The start of a new year presents a time to reflect on the past 12 months and predict what may occur next. Below is a list of the top eight tax developments from 2017 that may prove particularly important as we move forward:
A sweeping rewrite of the nation’s tax laws was signed into law by President Trump on December 22, 2017. The Tax Cuts and Jobs Act (H.R. 1) permanently lowers the corporate tax rate to 21%, and temporarily lowers the individual tax rates to a maximum of 37%. Certain shareholders, partners and sole proprietors could reap unprecedented rate cuts due to new pass-through rules. The Act also temporarily enhances the child tax credit, the medical expense deduction, bonus depreciation, small business expensing, and more. Lawmakers, however, did not repeal the federal estate or the alternative minimum tax (AMT) for individuals, although they did add temporary sweeteners to these provisions. This tax bill will impact virtually every individual and business in ways not seen for 30 years. For more detail and analysis, see our Tax Cuts and Jobs Act guide.
President Trump has issued several Executive Orders (EO) on regulations since he took office. EO 13789, issued in April of 2017, directed the Treasury Department to review all significant tax regulations issued since January 1, 2016 with the intention to identify regulations that impose undue taxpayer financial burden, add undue complexity, or exceed IRS statutory authority. As a result, the Treasury Department identified eight recent tax regulations for reevaluation in July. The Treasury Department later withdrew the Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG-163113-02). The Proposed Regulation would have prohibited any meaningful valuation discount associated with the transfer of an interest in a family controlled entity.
IRS audit coverage is on a decline, partially as a result of a 20-year low in staffing. The IRS’s latest Data Book, released in 2017, showed that the IRS audited 0.7 percent of all individual income tax returns in calendar year (CY) 2015, an all-time low. Approximately two-thirds of those individual audits were correspondence audits and one-third were field audits. The Treasury Inspector General for Tax Administration (TIGTA) later reported that the IRS examined one of every 143 individual income tax returns in fiscal year (FY) 2016. This reflected a 16 percent decline compared to FY 2015, according to TIGTA. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, represented a decline of 29 percent compared to FY 2015.
Much of the first half of the 2017 news cycle involved Congressional efforts to repeal and replace the Affordable Care Act, which eventually failed when the Senate Republicans’ legislation, the Health Care Freedom Bill, failed during a past-midnight vote on July 28. However, Republican efforts were later partially effective as the Tax Cuts and Jobs Act repealed the individual mandate by making the payment amount $0. However the 3.8 percent net investment income tax (NII tax), and the 0.9 percent Additional Medicare Tax on compensation, which were enacted as part of the Affordable Care Act, have not yet been repealed and will continue into the new year.
The IRS is taking notice of the gig, or sharing, economy where temporary, flexible, positions are becoming more commonplace. The Service opened a Sharing Economy Tax Center on its website, and is educating agents on relevant examination techniques. Activities in the sharing economy can vary and can range from selling goods online, advertising or other revenue from a website or blog, creating a crowdfunding site, short-term renting out a residence, or driving others for hire. More of these activities have come to the attention of the IRS as new Form 1099-K reporting requirements emerge for online and credit card transactions, as well as the use of Form 1099-MISC by large facilitators for service or goods providers.
The new centralized partnership audit regime under the Bipartisan Budget Act of 2015 (BBA) replaces the current TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) procedures beginning for 2018 tax year audits, with an earlier “opt-in” for electing partnerships. These rules dramatically change the way that audit adjustments are imposed on the partnership and its partners. The IRS will now, by default, assess tax at the partnership level as a result of IRS adjustment. If the partnership has more than 100 partners the new audit rules are mandatory. Generally, partnerships with fewer than 101 partners can elect out of the new rules yearly to push audit adjustments out to the partners (as has been the case prior to the new rules). Partnerships and their partners, if they have not yet done so, should review partnership agreements to address the new rules and the issues surrounding them.
Because capital asset investments occur in virtually every business (especially in capital-intensive industries such as manufacturing), the enhanced write-offs under the Tax Cuts and Jobs Act deserves special mention. The new law generally increases the 50-percent “bonus depreciation” allowance to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023. A 20-percent phase-down schedule would then kick in. One important highlight here is a change to the requirement that the original use of qualified property must commence with the taxpayer. This has now been removed, thus allowing bonus depreciation on used assets after September 27, 2017.
The Section 179 expensing limitation is increased to $1 million and the phase out is increased to $2.5 million for tax years beginning after 2017. The definition of qualified real property eligible for expensing is redefined to include improvements to the interior of any nonresidential real property (“qualified improvement property”), as well as roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems installed on such property.
President Trump signed the Disaster Tax Relief Act on September 29. The new law provides targeted and temporary tax relief to victims of Hurricanes Harvey, Irma and Maria. Also in connection with these disasters and California wildfires, the IRS postponed certain tax deadlines for affected taxpayers. In December, the IRS issued safe harbor methods of calculating casualty and theft loss deductions (Rev. Proc. 2018-8, Rev. Proc. 2018-9).
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.