Bipartisan Budget Act contains several tax provisions

Bipartisan Budget Act contains several tax provisions

Early Friday morning, the Bipartisan Budget Act of 2018, H.R.1892, passed the Senate by a vote of 71–28 and the House of Representatives, 240–186. President Donald Trump signed the bill later in the day.

The 640-page legislation contains many tax provisions, with Congress retroactively extending a number of tax provisions for one year so they were effective for 2017 only.

The act also contained a number of disaster relief provisions, many of them for victims of the California wildfires. The act also contained some special relief provisions for Puerto Rico.

Qualified wildfire distributions: The act provides that the 10% additional tax imposed by Sec. 72(t) on early distributions from a qualified retirement plan will not apply to any “qualified wildfire distribution.” A qualified wildfire distribution is any distribution (up to $100,000) from a plan described in Sec. 402(c)(8)(B) made to a “qualified individual” during prescribed periods. A qualified wildfire distribution can be made to an individual whose principal place of abode during any portion of the period from Oct. 8, 2017, to Dec. 31, 2017, is located in the California wildfire disaster area (as defined by the act) and who has sustained an economic loss by reason of the wildfires to which the declaration of the area relates.

In addition to relief from the Sec. 72(t) penalty, the act allows eligible taxpayers to spread out any income inclusion resulting from those distributions over a three-year period, beginning with the tax year the distribution is required to be included in income. The distributions are also exempt from the trustee-to-trustee transfer and withholding rules.

Repayments: Taxpayers who receive qualified wildfire distributions can repay them into a qualified plan (other than an individual retirement account (IRA)) within three years of the distribution, and the repayment will be treated as an eligible rollover distribution. Repayments to IRAs will be treated as transfers from an eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution.

Similarly, taxpayers who made withdrawals from qualified plans after March 31, 2017, and before Jan. 15, 2018, to purchase or construct a residence within one of the wildfire disaster areas, and whose purchase or construction was canceled because of one of the wildfires, can repay that distribution on or before June 30, 2018.

Loans: The act also increases the limit on the amount of a loan from a qualified employer plan that will not be treated as a distribution, from $50,000 to $100,000. This increase applies to loans made on or after Feb. 9, 2018, through Dec. 31, 2018. The act also removes the Sec. 72(p)(2)(A)(ii) “one-half of the present value” limitation for these loans and allows for a longer repayment period.

The act provides eligible employers with an employee retention tax credit. Eligible employers are employers that conducted an active trade or business on Oct. 17, 2017, in the California wildfire disaster zone (as defined by the act) and whose business is inoperable any day between Oct. 17, 2017, and before Jan. 1, 2018.

The credit equals 40% of up to $6,000 (a maximum of $2,400) in “qualified wages” paid to an eligible employee by an eligible employer. An eligible employee is one who worked for the eligible employer on the date listed above in the California wildfire disaster zone.

For charitable contributions made in cash between Oct. 8, 2017, and Dec. 31, 2018, to a Sec. 170 charitable organization for relief efforts in the California wildfire disaster area, the act temporarily suspends the percentage limitations in Sec. 170(b) and provides that those contributions will not be taken into account for purposes of applying Sec. 170(b) or the Sec. 170(d) carryover rules to other contributions. The act also temporarily loosens the rules regarding excess contributions and makes an exception to the overall limitation on itemized deductions for qualified contributions.

The act eases the rules for casualty losses for taxpayers who suffer a “net disaster loss” in the California wildfire disaster area. A net disaster loss is the excess of the taxpayer’s “qualified disaster-related personal casualty losses” over the taxpayer’s personal casualty gains (as defined in Sec. 165(h)(3)(A)).

A qualified disaster-related personal casualty loss is a casualty loss that arises on or after Oct. 8, 2017, in the California wildfire disaster area.

For qualified disaster-related personal casualty losses, the act removes the requirement that personal casualty losses must exceed 10% of the taxpayer’s adjusted gross income to be deductible. It also allows nonitemizers to increase their standard deduction by the amount of their net disaster loss. And, although the standard deduction is disallowed for alternative minimum tax (AMT) purposes, taxpayers subject to the AMT can claim the portion of their standard deduction that is attributable to their net disaster loss for AMT purposes.

The act also increases the Sec. 165(h)(1) $100 per-casualty floor to $500 for qualified disaster-related personal casualty losses.

The act allows qualified individuals to elect to use their prior-year earned income, instead of their current-year income, for purposes of the Sec. 32 earned income tax credit and the Sec. 24 child tax credit, if their current-year income is less than their prior-year income.

A qualified individual is a person whose principal place of abode was in the California wildfire disaster zone or area on Oct. 8, 2017, through Dec. 31, 2017, and, if the individual resided in the wildfire disaster area, the individual was displaced from his or her abode by the wildfires.

Provisions for individuals that expired at the end of 2016 that were retroactively reinstated, but only through 2017, include:

Provisions for businesses that expired at the end of 2016 but have been retroactively reinstated for one year, through 2017 (meaning the provisions are not in effect for 2018, except where otherwise indicated), include:

Provisions for energy expenses that expired at the end of 2016, but were retroactively extended for one year, through 2017 (unless indicated otherwise), include:

Other notable provisions in the act include mandating the creation of a new Form 1040SR, a special tax form for taxpayers over 65 that is supposed to be as simple as Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents, but allow for reporting Social Security and retirement distributions.

The act also adds each low-income community in Puerto Rico to be designated as a qualified opportunity zone under Sec. 1400Z-1, which allows those areas to qualify for certain tax incentives. This provision is effective Dec. 22, 2017, the date of enactment of P.L. 115-97.

Finally, the law also modifies the rules for hardship distributions, directing the IRS, not later than one year after Feb. 9, 2018, to modify Regs. Sec. 1.401(k)–1(d)(3)(iv)(E) to eliminate the rule prohibiting contributions to qualified plans for six months after a taxpayer takes a hardship distribution. The new rule will be effective for plan years beginning after Dec. 31, 2018.

Sally P. Schreiber (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.

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