Year-End Spending Bill Includes Tax Extenders, Disaster Tax Relief

Year-End Spending Bill Includes Tax Extenders, Disaster Tax Relief

Dec 17, 2019

Client Alert

Brownstein Client Alert, December 17, 2019

Just past midnight on Dec. 17, lawmakers released an amendment to one of two spending bills released on Dec. 16—H.R. 1865—the Further Consolidated Appropriations Act of 2020. Most notably, the amendment included an extension for several expiring and expired temporary tax provisions known as tax extenders, as well as tax relief for taxpayers affected by natural disasters.

H.R. 1865 also included the following tax priorities:

  • A repeal of three Patient Protection and Affordable Care Act (Affordable Care Act, P.L.111-148) taxes: the Medical Device Tax, the Health Insurance Tax and the Cadillac Tax.
     
  • The Setting Every Community Up for Retirement Enhancement (SECURE) Act (H.R.1994)—bipartisan legislation to help Americans prepare for retirement. Of note, included in the SECURE Act is the “kiddie tax” fix. The TCJA unintentionally led to a tax increase on survivors of fallen service members and first responders who died in the line of duty. The correction rolls back the changes made in the TCJA, shielding survivor benefits from a 37% tax.

Not included in the amendment or H.R. 1865 are two major priorities for House Democrats—an expansion of the Earned Income Tax Credit and the Child Tax Credit. Also missing are technical corrections to the Tax Cuts and Jobs Act (TCJA, P.L.115-97), such as the Qualified Improvement Property (QIP) fix.

Click here for the text for the amendment, which includes the tax extenders and disaster relief provisions, as well as text for H.R. 1865, which includes the SECURE Act and the repeal of the ACA-taxes.

Below is a more detailed overview of all major tax priorities included in the spending bill.
 

Tax Extenders

The chart below includes a brief summary of tax extenders provisions included in the amendment. Most provisions are extended through 2020, with the exception of the biodiesel tax credit and the railroad maintenance credit, which were extended through 2022.

Sec.

Provision

Brief Summary

Subtitle A—Tax Relief and Support for Families and Individuals

101

Exclusion from gross income of discharge of qualified principal residence indebtedness

Provides a maximum exclusion of $2 million from gross income for a discharge of qualified principal residence indebtedness. Generally, indebtedness must be the result of acquisition, construction, or substantial improvement of primary residence.

102

Treatment of mortgage insurance premiums as qualified residence interest

Provides for the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. This deduction phases out for taxpayers with adjusted gross income (AGI) over $100,000 ($50,000 if married filing separately).

103

Reduction in medical expense deduction floor

Before 2017, individuals could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceeded 10% of AGI. The provision extends the lower threshold of 7.5% through 2020.

104

Deduction of qualified tuition and related expenses

Provides an above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose AGI does not exceed $65,000 or $2,000 for an individual whose AGI does not exceed $80,000.

105

Black lung disability trust fund excise tax

Imposes an excise tax of $1.10/ton for coal from underground mines and $0.55/ton for coal from surface mines, each up to 4.4% of the sale price effective beginning on the first day of the first calendar month after date of enactment.

Subtitle B—Incentives for Employment, Economic Growth, and Community

Development

111

Indian employment credit

Provides a credit on the first $20,000 of qualified wages and qualified employee health insurance costs paid to or incurred by the employer with respect to each qualified employee who works on an Indian reservation.

112

Railroad track maintenance credit

Provides a credit for 50% of qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer. The credit is extended through 2022.

113

Mine rescue team training credit

Provides employers a credit equal to the lesser of 20% of the training program costs incurred, or $10,000, with respect to the costs of training each qualified mine rescue team employee.

114

Classification of certain race horses as 3-year property

Assigns a three-year recovery period for race horses 2 years old or younger placed in service before 2021.

115

7-year recovery period for motorsports entertainment complexes

Provides a seven-year recovery period for motorsports entertainment complexes.

116

Accelerated depreciation for business property on Indian reservations

Provides accelerated depreciation for qualified Indian reservation property.

117

Expensing rules for certain productions

Provides a deduction through 2020 of up to $15 million of the aggregate cost ($20 million for certain areas) of a qualifying film, television, or theatrical production in the year the expenditure was incurred.

118

Empowerment zone tax incentives

Provides tax benefits through the end of 2020 for certain businesses and employers operating in empowerment zones. There are 41 areas designated as empowerment zones. The tax benefits available include tax-exempt bond financing, tax credit for employers who hire qualifying employees, accelerated depreciation deductions on qualifying equipment under section 179, and deferral of capital gains tax on the sale of qualified assets sold and replaced.

119

American Samoa economic development credit

Provides a credit to certain corporations in American Samoa that may be claimed against U.S. corporate income tax.

Subtitle C—Incentives for Energy Production, Efficiency, and Green Economy

Jobs

121

Biodiesel and renewable diesel

Provides a $1.00/gallon tax credit for biodiesel and biodiesel mixtures, and the small agri-biodiesel producer credit of $0.10/gallon. Additionally, the provision treats renewable diesel the same as biodiesel, though there is no small producer credit. The credit is extended through 2022.

122

Second generation biofuel producer credit

Provides a $1.01/gallon nonrefundable income tax credit for second generation biofuel sold at retail into the fuel tank of a buyer’s vehicle, or second generation biofuel mixed with gasoline or a special fuel and sold or used as a fuel. The provision was formerly known as the “cellulosic biofuel producer credit.”

123

Nonbusiness energy property

The provision allows a credit of 10% of amounts paid or incurred by the taxpayer for qualified energy improvements to the building of principal residences. The provision allows credits of fixed dollar amounts ranging from $50 to $300 for energy-efficient property including furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans, and is subject to a lifetime cap of $500.

124

Qualified fuel cell motor vehicles

Provides a credit for purchases of new qualified fuel cell motor vehicles. The provision allows a credit of between $4,000 and $40,000, depending on the weight of the vehicle. Other vehicles, depending on their fuel efficiency, may qualify for an additional $1,000 to $4,000 credit.

125

Alternative fuel refueling property credit

Provides a credit for the installation of alternative fuel vehicle refueling property, which includes property that dispenses alternative fuels including ethanol, biodiesel, natural gas, hydrogen, and electricity. The credit is capped at $30,000 per location for business property and $1,000 for property installed at a principal residence.

126

2-wheeled plug-in electric vehicle credit

Provides a 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500).

127

Credit for electricity produced from certain renewable resources

For renewable power facilities, the provision extends for three years (one year in the case of wind facilities) 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%.

128

Production credit for Indian coal facilities

Provides a credit $2/ton production tax credit for coal produced on land owned by an Indian tribe.

129

Energy-efficient homes credit

Provides a $1,000 or $2,000 credit for manufacturers of energy-efficient residential homes.

130

Special allowance for second-generation biofuel plant property

Provides an additional first-year 50% bonus depreciation for cellulosic biofuel facilities.

131

Energy-efficient commercial buildings deduction

Provides a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings.

132

Special rule for sales or dispositions to implement FERC or state electric restructuring policy for qualified electric utilities

Provides taxpayers an election to recognize gain from qualifying electric transmission transactions ratably over an eight-year period beginning in the year of sale (rather than entirely in the year of sale) if the amount realized from such sale is used to purchase exempt utility property within the applicable period.

133

Extension and clarification of excise tax credits relating to alternative fuels

Provides a $0.50/gallon excise-tax credit or payment for alternative fuel and a $0.50/gallon credit for alternative fuel mixed with traditional fuel. Additionally, the provision modifies the mixture component of the credit by specifying that liquefied petroleum gas, compressed or liquefied natural gas, and compressed or liquefied gas derived from biomass, are not eligible to be included in an alternative fuel mixture.

134

Oil spill liability trust fund rate

Imposes an excise tax of $0.09/barrel on crude oil received at a refinery and petroleum products entered into the U.S. and deposited into the Oil Spill Liability Trust Fund.

Subtitle D—Certain Provisions Expiring at the End of 2019

141

New markets tax credit

Provides a $5 billion New Markets Tax Credit allocation for 2020. The proposal also extends for one year, through 2025, the carryover period for unused New Markets Tax Credits.

142

Employer credit for paid family and medical leave

Provides an employer credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per taxable year.

143

Work opportunity credit

Provides an elective general business credit to employers hiring individuals who are members of one or more of 10 specified groups.

144

Certain provisions related to beer, wine, and distilled spirits

Provides a reduction of certain excise taxes and simplified record-keeping requirements related to the taxation of beer, wine, and distilled spirits through 2021.

145

Look-through rule for related controlled foreign corporations

Provides look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations.

146

Credit for health insurance costs of eligible individuals

Provides a refundable credit of 72.5% of the premiums paid by certain individuals for self-coverage and qualifying family members under qualified health insurance.

 

Retirement

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is included in Division O as part of the Further Consolidated Appropriations Act, 2020 (H.R. 1865), released yesterday. The version of the SECURE Act included in H.R. 1865 is substantially similar to H.R. 1994, the version of the bill that passed the House 417-3 on May 23.

The SECURE Act is bipartisan legislation to help Americans prepare for retirement. It includes provisions allowing companies to offer joint retirement plans, enhancements to the auto-enrollment and lifetime income rules and increases the minimum required distribution age from 70.5 to 72.

The following changes were made to the SECURE Act in the appropriations bill:

  • Trusts for Disabled or Chronically Ill Beneficiaries. The bill recognizes and provides for trusts established for disabled or chronically ill beneficiaries and multi-beneficiary trusts.
     
  • Increase in Penalty for Failure to File. The bill increases the penalty of failing to file from $330 to $435.
     
  • Plan Amendments. Sec. 601 in the bill, which relates to plan amendments, was included as Sec. 401(b) in the original bill (H.R. 1994). There are no substantive changes to this provision.

Click here for a brief summary of the SECURE Act provisions included in the spending bill.
 

TCJA Modifications

The year-end deal includes the following modifications to the TCJA:

  • Modification of income for purposes of determining tax-exempt status of certain mutual or cooperative telephone or electric companies (“Rural Coop”): Included in Sec. 301 of the amendment, the provision modifies the definition of income used to determine the tax-exempt status of a cooperative telephone or electric company. Specifically, the provision excludes from income (1) grants, contributions, and assistance provided under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or by local, state, or regional governmental entities for disasters or emergencies; and (2) certain grants or contributions provided by a government entity for electric, communications, broadband, internet, or other utility facilities or services.
     
  • Repeal of increase in unrelated business taxable income for certain fringe benefit expenses (“Church Parking Tax”): Included in Sec. 302 of the amendment, this section rescinds the controversial tax created as part of the TCJA that imposed a new tax on fringe benefits that nonprofits provide to their employees.
     
  • Modification of rules relating to the taxation of unearned income of certain children (“Kiddie Tax” Correction): The TCJA unintentionally led to a tax increase on survivors of fallen service members and first responders who died in the line of duty, also known as the “Kiddie Tax.” The correction rolls back the changes made in the TCJA, shielding survivor benefits from a 37% tax. This was included in the SECURE Act Secs. 301 and 501 (Division O) in H.R. 1865.
     
Repealing Sections of the Affordable Care Act (ACA)

The deal includes a full repeal of several ACA-related taxes, including the Medical Device Tax, the Health Insurance Tax (HIT) and the Cadillac Tax.

  • Sec. 501 – Medical Device Tax. Scheduled to take effect again on Jan. 1, 2020, the medical device tax imposed a 2.3% excise tax on the sale of all medical devices. This provision permanently repeals the tax.
     
  • Sec. 502 – Health Insurance Tax. The HIT is an annual fee charged to insurance companies on health policy premiums. This provision permanently repeals the tax.
     
  • Sec. 503 – Cadillac Tax. Effective beginning in 2022, the Cadillac Tax would have applied a 40% tax on employer-sponsored health benefits whose value exceeds $11,200 for single coverage and $30,150 for family coverage. This provision permanently repeals the tax.
     
Disaster Relief

Disaster relief—specifically for victims of Hurricanes Michael, Florence and Maria—were included in the final spending bill. Similar to the provisions in the Taxpayer Certainty and Disaster Tax Relief Act (H.R.3301), which passed the House Ways and Means Committee in June, the disaster tax relief package included in the bill implements special disaster-related rules for use of retirement funds, provides automatic tax filing extensions to those affected by these hurricanes, modifies the investment income tax rate of private foundations, and includes an employee retention credit for employers affected by these disasters. The spending bill also provides additional low-income housing credit allocations for qualified 2017 and 2018 California disaster areas.
 

What Was Left Out?

Lawmakers were unable to reach agreement on the following provisions:

  • Refundable Tax Credits. A top priority for Speaker Nancy Pelosi (D-CA) was an expansion of refundable tax credits, such as the Earned Income Tax Credit and the Child Tax Credit. The increases to both credits were included in H.R. 3300, passed by the Ways and Means Committee 22-19, on June 20.
     
  • Technical Corrections. Apart from the three modifications to the TCJA mentioned above, there were no major technical corrections to the TCJA included in the spending deal. Despite widespread bipartisan support, the Qualified Improvement Property (QIP) fix did not make it into the final package. The TCJA intended to consolidate the various categories of QIP that existed under old law into a new category with a 15-year cost recovery period. This would also have allowed QIP investments to qualify for the 100% bonus depreciation provision created by the TCJA. However, due to a drafting error, the TCJA excluded QIP from 100% bonus depreciation by leaving the cost recovery period unassigned. This results in a default 39-year recovery period for QIP.

This document is intended to provide you with general information regarding the tax priorities in the 2019 year-end spending bill. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.

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