dot.gov/rail-network-
development/freight-rail-overview.
\1780\ 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).
\1781\ 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.
\1782\ 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.
\1783\ Sec. 45G(c).
---------------------------------------------------------------------------
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).\1784\
---------------------------------------------------------------------------
\1784\ 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 $40,384,263 or more, but
less than $504,803,294 ($39,194,876 or more, but less than
$489,935,956, for 2018), and a Class III railroad as a carrier with
annual operating revenue of less than $40,384,263 (less than
$39,194,876 for 2018). See the Surface Transportation Board Railroad
Revenue Deflator Factors, available at https://prod.stb.gov/reports-
data/economic-data/railroad-revenue-deflator-factors/.
---------------------------------------------------------------------------
Qualified railroad track maintenance expenditures
Qualified railroad track maintenance expenditures are
defined as gross expenditures (whether or not otherwise
chargeable to capital account \1785\) 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 which made the assignment of such
track.\1786\ 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.\1787\ 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.\1788\
---------------------------------------------------------------------------
\1785\ 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.
\1786\ Sec. 45G(d); Treas. Reg. sec. 1.45G-1(b)(5).
\1787\ Treas. Reg. sec. 1.45G-1(c)(3)(ii).
\1788\ Treas. Reg. sec. 1.45G-1(c)(3).
---------------------------------------------------------------------------
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.\1789\ 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.\1790\ 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.\1791\
---------------------------------------------------------------------------
\1789\ Sec. 45G(e)(3). See also sec. 1016(a)(29) and Treas. Reg.
Sec. 1.45G-1(e).
\1790\ Treas. Reg. sec. 1.45G-1(e)(2).
\1791\ Ibid.
---------------------------------------------------------------------------
Explanation of Provision
The provision makes the credit permanent and reduces the
credit to 40 percent of qualified railroad track maintenance
expenditures paid or incurred by an eligible taxpayer during
taxable years beginning on or after January 1, 2023.
Effective Date
The provision applies to taxable years ending after the
date of enactment (December 27, 2020).
6. Provisions related to beer, wine, and distilled spirits (secs. 106-
110 of the Act and sec. 263A, sec. 5001, sec. 5041, sec. 5051,
new sec. 5067, sec. 5212, sec. 5415, sec. 5555, new sec. 6038E,
and sec. 7652 of the Code)
Production period for beer, wine, and distilled spirits
Present Law
The uniform capitalization (``UNICAP'') rules require
certain direct and indirect costs allocable to real property or
tangible personal property produced by the taxpayer to be
included in either inventory costs or capitalized into the
basis of such property, as applicable. For real or personal
property acquired by the taxpayer for resale, section 263A
generally requires certain direct and indirect costs allocable
to such property to be included in inventory.\1792\
---------------------------------------------------------------------------
\1792\ Sec. 263A. Note that a taxpayer that meets the gross
receipts test of section 448(c) is generally exempt from the
application of section 263A. See sec. 263A(i). The gross receipts test
looks to whether the average annual gross receipts for the three-
taxable-year period ending with the prior taxable year is under a
threshold amount ($26 million for 2020). See sec. 448(c) and Rev. Proc.
2019-44, 2019-47 I.R.B. 1093.
---------------------------------------------------------------------------
In the case of interest expense, the UNICAP rules apply
only to interest paid or incurred during the property's
production period \1793\ and that is allocable to property
produced by the taxpayer which (1) is either real property or
property with a class life of at least 20 years, (2) has an
estimated production period exceeding two years, or (3) has an
estimated production period exceeding one year and a cost
exceeding $1,000,000.\1794\ The production period with respect
to any property is the period beginning on the date on which
production of the property begins,\1795\ and, except as
described below, ending on the date on which the property is
ready to be placed in service or held for sale.\1796\
---------------------------------------------------------------------------
\1793\ See Treas. Reg. sec. 1.263A-12.
\1794\ Sec. 263A(f).
\1795\ In the case of tangible personal property, the production
period begins on the first date the taxpayer's accumulated production
expenditures, including planning and design expenditures, are at least
five percent of the taxpayer's total estimated accumulated production
expenditures for the property unit. Treas. Reg. sec. 1.263A-12(c)(3).
Thus, the production period may begin before physical production
activity has commenced. See Treas. Reg. sec. 1.263A-12(c)(3). For
example, in the case of the beer, wine, and distilled spirits
industries, the production period may include time spent planning and
designing ingredients, production space, or production personnel.
\1796\ Sec. 263A(f)(5)(B). The production period for a unit of
property produced for sale ends on the date that the unit is ready to
be held for sale and all production activities reasonably expected to
be undertaken by, or for, the taxpayer or a related person are
complete. Treas. Reg. sec. 1.263A-12(d)(1).
---------------------------------------------------------------------------
For interest costs paid or accrued after December 31, 2017,
and before January 1, 2021, the aging period for beer,\1797\
wine,\1798\ or distilled spirits \1799\ is excluded from the
production period as determined for purposes of the UNICAP
interest capitalization rules. Thus, producers of beer, wine,
or distilled spirits (other than spirits unfit for beverage
purposes) are able to deduct interest expenses (subject to any
other applicable limitation) attributable to the aging period
of beer, wine, or distilled spirits. In the case of interest
costs paid or accrued after December 31, 2020, the production
period as determined for purposes of the UNICAP interest
capitalization rules will include the aging period for beer,
wine, or distilled spirits.
---------------------------------------------------------------------------
\1797\ As defined in section 5052(a).
\1798\ As defined in section 5041(a).
\1799\ As defined in section 5002(a)(8), except such spirits that
are unfit for use for beverage purposes.
---------------------------------------------------------------------------
Explanation of Provision
The provision makes permanent the exclusion of the aging
period for beer, wine, or distilled spirits from the production
period as determined for purposes of the UNICAP interest
capitalization rules.
Effective Date
The provision applies to interest costs paid or accrued
after December 31, 2020.
Reduced rate of excise tax on beer, refunds in lieu of reduced rates
for beer produced outside the United States, and other
provisions related to beer
Present Law
In general
Federal excise taxes are imposed at different rates on
distilled beer, wine, and distilled spirits and are imposed on
these products when produced or imported. Generally, these
excise taxes are administered and enforced by the Alcohol and
Tobacco Tax and Trade Bureau (the ``TTB''), except the taxes on
imported bottled beer, wine, and distilled spirits are
collected by the Customs and Border Protection Bureau (the
``CBP'') of the Department of Homeland Security (under
delegation by the Secretary).\1800\
---------------------------------------------------------------------------
\1800\ Treasury Order 100-16 (May 15, 2003). Bulk (non-bottled)
beer, wine, and distilled spirits may be imported and transferred in
bond free of tax. See secs. 5232, 5364, and 5418.TB collects tax on
such items when they are removed from bond.
---------------------------------------------------------------------------
Liability for the excise tax on beer arises when the
alcohol is produced or imported but is not payable until the
beer is removed from the brewery or customs custody for
consumption or sale. Generally, beer may be transferred between
commonly owned breweries without payment of tax; however, tax
liability follows these products. Imported bulk beer may be
released from customs custody without payment of tax and
transferred in bond to a brewery, which becomes liable for the
tax on such beer. Beer may be exported without payment of tax
and may be withdrawn from a brewery without payment of tax or
free of tax for certain authorized uses, including industrial
uses and non-beverage uses.\1801\
---------------------------------------------------------------------------
\1801\ Sec. 5053.
---------------------------------------------------------------------------
Temporary reduced rates
Notwithstanding the temporary rates for calendar years
2018, 2019, and 2020 described below, the rate of tax on beer
is $18 per barrel.\1802\ Small brewers are eligible for a
reduced tax rate of $7 per barrel on the first 60,000 barrels
of beer domestically produced and removed each year.\1803\
Small brewers are brewers producing not more than two million
barrels of beer during a calendar year. The lower rates for
small producers reduce the effective per-gallon tax rate from
approximately 58 cents per gallon to approximately 22.6 cents
per gallon for this beer.
---------------------------------------------------------------------------
\1802\ Sec. 5051. One barrel is equal to 31 gallons of beer.
\1803\ Sec. 5051(a)(2).
---------------------------------------------------------------------------
In the case of a controlled group, the two million barrel
limitation for small brewers is applied to the controlled
group,\1804\ and the 60,000 barrels eligible for the reduced
rate of tax are apportioned among the brewers that are
component members of such group. Additionally, two or more
entities (whether or not under common control) that produce
beer marketed under a similar brand, license, franchise, or
other arrangement are treated as a single taxpayer (the ``beer
single taxpayer rule'').
---------------------------------------------------------------------------
\1804\ The term ``controlled group'' has the meaning assigned to it
by section 1563(a), except that the phrase ``more than 50 percent'' is
substituted for the phrase ``at least 80 percent'' in each place it
appears in section 1563(a).
---------------------------------------------------------------------------
Individuals may produce limited quantities of beer for
personal or family use without payment of tax during each
calendar year. The limit is 200 gallons per calendar year for
households of two or more adults and 100 gallons per calendar
year for single-adult households.
Temporary reduced rates
For calendar years 2018, 2019, and 2020, the rate of tax on
beer is temporarily lowered to $16 per barrel on the first six
million barrels brewed by the brewer or imported by the
importer. For an importer to receive the tax benefit, the
importer must be an electing importer and the barrels of beer
must be assigned to the importer by the person producing the
beer. In general, in the case of a controlled group of brewers,
the six million barrel limitation is applied and apportioned at
the level of the controlled group. Beer brewed or imported in
excess of the six million barrel limitation continues to be
taxed at $18 per barrel. In the case of small brewers, such
brewers are taxed at a rate of $3.50 per barrel on the first
60,000 barrels domestically produced, and $16 per barrel on any
further barrels produced.
Transfer rules and removals without tax
Certain removals or transfers of beer are exempt from tax.
Beer may be transferred without payment of tax between bonded
premises under certain conditions specified in the
regulations.\1805\ The tax liability accompanies the beer that
is transferred in bond. However, beer may only be transferred
without payment of tax between breweries if both breweries are
owned by the same brewer (the ``shared ownership
requirement'').
---------------------------------------------------------------------------
\1805\ Sec. 5414.
---------------------------------------------------------------------------
The shared ownership requirement is temporarily relaxed for
calendar years 2018, 2019, and 2020. Thus, a brewer may
transfer beer from one brewery to another without payment of
tax, including instances where (1) the breweries are owned by
the same person; (2) one brewery owns a controlling interest in
the other; (3) the same person or persons have a controlling
interest in both breweries; or (4) the proprietors of the
transferring and receiving premises are independent of each
other, and the transferor has divested itself of all interest
in the beer so transferred, and the transferee has accepted
responsibility for payment of the tax.
For purposes of transferring the tax liability pursuant to
(4) above, such relief from liability will be effective from
the time of removal from the transferor's bonded premises, or
from the time of divestment, whichever is later.
Explanation of Provision
The provision makes permanent the reduced rate schedule on
beer.
The provision modifies the rules for transfers of beer
without payment of tax between bonded breweries. Under the
provision, such transfers do not require the bonded breweries
to be owned by the same brewer. As under present law, a brewer
may transfer beer from one brewery to another without payment
of tax, including instances where (1) the breweries are owned
by the same person; (2) one brewery owns a controlling interest
in the other; (3) the same person or persons have a controlling
interest in both breweries; or (4) the proprietors of the
transferring and receiving premises are independent of each
other, and the transferor has divested itself of all interest
in the beer so transferred, and the transferee has accepted
responsibility for payment of the tax.
The provision clarifies that beer smuggled into the United
States or produced other than as authorized under chapter 51 of
the Code is not eligible for reduced tax rates.
Under the provision modifying the beer single taxpayer
rule, two or more entities (whether or not under common
control) that produce beer under a license, franchise, or other
arrangement are treated as a single taxpayer.
Refunds in lieu of reduced rates
The provision provides that barrels of beer that are
produced outside the United States, imported into the United
States, and removed after December 31, 2022, do not qualify for
reduced excise tax rates, but the importer may claim a refund
in lieu of reduced rates. Refunds are treated as overpayment of
tax and determined for periods no less frequently than
quarterly. As under prior law, in order for an importer to
receive the tax benefit, the importer must be an electing
importer and the barrels of beer must be assigned to the
importer by the person producing the beer.
Under the provision, the amount of refund with respect to
any importer for a given filing period is equal to (1) the
excess (if any) of (a) the amount of tax imposed on the barrels
of beer removed during the filing period over (b) the amount of
tax that would have been imposed on such barrels if the
importer had been eligible to receive reduced rates, plus (2)
the amount of interest that would be allowed and paid on an
overpayment of tax at the overpayment rate, if that rate
applied to the amount determined in (1) for the number of days
in the filing period. The overpayment rate is the rate
established under section 6621(a)(1), but without regard to the
lower rate for corporate overpayments of tax exceeding $10,000.
Generally, no additional interest is paid on the refund if the
refund is paid within 90 days after the tax return is filed.
Information reporting in case of assignment of lower rates or refunds
by foreign producers of beer
The provision requires that a foreign producer that elects
to make an assignment of lower rates or refunds to an importer
must provide the documentation required by the Secretary, which
may include providing information about the controlled group
structure of the foreign producer.
The provision also requires the Secretary (or the
Secretary's delegate within the Treasury Department) to
implement and administer the new refund regime for beer, in
coordination with the CBP. The Secretary (or the Secretary's
delegate within the Treasury Department) must prescribe such
regulations as may be necessary or appropriate, including
regulations to require foreign producers to provide the
information necessary to enforce the volume limitations for
beer. The Secretary (or the Secretary's delegate within the
Treasury Department), in coordination with CBP, must make
publicly available a report detailing plans for implementing
and administering the new refund regime not later than 180 days
after the date of enactment.
Effective Date
The provision to make permanent the reduced rate schedule
on beer applies to beer removed after December 31, 2020.
The provision to modify the rules regarding transfer of
beer between bonded breweries applies to calendar quarters
beginning after December 31, 2020.
The provision to clarify the treatment of smuggled beer
applies to beer produced after the date of enactment (December
27, 2020).
The provision to modify the beer single taxpayer rule
applies to beer removed after December 31, 2020.
The provision to provide refunds in lieu of reduced rates
for imported beer applies to beer removed after December 31,
2022.
The provision requiring information reporting by foreign
producers is effective for elections to make an assignment of
lower rates or refunds for beer after December 31, 2020.
Credits against excise tax on certain wine, refunds in lieu of credits
for wine produced outside the United States, and other
provisions related to wine
Present Law
In general
Excise taxes are imposed on wine, based on the wine's
alcohol content and carbonation levels. In general,
notwithstanding the temporary changes made for calendar years
2018, 2019, and 2020, the following table outlines the rates of
tax on wine.
---------------------------------------------------------------------------
\1806\ A ``still wine'' is a non-effervescent or minimally
effervescent wine containing no more than 0.392 grams of carbon dioxide
per hundred milliliters of wine. Champagne wine typically contains more
than twice that amount.
\1807\ A wine gallon is a U.S. liquid gallon.
------------------------------------------------------------------------
Tax (and Code Section) Tax Rates
------------------------------------------------------------------------
Wines (sec. 5041)
``Still wines'' \1806\ not more than $1.07 per wine gallon \1807\
14 percent alcohol.
``Still wines'' more than 14 percent, $1.57 per wine gallon
but not more than 21 percent, alcohol.
``Still wines'' more than 21 percent, $3.15 per wine gallon
but not more than 24 percent, alcohol.
``Still wines'' more than 24 percent $13.50 per proof gallon
alcohol. (taxed as distilled
spirits)
Champagne and other sparkling wines... $3.40 per wine gallon
Artificially carbonated wines......... $3.30 per wine gallon
------------------------------------------------------------------------
Liability for the excise taxes on wine arises when the wine
is produced or imported but is not payable until the wine is
removed from the bonded wine cellar or winery, or from customs
control, for consumption or sale. Generally, bulk and bottled
wine may be transferred between bonded premises; however, the
tax liability on such wine becomes the responsibility of the
transferee. Bulk natural wine may be released from customs
custody without payment of tax and transferred in bond to a
winery. Wine may be exported without payment of tax and may be
withdrawn from a wine cellar or winery without payment of tax
or free of tax for certain authorized uses, including
industrial uses and non-beverage uses.\1808\
---------------------------------------------------------------------------
\1808\ Sec. 5042.
---------------------------------------------------------------------------
Credits and exemptions for certain wine producers
Notwithstanding the temporary modifications described
below, domestic wine producers having aggregate annual
production not exceeding 250,000 wine gallons (``small domestic
producers'') receive a credit against the wine excise tax equal
to 90 cents per gallon (the amount of a wine tax increase
enacted in 1990) on the first 100,000 wine gallons of wine
domestically produced and removed during a calendar year.\1809\
The credit is reduced (but not below zero) by one percent for
each 1,000 gallons produced in excess of 150,000 wine gallons;
the credit may not be applied to the tax liability on sparkling
wines. In the case of a controlled group,\1810\ the 250,000
wine gallon limitation for wineries is applied to the
controlled group, and the 100,000 wine gallons eligible for the
credit are apportioned among the wineries that are component
members of such group. Additionally, two or more entities
(whether or not under common control) that produce wine
marketed under a similar brand, license, franchise, or other
arrangement are treated as a single taxpayer (the ``wine single
taxpayer rule'').
---------------------------------------------------------------------------
\1809\ Sec. 5041(c).
\1810\ The term ``controlled group'' has the meaning assigned to it
by section 1563(a), except that the phrase ``more than 50 percent'' is
substituted for the phrase ``at least 80 percent'' in each place it
appears in section 1563(a).
---------------------------------------------------------------------------
Temporary modifications
The credit against the wine excise tax for small domestic
producers is temporarily modified for calendar years 2018,
2019, and 2020 in several ways. First, the 250,000 wine gallon
domestic production limitation is removed (thus making the
credit available for all wine producers and importers). In
order for an importer to receive the tax benefit, the importer
must be an electing importer and the wine gallons of wine must
be assigned to the importer by the person producing the wine.
Second, under the modifications, the credit may be applied to
the tax liability on sparkling wine. Third, with respect to
wine produced in, or imported into, the United States during a
calendar year, the credit amount is modified to (1) $1 per wine
gallon for the first 30,000 wine gallons of wine, plus; (2) 90
cents per wine gallon on the next 100,000 wine gallons of wine,
plus; (3) 53.5 cents per wine gallon on the next 620,000 wine
gallons of wine.\1811\ Finally, there is no phaseout of the
credit with additional production.
---------------------------------------------------------------------------
\1811\ The credit rate for hard cider is tiered at the same level
of production or importation, but is equal to 6.2 cents, 5.6 cents, and
3.3 cents, respectively.
---------------------------------------------------------------------------
Alcohol-by-volume levels of the first two tiers of the
excise tax on wine are temporarily modified for calendar years
2018, 2019, and 2020, by changing 14 percent to 16
percent.\1812\ Thus, a wine producer or importer may
temporarily produce or import ``still wine'' that has an
alcohol-by-volume level of up to 16 percent and remain subject
to the lowest rate of $1.07 per wine gallon.
---------------------------------------------------------------------------
\1812\ Sec. 5041(b)(1) and (2).
---------------------------------------------------------------------------
Mead and certain sparkling, low alcohol-by-volume wines are
temporarily designated to be taxed at the lowest rate
applicable to ``still wine,'' $1.07 per wine gallon of wine,
for calendar years 2018, 2019, and 2020.\1813\ To qualify for
the lowest rate, mead is defined as wine that contains not more
than 0.64 grams of carbon dioxide per hundred milliliters of
wine,\1814\ which is derived solely from honey and water,
contains no fruit product or fruit flavoring, and contains less
than 8.5 percent alcohol-by-volume. The sparkling wines
eligible to be taxed at the lowest rate are those wines that
contain not more than 0.64 grams of carbon dioxide per hundred
milliliters of wine,\1815\ which are derived primarily from
grapes or grape juice concentrate and water, which contain no
fruit flavoring other than grape, and which contain less than
8.5 percent alcohol by volume.
---------------------------------------------------------------------------
\1813\ Sec. 5041(h).
\1814\ The Secretary is authorized to prescribe tolerances to this
limitation as may be reasonably necessary in good commercial practice.
\1815\ The Secretary is authorized to prescribe tolerances to this
limitation as may be reasonably necessary in good commercial practice.
---------------------------------------------------------------------------
Explanation of Provision
The provision makes permanent the temporary changes that
were in effect for calendar years 2018, 2019, and 2020.
Specifically, the provision makes permanent
the modifications to the credit against the
wine excise tax,
the modifications to the alcohol-by-volume
levels for application of the wine excise tax, and
the rates on mead and certain sparkling, low
alcohol-by-volume wines.
The provision also clarifies that wine smuggled into the
United States or produced other than as authorized under
chapter 51 of the Code is not eligible for the wine excise tax
credit.
Under the provision modifying the wine single taxpayer
rule, two or more entities (whether or not under common
control) that produce wine under a license, franchise, or other
arrangement are treated as a single taxpayer.
Refunds in lieu of tax credits
The provision provides that wine gallons of wine that are
produced outside the United States, imported into the United
States, and removed after December 31, 2022, do not qualify for
credit against wine excise tax, but the importer may claim a
refund in lieu of credits. Refunds are treated as overpayment
of tax and determined for periods no less frequently than
quarterly. As under prior law, in order for an importer to
receive the tax benefit, the importer must be an electing
importer and the wine gallons of wine must be assigned to the
importer by the person producing the wine.
Under the provision, the amount of refund with respect to
any importer for a given filing period is equal to (1) the
excess (if any) of (a) the amount of tax imposed on wine
gallons of wine removed during the filing period over (b) the
amount of tax that would have been imposed on such wine gallons
if the importer had been eligible to receive a credit against
wine excise tax, plus (2) the amount of interest that would be
allowed and paid on an overpayment of tax at the overpayment
rate, if that rate applied to the amount determined in (1) for
the number of days in the filing period. The overpayment rate
is the rate established under section 6621(a)(1), but without
regard to the lower rate for corporate overpayments of tax
exceeding $10,000. Generally, no additional interest is paid on
the refund if the refund is paid within 90 days after the tax
return is filed.
Information reporting in case of assignment of credits or refunds by
foreign producers of wine
The provision requires that a foreign producer that elects
to make an assignment of credits or refunds to an importer must
provide the documentation required by the Secretary, which may
include providing information about the controlled group
structure of the foreign producer.
The provision also requires the Secretary (or the
Secretary's delegate within the Treasury Department) to
implement and administer the new refund regime for wine, in
coordination with the CBP. The Secretary (or the Secretary's
delegate within the Treasury Department) must prescribe such
regulations as may be necessary or appropriate, including
regulations to require foreign producers to provide the
information necessary to enforce the volume limitations for
wine. The Secretary (or the Secretary's delegate within the
Treasury Department), in coordination with CBP, must make
publicly available a report detailing plans for implementing
and administering the new refund regime not later than 180 days
after the date of enactment.
Effective Date
The provision to make permanent the modifications to the
wine excise credit applies to wine removed after December 31,
2020.
The provision to make permanent the modifications to the
alcohol-by-volume levels applies to wine removed after December
31, 2020.
The provision to make permanent the rates on mead and
certain sparkling, low alcohol-by-volume wines applies to wine
removed after December 31, 2020.
The provision to clarify the treatment of smuggled wine
applies to wine produced after the date of enactment (December
27, 2020).
The provision to modify the wine single taxpayer rule
applies to wine removed after December 31, 2020.
The provision to provide refunds in lieu of credits for
imported wine applies to wine removed after December 31, 2022.
The provision requiring information reporting by foreign
producers is effective for elections to make an assignment of
credits or refunds for wine after December 31, 2020.
Reduced rate of excise tax on certain distilled spirits, refunds in
lieu of reduced rates for distilled spirits, and other
provisions related to distilled spirits
Present Law
Notwithstanding the current, temporary rates described
below, distilled spirits are taxed at a rate of $13.50 per
proof gallon.\1816\ Liability for the excise tax on distilled
spirits arises when the distilled spirits are produced or
imported 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. 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 be exported without
payment of tax and may be withdrawn from a distillery without
payment of tax or free of tax for certain authorized uses,
including industrial uses and non-beverage uses.
---------------------------------------------------------------------------
\1816\ Secs. 5001, 5006, 5043, and 5054.
---------------------------------------------------------------------------
Temporary reduced rates
For calendar years 2018, 2019, and 2020, there is a
temporary tax rate schedule for distilled spirits based on the
annual quantity (1) distilled or processed and removed for
consumption or sale, or (2) imported into the United States.
The rate of tax is lowered to $2.70 per proof gallon on the
first 100,000 proof gallons of distilled spirits produced,
$13.34 on the next 22,130,000 proof gallons, and $13.50 for
amounts thereafter.
In the case of a controlled group,\1817\ the 100,000 and
22,130,000 proof gallon limitations are applied to the
controlled group and apportioned among the distillers that are
component members of such group. In order for an importer to
receive the tax benefit, the importer must be an electing
importer and the proof gallons of distilled spirits must be
assigned to the importer by the person producing the distilled
spirits. Two or more entities (whether or not under common
control) that produce distilled spirits marketed under a
similar brand, license, franchise, or other arrangement are
treated as a single taxpayer for purposes of the temporary
lower rates (the ``distilled spirits single taxpayer rule'').
---------------------------------------------------------------------------
\1817\ The term ``controlled group'' has the meaning assigned to it
by section 1563(a), except that the phrase ``more than 50 percent'' is
substituted for the phrase ``at least 80 percent'' in each place it
appears in section 1563(a).
---------------------------------------------------------------------------
For calendar years 2018, 2019, and 2020, distillers may
also transfer distilled spirits in bond in containers other
than bulk containers without payment of tax.
Cover over rules
For purposes of the excise tax on distilled spirits, the
territories of Puerto Rico and the U.S. Virgin Islands are not
considered part of the United States.\1818\ Additionally,
distilled spirits brought into the United States from these
territories are not considered imports for purposes of the
excise tax.\1819\ 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.
---------------------------------------------------------------------------
\1818\ Sec. 7701(a)(9).
\1819\ 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.\1820\ 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.\1821\ 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.\1822\ The revenues are
apportioned between the two treasuries according to a formula
determined by the Secretary.\1823\
---------------------------------------------------------------------------
\1820\ 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).
\1821\ Sec. 7652(b)(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).
\1822\ Sec. 7652(e)(1). 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).
\1823\ 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. 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,
2021.\1824\ 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.
---------------------------------------------------------------------------
\1824\ Sec. 7652(f)(1).
---------------------------------------------------------------------------
Explanation of Provision
The provision makes permanent the reduced rate schedule on
distilled spirits.
The provision modifies the rules for transfer of distilled
spirits, allowing distillers to transfer spirits in bond in
containers other than bulk containers without payment of tax if
(1) distilled spirits are transferred between bonded premises
belonging to the same person or members of the same controlled
group (within the meaning of section 5001(c)(2)), or (2)
distilled spirits are transferred in bond from the person who
distilled (or processed) the distilled spirits (the
``transferor'') to another person for bottling or storage and
returned to the transferor for removal, and the transferor
retained title during the entire period between distillation
(or processing) and removal.
The provision provides that a distilled spirit is not
treated as processed for purposes of the reduced tax rates
unless a process described in section 5002(a)(5)(A) (other than
bottling) is performed with respect to the distilled
spirit.\1825\
---------------------------------------------------------------------------
\1825\ Processes described in section 5002(a)(5)(A) include
manufacturing and mixing.
---------------------------------------------------------------------------
The provision clarifies that distilled spirits smuggled
into the United States or produced other than as authorized
under chapter 51 of the Code are not eligible for reduced tax
rates.
The provision modifies the distilled spirits single
taxpayer rule and expands it to apply to processors of
distilled spirits. Under the provision, two or more entities
(whether or not under common control) that produce or process
distilled spirits under a license, franchise, or other
arrangement are treated as a single taxpayer.
Refunds in lieu of reduced rates
In general
The provision provides that proof gallons of distilled
spirits produced outside the United States, imported into the
United States, and removed after December 31, 2022, do not
qualify for reduced excise tax rates, but the importer may
claim a refund in lieu of reduced rates. Refunds are treated as
overpayment of tax and determined for periods no less
frequently than quarterly. As under prior law, in order for an
importer to receive the tax benefit, the importer must be an
electing importer and the proof gallons of distilled spirits
must be assigned to the importer by the person producing the
distilled spirits.
Under the provision, the amount of refund with respect to
any importer for a given filing period is equal to (1) the
excess (if any) of (a) the amount of tax imposed on the proof
gallons of distilled spirits removed during the filing period
over (b) the amount of tax that would have been imposed on such
proof gallons if the importer had been eligible to receive
reduced rates, plus (2) the amount of interest that would be
allowed and paid on an overpayment of tax at the overpayment
rate, if that rate applied to the amount determined in (1) for
the number of days in the filing period. The overpayment rate
is the rate established under section 6621(a)(1), but without
regard to the lower rate for corporate overpayments of tax
exceeding $10,000. Generally, no additional interest is paid on
the refund if the refund is paid within 90 days after the tax
return is filed.
Coordination with cover over to Puerto Rico and Virgin
Islands
With respect to 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 provision clarifies that the
amounts covered over to Puerto Rico and the Virgin Islands are
determined without regard to reduced rates or refunds in lieu
of reduced rates. The provision also clarifies that refunds in
lieu of reduced rates are not treated as refunds for purposes
of determining the amounts of cover over.
Information reporting in case of assignment of lower rates or refunds
by foreign producers of distilled spirits
The provision requires that a foreign producer that elects
to make an assignment of lower rates or refunds to an importer
must provide the documentation required by the Secretary, which
may include providing information about the controlled group
structure of the foreign producer.
The provision also requires the Secretary (or the
Secretary's delegate within the Treasury Department) to
implement and administer the new refund regime for distilled
spirits, in coordination with the CBP. The Secretary (or the
Secretary's delegate within the Treasury Department) must
prescribe such regulations as may be necessary or appropriate,
including regulations to require foreign producers to provide
the information necessary to enforce the volume limitations for
distilled spirits. The Secretary (or the Secretary's delegate
within the Treasury Department), in coordination with CBP, must
make publicly available a report detailing plans for
implementing and administering the new refund regime not later
than 180 days after the date of enactment.
Effective Date
The provision to make permanent the reduced rate schedule
applies to distilled spirits removed after December 31, 2020.
The provision to modify the rules for transfers of
distilled spirits between bonded premises applies to distilled
spirits transferred in bond after December 31, 2020.
The provision to provide minimum processing requirements
applies to distilled spirits removed after December 31, 2021.
The provision to clarify the treatment of smuggled
distilled spirits applies to distilled spirits produced after
the date of enactment (December 27, 2020).
The provision modifying the distilled spirits single
taxpayer rule applies to distilled spirits removed after
December 31, 2020.
The provision to provide refunds in lieu of reduced rates
for imported distilled spirits and coordinate with cover over
rules applies to distilled spirits brought into the United
States and removed after December 31, 2022.
The provision requiring information reporting by foreign
producers is effective for elections to make an assignment of
lower rates or refunds for distilled spirits after December 31,
2020.
Simplification of rules regarding records, statements, and returns
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.\1826\ For calendar quarters
beginning after February 9, 2018, and before January 1, 2021,
the Secretary must 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 which has been removed for consumption on
the premises of the brewery.
---------------------------------------------------------------------------
\1826\ Sec. 5555(a).
---------------------------------------------------------------------------
Explanation of Provision
The provision makes permanent the requirement that the
Secretary 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 which has been removed for consumption on the premises of
the brewery.
Effective Date
The provision applies to calendar quarters beginning after
December 31, 2020.
Subtitle B--Certain Provisions Extended Through 2025
1. Extension of look-through treatment of payments between related
controlled foreign corporations under foreign personal holding
company rules (sec. 111 of the Act and sec. 954(c)(6) of the
Code)
Present Law
In general
The rules of subpart F \1827\ require U.S. shareholders
with a 10-percent or greater interest in a controlled foreign
corporation (``CFC'') to include certain income of the CFC
(referred to as ``subpart F income'') on a current basis for
U.S. tax purposes.\1828\
---------------------------------------------------------------------------
\1827\ Secs. 951-964.
\1828\ Sec. 951(a).
---------------------------------------------------------------------------
Subpart F income includes foreign base company
income.\1829\ One category of foreign base company income is
foreign personal holding company income, which includes passive
income such as dividends, interest, rents, and royalties, among
other types of income.\1830\ There are several exceptions to
these rules. For example, foreign personal holding company
income does not include dividends and interest received by a
CFC from a related corporation organized and operating in the
same foreign country in which the CFC is organized, or rents
and royalties received by a CFC from a related corporation for
the use of property within the country in which the CFC is
organized.\1831\ Interest, rent, and royalty payments do not
qualify for this exclusion to the extent that such payments
reduce the subpart F income of the payor.
---------------------------------------------------------------------------
\1829\ Secs. 952(a)(2) and 954.
\1830\ Sec. 954(c)(1).
\1831\ Sec. 954(c)(3).
---------------------------------------------------------------------------
In addition, subpart F income of a CFC does not include any
item of income from sources within the United States that is
effectively connected with the conduct by such CFC of a trade
or business within the United States (``ECI'') unless such item
is exempt from taxation (or is subject to a reduced rate of
tax) pursuant to a tax treaty.\1832\
---------------------------------------------------------------------------
\1832\ Sec. 952(b).
---------------------------------------------------------------------------
``CFC look-through''
Section 954(c)(6), colloquially referred to as ``CFC look-
through,'' provides that dividends, interest (including
factoring income that is treated as equivalent to interest
under section 954(c)(1)(E)), rents, and royalties received or
accrued by one CFC from a related CFC are not treated as
foreign personal holding company income to the extent
attributable or properly allocable to income of the payor that
is neither subpart F income nor treated as ECI. For this
purpose, a related CFC is a CFC that controls or is controlled
by the other CFC, or a CFC that is controlled by the same
person or persons that control the other CFC. Ownership of more
than 50 percent of the CFC's stock (by vote or value)
constitutes control for these purposes.
The Secretary is authorized to prescribe regulations that
are necessary or appropriate to carry out CFC look-through,
including such regulations as may be necessary or appropriate
to prevent the abuse of the purposes of such rule.
CFC look-through applies to taxable years of foreign
corporations beginning after December 31, 2005, and before
January 1, 2021, and to taxable years of U.S. shareholders with
or within which such taxable years of foreign corporations end.
Explanation of Provision
The provision extends for five years the application of CFC
look-through, to taxable years of foreign corporations
beginning before January 1, 2026, and to taxable years of U.S.
shareholders with or within which such taxable years of foreign
corporations end.
Effective Date
The provision applies to taxable years of foreign
corporations beginning after December 31, 2020, and to taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
2. New markets tax credit (sec. 112 of the Act and sec. 45D of the
Code)
Present Law
In general
The New Markets Tax Credit (``NMTC'') is a geography-based
tax credit program. Under section 45D(a), an investor may claim
tax credits for a qualified equity investment in a qualified
community development entity (``CDE''). The qualified CDE
designates equity investments as qualified equity investments,
rendering the investor eligible to receive tax credits. The
qualified CDE can only designate up to an amount allocated to
it by the Department of the Treasury's Community Development
Financial Institutions Fund (``CDFI Fund''). The CDFI Fund
allocates amounts to qualified CDEs through a competitive
application process.
The amount of the NMTC is determined on a credit allowance
date as an amount equal to the applicable percentage of the
investment in the qualified CDE on that date. The applicable
percentage is five percent for the first three years of the
investment and six percent for the remaining four years, for a
total credit of 39 percent over seven years. The credit
allowance date is the date of the investment and the next six
anniversary dates of the investment.
To continue to be eligible for tax credits, the taxpayer
must continue to hold the qualified equity investment on the
credit allowance date of each year. In other words, if the
qualified equity investment ceases, or ceases to be qualified,
the remaining tax credits are no longer allowed. The credits
already claimed may also be subject to recapture if the CDE
ceases to be qualified, if the proceeds of the investment cease
to be used in a qualified manner, or if the taxpayer redeems
its qualified equity investment.
Regulated financial institutions provide most of the equity
for NMTC transactions. In addition to receiving the NMTC,
financial institutions often receive credit under the Community
Reinvestment Act for investing in low-income census tracts.
Substantially all of the qualified equity investment must
be used by the qualified CDE to provide investments in low-
income communities through qualified active low-income
community businesses.
Qualifying geography
The NMTC provisions require CDEs to serve or provide
investment capital for low-income communities or low-income
persons. A low-income community is either (1) a population
census tract that meets certain criteria or (2) a specific area
designated by the Secretary. Specifically, a ``low-income
community'' is a population census tract with either (1) a
poverty rate of at least 20 percent or (2) median family income
which 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. In addition, a
population census tract with a population of less than 2,000 is
treated as a low-income community for purposes of the NMTC if
such tract is within an empowerment zone (the designation of
which is in effect under section 1391) and is contiguous to one
or more low-income communities.
CDEs may also qualify for the NMTC if they serve targeted
populations, as designated by the Secretary, regardless of the
composition of the population census tract or tracts in which
the targeted populations live. 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 80 percent of
the area median family income or 80 percent of the statewide
nonmetropolitan area median family income.
Project structures
In a typical NMTC structure, an intermediary entity (the
``investment fund LLC'') receives equity investments from
investors (usually financial institutions) and debt from other
sources. The investment fund LLC's proceeds are then invested
as equity investment into a qualified CDE. The qualified CDE in
turn makes a qualified low-income community investment in a
qualified active low-income community business.
A qualified CDE is any domestic corporation or partnership:
(1) whose primary mission is serving or providing investment
capital for low-income communities or low-income persons; (2)
that maintains accountability to residents of low-income
communities by their representation on any governing board of
or any advisory board to the CDE; and (3) that is certified by
the Secretary as being a qualified CDE. A qualified equity
investment means stock (other than nonqualified preferred
stock) in a corporation or a capital interest in a partnership
that is acquired directly from a CDE for cash and includes an
investment of a subsequent purchaser if such investment was a
qualified equity investment in the hands of the prior holder.
Substantially all the investment proceeds must be used by the
CDE to make qualified low-income community investments. For
this purpose, qualified low-income community investments
include: (1) capital or equity investments in, or loans to,
qualified low income community businesses; (2) certain
financial counseling and other services to businesses and
residents in low-income communities; (3) the purchase from
another CDE of any loan made by such entity that is a qualified
low-income community investment; or (4) an equity investment
in, or loan to, another CDE.
Although equity investments in qualified active low-income
community businesses qualify under the NMTC rules, generally,
such investments are in the form of loans. Equity investors
that own a majority interest in a low-income community business
can have their NMTC credits recaptured if the business violates
the rules for qualification. However, Treasury regulations
provide a ``reasonable expectation'' safe harbor for CDEs that
lend to such a business; if the CDE ``reasonably expects'' that
the rules are being satisfied, NMTC credits are not subject to
recapture.\1833\
---------------------------------------------------------------------------
\1833\ Treas. Reg. sec. 1.45(D)-1(d)(6)(i).
---------------------------------------------------------------------------
A qualified active low-income community business is defined
as a business that satisfies, with respect to a taxable year,
the following requirements: (1) at least 50 percent of the
total gross income of the business is derived from the active
conduct of trade or business activities in any low-income
community; (2) a substantial portion of the tangible property
of such business is used in a low-income community; (3) a
substantial portion of the services performed for such business
by its employees is performed in a low-income community; and
(4) less than five percent of the average of the aggregate
unadjusted bases of the property of such business is
attributable to certain financial property or to certain
collectibles.
Allocation process
The CDFI Fund annually allocates NMTCs to CDEs under a
competitive application process. CDEs, in turn, allocate NMTCs
to equity investors. The maximum annual amount of NMTCs that
the CDFI Fund can allocate is $3.5 billion for calendar years
2010 through 2019 and $5 billion for calendar year 2020. No
amount of unused allocation limitation may be carried to any
calendar year after 2025.
For the 2019 allocation application round, the CDFI Fund
awarded 76 CDEs more than $3.5 billion in NMTCs from a total of
206 applications requesting $14.7 billion.\1834\ Out of the
total awarded, approximately $2.6 billion (74.6 percent) of
NMTC investment proceeds will likely be used to finance and
support loans to or investments in operating businesses in low-
income communities, and approximately $882.8 million (25.4
percent) of NMTC investment proceeds will likely be used to
finance and support real estate projects in low-income
communities.\1835\
---------------------------------------------------------------------------
\1834\ Information is available at https://www.cdfifund.gov/
programs-training/programs/new-markets-tax-credit/award-announcement-
step (last visited April 26, 2021).
\1835\ Information is available in the 2019 NMTC Award Book. It is
available at https://www.cdfifund.gov/sites/cdfi/files/documents/2019-
nmtc-award-book-finalforwebsite-13july2020.pdf (last visited April 26,
2021).
---------------------------------------------------------------------------
Applications for NMTCs are reviewed in two phases.\1836\ In
Phase 1, applications are reviewed, scored, and ranked based on
two criteria: business strategy and community outcomes.
Applicants that meet the minimum scoring thresholds in Phase 1
advance to Phase 2 review and will be provided with
``preliminary'' awards, in descending order of final rank
score, until the available allocation authority is fulfilled.
Final rank scores are determined by evaluating management
capacity, capitalization strategy, and information regarding
previous awards.\1837\
---------------------------------------------------------------------------
\1836\ The 2019 NMTC program allocation application provides
information on reviewer criteria. It is available at https://
www.cdfifund.gov/sites/cdfi/files/documents/cy-2019-nmtc-application-
final.pdf (last visited April 26, 2021).
\1837\ Information on the allocation application review process,
general characteristics of a highly ranked application, and application
ratings is available at https://www.cdfifund.gov/sites/cdfi/files/
documents/2019-nmtc-program-allocation-evaluation-process_508-
compliant.pdf (last visited April 26, 2021).
---------------------------------------------------------------------------
In Phase 1, in evaluating and scoring the business strategy
criteria, the CDFI Fund is looking for a CDE to articulate,
with specificity, its strategy to use an allocation and to
describe a long track record serving low-income communities,
and of providing products and services like those that it
intends to provide through its investments. The CDE can earn
``priority points'' if it has a track record of five or more
years of experience providing capital and/or technical
assistance to disadvantaged businesses and communities. For the
community outcomes criteria, the CDFI Fund considers the extent
to which the CDE is working in particularly economically
distressed or otherwise underserved communities, shows that its
projected financing activities will generate demonstrable
community outcomes, and demonstrates meaningful engagement with
community stakeholders when vetting potential investments. In
general, the highest ranked applications provide specifics
concerning job creation, community development benefits, and a
track record of providing capital and/or technical assistance
to disadvantaged businesses and communities.
In Phase 2, management capacity is evaluated based on
management experience in low-income communities, asset and risk
management, and fulfilling government compliance requirements.
Capitalization is evaluated based on an applicant's track
record of raising capital, investor commitments (or a strategy
to secure such commitments), plan to pass along the benefits of
the credit to the underlying businesses, and willingness to
invest in amounts that exceed the minimum statutory
requirements. Applicants with prior year allocations are
evaluated on their effective use of prior-year allocations and
whether they have substantiated a need for additional
allocation authority.
Explanation of Provision
This provision extends the new markets tax credit for five
years, from 2021 through 2025, permitting up to $5 billion in
qualified equity investments for each calendar year. The
provision also extends for five years, through 2030, the
carryover period for unused new markets tax credits.
Effective Date
The provision applies to calendar years beginning after
December 31, 2020.
3. Work opportunity credit (sec. 113 of the Act and sec. 51 of the
Code)
Present Law
Background for the provision and a description of the work
opportunity credit that the provision extends may be found
above in the section describing section 143 of the Taxpayer
Certainty and Disaster Tax Relief Act of 2019 (Division Q of
Pub. L. No. 116-94) in Part Three of this document.
Expiration
The work opportunity tax credit is not available for
individuals who begin work for an employer after December 31,
2020.
Explanation of Provision
The provision extends for five years the work opportunity
tax credit, making it available with respect to individuals who
begin work for an employer before January 1, 2026.
Effective Date
The provision generally applies to individuals who begin
work for an employer after December 31, 2020.
4. Exclusion from gross income of discharge of qualified principal
residence indebtedness (sec. 114 of the Act and sec. 108 of the
Code)
Present Law
Background for the provision and a description of the
exclusion from gross income of discharge of qualified principal
residence indebtedness that the provision modifies may be found
above in the section describing section 101 of the Taxpayer
Certainty and Disaster Tax Relief Act of 2019 (Division Q of
Pub. L. No. 116-94) in Part Three of this document.
Explanation of Provision
The provision extends for five additional years the
exclusion from gross income for discharges of qualified
principal residence indebtedness. Thus, the exclusion for
qualified principal residence indebtedness is effective for
discharges of indebtedness before January 1, 2026 and for
discharges of indebtedness on or after January 1, 2026 if the
discharge is subject to a written arrangement entered into
prior to January 1, 2026.
The provision also reduces the maximum amount of
acquisition indebtedness that may be taken into account for
qualified principal residence indebtedness to $750,000.\1838\
---------------------------------------------------------------------------
\1838\ The limitation is $375,000 in the case of a married
individual filing a separate return. See sec. 114(b) of the Act.
---------------------------------------------------------------------------
Effective Date
The provision generally applies to discharges of
indebtedness after December 31, 2020.
5. Seven-year recovery period for motorsports entertainment complexes
(sec. 115 of the Act and sec. 168(i)(15) 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.\1839\ The period
for depreciation or amortization generally begins when the
asset is placed in service by the taxpayer.\1840\ 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
placed in service convention.\1841\ For some assets, the
recovery period for the asset is provided in section 168.\1842\
In other cases, the recovery period of an asset is generally
set forth in Revenue Procedure 87-56.\1843\
---------------------------------------------------------------------------
\1839\ 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 use 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.
\1840\ 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).
\1841\ Sec. 168.
\1842\ See sec. 168(e) and (g).
\1843\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785). Exercising authority granted by Congress, the
Secretary issued Rev. Proc. 87-56, 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,\1844\ 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.
---------------------------------------------------------------------------
\1844\ 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, 27.5 years for residential
rental property, and 15 years for qualified improvement
property.\1845\ The straight line depreciation method is
required for the aforementioned real property.\1846\ 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.\1847\ 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.\1848\
---------------------------------------------------------------------------
\1845\ Sec. 168(c) and (e).
\1846\ Sec. 168(b)(3).
\1847\ Sec. 168(d)(2) and (d)(4)(B).
\1848\ 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.\1849\ 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.\1850\ Racetrack facilities are excluded from the
definition of theme and amusement park facilities classified
under asset class 80.0.\1851\
---------------------------------------------------------------------------
\1849\ 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).
\1850\ 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, landscaping, etc.) 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.
\1851\ 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, 2021.\1852\ For this purpose, a motorsports
entertainment complex means a racing track facility which (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 which are open to the public for the price of
admission.\1853\
---------------------------------------------------------------------------
\1852\ Sec. 168(e)(3)(C)(ii) and (i)(15)(D).
\1853\ 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).\1854\ 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.
A motorsports entertainment complex does not include any
transportation equipment, administrative services assets,
warehouses, administrative buildings, hotels, or motels.\1855\
---------------------------------------------------------------------------
\1854\ Sec. 168(i)(15)(B).
\1855\ Sec. 168(i)(15)(C).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the seven-year recovery period for
motorsports entertainment complexes for five years to apply to
property placed in service before January 1, 2026.
Effective Date
The provision applies to property placed in service after
December 31, 2020.
6. Expensing rules for certain productions (sec. 116 of the Act and
sec. 181 of the Code)
Present Law
Under section 181, a taxpayer may elect \1856\ 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, 2021,\1857\ 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.\1858\ 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.\1859\
---------------------------------------------------------------------------
\1856\ See Treas. Reg. sec. 1.181-2 for rules on making (and
revoking) an election under section 181.
\1857\ 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.
\1858\ 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, e.g., 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.
\1859\ Sec. 181(a)(2)(B).
---------------------------------------------------------------------------
A section 181 election may only be made by an owner of the
production.\1860\ 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.\1861\ 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.\1862\ 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.\1863\
---------------------------------------------------------------------------
\1860\ Treas. Reg. sec. 1.181-1(a).
\1861\ Treas. Reg. sec. 1.181-1(a)(2)(i).
\1862\ 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).
\1863\ 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).
---------------------------------------------------------------------------
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.\1864\ Solely for purposes of this rule, the term
``compensation'' does not include participations and residuals
(as defined in section 167(g)(7)(B)).\1865\
---------------------------------------------------------------------------
\1864\ Sec. 181(d)(3)(A).
\1865\ 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).
---------------------------------------------------------------------------
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.\1866\ Qualified
productions do not include sexually explicit productions as
referenced by section 2257 of title 18 of the U.S. Code.\1867\
---------------------------------------------------------------------------
\1866\ Sec. 181(d)(2)(B).
\1867\ Sec. 181(d)(2)(C).
---------------------------------------------------------------------------
A qualified live theatrical production is defined as a live
staged production of a play (with or without music) which 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.\1868\ 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 which has an audience capacity of not
more than 6,500.\1869\ 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 productions that include or consist
of any performance of conduct described in section 2257(h)(1)
of title 18 of the U.S. Code.\1870\
---------------------------------------------------------------------------
\1868\ Sec. 181(e)(2)(A).
\1869\ Sec. 181(e)(2)(D).
\1870\ Sec. 181(e)(2)(E).
---------------------------------------------------------------------------
For purposes of recapture under section 1245, any deduction
allowed under section 181 is treated as if it were a deduction
allowable for amortization.\1871\ 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.\1872\
---------------------------------------------------------------------------
\1871\ Sec. 1245(a)(2)(C). For a discussion of the recapture rules
applicable to depreciation and amortization deductions, see Joint
Committee on Taxation, Tax Incentives for Domestic Manufacturing (JCX-
15-21), March 12, 2021, pp. 14-17. This document can be found on the
Joint Committee on Taxation website at www.jct.gov.
\1872\ See Treas. Reg. sec. 1.181-4.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the special treatment for qualified
film, television, and live theatrical productions under section
181 for five years to qualified productions commencing prior to
January 1, 2026.
Effective Date
The provision applies to productions commencing after
December 31, 2020.
7. Oil Spill Liability Trust Fund rate (sec. 117 of the Act and sec.
4611 of the Code)
Present Law
Background for the provision and a description of the Oil
Spill Liability Trust Fund financing rate that the provision
modifies may be found above in the section describing section
134 of the Taxpayer Certainty and Disaster Tax Relief Act of
2019 (Division Q of Pub. L. No. 116-94) in Part Three of this
document.
Explanation of Provision
The provision extends the Oil Spill Liability Trust Fund
financing rate for an additional five years, through December
31, 2025.
Effective Date
The provision applies on and after January 1, 2021.
8. Empowerment zone tax incentives (sec. 118 of the Act and secs. 1391,
1394, 1396, 1397A, and 1397B of the Code)
Present Law
The Omnibus Budget Reconciliation Act of 1993 (``OBRA 93'')
\1873\ authorized the designation of nine empowerment zones
(``Round I empowerment zones'') to provide tax incentives for
businesses to locate within certain targeted areas \1874\
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,\1875\
which were located in smaller rural areas and cities.\1876\
---------------------------------------------------------------------------
\1873\ Pub. L. No. 103-66.
\1874\ 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.
\1875\ Sec. 1391(b)(1).
\1876\ 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).
---------------------------------------------------------------------------
The Taxpayer Relief Act of 1997 \1877\ 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'') \1878\ 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.\1879\ 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 incentives through
December 31, 2009. Subsequent legislation, most recently the
Further Consolidated Appropriations Act, 2020, extended the
empowerment zone incentives through December 31, 2020.\1880\
---------------------------------------------------------------------------
\1877\ Pub. L. No. 10.
\1878\ 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.
\1879\ 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, MO/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 Uni.e., 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.
\1880\ Pub. L. No. 116-94, Div. Q, sec. 118 (2019); 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,
2020 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.
---------------------------------------------------------------------------
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, and deferral of capital gains tax on the
sale of qualified assets sold and replaced.
The following is a description of the empowerment zone tax
incentives as in effect through 2020.
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.\1881\
---------------------------------------------------------------------------
\1881\ 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.
---------------------------------------------------------------------------
The wage credit rate applies to qualifying wages paid
before January 1, 2018. 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.\1882\
---------------------------------------------------------------------------
\1882\ 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.
---------------------------------------------------------------------------
An employer's deduction otherwise allowed for wages paid is
reduced by the amount of wage credit claimed for that taxable
year.\1883\ Wages are not to be taken into account for purposes
of the wage credit if taken into account in determining the
employer's work opportunity tax credit under section 51.\1884\
In addition, the $15,000 cap is reduced by any wages taken into
account in computing the work opportunity tax credit.\1885\ The
wage credit may be used to offset up to 25 percent of the
employer's alternative minimum tax liability.\1886\
---------------------------------------------------------------------------
\1883\ Sec. 280C(a).
\1884\ Sec. 1396(c)(3)(A).
\1885\ Sec. 1396(c)(3)(B) .
\1886\ Sec. 38(c)(2). The corporate alternative minimum tax is
repealed for taxable years beginning after December 31, 2017. However,
the full amount of the minimum tax credit is allowed in taxable years
beginning before 2020. See sec. 53(e).
---------------------------------------------------------------------------
Increased section 179 expensing limitation
An enterprise zone business \1887\ is allowed up to an
additional $35,000 of section 179 expensing for qualified zone
property placed in service before January 1, 2021.\1888\ For
taxable years beginning in 2020, the total amount that may be
expensed is $1,075,000.\1889\ 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.\1890\
However, only 50 percent of the cost of qualified zone property
placed in service during the year by the taxpayer is taken into
account in determining whether the cost of qualifying property
placed in service during the taxable year exceeds the specified
dollar amount.\1891\
---------------------------------------------------------------------------
\1887\ 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).
\1888\ Sec. 1397A. Note that section 168(k) provides 100-percent
bonus depreciation for qualified property acquired and placed in
service after September 27, 2017 and before January 1, 2023. The 100-
percent allowance is phased down by 20 percent per calendar year for
qualified property placed in service after December 31, 2022. Qualified
property includes MACRS property with an applicable recovery period of
20 years or less, and therefore generally includes qualified zone
property other than buildings.
\1889\ $1,040,000 section 179(b)(1) limitation + $35,000 increase
for qualified zone property = $1,075,000 maximum dollar limitation. See
sec. 179(b)(1) and Section 3.26 of Rev. Proc. 2019-44.
\1890\ For taxable years beginning in 2020, the relevant dollar
amount is $2,590,000. Sec. 179(b)(2) and Section 3.26 of Rev. Proc.
2019-44.
\1891\ Sec. 1397A(a)(2). For example, assume that during 2020 a
calendar year taxpayer in an enterprise zone business purchased and
placed in service $5,500,000 of section 179 property that is qualified
zone property. The $1,040,000 section 179(b)(1) dollar amount for 2020
is increased to $1,075,000 (by the lesser of $35,000 or $5,500,000).
That amount is reduced by the excess section 179 property cost amount
of $160,000 ((50 percent $5,500,000) - $2,590,000)). The
taxpayer's expensing limitation is $915,000 ($1,075,000 - $160,000). 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.
---------------------------------------------------------------------------
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.\1892\ Special rules are provided in the case of property
that is substantially renovated by the taxpayer.\1893\
---------------------------------------------------------------------------
\1892\ 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(e)).
\1893\ Sec. 1397D(a)(2).
---------------------------------------------------------------------------
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.\1894\
---------------------------------------------------------------------------
\1894\ Sec. 1397C(b).
---------------------------------------------------------------------------
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 which 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 which is
used in such business is attributable to nonqualified financial
property.\1895\
---------------------------------------------------------------------------
\1895\ Sec. 1397C(c). For these purposes, the term ``employee''
includes the proprietor.
---------------------------------------------------------------------------
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.\1896\ 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. 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.
---------------------------------------------------------------------------
\1896\ 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).
---------------------------------------------------------------------------
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.\1897\ These bonds can be
used in areas designated enterprise communities as well as
areas designated 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.
---------------------------------------------------------------------------
\1897\ Sec. 1394.
---------------------------------------------------------------------------
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.\1898\
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 which 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.
---------------------------------------------------------------------------
\1898\ Pub. L. No. 114-113, Div. Q, sec. 171 (2015) (effective for
bonds issued after 2015).
---------------------------------------------------------------------------
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).\1899\
---------------------------------------------------------------------------
\1899\ Sec. 1394(b)(3).
---------------------------------------------------------------------------
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 so long as 35 percent of its employees are residents
of an empowerment zone, an 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.\1900\ 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.
---------------------------------------------------------------------------
\1900\ Sec. 1397B.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for five years, through December 31,
2025, the period for which the designation of an empowerment
zone is in effect, thus extending for five years two
empowerment zone tax incentives: the wage credit and tax-exempt
bond financing.
The provision terminates the two other empowerment zone tax
incentives: increased section 179 expensing for qualified zone
property under section 1397A and deferral of capital gains tax
on the sale of qualified assets replaced with other qualified
assets under section 1397B. Section 1397A will not apply to any
property placed in service in taxable years beginning after
December 31, 2020, and section 1397B will not apply to sales in
taxable years beginning after December 31, 2020.
The provision also provides that in the case of a
designation of an empowerment zone the nomination for which
included a termination date which is December 31, 2020,
termination shall not apply with respect to such designation if
the entity which made such nomination amends the nomination to
provide for a new termination date in such manner as the
Secretary may provide.
Effective Date
The provision applies to taxable years beginning after
December 31, 2020.
9. Employer credit for paid family and medical leave (sec. 119 of the
Act and sec. 45S of the Code)
Present Law
In general
The Family and Medical Leave Act of 1993, as amended (the
``FMLA''), generally requires employers to provide employees
with up to 26 weeks of leave under certain circumstances.\1901\
In general, FMLA does not require that the employer continue to
pay employees during such leave, although employers may choose
to pay for all or a portion of such leave. State and local
governments may provide, or State and local laws may require
employers to provide, employees with up to a certain amount of
paid leave for types of leave that may or may not fall under
the FMLA.
---------------------------------------------------------------------------
\1901\ Pub. L. No. 103-3 (Feb. 5, 1993); 29 U.S.C. sec. 2601, et
seq.
---------------------------------------------------------------------------
Employer credit for paid family and medical leave
For wages paid in taxable years beginning after December
31, 2017, and before January 1, 2021, eligible employers may
temporarily claim a general business credit equal to 12.5
percent of the amount of eligible wages (based on the normal
hourly wage rate) \1902\ paid to ``qualifying employees''
during any period in which such employees are on ``family and
medical leave'' if the rate of payment under the program is 50
percent of the wages normally paid to an employee for actual
services performed for the employer.\1903\ The credit is
increased by 0.25 percentage points (but not above 25 percent)
for each percentage point by which the rate of payment exceeds
50 percent. The maximum amount of family and medical leave that
may be taken into account with respect to any qualifying
employee for any taxable year is 12 weeks.
---------------------------------------------------------------------------
\1902\ Wages for this purpose are Federal Unemployment Tax Act
wages defined in section 3306(b), without regard to the dollar
limitation, but do not include amounts taken into account for purposes
of determining any other credit under subpart D of the Code. A
technical correction may be necessary to reflect that the wages with
respect to the credit are limited to the employee's normal hourly wage
rate and do not include additional amounts, such as a bonus, that could
be paid during the leave period.
\1903\ Pub. L. 115-97 (December 22, 2017), as amended by Pub. L.
116-94 (December 20, 2019); Notice 2018-71, 2018-41 I.R.B.548.
---------------------------------------------------------------------------
An ``eligible employer'' is one which has in place a
written policy that allows all qualifying full-time employees
not less than two weeks of annual paid family and medical
leave, and which allows all less-than-full-time qualifying
employees a commensurate amount of leave (on a pro rata basis)
compared to the leave provided to full-time employees. The
policy must also provide that the rate of payment under the
program is not less than 50 percent of the wages normally paid
to any such employee for services performed for the employer.
In addition, in order to be an eligible employer, the
employer is prohibited from certain practices or acts which are
also prohibited under the FMLA, regardless of whether the
employer is subject to the FMLA. Specifically, the employer
must provide paid family and medical leave in compliance with a
written policy that ensures that the employer will not
interfere with, restrain, or deny the exercise of or the
attempt to exercise, any right provided under the policy and
will not discharge or in any other manner discriminate against
any individual for opposing any practice prohibited by the
policy.
A ``qualifying employee'' means any individual who is an
employee under tax rules and principles and is defined in
section 3(e) of the Fair Labor Standards Act of 1938,\1904\ as
amended, who has been employed by the employer for one year or
more, and who for the preceding year, had compensation not in
excess of 60 percent of the compensation threshold for highly
compensated employees.\1905\ For 2020 and 2021, this 60 percent
amount is $78,000.
---------------------------------------------------------------------------
\1904\ Pub. L. No. 75-718 (June 25, 1938).
\1905\ Sec. 414(q)(1)(B) ($130,000 for 2020).
---------------------------------------------------------------------------
``Family and medical leave'' for purposes of section 45S is
generally defined as leave described under sections
102(a)(1)(A)-(E) or 102(a)(3) of the FMLA.\1906\ If an employer
provides paid leave as vacation leave, personal leave, or other
medical or sick leave \1907\ (unless the medical or sick leave
is specifically for one or more of the ``family and medical
leave'' purposes defined above), such paid leave would not be
considered to be family and medical leave. In addition, leave
paid for by a State or local government or required by State or
local law (including such leave required to be paid by the
employer) is not taken into account in determining the amount
of paid family and medical leave provided by the employer that
is eligible for the credit.
---------------------------------------------------------------------------
\1906\ FMLA section 102(a)(1) provides leave for FMLA purposes due
to (A) the birth of a son or daughter of the employee and in order to
care for such son or daughter; (B) the placement of a son or daughter
with the employee for adoption or foster care; (C) caring for the
spouse, or a son, daughter, or parent, of the employee, if such spouse,
son, daughter, or parent has a serious health condition; (D) a serious
health condition that makes the employee unable to perform the
functions of the employee's position; (E) any qualifying exigency (as
the Secretary of Labor shall, by regulation, determine) arising out of
the fact that the spouse, or a son, daughter, or parent of the employee
is on covered active duty (or has been notified of an impending call or
order to covered active duty) in the Armed Forces. In addition, FMLA
section 102(a)(3) provides leave for FMLA purposes due to the need of
an employee who is a spouse, son, daughter, parent, or next-of-kin of
an eligible service member to care for such service member.
\1907\ These terms mean these types of leave within the meaning of
FMLA section 102(d)(2).
---------------------------------------------------------------------------
The Secretary will make determinations as to whether an
employer or an employee satisfies the applicable requirements
for an eligible employer or qualifying employee, based on
information provided by the employer that the Secretary
determines to be necessary or appropriate.
Employer credit and paid sick and family leave related to COVID-19
The Families First Coronavirus Response Act (``FFCRA'')
\1908\ required certain employers with fewer than 500 employees
to provide paid sick and expanded family and medical leave to
employees unable to work or telework for specified reasons
related to COVID-19. Employers that paid sick or family leave
wages could receive a corresponding payroll tax credit. The
paid sick leave requirements in the Emergency Paid Sick Leave
Act,\1909\ and the expanded family and medical leave
requirements in the Emergency Family and Medical Leave
Expansion Act,\1910\ expired on December 31, 2020, but the
credits were extended to March 31, 2021.\1911\
---------------------------------------------------------------------------
\1908\ Pub. L. No. 116-127 (March 18, 2020).
\1909\ Division E, FFCRA, Pub. L. No. 116-127.
\1910\ Division C, FFCRA, Pub. L. No. 116-127.
\1911\ Pub. L. No. 116-260 (December 27, 2020).
---------------------------------------------------------------------------
Any qualified sick leave wages or qualified family leave
wages taken into account for the payroll tax credit on such
wages are not taken into account for purposes of determining
the employer credit for certain paid family and medical leave
under section 45S.\1912\ Thus, the employer may not claim a
credit under section 45S with respect to the qualified sick
leave or family leave wages paid, but may be able to take a
credit under section 45S with respect to any additional wages
paid, provided the requirements of section 45S are met with
respect to the additional wages.
---------------------------------------------------------------------------
\1912\ Pub. L. No. 116-127 (March 18, 2020).
---------------------------------------------------------------------------
Explanation of Provision
The provision extended the employer credit for paid family
and medical leave so that it will expire on December 31, 2025
rather than December 31, 2021.
Effective Date
The provision is effective for all wages paid in taxable
years beginning after December 31, 2020.
10. Exclusion for certain employer payments of student loans (sec. 120
of the Act and secs. 127, 3121, 3306, and 3401 of the Code)
Present Law
Employer-provided educational assistance programs
Under section 127, an employee may exclude from gross
income for income tax purposes \1913\ and the employer may
exclude from wages for employment tax purposes \1914\ up to
$5,250 annually of educational assistance provided by the
employer to the employee. For the exclusion to apply, certain
requirements must be satisfied: (1) the educational assistance
must be provided pursuant to a separate written plan of the
employer; (2) employers must provide reasonable notification of
the terms and availability of the program to eligible
employees; (3) the employer's educational assistance program
must not discriminate in favor of highly compensated employees;
and (4) no more than five percent of the amounts paid or
incurred by the employer during the year for educational
assistance under a qualified educational assistance program may
be provided for the class of individuals consisting of (i) more
than five-percent owners of the employer and (ii) the spouses
or dependents of such owners.
---------------------------------------------------------------------------
\1913\ See also sec. 3401(a)(18).
\1914\ Secs. 3121(a)(18) and 3306(b)(13).
---------------------------------------------------------------------------
For purposes of the exclusion, ``educational assistance''
means the payment by an employer of expenses incurred by or on
behalf of the employee for education of the employee including,
but not limited to, tuition, fees and similar payments, books,
supplies, and equipment. Educational assistance also includes
the provision by the employer of courses of instruction for the
employee, including books, supplies, and equipment. Educational
assistance does not include payment for or the provision of (1)
tools or supplies that may be retained by the employee after
completion of a course, (2) meals, lodging, or transportation,
or (3) any education involving sports, games, or hobbies. The
education need not be job-related or part of a degree
program.\1915\ Educational assistance qualifies for the
exclusion only if the employer does not give the employee a
choice between educational assistance and other remuneration
includible in the employee's income.
---------------------------------------------------------------------------
\1915\ Treas. Reg. sec. 1.127-2(c)(4).
---------------------------------------------------------------------------
Educational assistance also includes certain payments of
principal or interest made by an employer on a qualified
education loan incurred by an employee of the employer,
discussed more below.
The exclusion for employer-provided educational assistance
applies only with respect to education provided to the
employee. The exclusion does not apply, for example, to
assistance provided directly or indirectly for the education of
the spouse or a child of the employee.
The employer's costs for providing such educational
assistance are generally deductible as a trade or business
expense.\1916\
---------------------------------------------------------------------------
\1916\ See sec. 162.
---------------------------------------------------------------------------
In the absence of the specific exclusion for employer-
provided educational assistance under section 127, employer-
provided educational assistance is excludable from gross income
for income tax purposes \1917\ and wages for employment tax
purposes \1918\ only if the education expenses qualify as a
working condition fringe benefit under section 132(d) or as a
qualified tuition reduction under section 117(d). In general,
education qualifies as a working condition fringe benefit if
the employee could have deducted the education expenses under
section 162 if the employee paid for the education.\1919\ In
general, education expenses are deductible by an individual
under section 162 if the education (1) maintains or improves a
skill required in a trade or business currently engaged in by
the taxpayer, or (2) meets the express requirements of the
taxpayer's employer, applicable law, or regulations imposed as
a condition of continued employment.\1920\ However, education
expenses are generally not deductible if they relate to certain
minimum educational requirements or to education or training
that enables a taxpayer to begin working in a new trade or
business.\1921\
---------------------------------------------------------------------------
\1917\ See also sec. 3401(a)(19).
\1918\ Secs. 3121(a)(20) and 3306(b)(16).
\1919\ Sec. 132(d).
\1920\ Treas. Reg. sec. 1.162-5.
\1921\ For taxable years beginning before January 1, 2026, trade or
business expenses relating to the trade or business of the performance
of services by the taxpayer as an employee are disallowed miscellaneous
itemized deductions. Secs. 62(a)(1), 67(g), and 162(a).
---------------------------------------------------------------------------
Section 117(d) provides an exclusion from gross income and
wages for qualified tuition reductions for certain education
provided to employees of certain educational organizations, and
to the spouses and dependents of such employees.
Deduction for student loan interest
Under section 221, certain individual taxpayers may claim
an above-the-line deduction for interest paid on student
loans.\1922\ Only interest paid on a ``qualified education
loan'' is eligible for the deduction.
---------------------------------------------------------------------------
\1922\ Sec. 62(a)(17), 221; see also sec. 163(h)(2)(F).
---------------------------------------------------------------------------
A qualified education loan generally is defined as any
indebtedness incurred to pay for the costs of attendance at an
eligible educational institution on at least a half-time
basis.\1923\ The payments may be for the attendance of the
taxpayer, the taxpayer's spouse, or any dependent of the
taxpayer as of the time the indebtedness was incurred. Eligible
educational institutions are (1) post-secondary educational
institutions and certain vocational schools defined by
reference to section 481 of the Higher Education Act of 1965,
and (2) institutions conducting internship or residency
programs leading to a degree or certificate from an institution
of higher education, a hospital, or a health care facility
conducting postgraduate training.\1924\ Additionally, to
qualify as an eligible educational institution, an institution
must be eligible to participate in Department of Education
student aid programs.
---------------------------------------------------------------------------
\1923\ Secs. 221(d)(1)-(3); see also sec. 25A(b)(3).
\1924\ Secs. 25A(f)(2) and 221(d)(2).
---------------------------------------------------------------------------
The maximum allowable deduction per year is $2,500. The
deduction is phased out and reduced to zero at higher-income
levels.\1925\ Dependents are ineligible to claim the deduction.
---------------------------------------------------------------------------
\1925\ For 2020, the phaseout range is for modified adjusted gross
income between $140,000 to $170,000 for married taxpayers filing a
joint return and between $70,000 and $85,000 for other taxpayers. Sec.
221(b)(2)(B); Rev. Proc. 2019-44, 2019-47 I.R.B. 1093.
---------------------------------------------------------------------------
Employer payment of employee student loans
For payments made before January 1, 2021, the term
``educational assistance'' under section 127 includes payments
of principal or interest made by an employer on a qualified
education loan incurred by an employee of the employer.\1926\
Thus, the employee may exclude these payments from gross income
for income tax purposes and the employer may exclude these
payments from wages for employment tax purposes. The term
``qualified education loan'' is defined in section 221(d)(1).
The loan must be incurred for the education of the employee.
The exclusion applies to payments made to the employee or a
lender.
---------------------------------------------------------------------------
\1926\ Sec. 127(c)(1)(B)
---------------------------------------------------------------------------
The employee may not claim a deduction under section 221
for interest paid on student loans on an amount for which an
exclusion is allowable under the provision.\1927\
---------------------------------------------------------------------------
\1927\ Sec. 221(e)(1).
---------------------------------------------------------------------------
These amounts are generally deductible by the employer as a
trade or business expense.\1928\
---------------------------------------------------------------------------
\1928\ See sec. 162.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the exclusion of payments of
principal or interest made by an employer on a qualified
education loan incurred by an employee of the employer to
payments made before January 1, 2026.
Effective Date
The provision is effective for payments made after December
31, 2020.
11. Credit for carbon oxide sequestration (sec. 121 of the Act and sec.
45Q of the Code)
Present Law
In general
A credit is available for the capture and sequestration of
carbon oxide and carbon dioxide. Significant changes to the
credit rate and structure were made in 2018 by the Bipartisan
Budget Act of 2018 (``BBA'').\1929\ These changes were
effective for taxable years beginning after December 31, 2017.
This description of present law describes the rules in effect
after the effective date of the BBA.
---------------------------------------------------------------------------
\1929\ Pub. L. 115-123, sec. 41119.
---------------------------------------------------------------------------
Carbon dioxide captured using equipment placed in service before
February 9, 2018 (Pre-BBA)
For carbon dioxide captured using equipment placed in
service before February 9, 2018, 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.\1930\
---------------------------------------------------------------------------
\1930\ Sec. 45Q(a)(2).
---------------------------------------------------------------------------
For carbon dioxide captured in taxable years beginning
after December 31, 2017, using equipment placed in service
before February 9, 2018, a credit of $10 per metric ton is also
available for carbon dioxide that is ``utilized'' by a taxpayer
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 which 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.\1931\
---------------------------------------------------------------------------
\1931\ Sec. 45Q(f)(5).
---------------------------------------------------------------------------
Finally, for carbon dioxide captured using equipment placed
in service before February 9, 2018, 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 or utilized by a taxpayer in a prescribed
manner.
All three credit amounts are adjusted for inflation using
2008 as the base year. For 2020, as adjusted for inflation, the
$10 credit is increased to $11.91 per metric ton and the $20
credit is increased to $23.82 per metric ton of carbon
dioxide.\1932\
---------------------------------------------------------------------------
\1932\ Notice 2020-40, 2020-25 I.R.B. 953, June 15, 2020.
---------------------------------------------------------------------------
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.\1933\
---------------------------------------------------------------------------
\1933\ Final Treasury regulations for section 45Q were published in
the Federal Register on January 15, 2021. T.D. 9944, 86 Fed. Reg. 4728,
January 15, 2021.
---------------------------------------------------------------------------
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.
In general, a qualified facility is any industrial facility
or direct air capture facility located in the United States or
a possession of the United States the construction of which
begins before January 1, 2024, and the construction of carbon
capture equipment begins before such date or is integrated into
the original planning and design of the facility.
Qualified facilities also must capture a minimum amount of
carbon oxide. For electricity generation facilities that emit
500,000 metric tons or more of carbon oxide in a taxable, the
facility must capture at least 500,000 metric tons of carbon
oxide. For facilities that emit less than 500,000 metric tons
of carbon oxide or non-power facilities that emit at least
500,000 metric tons of carbon oxide, the facility must
generally capture at least 100,000 metric tons of carbon oxide
per taxable year. However, where the carbon oxide is captured
at a facility that emits less than 500,000 metric tons of
carbon oxide and is being utilized for commercial purposes,
this minimum amount is reduced to 25,000 metric tons of carbon
oxide. Direct air capture facilities (described below) must
also capture at least 100,000 metric tons of carbon oxide per
taxable year to be qualified facilities.
Credits are generally attributable to the person that
captures and physically or contractually ensures the disposal,
utilization, or use as a tertiary injectant, of the qualified
carbon dioxide. Such persons may elect to transfer the credit
to the taxpayer that disposes of, utilizes, or uses (as a
tertiary injectant) the qualified carbon dioxide.
Credits are subject to recapture with respect to any
qualified carbon dioxide that ceases to be captured, disposed
of, or used as a tertiary injectant in a manner consistent with
the credit rules.\1934\
---------------------------------------------------------------------------
\1934\ Sec. 45Q(f)(4).
---------------------------------------------------------------------------
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 taken into
account for purposes of the credit. As of May 11, 2018, the
credit had been claimed for 72,087,903 tons of qualified carbon
dioxide.\1935\
---------------------------------------------------------------------------
\1935\ Notice 2020-40, 2020-25 I.R.B. 954, June 15, 2020.
---------------------------------------------------------------------------
Carbon oxide captured using equipment placed in service on or after
February 9, 2018 (Post-BBA)
For carbon captured using equipment placed in service on or
after February 9, 2018, the definition of qualified carbon is
expanded to include all carbon oxides, not just carbon dioxide.
In addition, qualified carbon is no longer limited to carbon
capture from industrial sources, but includes carbon captured
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 oxide utilization,
the credit rate for carbon oxide captured using equipment
placed in service on or after February 9, 2018, is $12.83 per
metric ton in 2017, increasing linearly each calendar year to
$35 per metric ton by December 31, 2026, and adjusted for
inflation thereafter. For qualified carbon oxide disposed of in
secure geological storage, the credit rate is $22.66 per metric
ton in 2017, increasing linearly each calendar year to $50 per
metric ton by December 31, 2026, and adjusted for inflation
thereafter. For 2020, the credit rates are $20.22 and $31.77
respectively.\1936\
---------------------------------------------------------------------------
\1936\ Treas. Reg. sec. 1.45Q-1(d).
---------------------------------------------------------------------------
Carbon oxide captured using equipment placed in service on
or after February 9, 2018, is not subject to the 75 million
metric ton cap applicable to the pre-February 9, 2018 credit
rules. 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.\1937\ In general, a qualified facility has the
same definition as a pre-BBA qualified facility, except that it
is placed in service on or after February 9, 2018.
---------------------------------------------------------------------------
\1937\ Sec. 45Q(d).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends for two years, through calendar year
2025, the period in which the construction of an otherwise
qualified carbon capture facility must begin.
Effective Date
The provision is effective on the date of enactment
(December 27, 2020).
Subtitle C--Extension of Certain Other Provisions
1. Credit for electricity produced from certain renewable resources
(secs. 131 and 204 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'').\1938\ 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.
---------------------------------------------------------------------------
\1938\ 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
----------------------------------------------------------------------------------------------------------------
Credit amount for 2020
Eligible electricity production activity \1\ (cents per kilowatt- Expiration \2\
(sec. 45) hour)
----------------------------------------------------------------------------------------------------------------
Wind....................................... 2.5 December 31, 2020
Closed-loop biomass........................ 2.5 December 31, 2020
Open-loop biomass (including agricultural 1.3 December 31, 2020
livestock waste nutrient facilities)
Geothermal................................. 2.5 December 31, 2020
Municipal solid waste (including landfill 1.3 December 31, 2020
gas facilities and trash combustion
facilities)
Qualified hydropower....................... 1.3 December 31, 2020
Marine and hydrokinetic.................... 1.3 December 31, 2020
----------------------------------------------------------------------------------------------------------------
\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 years 2018 and 2020, and by 60 percent for facilities the construction of which begins in
calendar year 2019. Inflation adjustment calculations may be found in IRS Notice 2020-38, Internal Revenue
Bulletin 2020-23, p. 903, June 1, 2020.
\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 which 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 years 2018 and 2020, 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
In general, for renewable power facilities, the provisions
extend for one year, through December 31, 2021, the beginning
of construction deadline for the renewable electricity
production credit and the election to claim the energy credit
in lieu of the electricity production credit.\1939\ For wind
facilities the construction of which begins in calendar year
2021, the credit is reduced by 40 percent.
---------------------------------------------------------------------------
\1939\ See sec. 131 of the Act.
---------------------------------------------------------------------------
The provisions create a special rule for property used in
qualified offshore wind facilities.\1940\ Qualified offshore
wind facilities are qualified wind facilities (within the
meaning of the section 45 renewable electricity production
credit, without regard to any sunset date) that are located in
the inland navigable waters of the United States or in the
coastal waters of the United States, and include property owned
by the taxpayer necessary to condition electricity for use on
the grid such as subsea cables and voltage transformers. For
this purpose, coastal waters include the waters of the Great
Lakes, the territorial seas, the exclusive economic zone, and
the outer continental shelf, but only if such waters are
treated as within the United States or a possession of the
United States for purposes of section 45(e)(1).\1941\ Such
property the construction of which begins before January 1,
2026, is eligible for a 30 percent investment credit and is not
subject to the phasedown applicable to other wind facilities.
---------------------------------------------------------------------------
\1940\ See sec. 204 of the Act.
\1941\ A technical correction may be necessary to clarify the
meaning of this term.
---------------------------------------------------------------------------
Effective Date
The provision extending the renewable electricity
production credit takes effect on January 1, 2021. The
provision creating a special rule for qualified offshore wind
facility property is effective for periods after December 31,
2016, under rules similar to the rules of section 48(m) of the
Code (as in effect on the day before the date of the enactment
of the Revenue Reconciliation Act of 1990).
2. Modification of energy investment credit (secs. 132 and 203 of the
Act and sec. 48 of the Code)
Present Law
In general
A permanent nonrefundable 10-percent business energy credit
\1942\ is allowed for the cost of new property that is
equipment that either (1) uses solar energy to generate
electricity, to heat or cool (or provide hot water for use in)
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 (but not including) the electric
transmission stage. Property used to generate energy for the
purposes of heating a swimming pool is not eligible solar
energy property.
---------------------------------------------------------------------------
\1942\ Sec. 48.
---------------------------------------------------------------------------
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 the construction of which begins
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.\1943\ An unused general business credit generally may
be carried back one year and carried forward 20 years.\1944\
The taxpayer's basis in the property is reduced by one-half of
the amount of the credit claimed.\1945\ 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.
---------------------------------------------------------------------------
\1943\ Sec. 38(b)(1)
\1944\ Sec. 39.
\1945\ Sec. 50(c)(3).
---------------------------------------------------------------------------
Increased credit rate for solar energy property
For property the construction of which begins before
January 1, 2022, 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 (subject to a phase-down rule) for property the
construction of which begins prior to January 1, 2022. Under
the phase-down rule, the credit rate is reduced to 26 percent
for property the construction of which begins in calendar year
2020 and to 22 percent for property the construction of which
begins in calendar year 2021. Eligible property must be placed
in service before January 1, 2024.
Fuel cells and microturbines
The energy credit applies to qualified fuel cell power
plants, but only for the construction of which begins prior to
January 1, 2022. The credit rate is 30 percent and is subject
to the same phase-down rule as fiber optic solar property
(described above).
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, 2022. 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
nameplate capacity of less than 2,000 kilowatts.
Geothermal heat pump property
The energy credit applies to qualified geothermal heat pump
property the construction of which begins prior to January 1,
2022. 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 the construction of which begins prior to January 1,
2022. The credit rate is 30 percent and is subject to the same
phase-down rule as fiber optic solar property (described
above). 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 the construction of which begins prior to
January 1, 2022. 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 (or a combination thereof), 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 five-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, 2021, 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, 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 years 2018 and 2020,
and by 60 percent for facilities the construction of which
begins in calendar year 2019.\1946\
---------------------------------------------------------------------------
\1946\ See section 131 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 provisions generally extend the energy credit for 2
years, through December 31, 2023.\1947\
---------------------------------------------------------------------------
\1947\ See section 132 of the Act.
---------------------------------------------------------------------------
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,
2024, subject to a credit rate phasedown. For property the
construction of which begins in calendar years 2020, 2021, and
2022, and that is placed in service by the end of calendar year
2025, the credit rate is 26 percent. For property the
construction of which begins in calendar year 2023 and that is
placed in service by the end of calendar year 2025, the credit
rate is 22 percent. No credit is available for property the
construction of which begins after calendar year 2023 or that
does not meet the 2025 placed-in-service deadline.
For solar energy property, the provisions extends the
enhanced credit rate through December 31, 2023, subject to a
credit rate phasedown. For property the construction of which
begins in calendar years 2020, 2021, and 2022, and that is
placed in service by the end of calendar year 2025, the credit
rate is 26 percent. For property the construction of which
begins in calendar year 2023 and that is placed in service by
the end of calendar year 2025, the credit rate is 22 percent.
For property the construction of which begins after calendar
year 2023 or that began in any year before calendar year 2024
but which is not placed in service by the end of calendar year
2025, no enhanced credit rate is available, but taxpayers may
still claim the permanent 10 percent credit.
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, 2024.
The provisions also add waste energy recovery property to
the energy credit.\1948\ Waste energy recovery property is
property that generates electricity solely from heat from
buildings or equipment if the primary purpose of such building
or equipment is not the generation of electricity. Qualified
property does not include any property which has a capacity in
excess of 50 megawatts. In the case of property that qualifies
as both waste energy recovery property and CHP system property,
no double benefit is permitted but a taxpayer may elect to
claim the higher credit. The credit rate for waste energy
recovery property is initially 30 percent, subject to the same
phase-down and sunset rules as fiber optic solar property, fuel
cell property, and small wind energy property.
---------------------------------------------------------------------------
\1948\ See section 203 of the Act.
---------------------------------------------------------------------------
Effective Date
The provision extending the energy credit is effective
beginning January 1, 2020. The provision adding waste energy
recovery property to the energy credit is effect for periods
after December 31, 2020, 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.
3. Treatment of mortgage insurance premiums as qualified residence
interest (sec. 133 of the Act and sec. 163(h) of the Code)
Present Law
Background for the provision and a description of the
treatment of mortgage insurance premiums as qualified residence
interest that the provision modifies may be found above in the
section describing section 102 of the Taxpayer Certainty and
Disaster Tax Relief Act of 2019 (Division Q of Pub. L. No. 116-
94) in Part Three of this document.
Explanation of Provision
The provision extends the deduction for qualified 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 2021 (and not properly
allocable to any period after December 31, 2021).
Effective Date
The provision applies to amounts paid or accrued after
December 31, 2020.
4. Credit for health insurance costs of eligible individuals (sec. 134
of the Act and sec. 35 of the Code)
Present Law
Background for the provision and a description of the
health coverage tax credit that the provision extends may be
found above in the section describing section 146 of the
Taxpayer Certainty and Disaster Tax Relief Act of 2019
(Division Q of Pub. L. No. 116-94) in Part Three of this
document.
Explanation of Provision
The provision extends the availability of the health
coverage tax credit for 12 months by amending the definition of
eligible coverage month to include months beginning before
January 1, 2022.
Effective Date
The provision is effective for months beginning after
December 31, 2020.
5. Indian employment credit (sec. 135 of the Act and sec. 45A of the
Code)
Present Law
Background for the provision and a description of the
Indian employment credit that the provision modifies may be
found above in the section describing section 111 of the
Taxpayer Certainty and Disaster Tax Relief Act of 2019
(Division Q of Pub. L. No. 116-94) in Part Three of this
document.\1949\
---------------------------------------------------------------------------
\1949\ 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 $50,000 for 2019). See
Instructions for Form 8845, Indian Employment Credit (Rev. January
2020).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the Indian employment credit for one
year (through taxable years beginning on or before December 31,
2021).
Effective Date
The provision applies to taxable years beginning after
December 31, 2020.
6. Mine rescue team training credit (sec. 136 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 (the ``mine rescue
team training credit'').\1950\
---------------------------------------------------------------------------
\1950\ Sec. 45N(a).
---------------------------------------------------------------------------
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.\1951\
---------------------------------------------------------------------------
\1951\ Sec. 45N(b).
---------------------------------------------------------------------------
An eligible employer is any taxpayer which employs
individuals as miners in underground mines in the United
States.\1952\ The term ``wages'' has the meaning given to such
term by section 3306(b) \1953\ (determined without regard to
any dollar limitation contained in that section).\1954\
---------------------------------------------------------------------------
\1952\ Sec. 45N(c).
\1953\ Section 3306(b) defines wages for purposes of Federal
Unemployment Tax.
\1954\ Sec. 45N(d).
---------------------------------------------------------------------------
No deduction is allowed for the portion of the expenses
otherwise allowable as a deduction for the taxable year that is
equal to the amount of the mine rescue team training credit
determined for the taxable year.\1955\ The credit does not
apply to taxable years beginning after December 31, 2020.\1956\
Additionally, the credit is not allowable for purposes of
computing the alternative minimum tax.\1957\
---------------------------------------------------------------------------
\1955\ Sec. 280C(e).
\1956\ Sec. 45N(e).
\1957\ Sec. 38(c). Note that the corporate alternative minimum tax
was repealed for taxable years beginning after December 31, 2017. See
Pub. L. No. 115-97, sec. 12001, December 22, 2017.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the credit for one year through
taxable years beginning before January 1, 2022.
Effective Date
The provision applies to taxable years beginning after
December 31, 2020.
7. Classification of certain race horses as three-year property (sec.
137 of the Act and sec. 168(e)(3)(A) 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.\1958\ The period
for depreciation or amortization generally begins when the
asset is placed in service by the taxpayer.\1959\ 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
placed in service convention.\1960\ For some assets, the
recovery period for the asset is provided in section 168.\1961\
In other cases, the recovery period of an asset is generally
set forth in Revenue Procedure 87-56.\1962\
---------------------------------------------------------------------------
\1958\ 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.(0A.
\1959\ 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).
\1960\ Sec. 168.
\1961\ See sec. 168(e) and (g).
\1962\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785). Exercising authority granted by Congress, the
Secretary issued Rev. Proc. 87-56, 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,\1963\ 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.
---------------------------------------------------------------------------
\1963\ 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,
2021, and (2) placed in service after December 31, 2020, and
more than two years old at such time it is placed in service by
the purchaser.\1964\ A seven-year recovery period applies to
any race horse that is placed in service after December 31,
2020, and that is two years old or younger at the time it is
placed in service.\1965\
---------------------------------------------------------------------------
\1964\ 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.
\1965\ 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, 2022. 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, 2021.
Effective Date
The provision applies to property placed in service after
December 31, 2020.
8. Accelerated depreciation for business property on Indian
reservations (sec. 138 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:
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 \1966\
---------------------------------------------------------------------------
\1966\ Section 168(j)(2) does not provide shorter recovery periods
for water utility property, residential rental property, or railroad
grading and tunnel bores.
---------------------------------------------------------------------------
``Qualified Indian reservation property'' eligible for
accelerated depreciation includes property described in the
table above which 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;
\1967\ and (4) is not property placed in service for purposes
of conducting or housing certain gaming activities.\1968\
---------------------------------------------------------------------------
\1967\ For these purposes, the term ``related persons'' is defined
in section 465(b)(3)(C).
\1968\ 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).\1969\
---------------------------------------------------------------------------
\1969\ 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)) \1970\ or section 4(10) of the Indian Child Welfare
Act of 1978 (25 U.S.C. 1903(10)).\1971\ The definition in
section 3(d) of the Indian Financing Act of 1974 includes, in
addition to current Indian reservations and certain other
lands, ``former Indian reservations in Oklahoma.'' For purposes
of section 168(j), 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).\1972\
---------------------------------------------------------------------------
\1970\ Pub. L. No. 93-262.
\1971\ Pub. L. No. 95-608.
\1972\ Sec. 168(j)(6). See also IRS Notice 98-45, 1998-2 C.B. 257
(defining ``former Indian reservations in Oklahoma'' for purposes of
section 168(j)(6)); and the IRS ``Geographic Boundaries Determined for
Tax Incentives Associated with `Former Indian Reservations in
Oklahoma','' available at https://www.irs.gov/newsroom/geographic-
boundaries-determined-for-tax-incentives-associated-with-former-indian-
reservations-in-oklahoma#main-content.
---------------------------------------------------------------------------
The depreciation deduction allowed for regular tax purposes
is also allowed for purposes of the alternative minimum
tax.\1973\
---------------------------------------------------------------------------
\1973\ Sec. 168(j)(3). Note that the corporate alternative minimum
tax was repealed for taxable years beginning after December 31, 2017.
See Pub. L. No. 115-97, sec. 12001, December 22, 2017.
---------------------------------------------------------------------------
The accelerated depreciation for qualified Indian
reservation property is available with respect to property
placed in service before January 1, 2021.\1974\ A taxpayer may
annually make an irrevocable election out of section 168(j) on
a class-by-class basis.\1975\
---------------------------------------------------------------------------
\1974\ Sec. 168(j)(9).
\1975\ 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, 2022.
Effective Date
The provision applies to property placed in service after
December 31, 2020.
9. American Samoa economic development credit (sec. 139 of the Act)
Present Law
Beginning in 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.\1976\
---------------------------------------------------------------------------
\1976\ This credit was previously extended during the 116th
Congress by section 119 of the Taxpayer Certain and Disaster Tax Relief
Act of 2019 (Division Q of the ``Further Consolidated Appropriations
Act of 2020,'' Pub. L. No. 116-94), as described above in Part Three of
this document.
---------------------------------------------------------------------------
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 \1977\ in an election in effect for its
taxable year that included October 13, 1995, or that acquired
all of the assets of a trade or business that met the foregoing
conditions. 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.
---------------------------------------------------------------------------
\1977\ 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.
---------------------------------------------------------------------------
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 rule denying a credit or deduction for any possessions
tax or foreign tax paid with respect to taxable income that is
taken into account in computing the credit under section 936
\1978\ does not apply with respect to the credit allowed by the
provision.
---------------------------------------------------------------------------
\1978\ See sec. 936(c).
---------------------------------------------------------------------------
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 15
taxable years of the corporation which begin after December 31,
2005, and before January 1, 2021. For any other corporation,
the credit applies to the first nine taxable years of that
corporation which begin after December 31, 2011, and before
January 1, 2021
Explanation of Provision
The provision extends the credit for one year 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 16 taxable years of the
corporation which begin after December 31, 2005, and before
January 1, 2022, and (b) in the case of any other corporation,
to the first ten taxable years of the corporation which begin
after December 31, 2011 and before January 1, 2022.
For purposes of this credit, the Code is applied without
regard to the repeal of sections 30A and 936 in 2018,\1979\ or
the repeal of section 199 in 2017.\1980\
---------------------------------------------------------------------------
\1979\ See The Consolidated Appropriations Act 2018, Pub. L. No.
115-141, Division U, Title IV, at sec. 401(d)(1)(C) (the repeal of
section 936) and sec. 401(d)(1)(D)(viii)(I) (definition of intangible
property added to section 367(d)) (March 23, 2018).
\1980\ Pub. L. 115-97, section 13305(a).
---------------------------------------------------------------------------
Effective Date
The provision is effective for taxable years beginning
after December 31, 2017.
10. Second generation biofuel producer credit (sec. 140 of the Act and
sec. 40 of the Code)
Present Law
Background for the provision and a description of the
second generation biofuel producer credit that the provision
modifies may be found above in the section describing section
122 of the Taxpayer Certainty and Disaster Tax Relief Act of
2019 (Division Q of Pub. L. No. 116-94) in Part Three of this
document.
Explanation of Provision
The provision extends the credit for an additional year,
through December 31, 2021.
Effective Date
The provision applies to qualified second generation
biofuel production after December 31, 2020.
11. Nonbusiness energy property (sec. 141 of the Act and sec. 25C of
the Code)
Present Law
Background for the provision and a description of the
nonbusiness energy property credit that the provision extends
may be found above in the section describing section 123 of the
Taxpayer Certainty and Disaster Relief Act of 2019 (Division Q
of Pub. L. No. 116-94) in Part Three of this document.
Explanation of Provision
The provision extends the nonbusiness energy property
credit for one year, through December 31, 2021.\1981\
---------------------------------------------------------------------------
\1981\ Note that section 148 of the Act eliminates the credit for
biomass fueled stoves from the nonbusiness energy property credit and
replaces it with a new residential energy efficient property credit
under section 25D of the Code.
---------------------------------------------------------------------------
Effective Date
The provision is effective for property placed in service
after December 31, 2020.
12. Qualified fuel cell motor vehicles (sec. 142 of the Act and sec.
30B of the Code)
Present Law
A credit is available through 2020 for vehicles propelled
by chemically combining oxygen with hydrogen and creating
electricity (``fuel cell vehicles'').\1982\ 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.
---------------------------------------------------------------------------
\1982\ Sec. 30B.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the credit for fuel cell vehicles for
one year, through December 31, 2021.
Effective Date
The provision applies to property purchased after December
31, 2020.
13. Alternative fuel refueling property credit (sec. 143 of the Act and
sec. 30C of the Code)
Present Law
Background for the provision and a description of the
alternative fuel refueling property credit that the provision
extends may be found above in the section describing section
125 of the Taxpayer Certainty and Disaster Relief Act of 2019
(Division Q of Pub. L. No. 116-94) in Part Three of this
document.
Explanation of Provision
The provision extends for one year the 30-percent credit
for alternative fuel refueling property, through December 31,
2021.
Effective Date
The provision applies to property placed in service after
December 31, 2020.
14. Two-wheeled plug-in electric vehicle credit (sec. 144 of the Act
and sec. 30D of the Code)
Present Law
In general, for vehicles acquired before 2021, a 10-percent
credit is available for qualified two-wheeled plug-in electric
vehicles (``qualified electric motorcycles'').\1983\ Qualified
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 qualified electric motorcycle is $2,500.
---------------------------------------------------------------------------
\1983\ Sec. 30D(g). The credit lapsed and was not available for
vehicles placed in service in calendar year 2014. Before 2014, the
credit was also available for qualified vehicles having three wheels.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the qualified electric motorcycles
credit for one year, through December 31, 2021.
Effective Date
The provision applies to vehicles acquired after December
31, 2020.
15. Production credit for Indian coal facilities (sec. 145 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 Indian coal facility during the
15-year period beginning January 1, 2006, and ending December
31, 2020.\1984\ 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, $2.570 per
ton for 2020). 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.
---------------------------------------------------------------------------
\1984\ Sec. 45(e)(10).
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the credit for the production of
Indian coal for one year, through December 31, 2021.
Effective Date
The extension of the credit applies to Indian coal produced
after December 31, 2020.
16. Energy-efficient homes credit (sec. 146 of the Act and sec. 45L of
the Code)
Present Law
Background for the provision and a description of the
energy-efficient homes credit that the provision extends may be
found above in the section describing section 129 of the
Taxpayer Certainty and Disaster Relief Act of 2019 (Division Q
of Pub. L. No. 116-94) in Part Three of this document.
Explanation of Provision
The provision extends the credit for one year, to homes
that are acquired prior to January 1, 2022.
Effective Date
The provision applies to homes acquired after December 31,
2020.
17. Extension of excise tax credits relating to alternative fuels (sec.
147 of the Act and secs. 6426 and 6427 of the Code)
Present Law
Background for the provision and a description of the
excise tax credits relating to alternative fuels that the
provision modifies may be found above in the section describing
section 133 of the Taxpayer Certainty and Disaster Tax Relief
Act of 2019 (Division Q of Pub. L. No. 116-94) in Part Three of
this document.
Explanation of Provision
The provision extends the alternative fuel credit and
related payment provisions, and the alternative fuel mixture
credit for an additional year, through December 31, 2021.
Effective Date
The provision applies to fuel sold or used after December
31, 2020.
18. Extension and modification of credit for residential energy
efficient property (sec. 148 of the Act and secs. 25C and 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.\1985\ In general, the
credit rate is equal to 30 percent of qualifying expenditures.
---------------------------------------------------------------------------
\1985\ Sec. 25D.
---------------------------------------------------------------------------
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, 2021. The credit rate 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
located in the United States and used as a residence by the
taxpayer. 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 by the taxpayer 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 of electricity
using an electrochemical process. 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 connection
with a dwelling unit located in the United States and used as a
residence by the taxpayer.
Qualified geothermal heat pump property means any equipment
which (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 which 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, and for piping and wiring to
interconnect such property to the dwelling unit, 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 two years, through December 31,
2023, the residential energy efficient property credit. The
provision also extends the rate phasedown rule. For property
placed in service in calendar years 2021 and 2022, the credit
rate is 26 percent. For property placed in service in calendar
year 2023, the credit rate is 22 percent.
The provision also adds biomass fuel property expenditures
as qualified expenditures for purposes of the residential
energy efficient property credit. The term ``qualified biomass
fuel property expenditure'' is defined as property which uses
the burning of 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 a dwelling unit, and which has a
thermal efficiency rating of at least 75 percent. The term
``biomass fuel'' means any plant-derived fuel available on a
renewable or recurring basis. To avoid a double benefit, the
provision eliminates the credit for energy efficient biomass-
fueled stoves allowed for under section 25C, as a nonbusiness
energy property credit.
Effective Date
The provision is generally effective for property placed in
service after December 31, 2020. In the case of qualified
biomass fuel property expenditures, the provision is effective
for expenditures paid or incurred in taxable years beginning
after December 31, 2020.
19. Black Lung Disability Trust Fund excise tax (sec. 149 of the Act
and sec. 4121 of the Code)
Present Law
Before January 1, 2021, coal extracted from mines is taxed
at either $1.10 per ton if from an underground mine, or $0.55
per ton if from a surface mine.\1986\ The total amount of tax
was not to exceed 4.4 percent of the price at which such ton of
coal was sold by the producer.
---------------------------------------------------------------------------
\1986\ Sec. 4121.
---------------------------------------------------------------------------
After December 31, 2020, the ``temporary increase
termination date,'' the tax rates are to decline to rates of
$0.50 for underground mines, and $0.25 for surface mines. After
the temporary increase termination date, the total amount of
tax is not to exceed two percent of the price at which such ton
of coal is sold by the producer.
Additional background for the provision and a description
of the coal excise tax that the provision modifies may be found
above in the section describing section 105 of the Taxpayer
Certainty and Disaster Tax Relief Act of 2019 (Division Q of
Pub. L. No. 116-94) in Part Three of this document.\1987\
---------------------------------------------------------------------------
\1987\ From January 1, 2019 to December 31, 2019, the tax rate
temporarily dropped to 50 cents per ton or two percent of sales price
for underground mined coal, and for surface mined coal, the tax was 25
cents per ton or two percent of sales price.
---------------------------------------------------------------------------
Explanation of Provision
The provision extends the increased rates for an additional
year, through December 31, 2021.
Effective Date
The provision applies to sales after December 31, 2020.
TITLE II--OTHER PROVISIONS
1. Minimum low-income housing tax credit rate (sec. 201 of the Act and
sec. 42 of the Code)
Present Law
Background for the provision and a description of the low-
income housing tax credit that the provision modifies may be
found above in the section describing section 207 of the
Taxpayer Certainty and Disaster Tax Relief Act of 2019
(Division Q of Pub. L. No. 116-94) in Part Three of this
document.
Explanation of Provision
The provision provides that the applicable percentage is
set at a minimum of 4 percent for Federally subsidized newly
constructed housing, Federally subsidized substantial
rehabilitation, and certain housing acquisition costs (the
``four-percent floor''). The application of the four-percent
floor on the credit implies that the present value of the
credit amounts (as computed under section 42(b)(1)(B) and (C))
is always 30 percent or more of qualified basis.
The four-percent floor applies only to new or existing
buildings that are placed into service after December 31, 2020.
Effective Date
The provision is effective for buildings that receive an
allocation of credit after December 31, 2020, and buildings of
which any portion is financed with a tax-exempt obligation
described in section 42(h)(4)(A) and issued after December 31,
2020.
2. Depreciation of certain residential rental property over 30-year
period (sec. 202 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.\1988\ The period
for depreciation or amortization generally begins when the
asset is placed in service by the taxpayer.\1989\ 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
placed in service convention.\1990\ For some assets, the
recovery period for the asset is provided in section 168.\1991\
In other cases, the recovery period of an asset is generally
set forth in Revenue Procedure 87-56.\1992\
---------------------------------------------------------------------------
\1988\ 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.
\1989\ 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).
\1990\ Sec. 168.
\1991\ See sec. 168(e) and (g).
\1992\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785). Exercising authority granted by Congress, the
Secretary issued Rev. Proc. 87-56, 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,\1993\ 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. The recovery periods
for most real property are 39 years for nonresidential real
property, 27.5 years for residential rental property, and 15
years for qualified improvement property. The straight line
depreciation method is required for the aforementioned real
property.
---------------------------------------------------------------------------
\1993\ 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.
---------------------------------------------------------------------------
Depreciation of an asset begins when the asset is deemed to
be placed in service under the applicable convention.\1994\
Under MACRS, nonresidential real property, residential rental
property, and any railroad grading or tunnel bore generally are
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.\1995\ 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 to reflect the assumption that
assets are placed in service ratably throughout the year.\1996\
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,\1997\ designed to
prevent the recognition of disproportionately large amounts of
first-year depreciation under the half-year convention.
---------------------------------------------------------------------------
\1994\ Treas. Reg. sec. 1.167(a)-10(b).
\1995\ Sec. 168(d)(2) and (d)(4)(B).
\1996\ Sec. 168(d)(1) and (d)(4)(A).
\1997\ The mid-quarter convention 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).
---------------------------------------------------------------------------
Alternative depreciation system
The alternative depreciation system (``ADS'') is required
to be used for tangible property used predominantly outside the
United States,\1998\ certain tax-exempt use property,\1999\
tax-exempt bond financed property,\2000\ certain imported
property covered by an Executive order,\2001\ and certain
property held by either a real property trade or business
\2002\ or a farming business \2003\ electing out of the
business interest limitation under section 163(j). \2004\ In
addition, an election to use ADS is available to taxpayers for
any class of property for any taxable year. \2005\
---------------------------------------------------------------------------
\1998\ Sec. 168(g)(1)(A).
\1999\ Sec. 168(g)(1)(B).
\2000\ Sec. 168(g)(1)(C).
\2001\ Sec. 168(g)(1)(D).
\2002\ Sec. 168(g)(1)(F) and (g)(8). An electing real property
trade or business is defined in section 163(j)(7)(B) by cross reference
to section 469(c)(7)(C) (i.e., any real property development,
redevelopment, construction, reconstruction, acquisition, conversion,
rental, operation, management, leasing, or brokerage trade or
business).
\2003\ Sec. 168(g)(1)(G). An electing farming business is defined
in section 163(j)(7)(C), which defines an electing farming business as
(i) a farming business as defined in section 263A(e)(4), or (ii) any
trade or business of a specified agricultural or horticultural
cooperative as defined in section 199A(g)(4) (a clerical correction may
be necessary to correct this reference).
\2004\ Sec. 168(g).
\2005\ Sec. 168(g)(1)(E) and (g)(7).
---------------------------------------------------------------------------
Under ADS, all property is depreciated using the straight
line method and the applicable convention over recovery periods
which generally are equal to the class life of the property,
with certain exceptions.\2006\ For example, nonresidential real
property has a 40-year ADS recovery period, while residential
rental property has a 40-year ADS recovery period if placed in
service before January 1, 2018, and a 30-year ADS recovery
period if placed in service after December 31, 2017.\2007\
---------------------------------------------------------------------------
\2006\ Sec. 168(g)(2) and (3).
\2007\ Sec. 168(g)(3).
---------------------------------------------------------------------------
Change in use
As previously noted, certain property held by an electing
real property trade or business or electing farming business
under section 163(j) is required to be depreciated using ADS.
In the case of such property that was placed in service by the
electing business in taxable years beginning before the
election year under section 163(j), the required change from
MACRS to ADS is treated as a change in the use of the property,
not a change in method of accounting under section
446(e).\2008\ As a result, depreciation for such property
beginning in the election year and subsequent taxable years is
determined under the rules of Treas. Reg. sec. 1.168(i)-4(d).
Under these rules, if a change in the use of MACRS property
results in a longer recovery period than the recovery period
used before the change in use, the depreciation allowances
beginning with the year of change are determined as though the
MACRS property had been originally placed in service by the
taxpayer with the longer recovery period.\2009\ Further, the
taxpayer does not retroactively change the depreciation claimed
for the property. Rather, the taxpayer generally computes
depreciation in the year of change and any subsequent taxable
year based on its adjusted depreciable basis in the property
\2010\ as of the beginning of each taxable year in the longer
recovery period (taking into account the applicable
convention), determined from the original placed in service
date.\2011\
---------------------------------------------------------------------------
\2008\ See secs. 163(j)(11) and 168(i)(5); Treas. Reg. sec.
1.168(i)-4; and sec. 4.02(2)(b) of Rev. Proc. 2019-08, 2019-03 I.R.B.
347.
\2009\ Treas. Reg. sec. 1.168(i)-4(d)(4)(i).
\2010\ Adjusted depreciable basis is the unadjusted depreciable
basis of the property, as defined in Treas. Reg. sec. 1.168(b)-1(a)(3),
less the adjustments described in section 1016(a)(2) and (3). Treas.
Reg. sec. 1.168(b)-1(a)(4).
\2011\ Treas. Reg. sec. 1.168(i)-4(d)(2)(iii) and (d)(4)(ii). For
method change rules that may apply if the business fails to change to
use ADS in the section 163(j) election year, see sec. 4.02(3) of Rev.
Proc. 2019-08, 2019-03 I.R.B. 347, and sec. 6.05 of Rev. Proc. 2019-43,
2019-48 I.R.B. 1107, as modified by Rev. Proc. 2020-25, 2020-19 I.R.B.
785, and Rev. Proc. 2020-50, 2020-48 I.R.B. 1122.
---------------------------------------------------------------------------
For example, assume a calendar year electing real property
trade or business uses residential rental property in its trade
or business that it placed in service in January 1993 and
depreciates using the mid-month convention and straight-line
method over 27.5 years. Such taxpayer elects out of section
163(j) for 2020. The taxpayer is required to change to use a
40-year ADS recovery period for such residential rental
property starting in 2020. Pursuant to Treas. Reg. sec.
1.168(i)-4(d)(4), the taxpayer's allowable depreciation
deduction for 2020 and subsequent taxable years is determined
as though the residential rental property had been placed in
service in January 1993 as property subject to an ADS recovery
period of 40 years. The depreciation in 2020 is determined
based on the property's adjusted depreciable basis as of
January 1, 2020, using the straight-line method over the number
of years remaining as of the beginning of the taxable year
(taking into account the mid-month convention) of the 40-year
recovery period (i.e., approximately 13 years).
Explanation of Provision
The provision requires a real property trade or business
electing out of the interest limitation under section 163(j) to
use a 30-year ADS recovery period to depreciate any of its
residential rental property that was (i) placed in service
before January 1, 2018, and (ii) not subject to ADS (regardless
of whether the use of ADS was required or elected) \2012\ prior
to January 1, 2018.\2013\ For example, assuming the same facts
as in the example above, the electing real property trade or
business is required to change to use a 30-year ADS recovery
period for its residential rental property in 2020. Pursuant to
Treas. Reg. sec. 1.168(i)-4(d)(4), the taxpayer will determine
its depreciation for the residential rental property in 2020
based on the adjusted depreciable basis of the property as of
January 1, 2020, using the straight-line method over the number
of years remaining as of the beginning of the taxable year
(taking into account the mid-month convention) of the 30-year
recovery period (i.e., approximately 3 years).
---------------------------------------------------------------------------
\2012\ Specifically, such property for which section 168(g)(1)(A),
(B), (C), (D), or (E) did not apply.
\2013\ See also Rev. Proc. 2021-28, 2021-27 I.R.B. 5. Note that if
residential rental property to which the 30-year ADS recovery period
applies was depreciated using a 40-year ADS recovery period in 2018
and/or 2019 by the electing real property trade or business, the
business may be eligible to file an amended return, administrative
adjustment request under section 6227, or IRS Form 3115, Application
for Change in Accounting Method, to change to the required 30-year ADS
recovery period. See sec. 446(e); Rev. Proc. 2021-29, 2021-27 I.R.B.
12; and sec. 6 of Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, as modified
by Rev. Proc. 2020-25, 2020-19 I.R.B. 785, Rev. Proc. 2020-50, 2020-48
I.R.B. 1122, and Rev. Proc. 2021-28, 2021-27 I.R.B. 5.
---------------------------------------------------------------------------
Effective Date
The provision applies to taxable years beginning after
December 31, 2017.
3. Modification of energy investment credit (sec. 203 of the Act and
sec. 48 of the Code)
For an explanation of this provision, see the explanation
for section 132 of the Act, above.
4. Extension of energy credit for offshore wind facilities (sec. 204 of
the Act and sec. 48 of the Code)
For an explanation of this provision, see the explanation
for section 131 of the Act, above.
5. Minimum rate of interest for certain determinations related to life
insurance contracts (sec. 205 of the Act and sec. 7702 of the
Code)
Present Law
Section 7702 definition of a life insurance contract
A statutory definition of a life insurance contract was
enacted in 1984 because of ``a general concern with the
proliferation of investment-oriented life insurance
contracts.'' \2014\
---------------------------------------------------------------------------
\2014\ Joint Committee on Taxation, General Explanation of the
Revenue Provisions of the Deficit Reduction Act of 1984, JCS-41-84,
December 31, 1984, page 646. The provision enacted in 1984 is narrower
in some respects than 1982 and 1983 temporary guidelines relating to
flexible premium life insurance contracts because of Congress' concern
about investment oriented life insurance products. Ibid.
---------------------------------------------------------------------------
A life insurance contract is defined as any contract that
is a life insurance contract under applicable State or foreign
law, but only if the contract meets either of two alternatives:
(1) a cash value accumulation test, or (2) a test consisting of
a guideline premium requirement and a cash value corridor
requirement.\2015\ Whichever test is chosen, that test must be
met for the entire life of the contract in order for the
contract to be treated as life insurance for tax purposes.
Because the cash value accumulation test must be met at all
times by the terms of the contract, failure of a contract to
meet this requirement means that the contract must meet, at all
times, the guideline premium/cash value corridor test. Rather
than being a requirement of the terms of the contract the
guideline premium/cash value corridor test is applied in
practice and calls for specific corrective actions if a
contract fails to meet it at any time. Although the guideline
premium/cash value corridor test does not have to be met by the
terms of the contract, the test limitations can be built into a
contract to make compliance with the test automatic and to
avoid inadvertent violation. In the case of a variable life
insurance contract,\2016\ the determination of whether the
contract meets the cash value accumulation test, or meets the
guideline premium requirements and falls within the cash value
corridor, must be made whenever the amount of the death benefit
under the contract changes, but not less frequently than once
during each 12-month period. If a contract does not meet either
of the two alternative tests under the definition of a life
insurance contract, the income on the contract for any taxable
year of the policyholder is treated as ordinary income received
or accrued by the policyholder during that year. For this
purpose, the income on the contract for a taxable year is the
amount by which the sum of the increase in the net surrender
value of the contract and the cost of life insurance protection
exceeds premiums paid less policyholder dividends paid under
the contract during the taxable year.
---------------------------------------------------------------------------
\2015\ Sec. 7702.
\2016\ Sec. 817.
---------------------------------------------------------------------------
Minimum interest rates
Computational rules under both the cash value accumulation
test and the guideline premium/cash value corridor test require
the use of a minimum interest rate. The minimum interest rate
applies to determine either the maximum permitted accumulation
of cash value in the contract, or a guideline premium that
serves as an upper bound on the amount that can be invested in
the contract.\2017\
---------------------------------------------------------------------------
\2017\ ``The guideline premium portion of the test distinguishes
between contracts under which the policyholder makes traditional levels
of investment through premiums and those which involve greater
investments by the policyholder. . . . In combination [with the cash
value corridor], these requirements are intended to limit the
definition of life insurance to contracts which require only relatively
modest investment and permit relatively modest investment returns.''
Joint Committee on Taxation, General Explanation of the Revenue
Provisions of the Deficit Reduction Act of 1984, JCS-41-84, December
31, 1984, page 650.
---------------------------------------------------------------------------
Under the cash value accumulation test, the minimum
interest rate is the greater of an annual effective rate of
four percent, or the rate or rates guaranteed on issuance of
the contract.\2018\ Under the guideline premium piece of the
guideline premium/cash value corridor test, the minimum
interest rate is the greater of an annual effective rate of six
percent, or the rate or rates guaranteed on issuance of the
contract.\2019\
---------------------------------------------------------------------------
\2018\ Sec. 7702(b)(2)(A).
\2019\ Sec. 7702(c)(3)(B)(iii).
---------------------------------------------------------------------------
The rate guaranteed on issuance of the contract refers to
the floor rate, that is, the rate below which the interest
credited to the cash surrender value of the contract cannot
fall.\2020\ In the absence of a higher interest rate in a life
insurance contract guaranteed by the issuer through contractual
declaration or by operation of a formula or index, the rate or
rates guaranteed in the contract mean the interest rate or
rates reflected in the contract's nonforfeiture value (which is
the minimum amount that a policyholder receives in the event of
nonpayment of premiums) assuming the use of the method in the
Standard Nonforfeiture Law.\2021\ The method for determining
that rate is described in the NAIC's Valuation Manual,\2022\
which is amended as needed.\2023\ In 2020, the minimum
nonforfeiture interest rate described in the NAIC's Valuation
Manual is four percent for most life insurance contracts,\2024\
though that minimum interest rate has since been amended.\2025\
---------------------------------------------------------------------------
\2020\ The issuing company may guarantee a higher interest rate in
a life insurance contract from time to time, either by contractual
declaration or by operation of a formula or index.
\2021\ The National Association of Insurance Commissioners
(``NAIC'') publishes model laws and regulations for various types of
life insurance contracts. The NAIC publishes a standard nonforfeiture
law for life insurance contracts governing the minimum nonforfeiture
amount the policyholder receives in the event of nonpayment of premiums
or the minimum cash surrender value received on surrender of the
contract. See NAIC Model Regulation 808, Standard Nonforfeiture Law for
Life Insurance, section 2 and section 5c.I.2. (published January 2014).
Standard nonforfeiture laws are adopted and implemented by States in
connection with State regulation of insurance business.
\2022\ For contracts issued after the operative date of the latest
Valuation Manual, the nonforfeiture interest rate is provided by the
Valuation Manual (section 5c.I.2. of NAIC Model Regulation 808,
Standard Nonforfeiture Law for Life Insurance (published January
2014)).
\2023\ The NAIC adopted the Valuation Manual on December 2, 2012,
and periodically has amended it. See adoption and amendment dates at
page 3 of the January 1, 2020 Edition of the Valuation Manual, https://
content.naic.org/sites/default/files/pbr_data_val_2020_edition_
redline.pdf.
\2024\ See the January 1, 2020 Edition of the Valuation Manual, VM-
02, ``Minimum Nonforfeiture Mortality and Interest,'' section 3.A. at
https://content.naic.org/sites/default/files/
pbr_data_val_2020_edition_redline.pdf.
\2025\ On July 25, 2020, the NAIC published a proposed amendment to
the applicable Valuation Manual to remove the four percent floor from
the Standard Nonforfeiture Law for life insurance contracts. The
description of the amendment to the Valuation Manual states, ``Upon any
possible tax code (IRC, S. 7702) modifications to remove the hardcoded
interest rate floor starting in 1/1/2021, the life standard
nonforfeiture rate is being updated to ensure the minimum funding under
state requirements does not exceed the maximum funding under federal
requirements for life insurance contracts issued starting in 1/1/
2021.'' Under the proposed amendment, the Valuation Manual is amended
to strike the rate of four percent and to provide, ``the nonforfeiture
interest rate shall not be less than the applicable interest rate used
prescribed to meet the definition of life insurance in the Cash Value
Accumulation Test under Section 7702 (Life Insurance Contract Defined)
of the U.S. Internal Revenue Code.'' See NAIC, Amendments for the 2021
Valuation Manual for the Consideration of the Life Insurance and
Annuities Committee, July 10, 2020. On January 1, 2021, the NAIC
published a redlined January 1, 2021 Edition of the Valuation Manual,
showing that the amendment quoted above was adopted on August 14, 2020,
and showing in redline the change made in the 2021 edition of the
Valuation Manual. NAIC, Valuation Manual January 1, 2021, pages i and
02-1, https://content.naic.org/sites/default/files/
pbr_data_valuation_manual_future_edition_redline.pdf. The change to the
minimum interest rates in Code section 7702, described below, was
enacted on December 27, 2020.
---------------------------------------------------------------------------
For comparison, to illustrate recent governmentally
determined rates, the table below shows the midterm monthly
applicable federal rate \2026\ of interest for the month of
July in each of the years 2010-2020.
---------------------------------------------------------------------------
\2026\ The applicable federal rates are determined by the Treasury
Department under section 1274(d). The midterm applicable federal rate
is a component of the minimum interest rates for section 7702 as
determined under the provision of the Act described below.
MID-TERM APPLICABLE FEDERAL RATE (AFR) FOR JULY, ANNUAL COMPOUNDING
------------------------------------------------------------------------
------------------------------------------------------------------------
2020.................................................... 0.45%
2019.................................................... 2.08%
2018.................................................... 2.87%
2017.................................................... 1.89%
2016.................................................... 1.43%
2015.................................................... 1.77%
2014.................................................... 1.82%
2013.................................................... 1.22%
2012.................................................... 0.92%
2011.................................................... 2.00%
2010.................................................... 2.35%
------------------------------------------------------------------------
Source: IRS Revenue Rulings 2020-14, 2019-16, 2018-19, 2017-14, 2016-17,
2015-15, 2014-20, 2013-15, 2012-20, 2011-14, 2010-18.
Explanation of Provision
The provision changes the calculation of minimum interest
rates under both the cash value accumulation test and the
guideline premium/cash value corridor test of section 7702 for
purposes of determining if a contract meets the Federal tax
statutory definition of a life insurance contract. Instead of
the prior-law minimum rates of four percent (or six percent),
the minimum interest rate under section 7702 is the least of
three rates, unless a higher rate is guaranteed on issuance of
the contract. Absent a higher rate guaranteed on issuance by
the issuing company for a contract, the minimum interest rate
is unlikely to increase following a period of low market
interest rates unless the rate (of the three) that is
prescribed by the NAIC increases.
The provision modifies the minimum interest rate under the
cash value accumulation test by eliminating the four percent
rate and substituting the rate that is the lesser of four
percent or the insurance interest rate. The insurance interest
rate, in turn, is defined as the lesser of two other rates: (1)
the average of the midterm applicable Federal rates (``AFR'')
for the most recent 60-month period ending two years before the
most recent adjustment year,\2027\ or (2) the rate prescribed
in the NAIC's Standard Valuation model law as the U.S.
valuation interest rate for life insurance contracts with
guaranteed durations of more than 20 years for the calendar
year ending before the most recent adjustment year.\2028\
---------------------------------------------------------------------------
\2027\ Sec. 7702(f)(11)(C), defining the section 7702 applicable
federal interest rate. Because this rate is an average of the annually
compounded mid-term AFRs over a relatively long period, 60 months,
volatility over the period is muted. Because it is a lagging rate in
that it is measured over the 60-month period that ends two years before
the first year following any adjustment in the insurance interest rate,
it does not reflect any current interest rate at the time the contract
is issued (that is, neither the current mid-term AFR nor any market
rate in the year of contract issuance). Because of this lag, it is
unlikely in a period of level or rising interest rates that increases
in this rate will cause an increase in the minimum interest rate under
section 7702.
\2028\ See the model law published by the NAIC, referred to as the
NAIC Standard Valuation Law (July 2010), section 4, https://
content.naic.org/sites/default/files/inline-files/MDL-820.pdf.
---------------------------------------------------------------------------
An adjustment year means the next calendar year after the
year a change in that U.S. valuation interest rate becomes
effective.
Notwithstanding these rules of the provision, a transition
rule provides that the minimum interest rate for this purpose
is two percent, for calendar years beginning with 2021 and
ending with the year before the first subsequent adjustment
year. Specifically, the insurance interest rate is two percent
starting with calendar year 2021, until the calendar year
following the year in which a change becomes effective in the
NAIC-prescribed U.S. valuation interest rate for life insurance
with guaranteed durations of more than 20 years.
The provision defines the minimum interest rate under the
guideline premium/cash value corridor test as the rate that is
two percentage points higher than the rate determined under the
cash value accumulation test. This parallels the prior-law two-
percentage-point difference between the rates, which were four
and six percent, respectively. Thus, under the transition rule,
the minimum interest rate for purposes of the guideline
premium/cash value corridor test is four percent, that is, two
percentage points higher than the two-percent rate under the
transition rule for purposes of the cash value accumulation
test.
Effective Date
The provision is effective for contracts issued after
December 31, 2020.
6. Clarification and technical improvements to CARES Act employee
retention credit (sec. 206 of the Act and sec. 2301 of the
CARES Act)
Present Law
Background for the provision and a description of the
employee retention credit that the provision modifies may be
found above in section describing section 2301 of the CARES Act
(Pub. L. No. 116-136) in Part Six of this document.
Explanation of Provision
The provision modifies the employee retention credit that
was included in the CARES Act in the following ways.
First, the provision clarifies that, in the case of an
organization which is described in section 501(c) of the Code,
any reference to gross receipts in the CARES Act employee
retention credit (as modified by the Act) shall be treated as a
reference to gross receipts within the meaning of section 6033
of the Code.
The provision also clarifies that health plan expenses paid
to provide and maintain a group health plan \2029\ are treated
as wages that are potentially eligible for the credit, assuming
other requirements are met. The amount of such expenses per
employee and per period shall be the amount properly allocable
to such employee and such period under rules prescribed by the
Secretary. Except as otherwise provided by the Secretary, an
allocation of such expenses is proper if made on the basis of
being pro rata among periods of coverage.
---------------------------------------------------------------------------
\2029\ As defined in section 5000(b)(1) of the Code.
---------------------------------------------------------------------------
The provision alters the interaction of the credit and the
Paycheck Protection Program. The provision removes the rule in
section 2301(j) of the CARES Act that provided that an employer
that received a Paycheck Protection Program (``PPP'') loan
\2030\ was ineligible for the credit, as well as the
instruction to the Secretary in section 2301(l)(3) of the CARES
Act to provide for recapture of the credit in the event it was
allowed to a taxpayer who received a PPP loan. As a result,
taxpayers receiving a PPP loan may be eligible for the credit.
Section 1106 of the CARES Act \2031\ is amended to provide that
the definition of payroll costs that may give rise to loan
forgiveness described in section 1106(b) of the CARES Act
\2032\ shall not include qualified wages taken into account in
determining the credit. The provision then provides that an
employer may elect not to take into account any amount of the
employer's qualified wages for purposes of calculating the
credit. However, such an election does not prevent payroll
costs paid during the covered period from being treated as
qualified wages of the eligible employer to the extent that a
PPP loan is not forgiven by reason of a decision by the lender
under section 1106(g) of the CARES Act \2033\ to deny
forgiveness.
---------------------------------------------------------------------------
\2030\ Referred to in the statute as a ``small business
interruption loan'' and defined as a covered loan under paragraph (36)
of section 7(a) of the Small Business Act (15 U.S.C. 636(a), as added
by section 1102 of the CARES Act, and also known as a Paycheck
Protection Program loan.
\2031\ Section 304(b)(1) of Title III of Division N of the Act
redesignates section 1106 of the CARES Act as section 7A of the Small
Business Act (15 U.S.C. Sec. 631 et seq.).
\2032\ Redesignated by the Act as section 7A(b) of the Small
Business Act.
\2033\ Redesignated by the Act as section 7A(g) of the Small
Business Act.
---------------------------------------------------------------------------
Finally, the provision requires the Secretary to issue such
forms, instructions, regulations, and guidance as are necessary
to prevent the avoidance of the purposes of the limitations on
the credit, including through the leaseback of employees.
Effective Date
In general, the amendments made by the provision are
effective as if included in the provisions of the CARES Act to
which they relate.
The effective date of the provision includes a special rule
permitting any employer who has filed a return of tax with
respect to applicable employment taxes before the date of
enactment of the Act to elect to treat any applicable amount as
an amount paid in the calendar quarter which includes the date
of enactment of the Act (i.e., the 4th quarter of calendar year
2020). An applicable amount is any amount of either group
health plan expenses treated as wages by subsection (b) of the
provision or wages permitted to be treated as qualified wages
as a result of subsection (c)(2) of the provision (addressing
coordination between the Paycheck Protection Program and the
credit),\2034\ provided such amount was paid in a calendar
quarter beginning after December 31, 2019, and before October
1, 2020, and was not taken into account by the taxpayer in
calculating the credit for such calendar quarter.
---------------------------------------------------------------------------
\2034\ A technical correction may be needed to carry out this
intent.
---------------------------------------------------------------------------
7. Extension and modification of employee retention and rehiring credit
(sec. 207 of the Act and sec. 2301 of the CARES Act)
Present Law
Background for the provision and a description of the
employee retention credit that the provision modifies may be
found above in section describing section 2301 of the CARES Act
(Pub. L. No. 116-136) in Part Six of this document.
Additionally, the provision makes changes to the law as
modified by the preceding provision of the Act, described
above.
Explanation of Provision
The provision extends and modifies the employee retention
credit that was included in the CARES Act in the following
ways.
The provision extends the credit to apply to wages paid
before July 1, 2021, extending by two calendar quarters the
end-date provided by section 2301(m) of the CARES Act.
The provision makes several changes to limitations on the
credit.
First, the provision increases the percentage of qualified
wages used to calculate the credit from 50 percent of such
wages to 70 percent of such wages.
Second, the provision increases the amount of qualified
wages per employee that may be taken into account in
calculating the credit from $10,000 for all calendar quarters
to $10,000 per calendar quarter.
Third, the provision permits an employer to qualify as an
eligible employer under the reduced gross receipts test with
respect to a calendar quarter for which the gross receipts of
the employer are less than 80 percent of the gross receipts of
the same employer for the same calendar quarter in 2019. For
employers not in existence at the beginning of the relevant
calendar quarter in 2019, this rule is applied by reference to
the same calendar quarter in 2020 rather than 2019.
Additionally, the provision permits employers to elect to
compare the gross receipts of the immediately preceding
calendar quarter to the gross receipts for the corresponding
calendar quarter in 2019, rather than using the quarter for
which the credit is claimed. For employers not in existence in
2019, the election permits the employer to compare the gross
receipts of the immediately preceding calendar quarter to the
corresponding calendar quarter in 2020.
Fourth, with regard to the definition of qualified wages,
the provision increases the average number of full-time and
full-time-equivalent employees the eligible employer may have
had during 2019 to claim credit for any wages paid to an
employee--rather than merely wages with respect to which the
employee is not providing services--from 100 or fewer to 500 or
fewer.
Finally, the provision eliminates the rule that qualified
wages paid to an employee by an eligible employer that had more
than 500 full-time employees in 2019 cannot exceed the amount
such employee would have been paid for working an equivalent
duration during the 30 days immediately preceding the period in
which the eligible employer met either the governmental order
test or the reduced gross receipts test.
The provision modifies the rule prohibiting certain
government employers from claiming the credit. First, the
provision excludes from the rule any organization described in
section 501(c)(1) of the Code and exempt from tax under section
501(a) of the Code. Second, the provision excludes from the
rule any entity that is a college or university and any entity
the principal purpose or function of which is providing medical
or hospital care. As a result, such organizations and entities
are not prevented from claiming the credit by reason of the
general prohibition against certain government employers
claiming the credit. With respect to any organization or entity
meeting either exception, wages as defined in section 3121(a)
of the Code shall be determined for purposes of the credit
without regard to paragraphs (5) and (6) (relating to certain
services performed in the employ of the United States or an
instrumentality of the United States), (7) (relating to certain
services performed in the employ of a State, any political
subdivision thereof, or any instrumentality of one or more of
the foregoing which is wholly owned thereby), (10) (relating to
certain services performed in connection with a school,
college, or university), and (13) (relating to certain services
performed as a student nurse) of section 3121(b).
The provision revises and expands upon the denial of double
benefit rules that were included in section 2301(h) of the
CARES Act to provide that any wages taken into account in
determining the credit shall not be taken into account as wages
for purposes of sections 41 (providing a credit for increasing
research activities), 45A (the Indian employment credit), 45P
(providing an employer wage credit for employees who are active
duty members of the uniformed services), 45S (providing an
employer credit for paid family and medical leave), 51 (the
work opportunity credit), and 1396 (the empowerment zone
employment credit).
Under rules to be provided by the Secretary, the provision
permits small employers (i.e., those for whom the average
number of full-time and full-time-equivalent employees during
2019 was not greater than 500) to elect to receive an advance
payment of the credit for any quarter in an amount not to
exceed 70 percent of the average quarterly wages paid by the
employer in calendar year 2019. An employer who employs
seasonal workers \2035\ may elect a limitation equal to 70
percent of the wages for the calendar quarter in 2019 that
corresponds to the calendar quarter to which the election
relates, rather than 70 percent of average quarterly wages for
2019. For employers not in existence in 2019, the limitations
under both the general rule and the election are calculated
using 2020 numbers rather than 2020 numbers. The amount of the
credit which would be allowed but for receipt of such an
advance payment is reduced by the amount of the advance
payment.\2036\ If the advance payments to a taxpayer for a
calendar quarter exceed the credit allowed but for receipt of
the advance payment, the tax imposed by chapters 21 (FICA) or
22 (RRTA) of the Code (whichever is applicable) are increased
by the amount of the excess.
---------------------------------------------------------------------------
\2035\ As defined in section 45R(d)(5)(B) of the Code.
\2036\ Any failure to so reduce the credit is treated as arising
out of a mathematical or clerical error and any excess tax due as a
result is assessed according to section 6213(b) of the Code.
---------------------------------------------------------------------------
The provision modifies the grant of authority in section
2301(l) of the CARES Act to require that any forms,
instructions, regulations, or guidance issued with respect to
application of the credit to third party payors (including
professional employer organizations, certified professional
employer organizations, or agents under section 3504 of the
Code) require the customer to be responsible for the accounting
of the credit and for any liability for improperly claimed
credits. Such forms, etc., shall require the third party payor
to accurate report the credit based on the information provided
by the customer.
The provision requires the Secretary to conduct a public
awareness campaign, in coordination with the Administrator of
the Small Business Administration, to provide information
regarding the availability of the credit. As part of the
outreach, the Secretary is required to provide notice about the
credit to all employers who reported 500 or fewer employees on
their most recently filed employment tax return, and, within 30
days of the date of enactment of the Act, provide educational
materials about the credit to all employers.
Finally, under the provision an election not to take into
account any amount of the employer's qualified wages for
purposes of calculating the credit does not prevent payroll
costs paid during the covered period from being treated as
qualified wages of the eligible employer to the extent that a
Paycheck Protection Program second draw loan described in 15
U.S.C. section 636(a)(37) is not forgiven by reason of the
application of paragraph (37)(J) of such section.
Effective Date
The amendments made by the provision are effective for
calendar quarters beginning after December 31, 2020.
8. Minimum age for distributions during working retirement (sec. 208 of
the Act and sec. 401(a) of the Code)
Present Law
In general
For purposes of the qualification requirements under the
Code, a pension plan is defined as a plan established and
maintained primarily to provide systematically for the payment
of definitely determinable benefits to employees over a period
of years, usually for life, after retirement or attainment of
normal retirement age.\2037\ However, a pension plan does not
fail to be a qualified retirement plan solely because the plan
provides that a distribution may be made to an employee who has
attained age 59\1/2\ and who is not separated from employment
at the time of the distribution.\2038\ Pension plans include
both defined benefit plans \2039\ and money purchase pension
plans.
---------------------------------------------------------------------------
\2037\ Treas. Reg. sec. 1.401-1(b)(1)(i).
\2038\ Sec. 401(a)(36); Treas. Reg. sec. 1.401-1(b)(i). The
Bipartisan American Miners Act (Division M of Pub. L. No. 116-94)
lowered the age at which a pension plan may provide in-service
distributions from age 62 to age 59\1/2\. See the description of
section 104 of the Bipartisan American Miners Act in Part Three of this
document.
\2039\ As defined in section 414(j).
---------------------------------------------------------------------------
Multiemployer plans
A multiemployer plan is a plan to which more than one
unrelated employer contributes, that is established pursuant to
one or more collective bargaining agreements, and which meets
such other requirements as specified by the Secretary of
Labor.\2040\ Multiemployer plans are governed by a board of
trustees consisting of an equal number of employer and employee
representatives, referred to as the plan sponsor. In general,
the level of contributions to a multiemployer plan is specified
in the applicable collective bargaining agreements, and the
level of plan benefits is established by the plan sponsor.
---------------------------------------------------------------------------
\2040\ Sec. 414(f) and sec. 2(37) of ERISA.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, the age at which a pension plan may
provide in-service distributions is lowered from age 59\1/2\ to
age 55 in the case of a multiemployer plan that primarily
covers employees in the building and construction
industry,\2041\ with respect to individuals who were
participants in the plan on or before April 30, 2013, if the
following requirements are satisfied: (i) the plan's trust was
in existence before January 1, 1970; (ii) before December 31,
2011, at a time when the plan provided that distributions may
be made to an employee who has attained age 55 and who is not
separated from employment at the time of such distribution, the
plan received at least one written determination from the IRS
that the plan's trust is a qualified trust.\2042\
---------------------------------------------------------------------------
\2041\ As defined in section 4203(b)(1)(B)(i) of ERISA.
\2042\ Within the meaning of section 401(a).
---------------------------------------------------------------------------
Effective Date
The provision is effective for distributions made before,
on, or after the date of enactment of the Act (December 27,
2020).
9. Temporary rule preventing partial plan termination (sec. 209 of the
Act and sec. 411 of the Code)
Present Law
Vesting standards
To ensure that employees with substantial periods of
service with an employer do not lose plan benefits upon
separation from employment, under a qualified plan,\2043\ (1) a
participant's benefits must be fully vested upon attainment of
normal retirement age under the plan; (2) a participant must be
fully vested at all times in the benefit derived from employee
contributions; and (3) employer-provided benefits must vest at
least as rapidly as under one of three alternative minimum
vesting schedules.\2044\ Under these schedules, an employee's
right to benefits derived from employer contributions is
required to become nonforfeitable (vested) at varying rates
upon completion of a specified period of service with an
employer.
---------------------------------------------------------------------------
\2043\ A qualified plan is a retirement plan that satisfies the
requirements of section 401(a).
\2044\ Sec. 411(a).
---------------------------------------------------------------------------
In addition, under the Code, in the event of a partial
termination of a qualified plan, the rights of all affected
employees \2045\ to benefits accrued to the date of the partial
termination generally must become nonforfeitable to the extent
those benefits are funded.\2046\
---------------------------------------------------------------------------
\2045\ While ``affected employee'' is not defined in the Code or
Treasury guidance, the court in Borda v. Hardy, 138 F. 3d 1062, 1067
(6th Cir. 1998), for example, indicated that an employee who had
separated from service and was one who stood to be ``affected'' by the
termination of the plan should be treated as an ``affected employee.''
\2046\ Sec. 411(d)(3).
---------------------------------------------------------------------------
Partial terminations
Whether a partial termination of a qualified plan has
occurred (and the time of its occurrence) is determined by the
Commissioner of the Internal Revenue Service (``IRS'') on the
basis of all the facts and circumstances in a particular case.
According to Treasury regulations,\2047\ such facts and
circumstances include: the exclusion, by reason of a plan
amendment or severance by the employer, of a group of employees
who have previously been covered by the plan; and plan
amendments which adversely affect the rights of employees to
vest in benefits under the plan. To the extent a termination,
or partial termination, occurs, these rules only apply to the
part of the plan that is terminated.\2048\
---------------------------------------------------------------------------
\2047\ Treas. Reg. sec. 1.411(d)-2(b).
\2048\ Treas. Reg. sec. 1.411(d)-2(b)(3).
---------------------------------------------------------------------------
Under guidance,\2049\ the IRS has ruled that if the
turnover rate is at least 20 percent, there is a presumption
that a partial termination of the plan has occurred, but noted
that whether a partial termination of a qualified plan occurs
on account of participant turnover (and the time of such event)
depends on all the facts and circumstances, including whether
the turnover rate for an applicable period is routine for the
employer.\2050\
---------------------------------------------------------------------------
\2049\ Rev. Rul. 2007-43, 2007-2 C.B. 45.
\2050\ In that ruling, the IRS determined there was a partial
termination because the severances from employment occurred as a result
of the shutdown of one of the employer's business locations and not as
a result of routine turnover. IRS has also indicated that a partial
termination can occur (among other circumstances) in connection with a
significant corporate event such as a closing of a plant or division,
or as a result of general employee turnover due to adverse economic
conditions or other reasons that are not within the employer's control.
See Internal Revenue Service, Retirement Plan FAQs regarding Partial
Plan Termination, Sept. 4, 2020, available at https://www.irs.gov/
retirement-plans/retirement-plan-faqs-regarding-partial-plan-
termination.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, a plan is not treated as having a
partial termination during any plan year which includes the
period beginning on March 13, 2020, and ending on March 31,
2021, if the number of active participants covered by the plan
on March 31, 2021 is at least 80 percent of the number of
active participants covered by the plan on March 13, 2020.
Effective Date
The provision is effective on the date of enactment.
10. Temporary allowance of full deduction for business meals (sec. 210
of the Act and sec. 274 of the Code)
Present Law
Under section 274, no deduction is permitted with respect
to entertainment, amusement, or recreation.\2051\ In addition,
a deduction for any expense for food or beverages is generally
limited to 50 percent of the amount otherwise deductible.\2052\
In general, no deduction is allowed for the expense of any food
or beverage unless such expense is not lavish or extravagant,
and the taxpayer (or an employee of the taxpayer) is present at
the meal.\2053\ Thus, for example, a taxpayer may generally
deduct 50 percent of the food or beverage expenses associated
with operating its trade or business (e.g., meals consumed by
employees on work travel that are properly substantiated and a
business meal with a client that is not lavish or
extravagant).\2054\ When a meal is served during an activity
that constitutes entertainment, a 50 percent deduction for
meals served at the event may be allowable if the cost of the
food or beverages is separately stated on the invoice.\2055\
For example, food or beverages consumed during a theatre or
sporting event are subject to the 50-percent deduction
limitation to the extent the meal is delineated from the cost
of the entertainment.\2056\
---------------------------------------------------------------------------
\2051\ For a description of section 274 as it applied to the
deductibility of meals and entertainment for amounts paid or incurred
before January 1, 2018, see Joint Committee on Taxation, General
Explanation of Public Law No. 115-97 (JCS-1-18), December 2018.
\2052\ Sec. 274(n)(1)(A). This includes expenses for food or
beverages (and facilities used in connection therewith) furnished on
the business premises of the taxpayer primarily for the taxpayer's
employees under section 274(e)(1).
\2053\ Sec. 274(k)(1). See also, Treas. Reg. sec. 1.274-12.
\2054\ Sec. 274(d) and (k).
\2055\ Treas. Reg. sec. 1-274-11(b)(1)(ii).
\2056\ See, e.g., Treas. Reg. sec. 1.274-11(d), Examples 2 through
4.
---------------------------------------------------------------------------
The expenses of an employer associated with providing food
or beverages to employees through an eating facility that meet
the requirements for de minimis fringe benefits and for the
convenience of the employer are similarly subject to the 50
percent deduction limitation. However, such amounts incurred or
paid after December 31, 2025 are not deductible.
There are exceptions to the general rule limiting
deductions for food or beverage expenses to 50 percent of the
otherwise deductible amount. One such exception applies to food
or beverage expenses reported by the taxpayer as compensation
and as wages to an employee.\2057\ Another exception applies to
the extent that the food or beverage expenses are includible in
the gross income of a recipient who is not an employee (e.g., a
nonemployee director) as compensation for services rendered or
as a prize or award.\2058\ The exceptions apply only to the
extent that amounts are properly reported by the employer as
compensation and wages or otherwise includible in income. In no
event may the amount of the deduction exceed the amount of the
taxpayer's actual cost, even if a greater amount (i.e., fair
market value) is includible in income.\2059\
---------------------------------------------------------------------------
\2057\ Sec. 274(e)(2); Treas. Reg. sec. 1.274-12(c)(2)(i).
\2058\ Sec. 274(e)(9); Treas. Reg. sec. 1.274-12(c)(2)(i).
\2059\ Treas. Reg. sec. 1.162-25T(a).
---------------------------------------------------------------------------
Other exceptions to the 50-percent deduction limitation
include the following: food or beverage expenses paid or
incurred by the taxpayer, in connection with the performance of
services for another person (other than an employer), under a
reimbursement or other expense allowance arrangement if the
taxpayer accounts for the expenses to such person; \2060\
expenses for food or beverage expenses at recreational, social,
or similar activities primarily for the benefit of employees
other than certain owners and highly compensated employees;
\2061\ expenses for food or beverages made available by the
taxpayer to the general public; \2062\ and food or beverages
which are sold by the taxpayer in a bona fide transaction for
an adequate and full consideration in money or money's
worth.\2063\ Other exceptions to the 50-percent deduction
limitation include exceptions for food or beverage expenses
includible in an employee's income under section 82 (in
connection with moving from one residence to another residence
attributable to employment), and expenses for food or beverages
provided to crew members of certain commercial vessels and
certain oil or gas platform or drilling rig workers.\2064\
---------------------------------------------------------------------------
\2060\ Sec. 274(e)(3); Treas. Reg. sec. 1.274-12(c)(2)(ii).
\2061\ Sec. 274(e)(4); Treas. Reg. sec. 1.274-12(c)(2)(iii).
\2062\ Sec. 274(e)(7); Treas. Reg. sec. 1.274-12(c)(2)(iv).
\2063\ Sec. 274(e)(8); Treas. Reg. sec. 1.274-12(c)(2)(v).
\2064\ Secs. 274(n)(2)(B) and (C).
---------------------------------------------------------------------------
Explanation of Provision
The provision provides an exception to the 50 percent
deduction limitation for any food or beverage expense if such
expense is for food or beverages provided by a restaurant and
paid or incurred after December 31, 2020 and before January 1,
2023.\2065\ Thus, for example, amounts paid or incurred during
2021 and 2022 (1) for employee travel meals, (2) for business
meals with a client, to the extent the meal is not extravagant
or lavish, (3) for meals consumed during certain business
activities, such as professional development conferences, or
(4) by an employer associated with providing food or beverages
to employees through an eating facility that meet the
requirements for de minimis fringe benefits and for the
convenience of the employer, are not subject to the 50 percent
deduction limitation if such food or beverages are provided by
a restaurant. The provision does not change the tax treatment
of entertainment expenses, which remain nondeductible. However,
amounts paid or incurred during 2021 and 2022 for food or
beverages provided by a restaurant in connection with
entertainment may not be subject to the 50-percent deduction
limitation if such costs are separately stated on an invoice.
---------------------------------------------------------------------------
\2065\ The term ``restaurant'' is not defined in the Code.
---------------------------------------------------------------------------
Effective Date
The provision is effective for amounts paid or incurred
after December 31, 2020.
11. Temporary special rule for determination of earned income (sec. 211
of the Act and secs. 24 and 32 of the Code)
Present Law
Eligible taxpayers may claim an earned income tax credit
(``EITC'') and a child tax credit. In general, the EITC is a
refundable income tax credit for low-income workers.\2066\ 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.
---------------------------------------------------------------------------
\2066\ Sec. 32.
---------------------------------------------------------------------------
Taxpayers with incomes below certain threshold amounts are
eligible for a $2,000 child tax credit for each qualifying
child.\2067\ In some circumstances, all or a portion of the
otherwise allowable credit is treated as a refundable income
tax credit (the ``additional child tax credit''). Generally,
the amount of the additional child tax credit equals 15 percent
of the taxpayer's earned income in excess of $2,500. The
maximum amount of the refundable credit for each qualifying
child is $1,400 for taxable years beginning in 2020.\2068\
---------------------------------------------------------------------------
\2067\ Sec. 24.
\2068\ Rev. Proc. 2019-44. This amount is indexed for inflation.
---------------------------------------------------------------------------
Congress has at times enacted provisions that allow
individuals to use their earned income from the prior, rather
than current, taxable year in determining the amount of the
earned income tax credit or additional child tax credit.\2069\
---------------------------------------------------------------------------
\2069\ See, e.g., Pub. L. No. 116-94, sec. 204(c), December 20,
2019 (certain disasters occurring in 2018 and 2019); Pub. L. No. 115-
123, sec. 20104(c), February 9, 2018 (certain California wildfires);
Pub. L. No. 115-64, sec. 504(c), September 29, 2017 (hurricanes Harvey,
Irma, Maria); former sec. 1400S(d) (hurricanes Katrina, Rita, and
Wilma), repealed by Pub. L. No. 115-141, March 23, 2018.
---------------------------------------------------------------------------
Explanation of Provision
The provision permits a taxpayer to elect to calculate the
taxpayer's EITC and additional child tax credit for taxable
years beginning in 2020 using 2019 rather than 2020 earned
income if the taxpayer's earned income in 2020 is less than in
2019.
For purposes of the provision, in the case of a joint
return, the earned income which is attributable to the taxpayer
for 2019 is the sum of the earned income which is attributable
to each spouse for 2019.
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
(December 27, 2020).
12. Certain charitable contributions deductible by non-itemizers (sec.
212 of the Act and secs. 170, 6662, and 6751 of the Code)
Present Law
Adjusted gross income and taxable income of an individual
Adjusted gross income
Under the Code, gross income means ``income from whatever
source derived'' except for certain items specifically exempt
or excluded by statute.\2070\ An individual's AGI is determined
by subtracting certain ``above-the-line'' deductions from gross
income. These deductions include trade or business expenses,
losses from the sale or exchange of property, contributions to
a qualified retirement plan by a self-employed individual,
contributions to certain IRAs, certain moving expenses for
members of the Armed Forces, and certain education-related
expenses.\2071\
---------------------------------------------------------------------------
\2070\ Sec. 61.
\2071\ Sec. 62. In addition, alimony payments are generally
deductible by the payor spouse for divorce and separation instruments
executed before January 1, 2019.
---------------------------------------------------------------------------
Taxable income
To determine taxable income, an individual reduces AGI by
the applicable standard deduction or his or her itemized
deductions,\2072\ and by the deduction for qualified business
income.\2073\
---------------------------------------------------------------------------
\2072\ Sec. 63(a) and (b).
\2073\ Secs. 63(b)(3), (d)(3), and 199A.
---------------------------------------------------------------------------
A taxpayer may reduce AGI by the amount of the applicable
standard deduction to arrive at taxable income. The basic
standard deduction varies depending on a taxpayer's filing
status. For 2021, the amount of the standard deduction is
$12,550 for a single individual and for a married individual
filing separately, $18,800 for a head of household, and $25,100
for married taxpayers filing jointly and for a surviving
spouse. An additional standard deduction is allowed with
respect to any individual who is elderly (i.e., above age 64)
and/or blind.\2074\ The amounts of the basic standard deduction
and the additional standard deductions are indexed annually for
inflation.
---------------------------------------------------------------------------
\2074\ For 2021, the additional amount is $1,350 for married
taxpayers (for each spouse meeting the applicable criterion) and
surviving spouses. The additional amount for single individuals and
heads of households is $1,700. If an individual is both elderly and
blind, the individual is entitled to two additional standard
deductions, for a total additional amount (for 2021) of $2,700 or
$3,400, as applicable.
---------------------------------------------------------------------------
In lieu of taking the applicable standard deduction, an
individual may elect to itemize deductions. The deductions that
may be itemized include personal State and local income,
property, and sales taxes (up to $10,000 annually ($5,000 for
married taxpayers filing separately)), home mortgage interest
(on mortgages up to certain specified dollar amounts),
charitable contributions, certain investment interest, medical
expenses (in excess of 7.5 percent of AGI), and casualty and
theft losses attributable to Federally declared disasters (in
excess of 10 percent of AGI and in excess of $100 per loss).
Itemized deduction for charitable contributions
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
recipient organization.\2075\ For individuals, the deduction
for charitable contributions is available only to a taxpayer
who elects to itemize deductions.
---------------------------------------------------------------------------
\2075\ Sec. 170.
---------------------------------------------------------------------------
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.
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 recipient
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.\2076\
---------------------------------------------------------------------------
\2076\ Sec. 170(b)(1)(H).
---------------------------------------------------------------------------
Charitable contributions that exceed the applicable
percentage limit generally may be carried forward for up to
five years.\2077\ In general, contributions carried over from a
prior year are taken into account after contributions for the
current year that are subject to the same percentage limit.
---------------------------------------------------------------------------
\2077\ Sec. 170(b)(1)(G)(ii) and (d).
---------------------------------------------------------------------------
Temporary above-the-line deduction for certain charitable contributions
Under the CARES Act (Pub. L. No. 116-136), described in
Part Six of this document, an eligible individual may claim an
above-the-line deduction in an amount not to exceed $300 for
qualified charitable contributions made during a taxable year
that begins in 2020.\2078\ The above-the-line deduction is not
available for contributions made during a taxable year that
begins after 2020. An eligible individual is an individual who
does not elect to itemize deductions.\2079\ Thus, a taxpayer
taking the standard deduction, who absent the temporary rule
would not be able to deduct any charitable contributions, may
claim an above-the-line deduction for qualified charitable
contributions.
---------------------------------------------------------------------------
\2078\ Sec. 62(a)(22).
\2079\ Sec. 62(f)(1). The $300 limit applies to the tax-filing
unit. Thus, for example, married taxpayers who file a joint return and
do not elect to itemize deductions are allowed to deduct up to a total
of $300 in qualified charitable contributions on the joint return.
---------------------------------------------------------------------------
A qualified charitable contribution is a cash contribution
for which a deduction is allowable under section 170
(determined without regard to the percentage limitations under
section 170(b)) that is paid 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)).\2080\ 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. A qualified charitable contribution
does not include an amount that is treated as a contribution in
the taxable year by reason of being carried forward from a
prior contribution year under section 170(b)(1)(G) or (d)(1).
---------------------------------------------------------------------------
\2080\ Sec. 62(f)(2).
---------------------------------------------------------------------------
Accuracy-related penalty (sec. 6662)
An accuracy-related penalty under section 6662 applies to
the portion of any underpayment that is attributable to (1)
negligence, (2) any substantial understatement of income tax,
(3) any substantial valuation misstatement, (4) any substantial
overstatement of pension liabilities, or (5) any substantial
estate or gift tax valuation understatement. If the correct
income tax liability exceeds that reported by the taxpayer by
the greater of 10 percent of the correct tax or $5,000 (or, in
the case of corporations, by the lesser of (a) 10 percent of
the correct tax (or $10,000 if greater) or (b) $10 million),
then a substantial understatement exists and a penalty may be
imposed equal to 20 percent of the underpayment of tax
attributable to the understatement.\2081\ Except in the case of
tax shelters,\2082\ the amount of any understatement is
reduced by any portion attributable to an item if (1) the
treatment of the item is supported by substantial authority, or
(2) facts relevant to the tax treatment of the item were
adequately disclosed and there was a reasonable basis for its
tax treatment. The Secretary may prescribe a list of positions
that the Secretary believes do not meet the requirements for
substantial authority under this provision.
---------------------------------------------------------------------------
\2081\ Sec. 6662.
\2082\ A tax shelter is defined for this purpose as a partnership
or other entity, an investment plan or arrangement, or any other plan
or arrangement if a significant purpose of such partnership, other
entity, plan, or arrangement is the avoidance or evasion of Federal
income tax. Sec. 6662(d)(2)(C).
---------------------------------------------------------------------------
The section 6662 penalty generally is abated (even with
respect to tax shelters) in cases in which the taxpayer can
demonstrate that there was ``reasonable cause'' for the
underpayment and that the taxpayer acted in good faith.\2083\
The relevant regulations provide that reasonable cause exists
where the taxpayer ``reasonably relies in good faith on [a
professional] tax advisor's analysis of the pertinent facts and
authorities [that] . . . unambiguously states that the tax
advisor concludes that there is a greater than 50-percent
likelihood that the tax treatment of the item will be upheld if
challenged'' by the IRS.\2084\
---------------------------------------------------------------------------
\2083\ Sec. 6664(c).
\2084\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B). See also Treas. Reg.
sec. 1.6664-4(c).
---------------------------------------------------------------------------
With certain exceptions, section 6662 does not apply to any
portion of an underpayment that is attributable to a reportable
transaction understatement on which a penalty is imposed under
section 6662A.\2085\
---------------------------------------------------------------------------
\2085\ Sec. 6662(b) (flush language).
---------------------------------------------------------------------------
The 20-percent penalty is increased to 40 percent when
there is a gross valuation misstatement involving a substantial
valuation overstatement, a substantial overstatement of pension
liabilities, a substantial estate or gift tax valuation
understatement, or when a transaction lacking economic
substance is not properly disclosed.\2086\
---------------------------------------------------------------------------
\2086\ Secs. 6662(h) and 6662(i).
---------------------------------------------------------------------------
Mandatory supervisory approval to assert penalty
Assessment of an addition to tax or penalty under the Code
is barred in the absence of prior supervisory approval. Such
approval requires that the initial determination of the penalty
or addition to tax be approved in writing by the immediate
supervisor of the person asserting the penalty. The Code
authorizes the Secretary to designate a higher level official
to provide the supervisory approval. Certain penalties are
exempt from the requirement for supervisory approval, including
those penalties ``automatically calculated through electronic
means.'' \2087\ Because the IRS bears the burden of producing
evidence to support assessment of a penalty in any court
proceeding, the Commissioner must produce evidence of
compliance with the supervisory approval requirement, even if
the IRS does not bear the burden of proof.\2088\
---------------------------------------------------------------------------
\2087\ Sec. 6751(b), generally. Other penalties exempt from the
pre-approval requirement are penalties under sections 6651 (failure to
file or pay taxes), 6654 (failure to pay estimated individual taxes)
and 6655 (failure to pay estimated corporate taxes).
\2088\ Graev v. Commissioner, 149 T.C. 485 (2017). Cf. Chai v.
Commissioner, 851 F.3d 190 (2d Cir. 2017) (held that the Commissioner
bears both the burden of production and burden of proof with respect to
the penalty).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, an individual who does not itemize
deductions may claim a deduction in an amount not to exceed
$300 ($600 in the case of a joint return) for certain
charitable contributions made during a taxable year that begins
in 2021.\2089\ The deduction is not available for contributions
made during a taxable year that begins after 2021.
---------------------------------------------------------------------------
\2089\ New sec. 170(p). Unlike the temporary above-the-line
charitable deduction under the CARES Act for certain contributions made
during a taxable year that begins in 2020, the new deduction is not
subtracted from gross income in determining the individual's AGI and
thus is not an above-the-line deduction. Instead, as with the standard
deduction and an individuals itemized deductions, qualifying charitable
contributions made by a non-itemizer in a taxable year that begins in
2021 are subtracted from AGI in determining an individual's taxable
income.
---------------------------------------------------------------------------
Contributions taken into account for this purpose include
only contributions made in cash during the taxable year 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. A qualifying
charitable contribution does not include an amount that is
treated as a contribution in the taxable year by reason of
being carried forward from a prior contribution year under
section 170(b)(1)(G) or (d)(1).
The provision increases the penalty under section 6662 for
an underpayment of tax resulting from an overstatement of the
temporary nonitemizer charitable deduction for contributions
made during a taxable year that begins in 2021. The penalty is
increased from 20 percent of the underpayment to 50 percent of
the underpayment. In addition, the provision exempts the
section 6662 penalty relating to an overstatement of the
temporary nonitemizer charitable deduction from the requirement
for supervisory approval under section 6751(b).
Effective Date
The provision is effective for taxable years beginning
after December 31, 2020.
13. Modification of limitations on charitable contributions (sec. 213
of the Act and sec. 170 of the Code)
Present Law
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
recipient organization.\2090\
---------------------------------------------------------------------------
\2090\ Sec. 170.
---------------------------------------------------------------------------
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 contribution base is defined
as the taxpayer's AGI computed without regard to any net
operating loss carryback. The applicable percentage of the
contribution base varies depending on the type of recipient
organization and property contributed.
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,
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
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 with certain modifications.
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.
Carryforwards of excess contributions
Charitable contributions that exceed the applicable
percentage limitation may be carried forward for up to five
years.\2091\ 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 rule.
---------------------------------------------------------------------------
\2091\ Sec. 170(d).
---------------------------------------------------------------------------
Contributions of food inventory
A taxpayer's deduction for charitable contributions of
inventory generally is limited to the taxpayer's basis
(typically, cost) in the inventory, or, if less, the fair
market value of the inventory. For certain contributions of
inventory, however, a C corporation may claim an enhanced
deduction equal to the lesser of (1) basis plus one-half of the
item's appreciation (i.e., basis plus one-half of fair market
value in excess of basis) or (2) two times basis.\2092\
---------------------------------------------------------------------------
\2092\ Sec. 170(e)(3).
---------------------------------------------------------------------------
Any taxpayer engaged in a trade or business, whether or not
a C corporation, is eligible to claim the enhanced deduction
for donations of food inventory.\2093\ The enhanced deduction
for food inventory is available only for food that qualifies as
``apparently wholesome food.'' Apparently wholesome food is
defined as food intended for human consumption that meets all
quality and labeling standards imposed by Federal, State, and
local laws and regulations even though the food may not be
readily marketable due to appearance, age, freshness, grade,
size, surplus, or other conditions.
---------------------------------------------------------------------------
\2093\ Sec. 170(e)(3)(C).
---------------------------------------------------------------------------
For taxpayers other than C corporations, the total
deduction for donations of food inventory in a taxable year
generally may not exceed 15 percent of the taxpayer's net
income for such taxable year from all sole proprietorships, S
corporations, or partnerships (or other non-C corporation
trades or businesses) from which contributions of apparently
wholesome food are made. For C corporations, these
contributions are made subject to a limitation of 15 percent of
taxable income (as modified). The general 10-percent limitation
for a C corporation does not apply to these contributions, but
the 10-percent limitation applicable to other contributions is
reduced by the amount of these contributions. Qualifying food
inventory contributions in excess of these 15-percent
limitations may be carried forward and treated as qualifying
food inventory contributions in each of the five succeeding
taxable years in order of time.
Temporary modifications to charitable contribution limitations
In general
Congress has at times liberalized the charitable
contribution limitations for contributions made in response to
certain natural disasters.\2094\
---------------------------------------------------------------------------
\2094\ See, e.g., sec. 20104(a) of Pub. L. No. 115-123 (increasing
limits in response to 2017 California wildfires); sec. 504(a) of Pub.
L. No. 115-63 (increasing limits in response to Hurricanes Harvey,
Irma, and Maria); and former sec. 1400S (increasing limits in response
to Hurricanes Katrina, Rita, and Wilma). For a more detailed
description of the most recently enacted provision (related to the 2017
California wildfires), see Joint Committee on Taxation, General
Explanation of Certain Tax Legislation Enacted in the 115th Congress
(JCS-2-19), October 2019, pp. 27-29.
---------------------------------------------------------------------------
CARES Act
Section 2205 of the CARES Act (Pub. L. No. 116-136),
described in Part Six of this document, temporarily increases
the charitable contribution limitations. In the case of an
individual, the deduction for qualified contributions is
allowed up to the amount by which the taxpayer's contribution
base (AGI computed without regard to any net operating loss
carryback) exceeds the deduction for other charitable
contributions. Contributions in excess of this amount are
carried over to succeeding taxable years as contributions
described in section 170(b)(1)(G), subject to the limitations
of section 170(b)(1)(G)(ii).
In the case of a corporation, the deduction for qualified
contributions is allowed up to 25 percent of the corporation's
taxable income. 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
calendar year 2020 to a charitable organization described in
section 170(b)(1)(A), other than contributions (i) to 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. A taxpayer
must elect to have contributions treated as qualified
contributions.
For charitable contributions of food inventory that are
made during 2020 and which qualify for the enhanced deduction,
the 15-percent limitations described above are increased to 25
percent.
Explanation of Provision
The provision generally extends the temporary modifications
of the charitable contribution limits under the CARES Act to
contributions made during 2021. This is accomplished by (1)
amending the definition of a qualified contribution to include
a contribution paid during 2021 and (2) amending the temporary
increase in the limit for contributions of food inventory to
include contributions made during 2021.
Effective Date
The provision is effective for contributions made after
December 31, 2020.
14. Temporary special rules for health and dependent care flexible
spending arrangements (sec. 214 of the Act and sec. 125 of the
Code)
Present Law
Flexible spending arrangements
A flexible spending arrangement (``FSA'') generally is
defined as a benefit program which provides employees with
coverage under which specific incurred expenses may be
reimbursed (subject to reimbursement maximums and other
conditions) and the maximum amount of reimbursement reasonably
available is less than 500 percent of the value of such
coverage.\2095\ A flexible spending arrangement under a
cafeteria plan (as defined below) allows an employee to make
salary reduction contributions for use in receiving
reimbursements for certain incurred expenses.\2096\ The
arrangement can also include non-elective employer
contributions (known as employer flex-credits) that the
employer makes available for every employee eligible to
participate in the employer's cafeteria plan, to be used only
for certain tax-excludable benefits (but not as cash or a
taxable benefit).\2097\ Types of expenses that may be
reimbursed under a flexible spending arrangement in a cafeteria
plan include medical expenses (under a ``health FSA'') and
dependent care expenses (under a ``dependent care FSA'').
---------------------------------------------------------------------------
\2095\ Sec. 106(c)(2) and Prop. Treas. Reg. sec. 1.125-5(a).
\2096\ Sec. 125 and Prop. Treas. Reg. sec. 1.125-5.
\2097\ Prop. Treas. Reg. sec. 1.125-5(b).
---------------------------------------------------------------------------
Cafeteria plans
A cafeteria plan is a separate written plan of an employer
under which all participants are employees, and participants
are permitted to choose among at least one permitted taxable
benefit (for example, current cash compensation) and at least
one qualified benefit.\2098\ Qualified benefits are generally
employer-provided benefits that are not includible in gross
income by reason of an express provision of the Code. Examples
include employer-provided health coverage (including a health
FSA), group term life insurance coverage not in excess of
$50,000, and benefits under a dependent care assistance program
(including a dependent care FSA).\2099\ In order to be
excludable from gross income, any qualified benefit elected
under a cafeteria plan must independently satisfy any
requirements under the Code section that provides the
exclusion. If an employee receives a qualified benefit based on
his or her election between the qualified benefit and a taxable
benefit under a cafeteria plan, the qualified benefit generally
is not includible in gross income.\2100\ However, if a plan
offering an employee an election between taxable benefits
(including cash) and nontaxable qualified benefits does not
meet the requirements for being a cafeteria plan, the election
between taxable and nontaxable benefits results in gross income
to the employee, regardless of the benefit elected and when the
election is made.\2101\
---------------------------------------------------------------------------
\2098\ Sec. 125(d).
\2099\ Benefits under a health FSA are excludable from gross income
under sections 105(b) and 106, and benefits under a dependent care FSA
are excludable from gross income under section 129.
\2100\ Sec. 125(a).
\2101\ Sec. 125; Prop. Treas. Reg. sec. 1.125-1(b).
---------------------------------------------------------------------------
Cafeteria plans generally may not provide for the deferral
of compensation.\2102\ Elections under a cafeteria plan
generally must be made prior to the first day of the plan year
and must be irrevocable, except under certain circumstances
permitted under Treasury regulations, such as if the
participant experiences a change in status.\2103\ In addition,
a cafeteria plan may be amended during a plan year, but the
amendment must only be effective prospectively.\2104\
---------------------------------------------------------------------------
\2102\ Sec. 125(d)(2).
\2103\ Treas. Reg. sec. 1.125-4.
\2104\ Prop. Treas. Reg. sec. 1.125-1(c)(5).
---------------------------------------------------------------------------
Health FSAs
In order for coverage and reimbursements under a health FSA
to qualify for tax-favored treatment, the health FSA must
qualify as an accident and health plan.\2105\ Under the Code,
the value of employer-provided health coverage under an
accident or health plan is generally excludable from gross
income,\2106\ as are reimbursements under the plan for medical
care expenses for employees, their spouses, and their
dependents.\2107\ A health FSA may only reimburse medical
expenses as defined in section 213(d).
---------------------------------------------------------------------------
\2105\ Sec. 105 and 106; Prop. Treas. Reg. sec. 1.125-5(k)(1).
\2106\ Sec. 106. Health coverage provided to active members of the
uniformed services, military retirees, and their dependents are
excludable from gross income under section 134. That section provides
an exclusion for ``qualified military benefits,'' defined as benefits
received by reason of status or service as a member of the uniformed
services and which were excludable from gross income on September 9,
1986, under any provision of law, regulation, or administrative
practice then in effect.
\2107\ Sec. 105(b).
---------------------------------------------------------------------------
A benefit provided under a cafeteria plan through employer
contributions to a health FSA is not treated as a qualified
benefit unless the cafeteria plan provides that an employee may
not elect salary reduction contributions in excess of $2,500,
adjusted for inflation, for any taxable year.\2108\ For taxable
year 2021, the limit is $2,750.
---------------------------------------------------------------------------
\2108\ Sec. 125(i).
---------------------------------------------------------------------------
Dependent care FSAs
Amounts paid or incurred by an employer for dependent care
assistance provided to an employee are excludable from the
employee's income if the amounts are furnished pursuant to a
dependent care assistance program.\2109\ A dependent care
assistance program is a separate written plan of an employer
for the exclusive benefit of the employees that provides
dependent care assistance and meets certain other requirements
under the Code, including requirements relating to non-
discriminatory benefits, limits on principal shareholders, and
information to be provided to eligible employees.\2110\ A
dependent care FSA is a type of dependent care assistance
program.\2111\
---------------------------------------------------------------------------
\2109\ Sec. 129(a)(1).
\2110\ Sec. 129(d).
\2111\ Prop. Treas. Reg. sec. 1.125-5(h).
---------------------------------------------------------------------------
Dependent care assistance means the payment or provision of
services that would be considered employment-related expenses
under section 21(b)(2) (relating to expenses for household and
dependent care services necessary for gainful employment) if
paid for by the employee.\2112\ Such employment-related
expenses include expenses for the care of a qualifying
individual. Qualifying individual is defined as (i) a dependent
of the taxpayer \2113\ who has not attained age 13 or (ii) a
dependent \2114\ or spouse of the taxpayer who is physically or
mentally incapable of caring for himself or herself and who has
the same principal place of abode as the taxpayer for more than
one-half of the taxable year.\2115\
---------------------------------------------------------------------------
\2112\ Sec. 129(e)(1).
\2113\ As defined in sec. 152(a)(1).
\2114\ As defined in sec. 152, determined without regard to
subsections (b)(1), (b)(2), and (d)(1)(B).
\2115\ Sec. 21(b)(1).
---------------------------------------------------------------------------
The amount that may be excluded from an employee's gross
income under a dependent care assistance program, including a
dependent care FSA, is limited to $5,000 ($2,500 in the case of
a separate return by a married individual).\2116\ In addition,
a plan may permit an individual who has ceased participation in
a dependent care FSA (due to, for example, termination of
employment) to apply unused amounts remaining in the dependent
care FSA to expenses incurred through the last day of that plan
year.\2117\
---------------------------------------------------------------------------
\2116\ Sec. 129(a)(2).
\2117\ Prop. Treas. Reg. sec. 1.125-6. This rule does not apply to
Health FSAs.
---------------------------------------------------------------------------
``Use-or-lose'' rule
Health FSAs and dependent care FSAs are subject to the
general requirements for cafeteria plans, including the
requirement that the plan generally may not provide for the
deferral of compensation.\2118\ Thus, amounts remaining in a
health FSA or dependent care FSA at the end of a plan year
generally must be forfeited by the employee (referred to as the
``use-or-lose'' rule).\2119\ However, a cafeteria plan may
allow a grace period not to exceed two and one-half months
immediately following the end of the plan year during which
unused amounts may be paid or reimbursed to participants for
qualified expenses incurred during the grace period.\2120\
Alternatively, a cafeteria plan may permit up to $550 of unused
amounts remaining in a health FSA at the end of a plan year to
be paid or reimbursed to plan participants for qualifying
medical expenses during the following plan year.\2121\ Such a
carryover is not permitted in a dependent care FSA. A cafeteria
plan may only permit a carryover of amounts in a health FSA if
the plan does not also allow a grace period with respect to the
health FSA.
---------------------------------------------------------------------------
\2118\ Sec. 125(d)(2).
\2119\ Sec. 125(d)(2) and Prop. Treas. Reg. sec. 1.125-5(c).
\2120\ Notice 2005-42, 2005-1 C.B. 1204, June 6, 2005 and Prop.
Treas. Reg. sec. 1.125-1(e).
\2121\ Notice 2020-33, 2020-22 I.R.B. 868, May 26, 2020. For plan
years beginning before 2020, the amount that may be carried over to the
following plan year is $500. Notice 2013-71, 2013-47 I.R.B. 532,
November 18, 2013.
---------------------------------------------------------------------------
Special rules relating to COVID-19
Under IRS guidance, special rules apply to a health FSA or
dependent care FSA for 2020, due to the public health emergency
posed by the outbreak of COVID-19.\2122\ A cafeteria plan may
permit participants to apply unused amounts remaining in a
health FSA or dependent care FSA as of the end of a grace
period ending in 2020 or a plan year ending in 2020 to pay or
reimburse expenses incurred under the FSA through December 31,
2020. In addition, a plan may permit mid-year elections during
calendar year 2020 with respect to health and dependent care
FSAs (without requiring the employee to meet the criteria set
forth in the Treasury regulations, such as a change in status).
---------------------------------------------------------------------------
\2122\ Notice 2020-29, 2020-22 I.R.B. 864, May 26, 2020.
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, for plan years ending in 2020 or 2021,
a plan that includes a health FSA or dependent care FSA does
not fail to be treated as a cafeteria plan merely because the
plan permits participants to carry over (under rules similar to
the rules applicable to health FSAs) any unused benefits or
contributions remaining in the FSA from such plan year to the
following plan year. Thus, for example, a cafeteria plan may
permit a participant in a dependent care FSA to be paid or
reimbursed for dependent care expenses incurred during the plan
year ending in 2021 by applying unused amounts remaining in
that participant's dependent care FSA at the end of the plan
year ending in 2020.
In addition, for plan years ending in 2020 or 2021, a
cafeteria plan may extend the grace period applicable to a
health FSA or dependent care FSA (with respect to unused
benefits or contributions remaining in the FSA) to 12 months
after the end of the plan year.
Under the provision, a cafeteria plan that includes a
health FSA may allow an employee who ceases participation in
the plan during calendar year 2020 or 2021 (for example, due to
termination of employment) to continue to receive
reimbursements from unused benefits or contributions through
the end of the plan year in which such participation ceased
(including any grace period, taking into account the
modification to the grace period under this provision). Rules
similar to the rules applicable to dependent care FSAs apply.
The provision also modifies the definition of qualifying
individual as it applies to a dependent care FSA in certain
circumstances so that the term includes dependents who have not
yet reached age 14 (rather than age 13). To qualify for this
treatment, an employee must be enrolled in a dependent care FSA
for the last plan year with respect to which the end of the
regular enrollment period for the plan year was on or before
January 31, 2020. In addition, the employee must either have a
dependent who attains age 13 during such plan year, or, in the
case of an employee who has an unused balance remaining in the
FSA at the end of the plan year, must have a dependent who
attains age 13 during the subsequent plan year. In the former
case, the amended definition of qualifying individual
(substituting age 14 for age 13) applies for that plan year
(i.e., the last plan year with respect to which the end of the
regular enrollment period for the plan year was on or before
January 31, 2020). In the latter case, the amended definition
applies during the subsequent plan year, and applies only to so
much of the amounts paid for dependent care assistance with
respect to the dependent who attains age 13 during that
subsequent plan year as does not exceed the unused balance.
Under the provision, for plan years ending in 2021, a
cafeteria plan may permit an employee to modify prospectively
the amount (but not in excess of any applicable dollar
limitation) of the employee's contributions to a health FSA or
dependent care FSA (without regard to any change in status).
A cafeteria plan does not fail to qualify as such merely
because it is amended in accordance with the provision, so long
as the amendment is adopted no later than the last day of the
first calendar year beginning after the end of the plan year in
which the amendment is effective, and the plan is operated in
accordance with the amendment during the period beginning on
the amendment's effective date and ending on the date the
amendment is adopted.
Effective Date
The provision is effective as of the date of enactment of
the Act (December 27, 2020).
TITLE III--DISASTER TAX RELIEF
1. Definitions (sec. 301 of the Act and secs. 24, 32, 38, 42, 72, 165,
and 170 of the Code)
Present Law
The provisions below provide temporary tax relief to those
areas affected by certain major disasters declared in 2020 and
some portion of 2021. The provisions use the terms ``qualified
disaster area,'' ``qualified disaster zone,'' ``qualified
disaster,'' and ``incident period.''
As used in the bill, ``qualified disaster area'' refers to
an area with respect to which a major disaster has been
declared by the President during the period beginning on
January 1, 2020, and ending on the date which is 60 days after
the date of enactment of the Act (December 27, 2020), under
section 401 of the Robert T. Stafford Disaster Relief and
Emergency Assistance Act (the ``Stafford Act''), if the
incident period of the disaster with respect to which such
declaration is made begins on or after December 28, 2019 and on
or before the date of enactment of the Act. However, a
qualified disaster area does not include any area with respect
to which a major disaster has been declared only by reason of
COVID-19.
A ``qualified disaster zone'' refers to that portion of the
applicable ``qualified disaster area,'' as described above,
which has been determined by the President to warrant
individual or individual and public assistance from the Federal
government under the Stafford Act by reason of the applicable
qualified disaster.
A ``qualified disaster'' means, with respect to the
applicable qualified disaster area, the disaster by reason of
which a major disaster was declared with respect to such area.
``Incident period'' means, with respect to the applicable
qualified disaster, the period specified by the Federal
Emergency Management Agency as the period during which such
disaster occurred, except that such period shall not be treated
as ending after the date which is 30 days after the date of
enactment of the Act.
2. Special disaster-related rules for use of retirement funds (sec. 302
of the Act and sec. 72 of the Code)
Present Law
Distributions from tax-favored retirement plans
A distribution from a tax-qualified plan described in
section 401(a) (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.\2123\ These plans
are referred to collectively as ``eligible retirement plans.''
\2124\ 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.\2125\
---------------------------------------------------------------------------
\2123\ 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.
\2124\ Sec. 402(c)(8)(B). Eligible retirement plans also include
annuity plans described in section 403(a).
\2125\ Sec. 72(t). The 10-percent early withdrawal tax does not
apply to distributions from a governmental section 457(b) plan.
---------------------------------------------------------------------------
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 IRS 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.\2126\
---------------------------------------------------------------------------
\2126\ Rev. Proc 2020-46, 2020-45 I.R.B. 995, provides for a self-
certification procedure (subject to verification on audit) that may be
used by a taxpayer claiming eligibility for a waiver of the 60-day
requirement with respect to a rollover into a plan or IRA in certain
specified circumstances.
---------------------------------------------------------------------------
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 under certain types of plans in
the case of financial hardship or an unforeseeable emergency.
Loans from tax-favored retirement plans
Employer-sponsored retirement plans are permitted, but not
required, to 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 (1) the loan amount must not exceed the lesser
of 50 percent of the participant's account balance or $50,000
(generally taking into account outstanding balances of previous
loans), and (2) 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.\2127\ 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 a 10-percent early withdrawal tax, if applicable. A deemed
distribution is not eligible for rollover to another eligible
retirement plan. The rules generally do not limit the number of
loans an employee may obtain from a plan except to the extent
that any additional loan would cause the aggregate loan balance
to exceed limitations.
---------------------------------------------------------------------------
\2127\ Sec. 72(p).
---------------------------------------------------------------------------
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.
Disaster relief
Congress has at times liberalized the plan distribution and
loan provisions for individuals affected by certain natural
disasters.\2128\
---------------------------------------------------------------------------
\2128\ See, e.g., sec. 20102 of Pub. L. No. 115-123 (providing
relief in response to 2017 California wildfires); sec. 502 of Pub. L.
No. 115-63 (providing relief in response to Hurricanes Harvey, Irma,
and Maria); former sec. 1400Q (providing relief in response to
Hurricanes Katrina, Rita, and Wilma); and sec. 202 of Div. Q of Pub. L.
No. 116-94. For a more detailed description of the most recently
enacted provision, see Joint Committee on Taxation, General Explanation
of Certain Tax Legislation Enacted in the 115th Congress (JCS-2-19),
October 2019, pp. 22-26.
---------------------------------------------------------------------------
Congress has also provided relief from the plan
distribution and loan provisions for individuals affected by
COVID-19.\2129\
---------------------------------------------------------------------------
\2129\ See sec. 2202 of Pub. L. No. 116-136 (providing relief for
``coronavirus-related distributions'').
---------------------------------------------------------------------------
Explanation of Provision
Distributions and recontributions
The provision allows an exception to the 10-percent early
withdrawal tax for a ``qualified disaster distribution'' from a
qualified retirement plan, a section 403(b) plan, or an
IRA.\2130\ The provision also allows a taxpayer to include
income attributable to a qualified disaster distribution
ratably over three years and to recontribute the amount of the
distribution to an eligible retirement plan within three years.
---------------------------------------------------------------------------
\2130\ This exception also applies to an annuity plan described in
section 403(a). The 10-percent early withdrawal tax generally does not
apply to section 457 plans. Sec. 72(t)(1).
---------------------------------------------------------------------------
A ``qualified disaster distribution'' is any distribution
from a qualified retirement plan, section 403(b) plan,
governmental section 457(b) plan, or an IRA, made on or after
the first day of the incident period of a qualified disaster
and before the date which is 180 days after the date of
enactment, to an individual whose principal place of abode at
any time during the incident period is located in the qualified
disaster area and who has sustained an economic loss by reason
of such disaster.\2131\
---------------------------------------------------------------------------
\2131\ A qualified disaster distribution is subject to income tax
withholding unless the recipient elects otherwise. Mandatory 20-percent
withholding does not apply.
---------------------------------------------------------------------------
A plan is not treated as violating any Code requirement
merely because it treats a distribution as a qualified disaster
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 for each qualified disaster. The total
amount of distributions to an individual from all eligible
retirement plans that may be treated as qualified disaster
distributions with respect to each qualified disaster is
$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, or because
an individual may have been affected by more than one qualified
disaster.
Any amount required to be included in income as a result of
a qualified disaster 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 disaster distribution may, at
any time during the three-year period beginning the day after
the date on which the distribution was received, be
recontributed in one or more contributions 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 disaster
distribution in 2020, that amount is included in income,
generally ratably over the year of the distribution and the
following two years and is not subject to the 10-percent early
withdrawal tax. If, in 2022, the amount of the qualified
disaster distribution is recontributed to an eligible
retirement plan, the individual may file amended returns to
claim a refund of the tax attributable to the amounts
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 \2132\
during the period beginning on the date which is 180 days
before the first day of the incident period of the qualified
disaster and ending on the date which is 30 days after the last
day of such incident period, which was to be used to purchase
or construct a principal residence in a qualified disaster
area, but which was not so used on account of the qualified
disaster, may, during the ``applicable period,'' make one or
more contributions in an aggregate amount not to exceed the
amount of such qualified distribution to an eligible retirement
plan \2133\ of which such individual is a beneficiary and to
which a rollover contribution of such distribution could be
made.\2134\ The ``applicable period'' is, in the case of a
principal residence in a qualified disaster area with respect
to any qualified disaster, the period beginning on the first
day of the incident period of such qualified disaster and
ending on the date which is 180 days after the date of
enactment.
---------------------------------------------------------------------------
\2132\ Defined as a distribution described in sections
401(k)(2)(B)(i)(IV), 403(b)(7)(A)(i)(V), 403(b)(11)(B), or 72(t)(2)(F).
\2133\ As defined in section 402(c)(8)(B).
\2134\ Under sections 402(c), 403(a)(4), 403(b)(8), or 408(d)(3),
as the case may be.
---------------------------------------------------------------------------
Loans
The provision modifies the rules applicable to loans,
providing that for a qualified individual, in order for the
loan not to be treated as a distribution, the permitted maximum
loan amount from a qualified employer plan \2135\ during the
180-day period beginning on the date of enactment is the lesser
of the present value of the nonforfeitable accrued benefit of
the employee under the plan or $100,000.\2136\ For this
purpose, qualified individual has the same meaning as persons
eligible to receive qualified disaster distributions.
---------------------------------------------------------------------------
\2135\ For this purpose, qualified employer plan is defined in
section 72(p)(4).
\2136\ See sec. 72(p)(2)(A).
---------------------------------------------------------------------------
In the case of a qualified individual (with respect to any
qualified disaster) with an outstanding loan from a qualified
employer plan (on or after the first day of the incident period
of such qualified disaster), the provision delays by one year
the due date for any repayment with respect to such loan (or,
if later, until the date which is 180 days after the date of
enactment), if the due date for any repayment otherwise would
fall during the period beginning on the first day of the
incident period of such qualified disaster and ending on the
date which is 180 days after the last day of such incident
period. Under the provision, any subsequent repayments are
appropriately adjusted to reflect the delay in the earlier
repayment due date and any interest accruing during that delay.
The repayment delay is disregarded for purposes of the
requirement that a loan be repaid within five years.
Plan amendments
A plan amendment made under the provision (or a regulation
interpreting the provision) 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 on or after January 1, 2022 (or in the case of a
governmental plan, January 1, 2024), or a later date prescribed
by the Secretary. The provision treats the plan as being
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 to be made (or, if
earlier, the date the amendment is adopted). For an amendment
to be treated as 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.
3. Employee retention credit for employers affected by qualified
disasters (sec. 303 of the Act and sec. 38 of the Code)
Present Law
Employee retention credits
Congress has at times enacted employee retention credits
against employer income tax in response to specific natural
disasters.\2137\ There is not a generally applicable employer
income tax credit for wages paid in connection with natural
disasters.
---------------------------------------------------------------------------
\2137\ See, e.g., sec 203 of Pub. L. No. 116-94, December 20, 2019
(certain disasters occurring in 2018 and 2019); sec. 20103 of Pub. L.
No. 115-123 (providing a credit in response to 2017 California
wildfires); sec. 503 of Pub. L. No. 115-63, as amended by sec. 20201(b)
of Pub. L. No. 115-123 (providing a credit in response to Hurricanes
Harvey, Irma, and Maria); and former sec. 1400R (providing a credit in
response to Hurricanes Katrina, Rita, and Wilma).
---------------------------------------------------------------------------
Payroll tax credits
In general
There are a limited number of credits that may be taken
against certain payroll taxes, rather than the income tax.
Under section 3111(e) (the credit for employment of qualified
veterans) a qualified tax-exempt organization is allowed a
credit against the Old-Age, Survivors, and Disability Insurance
(``OASDI'') tax imposed on the employer for each calendar
quarter in an amount equal to a percentage of wages paid to a
qualified veteran.\2138\ Under section 3111(f) (the credit for
research expenditures of qualified small businesses), a
qualified small business that has made an election under
section 41(h) is allowed a credit against the OASDI tax imposed
on the employer for each calendar quarter in an amount equal to
a percentage of qualified research expenses.\2139\
---------------------------------------------------------------------------
\2138\ See also section 51. The term ``qualified tax-exempt
organization'' means an employer that is an organization described in
section 501(c) and exempt from taxation under section 501(a).
\2139\ See also section 41.
---------------------------------------------------------------------------
In addition, Congress enacted three temporary refundable
payroll tax credits in response to COVID-19: Under section 7001
of the Families First Coronavirus Response Act \2140\
(``FFCRA'') (the payroll tax credit for required paid sick
leave), an employer is generally allowed a credit against the
OASDI tax or Railroad Retirement Tax Act (``RRTA'') tax imposed
on the employer for each calendar quarter in an amount equal to
100 percent of the qualified sick leave wages paid by the
employer with respect to that calendar quarter. Under section
7003 of FFCRA (the payroll tax credit for required paid family
leave), an employer is generally allowed a credit against the
OASDI tax or RRTA tax imposed on the employer for each calendar
quarter in an amount equal to 100 percent of the qualified
family leave wages paid by the employer with respect to that
calendar quarter. Under section 2301 of the CARES Act (the
employee retention credit for employers subject to closure due
to COVID-19),\2141\ an applicable employer is generally allowed
a credit against the OASDI tax or RRTA tax imposed on the
employer for each calendar quarter in an amount equal to a
percentage of the qualified wages with respect to each employee
of such employer for such calendar quarter.
---------------------------------------------------------------------------
\2140\ Pub. L. No. 116-127.
\2141\ Pub. L. No. 116-136.
---------------------------------------------------------------------------
Ordering of credits
Section 7001 of the FFCRA, section 7003 of the FFCRA, and
section 2301 of the CARES Act contain rules for the ordering of
the credits prior to refundability:
The credit allowed under section 7001 of the FFCRA may not
exceed the OASDI tax or RRTA tax imposed on the employer for
that calendar quarter on the wages paid with respect to all the
employer's employees, reduced by any credits allowed under
section 3111(e) or section 3111(f). However, if for any
calendar quarter the amount of the credit exceeds the OASDI tax
or RRTA tax imposed on the employer, reduced as described in
the prior sentence, such excess is treated as a refundable
overpayment.
The credit allowed under section 7003 of the FFCRA may not
exceed the OASDI tax or RRTA tax imposed on the employer for
that calendar quarter on the wages paid with respect to all the
employer's employees, reduced by any credits allowed under
section 3111(e), section 3111(f), or section 7001 of the FFCRA.
However, if for any calendar quarter the amount of the credit
exceeds the OASDI tax or RRTA tax imposed on the employer,
reduced as described in the prior sentence, such excess is
treated as a refundable overpayment.
The credit allowed under section 2301 of the CARES Act may
not exceed the OASDI tax or RRTA tax imposed on the employer
for that calendar quarter on the wages paid with respect to all
the employer's employees, reduced by any credits allowed under
section 3111(e), section 3111(f), section 7001 of the FFCRA, or
section 7003 of the FFCRA. However, if for any calendar quarter
the amount of the credit exceeds the OASDI tax or RRTA tax
imposed on the employer, reduced as described in the prior
sentence, such excess is treated as a refundable overpayment.
Explanation of Provision
In general
The provision provides a credit against income tax equal to
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 in a qualified disaster zone at any
time during the incident period of the applicable qualified
disaster and (2) with respect to which the trade or business
described in (1), as a result of damage sustained by reason of
the applicable qualified disaster, is inoperable on any day
during the period beginning on the first day of the applicable
incident period of the applicable qualified disaster and ending
on the date of enactment of this bill.
An eligible employee is, with respect to an eligible
employer, an employee whose principal place of employment,
determined immediately before the applicable qualified
disaster, with such eligible employer was in the applicable
qualified 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 \2142\ paid or incurred by an
eligible employer with respect to an eligible employee 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 applicable
qualified disaster and (2) ending on the earlier of (i) the
date on which the trade or business resumes significant
operations at such principal place of employment or (ii) the
date which is 150 days after the last day of the applicable
incident period. Qualified wages include wages paid without
regard to whether the employee performs services, performs
services at a different place of employment than the principal
place of employment, or performs services at the principal
place of employment before significant operations resume. Wages
do not include wages taken into account under the employee
retention credit under section 2301 of the CARES ACT.
---------------------------------------------------------------------------
\2142\ For this purpose, ``wages'' is defined in section 51(c)(1),
without regard to section 3306(b)(2)(B).
---------------------------------------------------------------------------
Any wages taken into account in determining the credit
shall not be taken into account as wages for purposes of
sections 41 (providing a credit for increasing research
activities), 45A (the Indian employment credit), 45P (providing
an employer wage credit for employees who are active duty
members of the uniformed services), 45S (providing an employer
credit for paid family and medical leave), 51 (the work
opportunity credit), and 1396 (the empowerment zone employment
credit).
The credit is treated as a current year business credit
under section 38(b) and therefore is subject to the income tax
liability limitations of section 38(c). Rules similar to
sections 51(i)(1), 52, and 280C(a) apply.\2143\
---------------------------------------------------------------------------
\2143\ Section 51(i)(2) provides a rule that employers may not
claim the work opportunity credit for wages paid to rehired
employees.ection 52 provides, for purposes of the work opportunity
credit, rules to treat a controlled group of corporations, or trades or
businesses under common control, as a single employer, as well as
special rules for tax-exempt organizations, estates and trusts, and
certain other entities.ection 280C denies a deduction for the portion
of wages paid or incurred for the taxable year for which certain wage-
based credits are earned.
---------------------------------------------------------------------------
Payroll tax credit
In general
The provision allows a qualified tax-exempt organization to
claim a credit against OASDI tax imposed on the organization
under section 3111(a) equal to 40 percent of the qualified
wages paid to an eligible employee. The amount of qualified
wages with respect to any employee which may be taken into
account in calculating the credit for all calendar quarters may
not exceed $6,000.
The credit allowed may not exceed the applicable employment
taxes imposed on the eligible employer for that calendar
quarter on the wages paid with respect to all of the employer's
employees, reduced by any credits allowed under section 3111(e)
or section 3111(f). Any excess is carried forward to the next
calendar quarter.
The term ``qualified tax-exempt organization'' means an
organization described in section 501(c) of the Internal
Revenue Code of 1986 and exempt from taxation under section
501(a) of such Code if such organization would be an eligible
employer if the activities of such organization were an active
trade or business. Additionally, the credit is not available to
the Government of the United States, the government of any
State or political subdivision thereof, or any agency or
instrumentality of any of those entities. However, the
provision excludes from this rule (1) any organization
described in section 501(c)(1) of the Code and exempt from tax
under section 501(a) of the Code, and (2) any entity that is a
college or university or any entity the principal purpose or
function of which is providing medical or hospital care. As a
result, such organizations and entities are not prevented from
claiming the credit by reason of the general prohibition
against certain government employers claiming the credit.
For purposes of this provision, the terms ``eligible
employee'' and ``qualified wages'' shall be applied with
respect to any qualified tax-exempt organization by treating
the activities of such organization as an active trade or
business.\2144\
---------------------------------------------------------------------------
\2144\ In addition, ``qualified wages'' and other terms used for
the payroll tax credit which are also used in chapter 21 or 22 of the
Internal Revenue Code of 1986 shall have the same meaning as when used
in such chapter.
---------------------------------------------------------------------------
Employers in the U.S. territories may claim the credit by
filing their quarterly Federal employment tax returns.
An employer may elect, at such time and in such manner as
provided by the Secretary (or the Secretary's delegate), to
have the credit not apply to such employer for a calendar
quarter.
Amounts are appropriated to the OASDI Trust Funds and the
Social Security Equivalent Benefit Account established under
the RRTA \2145\ equal to the reduction in revenues to the
Treasury by reason of the credit. Such amounts are transferred
from the general fund at such times and in such manner as to
replicate to the extent possible the transfers that would have
occurred to the OASDI Trust Funds or Social Security Equivalent
Benefit Account had the credit not been enacted.
---------------------------------------------------------------------------
\2145\ Sec. 15A(a) of the RRTA (45 U.S.C. sec. 231n-1(a)).
---------------------------------------------------------------------------
Administrative rules, penalties, and regulations
Any credit allowed under the provision is treated as a
credit described in section 3511(d)(2) (relating to third party
payors).
The provision directs the Secretary (or the Secretary's
delegate) to waive any penalty under section 6656 for failure
to make a deposit of applicable employment taxes if the
Secretary (or the Secretary's delegate) determines that such
failure was due to the reasonable anticipation of the credit
allowed under the provision.
The Secretary (or the Secretary's delegate) shall provide
such regulations or other guidance as may be necessary to carry
out the purposes of the credit, including regulations or other
guidance: (1) to allow the advance payment of the credit based
on such information as the Secretary (or the Secretary's
delegate) may require; (2) to provide for the reconciliation of
such advance payment with the amount advanced at the time of
filing the return of tax for the applicable calendar quarter or
taxable year; (3) with respect to the application of the credit
to third party payors (including professional employer
organizations, certified professional employer organizations,
or agents under section 3504), including regulations or
guidance allowing such payors to submit documentation necessary
to substantiate the eligible employer status of employers that
use such payors; and (4) to recapture the benefit of the credit
in cases where there is a subsequent adjustment to the credit.
Ordering of credits
The provision applies before the temporary refundable
payroll tax credits enacted in response to the coronavirus
pandemic:
The credit allowed under section 7001 of the FFCRA may not
exceed the OASDI tax or RRTA tax imposed on the employer for
that calendar quarter on the wages paid with respect to all the
employer's employees, reduced by any credits allowed under
section 3111(e), section 3111(f), or the provision. However, if
for any calendar quarter the amount of the credit exceeds the
OASDI tax or RRTA tax imposed on the employer, reduced as
described in the prior sentence, such excess is treated as a
refundable overpayment.
The credit allowed under section 7003 of the FFCRA may not
exceed the OASDI tax or RRTA tax imposed on the employer for
that calendar quarter on the wages paid with respect to all the
employer's employees, reduced by any credits allowed under
section 3111(e), section 3111(f), the provision, or section
7001 of the FFCRA. However, if for any calendar quarter the
amount of the credit exceeds the OASDI tax or RRTA tax imposed
on the employer, reduced as described in the prior sentence,
such excess is treated as a refundable overpayment.
The credit allowed under section 2301 of the CARES Act may
not exceed the OASDI tax or RRTA tax imposed on the employer
for that calendar quarter on the wages paid with respect to all
the employer's employees, reduced by any credits allowed under
section 3111(e), section 3111(f), the provision, section 7001
of the FFCRA, or section 7003 of the FFCRA. However, if for any
calendar quarter the amount of the credit exceeds the OASDI tax
or RRTA tax imposed on the employer, reduced as described in
the prior sentence, such excess is treated as a refundable
overpayment.
Coordination with the Payroll Protection Program
Section 7A(a)(12) of the Small Business Act is amended to
provide that the definition of payroll costs that may give rise
to loan forgiveness shall not include qualified wages taken
into account in determining the credit under the provision.
However, under the provision an election not to take into
account any amount of the employer's qualified wages for
purposes of calculating the credit does not prevent payroll
costs paid during the covered period from being treated as
qualified wages of the eligible employer to the extent that a
Paycheck Protection Program second draw loan described in 15
U.S.C. section 636(a)(37) is not forgiven by reason of the
application of paragraph (37)(J) of such section.
Effective Date
The provision is effective on the date of enactment
(December 27, 2020).
4. Special rules for qualified disaster relief contributions of
corporations (sec. 304(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.\2146\
---------------------------------------------------------------------------
\2146\ Sec. 170.
---------------------------------------------------------------------------
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,
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.\2147\ 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.
---------------------------------------------------------------------------
\2147\ Sec. 170(d).
---------------------------------------------------------------------------
Temporary increase in percentage limitations under the CARES Act
Section 2205 of the CARES Act (Pub. L. No. 116-136),
described in Part Six of this document, temporarily increases
the charitable contribution limitations. In the case of an
individual, the deduction for qualified contributions is
allowed up to the amount by which the taxpayer's contribution
base (AGI computed without regard to any net operating loss
carryback) exceeds the deduction for other charitable
contributions. Contributions in excess of this amount are
carried over to succeeding taxable years as contributions
described in section 170(b)(1)(G), subject to the limitations
of section 170(b)(1)(G)(ii).
In the case of a corporation, the deduction for qualified
contributions is allowed up to 25 percent of the corporation's
taxable income. 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
calendar year 2020 to a charitable organization described in
section 170(b)(1)(A), other than contributions (i) to 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. A taxpayer
must elect to have contributions treated as qualified
contributions.
For charitable contributions of food inventory that are
made during 2020 and which qualify for the enhanced deduction,
the 15-percent limitations described above are increased to 25
percent.
Section 213 of this Act generally extends the temporary
modifications of the charitable contribution limits under the
CARES Act to contributions made during 2021.
Explanation of Provision
In the case of a qualified disaster relief contribution of
a corporation, the provision generally increases the 25 percent
limitation established by the CARES Act to 100 percent of a
corporation's taxable income. The 25 percent limitation under
the CARES Act is first applied to qualified contributions (as
defined in the CARES Act) other than qualified disaster relief
contributions. The increased percentage limitation is next
applied to qualified disaster relief contributions by
substituting 100 percent for 25 percent. As a result, the
deduction for qualified disaster relief 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 (including
qualified contributions under the CARES Act other than
qualified disaster relief contributions). Contributions in
excess of this amount are carried over to succeeding taxable
years, subject to the limitations under section 170(d)(2).
A qualified disaster relief contribution is a qualified
contribution within the meaning of section 2205 of the CARES
Act \2148\ that is paid during the period beginning on January
1, 2020, and ending on the date which is 60 days after the date
of enactment, and which is made for relief efforts in one or
more qualified disaster areas. A taxpayer must obtain from the
recipient organization a contemporaneous written acknowledgment
substantiating that the contribution was used (or is to be
used) for this purpose. A taxpayer must elect to have the
contribution treated as a qualified disaster relief
contribution.
---------------------------------------------------------------------------
\2148\ For example, the contribution must be paid in cash to a
charitable organization described in section 170(b)(1)(A), other than
contributions (i) to 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)).
---------------------------------------------------------------------------
Effective Date
The provision is effective on the date of enactment
(December 27, 2020).
5. Special rules for qualified disaster-related personal casualty
losses (sec. 304(b) of the Act and sec. 165 of the Code)
Present Law
An individual taxpayer may claim an itemized deduction for
a personal casualty loss only if the loss was attributable to a
disaster declared by the President under section 401 of the
Stafford Act.\2149\ All other personal casualty losses are
deductible only to the extent that those losses do not exceed
the individual's personal casualty gains. Personal casualty
losses are deductible only if they exceed $100 per casualty. In
addition, aggregate net losses (i.e., the excess of personal
casualty losses over personal casualty gains) are deductible
only to the extent they exceed 10 percent of the individual
taxpayer's adjusted gross income.
---------------------------------------------------------------------------
\2149\ 165(h)(5).
---------------------------------------------------------------------------
Congress has at times enacted more generous casualty loss
provisions in response to specific natural disasters.\2150\
---------------------------------------------------------------------------
\2150\ See, e.g., Pub. L. No. 116-94, sec. 204(b), December 20,
2019 (certain disasters occurring in 2018 and 2019); sec. 20104(b) of
Pub. L. No. 115-123 (certain California wildfires); Sec. 504(b) of Pub.
L. No. 115-63 (Hurricanes Harvey, Irma, and Maria); and former sec.
1400S(b) (Hurricanes Katrina, Rita, and Wilma).
---------------------------------------------------------------------------
Explanation of Provision
Under the provision, if an individual has a personal
casualty loss which arose in a qualified disaster area on or
after the first day of the incident period of the applicable
qualified disaster and which was attributable to that qualified
disaster, the individual is allowed a deduction for the loss
without regard to whether the individual's aggregate net losses
exceed 10 percent of adjusted gross income. A casualty loss is
deductible, however, only if it exceeds $500.\2151\
---------------------------------------------------------------------------
\2151\ The $100 per casualty rule still applies with respect to
other deductible personal casualty losses.
---------------------------------------------------------------------------
For a personal casualty loss to which the provision
applies, an individual is allowed a deduction in addition to
the standard deduction. The deduction is also allowed in
determining alternative minimum tax.
Effective Date
The provision is effective on the date of enactment
(December 27, 2020).
6. Low-income housing tax credit (sec. 305 of the Act and sec. 42 of
the Code)
Present Law
Background for the provision and a description of the low-
income housing tax credit that the provision modifies may be
found above in the section describing section 207 of the
Taxpayer Certainty and Disaster Tax Relief Act of 2019
(Division Q of Pub. L. No. 116-94) in Part Three of this
document.
Explanation of Provision
Under the provision, for calendar years 2021 and 2022, a
State's housing credit ceiling is increased by the amount of
housing credit allocated by the State housing credit agency for
each year to buildings located in qualified disaster zones
\2152\ in the State, subject to certain limitations. For 2021,
the amount of the State ceiling increase cannot exceed the
applicable dollar limitation. The applicable dollar limitation
is equal to the lesser of (1) the product of $3.50 multiplied
by the population which resided in qualified disaster zones in
the State in 2020, and (2) 65 percent of the State ceiling for
2020. For 2022, the amount of the State ceiling increase cannot
exceed the applicable dollar limitation reduced by the amount
of the State ceiling increase for 2021. Therefore, a State may
increase its State ceilings for 2021 and 2022 in total by no
more than the amount of the applicable dollar limitation.
---------------------------------------------------------------------------
\2152\ A qualified disaster zone is a portion of any qualified
disaster area which was determined by the President (during the period
beginning on January 1, 2020 and ending on the date which is 60 days
after the date of enactment) to warrant individual or individual and
public assistance from the Federal government under the Stafford Act by
reason of a major disaster with respect to such area. A qualified
disaster area is an area with respect to which a major disaster was
declared by the President (during the period beginning on January 1,
2020 and ending on the date which is 60 days after the date of
enactment) under the Stafford Act if the incident period of such
disaster begins on or after December 28, 2019, and on or before the
date of the enactment. Qualified disaster areas do not include areas
for which a major disaster has been declared only by reason of COVID-
19.
---------------------------------------------------------------------------
The provision also provides that housing credit that is
allocated by a State housing credit agency for calendar year
2021 or 2022 to a building located in a qualified disaster zone
in the State may receive an extension to have the building
placed in service by the end of the third calendar year
following the calendar year in which the allocation was made.
The State housing credit agency must designate the housing
credit to receive the extension. The amount of designated
housing credit for a given year cannot exceed the amount of the
State ceiling increase for that year, as provided under the
provision.
The provision also specifies that credit allocations are
treated as made first from these additional amounts for
purposes of determining the unused State housing credit ceiling
to be carried forward in a calendar year.
Effective Date
The provision is effective on the date of enactment
(December 27, 2020).
7. Treatment of certain possessions (sec. 306 of the Act)
Present Law
Citizens of the United States are generally subject to
Federal income tax on their U.S. and foreign income regardless
of whether they live in a U.S. State, the District of Columbia,
a foreign country, or a U.S. territory. Residents of the U.S.
territories 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 source of income specific to the territory.
The application of the Federal tax rules to the territories
varies from one territory to another. Three territories, Guam,
the Commonwealth of the Northern Mariana Islands, and the U.S.
Virgin Islands, are referred to as mirror Code territories
because the Code serves as the internal tax law of those
territories (substituting the particular territory for the
United States wherever the Code refers to the United States). A
resident of one of those territories generally files a single
tax return only with the territory of which the individual is a
resident, and not with the United States.\2153\ Income tax paid
by a bona fide resident of a mirror Code territory generally is
allocated between the U.S. government and the territory
government under special rules administered by the U.S.
Treasury Department and the revenue authority of the territory
government.
---------------------------------------------------------------------------
\2153\ Sec. 932 and former sec. 935.
---------------------------------------------------------------------------
American Samoa and Puerto Rico, by contrast, are non-mirror
Code territories. These two territories have their own internal
tax laws, and a resident of either American Samoa \2154\ or
Puerto Rico may be required to file income tax returns with
both the territory of residence and the United States. In
general, U.S.-source income and other income from outside the
territory of residence is included on a U.S. income tax return,
and income from sources within the territory of residence is
reported on the territory income tax return.
---------------------------------------------------------------------------
\2154\ The tax laws of American Samoa follow, with certain
modification, the Internal Revenue Code as in effect December 31, 2000.
See Am. Sam. Code Ann. sec. 11.0404.
---------------------------------------------------------------------------
Explanation of Provision
The provision requires the Secretary to make a payment to
each mirror Code territory in an amount equal to the loss in
revenue by reason of the temporary disaster-related tax relief
allowable by reason of Title III of the Act to residents of
such territory against its income tax. The Secretary must
determine the amount of each payment based on information
provided by the government of the respective territory.
The provision requires the Secretary to make a payment to
each non-mirror Code territory in an amount estimated by the
Secretary as the aggregate benefits (if any) of the temporary
disaster-related tax relief that would have been provided to
residents of that territory if a mirror code tax system had
been in effect in the territory. Accordingly, the amount of
each payment to a non-mirror Code territory is an estimate of
the aggregate benefits that would be allowed to the territory's
residents if the temporary tax relief provided by Title III of
the Act to U.S. residents were provided by the territory to its
residents. The Secretary is not permitted to make a payment to
a territory unless the territory has a plan that has been
approved by the Secretary under which the territory will
promptly distribute the payment to its residents.
Effective Date
The provision is effective on the date of enactment
(December 27, 2020).
=======================================================================
ESTIMATED BUDGET EFFECTS OF TAX
LEGISLATION ENACTED IN THE 116TH CONGRESS
=======================================================================
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
[all]