Trump Signs Tax Bill Lowering Corporate, Individual Rates
Posted December 22, 2017, 11:01 A.M. ET
By Kaustuv Basu,Laura Davison and Allyson Versprille
President Donald Trump signed the Republican tax bill into law, enacting the measure GOP lawmakers are pointing to as their No. 1 achievement during the first year of the administration.
The bill (H.R. 1) cuts taxes for corporations, moves toward a territorial system of taxation for companies operating internationally, and increases the standard deduction for individuals, which will make it simpler for some people to file their taxes.
The legislation passed with only Republican support. Democrats criticized the bill for cutting taxes on corporations and high earners at the expense of the middle class. The bill will largely take effect next year, with some exceptions.
The Tax Cuts and Jobs Act, Final Cut: A Methods-Based Review of the Tax Bill
Eversheds Sutherland (US) LLP
USA December 20 2017
On December 20, 2017, the Senate voted to pass the Tax Cuts and Jobs Act as revised by the Congressional Conference Committee (the Final Bill). The House voted again to pass the Final Bill later that day after technical issues regarding Senate procedural rule required a second vote on the Final Bill by the House. The bill is now ready to be signed into law by President Trump.
Although similar to the individual House and Senate proposals in numerous ways, the Final Bill contains certain differences not previously addressed. This alert discusses the particular provisions that fall under the umbrella of income tax accounting and accounting methods, and the potential impact such reforms will have on corporate taxpayers.
Corporate Tax Rate Reduction
The Final Bill sets the corporate tax rate at a flat rate of 21{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}, a 14{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} rate drop from the current corporate income tax rate of 35{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}. This new rate will become effective for the tax years beginning after December 31, 2017. After 2017, the 80{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} dividends received deduction (DRD) will drop to 65{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} and the 70{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} DRD to 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}.
ES Perspective: The drop in the effective tax rate should motivate companies to revisit their current treatment of income and expense, and ensure that as much income as possible is deferred into 2018 to take advantage of the reduced rate while as much expense as possible is accelerated into the 2017 tax year, where the value of deductions is much greater at the current 35{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} rate.
When evaluating their accounting methods practices, taxpayers should consider whether to file certain accounting method changes, particularly taxpayer-favorable changes that accelerate deductions or defer income. If a change is available automatically, such accounting method changes are not required to be filed until the extended due date for the taxpayer’s 2017 federal income tax return, providing taxpayers with over 9 months to evaluate their current methods. Such taxpayer-favorable automatic accounting method changes include, but are not limited to, tangible property/depreciation, customer rebates and allowances, accrued compensation, deducting prepaid payment liabilities (e.g., insurance, licenses, fees), and changing to defer revenue using advance payment provisions.
Additionally, companies should consider items that relate to changes in facts, for which no accounting method change is required (e.g., amending a return to capture missed deductions like § 199 deductions; filing carryback claims to take advantage of the current NOL provisions; and prepayment at year-end for certain goods and services, making prepayments, etc.).
Repeal of Alternative Minimum Tax (AMT) for Corporations
The Final Bill repeals the AMT for corporations entirely. For a taxpayer that currently has available carryforward AMT credits, the Final Bill provides that the AMT credit is refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} (100{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} in the case of taxable years beginning in 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Therefore, a taxpayer will be able to claim a refund of all remaining credits in the tax year beginning in 2021. The Final Bill also repeals § 168(k)(4) for tax years beginning after December 31, 2017; § 168(k)(4) had provided for taxpayers to elect to use alternative minimum tax (AMT) credits in lieu of additional depreciation.
ES Perspective: Due to the repeal of the AMT and the three-year, 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} limitation on refundable AMT credits beginning after 2017, usage of such credits will now be available on a more limited basis under the transition rules. For instance, taxpayers in a net operating loss position that had elected to amortize research and development costs rather than deduct such costs immediately now have limitations regarding the ability to claim refundable tax credits. Companies with AMT credits should ensure that these amounts have been properly carried back prior to repeal.
Expanded Bonus Depreciation and Other Cost Recovery Provisions
The Final Bill adopted many of the provisions included in the earlier House and Senate bills. In general, the final bill closely follows the Senate amendment, but also incorporates the House plan’s provision allowing the additional first-year depreciation deduction for new as well as used property, and the House’s application of the bonus depreciation phase-down to property acquired before September 28, 2017, and placed in service beginning in 2023. The Final Bill also includes the House’s phase-down of the limitation on the depreciation deductions allowed with respect to certain passenger vehicles acquired before September 28, 2017, and placed in service after September 27, 2017.
The Final Bill, following both the Senate and House proposals, expands bonus depreciation to allow full expensing of the cost of “qualified property” acquired and placed in service after September 27, 2017, and before January 1, 2023. The Conference Report excludes from the definition of qualified property, property primarily used in 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, as well as property that has had floor plan financing indebtedness if the floor plan financing interest related to such indebtedness was taken into account under § 163.
This Final Bill rejects the Senate proposal that sought to shorten the recovery period for real property, both residential and non-residential, to 25 years. While the Senate plan required property to begin with the taxpayer, the Final Bill incorporates the House language eliminating the “original use requirement,” which means that the bonus depreciation is available for both new and used property. Language from the Senate bill is also included that eliminates the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property, and reclassifies them as “qualified improvement property.” Additionally the Final Bill adopts language repealing the election to accelerate alternative minimum tax (AMT) credits in lieu of additional depreciation, in conformity with the repeal of the corporate AMT.
The Final Bill also adopts the House’s application of the phase-down of bonus depreciation to property acquired by the taxpayer before September 28, 2017, and placed in service after September 27, 2017. Additionally, the final bill incorporates the Senate language regarding § 280F depreciation limitations on luxury automobiles. For passenger automobiles for which bonus depreciation is not taken, the amount of allowable depreciation is increased to $10,000 for the first year in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years for qualifying automobiles acquired before September 28, 2017, and placed in service after September 27, 2017.
For farmers, the Final Bill revives a provision, which expired in 2009, that shortens the recovery period for most machinery and equipment from 7 to 5 years. The rule applies to machinery and equipment placed in use after December 31, 2017.
Lastly, a transition rule provides that a taxpayer may elect to apply a 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} allowance instead of the full 100{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} allowance during its first taxable year ending after September 27, 2017.
ES Perspective: By expanding the definition of qualified property with the elimination of the original use requirement, the Final Bill provides great benefit to taxpayers that historically acquired used property but were unable to take advantage of bonus depreciation because they were not the first to use such property. The provision allows companies to take advantage of the bonus depreciation for any property acquired by year-end with the ability to carry back the NOLs to prior tax years. Additionally, this provision will also apply to corporate transactions characterized as asset acquisitions (i.e., § 338) if the acquisition is for qualified property. Capitalized costs added to the adjusted basis of qualified property will be subject to these expensing provisions. Therefore, capitalized costs incurred in such transactions, which are added to the adjusted basis of the acquired property, so long as it is “qualified property,” is eligible for immediate expensing. While the Final Bill may be a disappointment regarding the cost recovery of real estate, it does provide significant benefits to farmers and luxury car owners in light of the increased expensing limits and favorable recovery periods.
Capital Contributions
The Final Bill adopted the policy of the proposed House amendments while changing the language. The final bill retains § 118(a), providing that the gross income of a corporation does not include any contribution to the capital of the taxpayer, and adds that the term “contribution to the capital of the taxpayer” does not include: (1) any contribution in aid of construction or any other contribution as a customer or potential customer; and (2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such). The final language removes special rules pertaining to water and sewage disposal facilities as well as the statute of limitations applied to the assessment of deficiency. The language also grants the Secretary of the Treasury the authority to issue regulations or guidance to carry out the section and provides for an effective date contemporaneous with the enactment of the Act. This section does not apply to contributions by a governmental entity made subsequent to the bill’s effective date made pursuant to a master development plan approved by the governmental entity before the date of enactment.
ES Perspective: It is likely that the Treasury Secretary will issue further guidance regarding the treatment of contributions, as taxpayers have frequently contested § 118 in the past as the amendment deleted the definition of a “contribution in aid of construction.” The Final Bill eliminates a taxpayer’s ability to lobby for the exclusion of certain property from gross income calculation, including amounts of property or money from governmental entities or civic groups (assuming such contributions are not considered part of a master development plan approved by the governmental entity before the date of enactment). Such changes will require taxpayers to assess whether contributions may be excluded from gross income, either under § 118 or through alternative options, or if they will need to include such amounts in their calculation of gross income.
Expansion of § 179 Expensing
The Final Bill adopted the language of the Senate bill, increasing both the maximum amount a taxpayer may expense to $1 million, and the phase-out threshold amount to $2.5 million. The provisions apply to qualifying property placed in service for tax years beginning after December 31, 2017.
Under the provision, depreciable tangible personal property used predominantly to furnish lodgings or in connection with furnishing lodging was added to the definition of § 179 property. The definition of qualified real property eligible for expensing is also expanded to include certain improvements to nonresidential real property. The effective date of the provision applies to property placed in service after December 31, 2017.
ES Perspective: As described, the $1 million limitation is reduced, but not below zero, by the amount the cost of qualifying property placed in service during the taxable year exceeds $2.5 million. Therefore, the limitation reduction provides a planning opportunity for taxpayers investing more than $3.5 million in qualifying property, as there would be no limitation on the possible total amount written off by the taxpayer.
Like-Kind Exchanges of Real Property
The Final Bill followed both the House and Senate bills, which modified the provision providing for nonrecognition of gain in the case of like-kind exchanges by limiting its application to real property that is not held primarily for sale. The provision is effective for exchanges completed after December 31, 2017, but there is an exception for any exchange if the property disposed of by the taxpayer in the exchange is disposed of on or before December 31, 2017.
ES Perspective: The Final Bill’s limitation of the deferral available under § 1031 will generally have an adverse impact on taxpayers. While certain exchanges, e.g., those involving real property not held primarily for sale, would still be afforded the benefits of § 1031, exchanges of tangible personal property and intangible property would no longer qualify for deferral under § 1031.
Repeal of the Domestic Production Manufacturing Deduction Under § 199
The Final Bill repeals the domestic production activities deduction provided for in § 199, effective for taxable years beginning after December 31, 2017.
ES Perspective: While the repeal of § 199 seems at odds with the publicly stated intent of the Tax Cuts and Jobs Act, to further US economic development, it is suggested that the overall corporate rate reduction (21{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}) provides a larger benefit, and repeal of § 199 is required to meet revenue targets. To the extent possible, taxpayers should maximize any § 199 deductions available in the 2017 tax year, before such benefit is gone.
Reduction in Amount of NOLs and Repeal of Most NOL Carrybacks
The Final Bill limits the deductibility of a taxpayer’s net operating loss (NOL) to 80{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the taxpayer’s taxable income. This provision also eliminates all NOL carrybacks, except for a special two-year carryback for farms and certain casualty and disaster insurance companies. The limitation on the NOL deduction applies to losses arising in taxable years beginning after December 31, 2017. The NOL deduction can be carried forward indefinitely.
ES Perspective: Taxpayers should fully evaluate any NOLs currently captured on their balance sheets as deferred tax assets to ensure that they are taking full advantage of the NOL carryback provisions before the provisions are repealed. Although NOLs may be carried forward in future years because of the 20{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} haircut to NOLs and the currently higher tax rate, NOLs are relatively more valuable currently than they will be in future years.
Special Rules for Tax Year of Income Inclusion
The Final Bill follows the Senate bill, which revised the rules associated with the recognition of income. It specifically requires taxpayers to recognize income no later than the tax year in which such income is taken into account for financial accounting purposes. This change does not apply with respect to a taxpayer using a special method of accounting. For example, under the Final Bill, any unbilled receivables for partially performed services would be recognized for tax purposes to the extent that they are recognized for financial accounting purposes. The Final Bill further directs taxpayers to apply the revenue recognition rules under § 451 before applying the original issue discount (OID) rules under § 1272. Thus, to the extent amounts are included for book purposes when received—e.g., late-payment fees, cash-advance fees or interchange fees—such amounts are included in income under the general recognition principles under § 451.
It is important to note that the Final Bill explicitly codifies the Deferral Method in Rev. Proc. 2004-34, 2004-22 IRB 991. This administrative provision allows a taxpayer to defer the inclusion of advance payments for goods and services to the tax year following the year of receipt to the extent that such amounts are deferred for financial accounting purposes. The Senate proposal specifies that it is intended to override the income deferral provision included in Treas. Reg. § 1.451-5(c) for inventoriable goods. If enacted, it may also be used to narrow the application of Treas. Reg. § 1.451-4, which allows a reduction in current gross receipts with respect to the future costs of redeeming coupons.
ES Perspective: Under current law, the Deferral Method under Rev. Proc. 2004-34 was only available administratively; codification of the provision should give taxpayers confidence that it will not be easily eliminated. However, codification indicates that the IRS may reconsider other administrative deferral provisions under § 451, such as those that are currently available income deferral associated with the sale goods or for coupon redemption. Although taxpayers will appreciate the Final Bill’s codification of an administrative provision that many companies use to defer income attributable to advance payments, the change may result in a narrowing of the other administrative deferral provisions by the IRS. With respect to taxpayers that would see an acceleration of income (for example, due to the changes to OID), taxpayers would be required to effect the change immediately. Because the provision refers to coordination with special methods of accounting but not specifically describe which methods would be considered special, questions lingers regarding the scope of the provision and the range of taxpayers that may be required to accelerate income recognition under this section. For this reason, regulatory guidance may be required to clarify the scope and application of the provision.
Research and Experimental Expenditures
The Final Bill follows the Senate bill language, requiring amounts defined as specified research or experimental expenditures to be capitalized and amortized ratably over a five-year period, beginning with the midpoint of the taxable year in which the specified expenditures were paid or incurred. Specified expenditures attributable to research that is conducted outside of the United States are required to be capitalized and amortized ratably over a period of 15 years, beginning with the midpoint of the taxable year in which such expenditures were paid or incurred.
Specified expenditures subject to capitalization include expenditures for software development, but exclude expenditures for land or depreciable or depletable property used in connection with the research or experimentation, though depreciation and depletion allowances of said property are included. Exploration expenditures incurred for ore or other minerals (including oil and gas) are also excluded.
In the case of retired, abandoned, or disposed property with respect to which specified research or experimental expenditures are paid or incurred, any remaining basis may not be recovered in the year of retirement, abandonment, or disposal, but instead must continue to be amortized over the remaining amortization period.
The language also features two conforming amendments for §§ 41 and 280(c), respectively. The language in § 41(d)(1) redefines the definition of qualified research to include research and experimental expenditures. Under § 280(c), Credit for Increasing Research Activities, the amount chargeable to the capital account is reduced by the excess of the § 41(a)(1) credit over the allowable qualified research expenses or basic research expenses deduction for the taxable year.
The application of this provision is treated as a change in the taxpayer’s method of accounting for purposes of § 481, initiated by the taxpayer, and made with the consent of the Secretary. This rule is applied on a cutoff basis to research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021.
ES Perspective: The final bill language reflects a significant change in the treatment of research and experimental expenditures subject to § 174. For instance, taxpayers would no longer be able to recover costs incurred for research and development in the year incurred, but would instead have to capitalize and amortize the costs over five years (or 15 years for research-related expenses conducted outside the United States). Additionally, costs associated with software development, which were previously deductible under Rev. Proc. 2000-50, would now require capitalization. Such changes will make incurring research and experimental expenses less favorable from a tax perspective, which may mean that companies may dedicate fewer resources to the area.
The final bill language notes § 174 should be treated as an accounting method change. As such, the IRS may take the position that other changes involving § 174 cannot be implemented with an amended return as a taxpayer may not adopt a different method of accounting from its original return.
Denial of Deduction for Certain Fines, Penalties and Other Amounts
The Final Bill retains the current rule in § 162(f) that disallows deductions for fines or penalties paid to a government for violating any law. This applies to any amount that is paid or incurred to or at the direction of any governmental entity, with some newly codified exceptions. The denial of deduction does not apply to amounts paid in restitution (including remediation of property) for a violation or potential violation of law, or for an amount paid to comply with a violation, such as in a court order or settlement agreement. Amounts that are paid to investigate or inquire into the deductibility status of such fines or penalties are also not included. Amounts paid or incurred for court orders that do not involve a government or governmental entity as a party are also not disallowed under the provision. Finally, amounts that are paid or incurred as taxes due are an exception. For these purposes, restitution does not include the reimbursement of costs related to government investigations or litigation.
The provision provides specific nongovernmental entities that are to be treated as governmental entities for the purpose of determining the deduction, which include nongovernmental entities that exercise self-regulatory powers.
Additionally, the Final Bill adds a new § 6050X to the Internal Revenue Code, which covers required information and reporting related to the deduction of fines and penalties. Under this, governmental agencies are required to report each settlement amount that is at least $600.00 to the IRS and relevant taxpayer(s).
The provision denying the deduction and the reporting provision are effective for amounts paid or incurred on or after the date of enactment, except that it would not apply to amounts paid or incurred under any binding order or agreement entered into before such date.
ES Perspective: While § 162(a) generally allows ordinary and necessary business expenses paid during a taxable year to be deducted, § 162(f) explicitly disallows deductions for fines or penalties. Therefore, businesses must analyze whether a settlement payment can be classified as a deductible expense or a disallowed fine or penalty. Treas. Reg. § 1.162-21(b)(2) provides that compensatory damages paid to the government are not considered a penalty. Courts have also historically differentiated between “punitive” and “compensatory” damages, and have related the former to fines or penalties, and the latter to restitution. In Nacchio v. United States1, the plaintiff sought to claim a deduction for taxes paid on profits that he forfeited to the SEC following a conviction of insider trading; the court ruled that the criminal forfeiture was not deductible because of public policy, as codified in § 162(f). A year later in 2017, the Supreme Court ruled that disgorgement payments such as in Nacchio should be treated as penalties rather than compensatory in nature.2
This Final Bill codifies previous court decisions distinguishing between compensatory and punitive damages. Section 13306 of the Final Bill confirms that disgorgement payments and similar punitive damages are nondeductible under § 162(f) and restitution is treated as a “compensatory” damage3 that can be deducted under § 162.
With these new exceptions, taxpayers should pay attention to payments made in connection with settlements and resolutions; if they can be characterized as compensatory rather than punitive, there may be an opportunity for deductions. If the payments are disgorgements, however, these are punitive rather than compensatory and not deductible. The ability for businesses to consider settlement amounts deductible is likely to lead to increased practice and less ambiguity in courts.
The new reporting requirements set forth in § 6050X will require the Secretary to report amounts and details of settlements at least $600.00 to the involved taxpayers and the IRS. This means that any suit or agreement that deals with a violation of any law or with respect to an investigation or inquiry by the government into a potential violation or law must be reported if it meets this low threshold. This places additional pressure on businesses involved in such suits and agreements to classify amounts accordingly.
Other Tax Accounting Provisions
Opportunity Zones
The Final Bill followed the Senate bill with respect to incentivizing development in economically distressed communities. As was offered in the Senate bill, the Final Bill would provide for the deferral of income for capital gains if the gains are reinvested in a qualified opportunity zone, and would also provide basis adjustments if an investment in a qualified opportunity zone fund is held for a certain period of time. The only differences in the Final Bill are: (1) each population census tract in each US possession that is a low-income community is deemed certified and designated as a qualified opportunity zone effective on the date of enactment; (2) the final bill clarifies that the chief executive officer of the State may submit nominations for a limited number of opportunity zones for certification and designation by the Secretary; and (3) there is no gain deferral available with respect to any sale or exchange made after December 31, 2026, and there is no exclusion available for instruments in qualified opportunity zones made after December 31, 2026.
ES Perspective: In light of the benefits available in connection with qualified opportunity zones, the creation of a qualified opportunity zone fund would serve to be a good planning tool for purposes of tax deferral and developing goodwill in certain communities. Additionally, given the income deferral and available basis adjustments, it is likely that investments in opportunity zones will increase, as would the number of transactions occurring by taxpayers seeking to take advantage of this new taxpayer-favorable provision.
Orphan Drug Credits
The Final Bill adopts the language in the Senate bill, but adjusts the credit rate to 25{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} (rather than the Senate proposed 27.5{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}) of qualified testing expenses—those amounts that are paid or incurred by the taxpayer during the taxable year beginning after December 31, 2017. The language, codified at § 45(c), currently calls for a 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} credit. The language limits qualified clinical testing expenses to those related to the use of a drug that has received prior approval in the treatment of a disease or condition, if the disease affects more than 200,000 people in the United States. The language also makes any proposed election to take the credit final.
ES Perspective: The Final Bill will likely result in a significant cut to the opportunities available to companies that take advantage of the credit, particularly in light of the near 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} reduction in the historic value of the credit. The reduction will mainly impact manufacturers, technology firms and pharmaceutical companies that receive the incentive in seeking treatments and cures for rare diseases. As the target population for such a drug is relatively small, sales may be insufficient to justify research and development costs without the tax credit.
Rehabilitation Credit
The Final Bill follows the Senate amendment with a modification to the transition rule under the effective date relating to qualified rehabilitation expenditures under certain phased rehabilitations for which the taxpayer may select a 60-month period. The final language repeals the 10{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} credit for pre-1936 buildings, but retains the 20{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} credit for qualified rehabilitation expenditures with respect to a certified historic structure. However, in regard to the historic structure, the credit allowable for a taxable year during the five-year period beginning in the taxable year in which the qualified rehabilitated building is placed in service is an amount equal to the ratable share. The ratable share for a taxable year during the five-year period is an amount equal to 20{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the qualified rehabilitation expenditures for the building, as allocated ratably to each taxable year during the five-year period.
Effective date. The provision applies to amounts paid or incurred after December 31, 2017. A transition rule provides that in the case of qualified rehabilitation expenditures (for a pre-1936 building) with respect to any building owned or leased (as provided under present law) by the taxpayer at all times on and after January 1, 2018, the 24-month period selected by the taxpayer (under § 47(c)(1)(C)) is to begin not later than the end of the 180-day period beginning on the date of the enactment of the Act, and the amendments made by the provision apply to such expenditures paid or incurred after the end of the taxable year in which such 24-month period ends.
ES Perspective: The loss of tax credits may dissuade real estate developers from renovating, restoring and reconstructing older buildings. Any taxpayer engaged in, or considering engaging in, rehabilitation projects should evaluate the project timeline with regard to the transition period rules. For projects with the timeline extending past the transition period, it will be important to reevaluate the contracts to understand what protections are provided.
Employer Credit for Paid Family and Medical Leave
The Final Bill adopts the provision of the Senate plan instituting a credit for compensation paid to employees on leave. The provision allows eligible employers to claim a general business credit equal to 12.5{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the amount of wages 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{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}) for each percentage point payment exceeds 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}. An eligible employer is one who 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 who allows all less-than-full-time qualifying employees a commensurate amount of leave on a pro rata basis. Leave paid by a State or local government is not taken into account and qualifying employees are characterized as an individual with at least a year of employment with the company and who received compensation in the preceding year an amount not in excess of 60{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the compensation threshold for highly compensated employees. The effective date of the provision is December 31, 2017, but would not apply to wages paid in taxable years beginning after December 31, 2019.
ES Perspective: The institution of the paid FMLA credit will result in a tax benefit to companies that already compensate their employees using leave under the FMLA and incentivizes others to offer compensated leave. The credit grants employers a general business credit of up to 25{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of wages paid to qualifying employees on family and medical leave. The credit extends to smaller businesses that may not have access to the benefits of the Family Medical Leave Act. This provides a planning opportunity and an opportunity to reexamine benefits offered to employees.
Citrus Farmer Relief
The Final Bill adopts the Senate language that modifies the special rule for costs incurred by persons other than the taxpayer in connection with replanting an edible crop for human consumption following loss or damage due to casualty. Established to aid citrus growers in the wake of hurricanes, particularly with respect to replanting costs paid or incurred after the date of enactment, but no later than a date that is ten years after such date of enactment, for citrus plants lost or damaged due to casualty, replanting costs may now be deducted by a person other than the taxpayer if: (1) the taxpayer has an equity interest of not less than 50{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} in the replanted citrus plants at all times during the taxable year in which the replanting costs are paid or incurred and such other person holds any part of the remaining equity interest; or (2) such other person acquires all of the taxpayer’s equity interest in the land on which the lost or damaged citrus plants were located at the time of such loss or damage, and the replanting is on such land.
ES Perspective: This section will benefit farmers unable to replace damaged trees, allowing them to raise capital through investors, who could then take advantage of the tax credit if the majority ownership requirement is satisfied. This section entitles an additional class of taxpayers to take advantage of available tax credits due to crop loss. It is important for potential members of the new class to review the provisions to ensure that they qualify for the benefit.
Relief for Craft Brewers and Wine and Spirits Producers
The Final Bill adopts the Senate language excluding the aging periods for beer, wine, and distilled spirits from the production period for purposes of the uniform capitalization (UNICAP) interest capitalization rules. The UNICAP rules generally require certain direct and indirect costs allocable to real or tangible personal property produced by the taxpayer to be included in either inventory or capitalized into the basis of such property. In the case of interest expense, the UNICAP rules apply only to interest paid or incurred during the property’s production period 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 million. Under the final bill, producers of beer, wine and distilled spirits are able to deduct interest expenses (subject to any other applicable limitation) attributable to a shorter production period. The provision is effective for interest costs paid or accrued after December 31, 2017, but does not apply after December 31, 2019.
ES Perspective: By adopting the language from the Senate bill, the Final Bill excludes producers of property that is aged (such as beer, wine, and distilled spirits) from the applicable interest capitalization provisions under UNICAP, making interest expenses attributable to shorter production periods deductible. For brewers this will result in potentially significant tax savings attributed to production expenses.
Aircraft Management Services
The Final Bill adopts the Senate language, exempting certain payments related to the management of private aircraft from excise taxes imposed on taxable transportation by air. Exempt payments include those amounts paid by an aircraft owner for management services related to maintenance and support of the owner’s aircraft or flights on the owner’s aircraft. Services that fall within the exemption include support activities related to the aircraft itself, such as its storage, maintenance, and fueling, and those related to its operation, such as the hiring and training of pilots and crew, as well as administrative services such as scheduling, flight planning, weather forecasting, obtaining insurance, and establishing and complying with safety standards.
ES Perspective: This proposal would provide certainty on the issue of whether amounts paid to aircraft management service companies are taxable. In March 2012, the IRS issued a Chief Counsel Advice concluding that amounts paid to aircraft management companies were generally subject to tax and the management company must collect the tax and pay it over to the government. The IRS began auditing aircraft management companies for this tax; however, it suspended assessments in May 2013 to develop further guidance. In 2017, the IRS decided not to pursue examination of this issue in ongoing audits. No further guidance has been issued to date; therefore, this provision will serve as a welcome piece of guidance to assist those taxpayers that incur such cost.
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Eversheds Sutherland (US) LLP – Ellen McElroy, Caroline R. Reaves and Benje A. Selan
