The Further Consolidated Appropriations Act, enacted on Dec. 20, 2019, included several tax changes with retroactive impact, requiring taxpayers and their advisors to consider filing amended 2018 tax returns. These include 28 regularly expiring tax breaks that had expired at the end of 2017 and have been retroactively extended. A package of disaster relief provisions was also enacted that have an application to disasters back to 2018. A couple of technical corrections to the Tax Cuts and Jobs Act also relate to 2018. Also, a provision in the SECURE Act gives taxpayers an election to revise the treatment of the changes to the Kiddie Tax retroactively for 2018.
Congress has never before waited so long to retroactively extend these expired provisions. There are still significant technical corrections to the TCJA that have not yet been enacted that, if enacted, could result in an additional need to amend 2018 tax returns. As tax practitioners go through the 2019 tax return preparation process, they will want to stay alert to these changes to spot taxpayers who may benefit from amending 2018 tax returns or use other software tools to identify these issues in 2018 tax returns for possible amendment. It could well result in the largest number of amended tax returns ever filed.
The expired tax provisions that were retroactively extended include several individual provisions, many business provisions, and many energy- related provisions.
The individual provisions retroactively extended to 2018 include the exclusion from gross income of discharge of qualified principal residence indebtedness and the treatment of mortgage insurance premiums as qualified residence interest. The deduction for qualified tuition and related expenses is also retroactively extended to 2018. Two other expired provisions were only required to be extended back to the beginning of 2019 — the return of the medical expense deduction floor to 7.5 percent of adjusted gross income, and the black lung disability trust fund excise tax. The business tax breaks that were retroactively extended back to 2018 include the railroad track maintenance credit, the mine rescue team training credit, the classification of certain race horses as three-year property, the seven-year recovery period for motorsports entertainment complexes, the Indian employment credit, the accelerated depreciation for business property on Indian reservations, the expanded expensing rules for qualified film, television and live theatrical productions, empowerment zone tax incentives, and the American Samoa economic development credit.
Among the energy-related tax provisions retroactively extended to 2018 are a few related to individuals. These include the non-business energy property credit, the qualified fuel cell motor vehicle credit, and the two-wheeled plug-in electric vehicle credit. Noticeably absent from this list was a further extension of the electric vehicle credit or the solar electricity credits. Business-focused energy-related provisions retroactively extended to 2018 include the biodiesel and renewable diesel credit, the second generation biofuel producer credit, the alternative fuel refueling property credit, the credit for electricity produced from certain renewable resources credit, the production credit for Indian coal facilities, the energy-efficient homes credit, the special allowance for second-generation biofuel plant property, the energy-efficient commercial building deduction, the special rule for sales or dispositions to implement FERC or state electric restricting policy for qualified electric utilities, the excise tax credits related to alternative fuels, and the oil spill liability trust fund rate.
Disaster tax relief
The disaster relief provisions enacted as part of the Further Consolidated Appropriations Act are similar to disaster relief provisions that had been enacted in response to prior natural disasters, except that the enactment of these was delayed, requiring an extension of the definition of a “qualified disaster area” back to Jan. 1, 2018. These provisions include special disaster-related rules for use of retirement funds, the employee retention credit for employers affected by qualified disasters, a temporary increase in the limitation on qualified contributions, special rules for qualified disaster-related personal casualty losses, additional low-income housing credit allocations for qualified 2017 and 2018 California disaster areas, and payments to possessions with mirror tax systems.
Two provisions with retroactive effect relate specifically to tax-exempt organizations. One would modify the definition of income for purposes of determining the tax-exempt status of certain mutual or cooperative telephone or electric companies, and the other would repeal the provision in the TCJA that increases the unrelated business taxable income for certain fringe benefit expenses.
The TCJA revised the Kiddie Tax to require taxation of a child’s unearned income not at the parents’ tax rate but the trust tax rate. The intent was to simplify taxes, but the result was to frequently raise taxes, since the top trust tax rate kicks in at a much lower income than the individual top tax rate. A provision enacted in the SECURE Act repealed this change to the Kiddie Tax effective after Dec. 31, 2019. However, it also provided for an election to also apply the change in the 2018 and 2019 tax years as directed by the Treasury. Currently, no direction from the Treasury has yet been forthcoming; however, it is assumed that this would permit an amended tax return for the 2018 tax year to change the tax to the parents’ tax rate.
Other SECURE Act provisions
The focus of the SECURE Act relates to reforms to the tax treatment of qualified retirement plans. Most of the changes are beneficial, but not all. Most of the changes are also only to be applied prospectively, but again not all. Provisions with potential retroactive application include the treatment of custodial accounts on termination of Section 403(b) plans; the clarification of retirement income account rules relating to church-controlled organizations; special rules for minimum funding standards for community newspaper plans; and treating excluded difficulty-of-care payments to home care workers as compensation for determining retirement contribution limitations. The retroactive application of these provisions would not necessarily affect 2018 tax returns but may require revisions to qualified retirement plans and estate plans
These tax changes are requiring the IRS to revise its 2019 tax forms and tax systems, delaying the start of the tax filing season to Jan. 27, 2020. Tax professionals will want to be alert to these changes to look for appropriate opportunities to recommend amendments to 2018 tax returns. Adding to the complexity is the fact that there are other significant technical corrections to the TCJA that have not yet been enacted by Congress, including the depreciation of qualified improvement property and the effective date of the net operating loss carryback provision.