2018 has marked the most changes to income taxation since the Tax Reform Act of 1986. Most provisions of the Tax Cuts and Jobs Act (TCJA or the Act) passed at the end of 2017 and became effective this year. Additionally, the landmark decision in the Wayfair case dramatically altered the state tax landscape.
While much TCJA guidance has come out, many areas of uncertainty remain as the Treasury Department works on regulations to address numerous missing parts and ambiguities contained in the legislation. This year’s letter focuses on those tax reform regulations that have been issued, areas of uncertainty and the impact of the Wayfair case on state taxation. We also discuss the business deduction for owners of pass-through businesses, the overhaul of international taxation, changes to employee benefit and executive compensation rules, and other critical areas.
We remind you that tax planning should be addressed throughout the year as an integral part of financial planning. As always, we encourage you to contact your Baker Tilly advisor to discuss how these issues impact your tax position.
Status of tax reform regulations and technical corrections
The Treasury Department has slowly released regulations and guidance addressing various provisions in the TCJA over the last few months. We have already seen the first rules relating to the new Internal Revenue Code (IRC) section 199A pass-through deduction, repatriation of foreign income and bonus depreciation. Later this fall, we expect guidance in critical areas such as the business interest limitations under section 163(j) and rules under section 451(b) that require revenue be recognized for tax purposes no later than when it is for financial statement purposes. Proposed regulations addressing Opportunity Zone incentives were recently published. There is no word on the timing of other regulations, but we anticipate more being issued over the next several months.
Typically following major tax legislation, a technical corrections package will tweak drafting errors missed during passage. This nonpartisan bill cannot make new law or policy and cannot affect revenue. Leading Republicans indicated contents of the package will be influenced by the recent and pending Treasury guidance. Since passage of the bill would require 60 votes due to Senate rules, Democratic support is needed. However, Democrats appear unwilling to assist in fixing a law they had no part in creating. As a result, many outstanding issues, such as the treatment of qualified improvement property, which currently has a 39-year recovery period and is not eligible for bonus depreciation, will remain unresolved in the near term. We expect any technical corrections package to be highly dependent upon the outcome of the November elections.
Tax Reform 2.0 proposal
House Republicans introduced the “Tax Reform 2.0” legislative package on Sept. 10. The House enacted a series of three bills known as Tax Reform 2.0. The package includes provisions to make the individual rate cuts from earlier tax reform permanent, as well as other provisions to induce savings and make additional small business cuts.
The Tax Reform 2.0 package includes:
- HR 6756, American Innovation Act of 2018
- HR 6757, Family Savings Act of 2018
- HR 6760, Protecting Family and Small Business Tax Cuts Act of 2018
While it does not appear the Senate will take action on these before the midterm elections, the Family Savings Act of 2018 may find backing from some senators during the lame duck session since it passed the House with bipartisan support. As for the other two bills, it is unclear whether they will garner the 60 votes needed for passage this year. Unlike 2017, when the budget reconciliation process was used to pass the TCJA, that process is not available this time around, as the cost could increase deficits beyond the 10-year budget window. This was the reason the individual rate reductions were only enacted in temporary form when the TCJA passed.
For more details on the three bills, please see our previous article.
Visit the sections below for more information about the most pressing year-end tax issues:
- Pass-through entity business deduction (section 199A)
- International taxation
- State and local tax update
- Business losses
- Business interest deduction limitations
- Tax reform: full expensing of assets in 2018
- Tax reform and the R&D tax credit
- Employee benefits and executive compensation update
- How to avoid an underwithholding surprise
- Procedures issued for implementing ASC 606 related accounting method changes
- Tax reform and the individual
- 529 plans
We will continue to keep you informed of the latest developments by sending updates to assist you with planning throughout the remainder of the year. We also encourage you to visit our Tax Reform Resource Center for more in-depth articles on the Tax Cuts and Jobs Act as well as the latest information on guidance. See our 2018 Tax Planning Guide for additional ways to help you reduce your taxable income by taking advantage of every tax break to which you are entitled.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.