Synopsis

On February 9, 2018, the President signed into law the Bipartisan Budget Act of 2018 (the Budget Act), H.R. 1892. In addition to providing a continuing resolution to fund the federal government through March 23, 2018, the Budget Act contains several tax law provisions. Among other things, it retroactively extends a myriad of tax provisions through 2017 and includes disaster tax relief to victims of the California wildfires.  

The Budget Act extended the following individual, business, and energy tax provisions, which expired at the end of 2016. These provisions have been retroactively extended for one year through 2017.  They are not in effect for 2018 unless otherwise indicated.

Individual tax provisions 

• Exclusion from gross income for discharge of indebtedness on a principal residence
• Treatment of mortgage insurance premiums as deductible and qualified residence interest
• Deduction for qualified tuition and related expenses

Business tax provisions

• Empowerment zone tax incentives
• Indian employment tax credit
• Mine rescue team training credit
• Three-year depreciation for racehorses
• Sever-year recovery period for motorsports entertainment complexes
• Accelerated depreciation for qualifying property used predominately in the active conduct of a trade or business within an Indian reservation
• Expensing rule with regards to certain film, television, and live theatrical productions. Allows taxpayers to treat the costs of any qualified film or television production as deductible. The tax provision applies to the cost of live theatrical productions as well.
• Election to expense advanced mine safety equipment
• Allowable deduction with respect to income attributable to domestic production activities in Puerto Rico
• Alternative 23.8% maximum tax rate for qualified timber gains of C corporations
• American Samoa economic development credit

Energy tax provisions

• 10% credit for qualified nonbusiness energy property
• Credit for residential energy property for qualified fuel cell property, small wind energy property, and geothermal heat pump property. The credit was extended through 2021.
• Credit for qualified fuel cell motor vehicles
• 30% credit for the cost of alternative (non-hydrogen) fuel vehicle refueling property
• 10% credit for plug-in electric motorcycles and two-wheeled vehicles
• Credit for each gallon of qualified second-generation biofuel produced
• Credit for biodiesel and renewable diesel
• Production credit for Indian coal facilities
• Credits for facilities producing energy from certain renewable resources
• Credit for each qualified new energy-efficient home constructed by an eligible contractor
• The following credits are extended through 2021: 
  • Fiber optic solar lighting system credit
  • Geothermal heat pump credit
  • Small wind energy and combined heat and power properties credit
  • Qualified fuel cell and microturbine plant property credit
• Depreciation is allowed equal to 50% of the adjusted basis of qualified second-generation biofuel plant property
• A deduction for energy-efficient commercial buildings
• The special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities
• The excise tax credits for alternative fuels and outlay payments for alternative fuels

California wildfire disaster relief provisions 

Qualified Wildfire Distributions: The Budget Act provides that the 10% additional tax imposed on early distributions from a qualified retirement plan will not apply to “qualified wildfire distributions” up to $100,000.  Qualified wildfire distributions are defined as any distribution from an eligible retirement plan made on or after October 8, 2017 and before January 1, 2019 to an individual whose principal place of abode during any portion of the period from October 8, 2017 to December 31, 2017 was located in the California wildfire disaster area and who has sustained an economic loss by reason of the wildfires.

Cancelled Home Purchases: The Budget Act allows a taxpayer to repay withdrawals from a qualified plan and avoid the tax on such withdrawals.  Where a taxpayer made withdrawals from a qualified plan after March 31, 2017 and before January 15, 2018 to purchase or construct a residence that was cancelled because of the California wildfire disaster, the taxpayer can repay the withdrawal penalty-free.  The repayment must be made during the period beginning on October 7, 2017 and ending on June 30, 2018. 

Retirement Plan Loans: The Budget Act expands the limit on the amount of a loan from a qualified employer plan that will not be treated as a distribution.  The loan amount increases from $50,000 to $100,000. The increased loan amount applies to loans made on or after February 9, 2018 through December 31, 2018 to “qualified individuals.”  The term “qualified individuals” means any individual whose principal place of abode during any portion of the period from October 8, 2017 to December 31, 2017 is located within the California wildfire disaster area and who has sustained an economic loss due to wildfires. 

California Wildfires Employee Retention Credit: The Budget Act provides “eligible employers” with an employee retention credit.  For this purpose, “eligible employers” are employers who conducted an active trade or business on October 8, 2017 in the California wildfire disaster area and whose business is inoperable on any day after October 8, 2017 and before January 1, 2018.  The credit amount is equal to 40% of up to $6,000 of the qualified wages with respect to each eligible employee of such employer for the tax year. As such, the maximum credit per employee is $2,400 ($6,000 x 40%).  An “eligible employee” is someone who worked for the eligible employer in the California wildfire disaster area on the dates specified above. 

Charitable Deduction Limitations: Percentage limitations and carryover rules on charitable contribution deductions are temporarily suspended for qualifying contributions. A contribution is a qualifying contribution if:
Paid in cash during the period of October 8, 2017 through December 31, 2018;
The contribution was made for relief efforts in the California wildfire disaster area; and
Contemporaneous written acknowledgement was obtained that the contribution was used for relief efforts.

Earned Income and Child Tax Credits: The Budget Act allows “qualified individuals” to elect to use prior-year earned income, as opposed to current-year income, for purposes of the earned income tax credit and child tax credit, if current year income is less than prior year income.  A qualified individual is one whose principal place of residence was in the California wildfire disaster area on October 8, 2017 through December 31, 2017.

What does CohnReznick think?

The extenders brought life back to many favorable provisions that had expired.  Until the Budget Act passed, taxpayers preparing 2017 tax returns could have no guarantee that these provisions would be extended.  Now that they have been extended through 2017, taxpayers can take affirmative steps to incorporate the above deductions and credits into their tax returns.  Some of the above credits and deductions require studies that could delay the filing of the tax return until after the original, unextended due date.  

_{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}