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Tax practitioners have identified fixes they think are needed to clarify mistaken cross-references and vagaries in the new tax law, saying changes need to be made as soon as possible to avoid widespread confusion during the next filing season.
The Senate Finance Committee is keeping three lists: one of technical corrections only Congress can make, another of larger policy issues that would require revisions to the law, and one of errors that the Treasury Department has the ability to fix itself, according to a person familiar with the discussions who spoke on the condition of anonymity.
Lawmakers will likely have only a handful of opportunities this year to pass technical corrections, which tax practitioners say they need quickly, and definitely before the 2019 tax filing season. Lawmakers must pass legislation, which will include a tax title, reauthorizing the Federal Aviation Administration by Sept. 30. Another year-end vehicle for tax legislation could surface if Congress passes a short-term spending bill in the fall.
“At the end of the day, it’s still going to come down to the Democrats’ willingness to play ball, and specifically what their ask will be,” Liam Donovan, a tax lobbyist at Bracewell LLP in Washington, told Bloomberg Tax April 12.
Earlier this year, Democrats were able to secure a more generous low-income housing tax credit in exchange for Republicans including a fix to the tax code Section 199A pass-through deduction for agriculture cooperatives.
The negotiations with Democrats, as well as limited must-pass bills with tax provisions, means that the changes to the 2017 tax act (Pub. L. No. 115-97) will likely be limited to the most-needed fixes. Here’s what tax practitioners told Bloomberg Tax they would like to see.
The conference report states that lawmakers wanted to combine three types of improvement property under tax code Section 168 eligible for depreciation—qualified retail improvement property, qualified restaurant improvement property, and qualified leasehold improvement property—into one category with a 15-year write-off period. The new category—qualified improvement property—wasn’t assigned a cost-recovery period in the text of the law, and fell to the 39-year period by default, rather than the intended 15-year period.
“Unfortunately, we have to follow the statute,” said Jane Rohrs, a director for the Federal Tax Accounting Periods, Methods & Credits Group in the Washington National Tax office of Deloitte Tax LLP. “It says what it says.”
This means companies will pay more in estimated taxes because they can’t take the additional depreciation into their computation, she said. In previous years, companies would pay estimated taxes based on their prior years, but because the law has changed so much, it doesn’t make sense to do that in 2018, Rohrs said.
Similar to the qualified improvement property issue, there is also a discrepancy for the use of net operating losses between the conference report and the law’s text.
The overhaul eliminated that two-year carryback period for losses. But the way the effective date for the NOL provision is written in the law, calendar-year taxpayers can still carry back their 2017 NOLs, while many fiscal-year taxpayers with 2017 taxable years ending after Dec. 31, 2017, can’t.
In the conference report, the elimination of the carryback period took effect in years beginning after Dec. 31, 2017. This effective date allowed carrybacks of 2018 NOLs by both calendar-year taxpayers—who figure their taxes based on financial operations between Jan. 1 and Dec. 31—and fiscal-year taxpayers, whose taxable years may end after the calendar year.
In the statute, however, the language changed from taxable years “beginning” after Dec. 31, 2017, to taxable years “ending” after that date, leaving many fiscal year taxpayers in the lurch.
“Unless there is a technical correction on this, taxpayers are stuck,” Rohrs said.
Treasury has broad authority to write regulations implementing the base erosion and anti-abuse tax (BEAT) aggregation rule, which determines if companies with at least $500 million in annual gross receipts and base erosion payments that are at least 3 percent of their deductions are subject to the tax. But “it’s not even 80 percent clear” what Congress intended in this rule, making it a strong candidate for further clarification, said Elizabeth Stevens, an associate at Caplin & Drysdale, Chartered.
The law is vague about which payments are included and how to aggregate income from various entities. For example, the statute isn’t clear on whether payments to U.S. group members and U.S. branches of foreign group members are ignored when calculating the base erosion percentage for a single-employer group. There are several ways to read the statute that don’t seem right or consistent with congressional intent, Stevens said.
“It’s not a model of clarity,” she said.
The tax law, under new tax code Section 1061, increased to three years from one year the period that investment managers must hold income classified as carried interest before it can be taxed as investment income at lower rates. But it didn’t apply the longer holding period to carried interest held through a corporation, which would seemingly include both S corporations and C corporations.
The Internal Revenue Service has said it plans to issue regulations that would clarify that the shorter holding period only applies to C corporations, which would prevent funds from routing the carried interest through S corporations to take advantage of the tax break more quickly.
“Treasury’s authority to interpret the scope of ‘corporation’ for purposes of carried interest has been questioned by some, so that might be another area.” Donovan said.
If Congress were to make the change in the language, it would settle the matter and prevent taxpayers from challenging the IRS’s interpretation.
The tax law decreased the deduction for charitable contributions if the taxpayer donates non-cash items, which reduces the amount of the deduction to 50 percent of adjusted gross income, rather than 60 percent as the law intended, the American Institute of CPAs said.
The group, in a Feb. 22 letter, requested that Congress fix the law so that it allows a 60 percent threshold, so that donations such as securities would be eligible for the higher deduction.
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