The Bipartisan Budget Act of 2018, P.L. 115-123, enacted on Feb. 9, 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.
Employee retention tax credit
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.
Charitable contribution limit
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.
Earned income and child tax credits
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 the abode by the wildfires.
Extended provisions for individuals
Provisions for individuals that expired at the end of 2016 that were retroactively reinstated, but only through 2017, include:
- Sec. 108(a)(1)(E), which excludes from gross income the discharge of qualified principal residence indebtedness income.
- The Sec. 163(h)(3) treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer's principal residence.
- Sec. 222, which provides an above-the-line deduction for qualified tuition and related expenses.
Extended business tax incentives
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:
- The Sec. 45A Indian employment tax credit for employers of enrolled members of Indian tribes (or their spouses) who work on and live on or near an Indian reservation.
- The Sec. 45G railroad track maintenance credit, equal to 50% of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer.
- The Sec. 45N mine rescue team training credit, which provides a credit for a portion of the training costs for qualified mine rescue team employees.
- Sec. 168(e)(3)(A), which allows certain racehorses to be depreciated as three-year property instead of seven-year property.
- Sec. 168(i)(15), which allows a seven-year recovery period for motorsports entertainment complexes.
- Sec. 168(j), which allows owners accelerated depreciation for qualifying property used predominantly in the active conduct of a trade or business within an Indian reservation.
- The Sec. 179E election to expense mine safety equipment, which permits taxpayers to elect to treat 50% of the cost of any qualified advanced mine safety equipment as a deduction in the year the property is placed in service.
- The Sec. 181 special expensing rules for certain film and television productions, which allows taxpayers to treat costs of any qualified film or television production as a deductible expense. The provision also applies to live theatrical productions.
- Sec. 199(d)(8), which permits a deduction for income attributable to domestic production activities in Puerto Rico (Sec. 199 was repealed in P.L. 115-97, so this provision is of necessity effective for only one year).
- The Sec. 1391 empowerment zone tax incentives are extended through 2017.
- The Sec. 7652(f) temporary increase in the limit on cover over of rum excise taxes from $10.50 to $13.25 per proof gallon to Puerto Rico and the Virgin Islands, which expired at the end of 2016, has been retroactively extended through 2021.
- The American Samoa economic development credit.
- Timber gains: C corporations' timber gains are subject to a 23.8% tax rate for 2017 as well as 2016, as under current law. (This provision is not needed after 2017 to offset the higher corporate tax rate since the top corporate tax rate was reduced to 21% by P.L. 115-97.)
Extended energy tax incentives
Provisions for energy expenses that expired at the end of 2016, but were retroactively extended for one year, through 2017 (unless indicated otherwise), include:
- Sec. 25C, which provides a 10% credit for qualified nonbusiness energy property.
- The Sec. 25D credit for residential energy property for qualified fuel cell property, small wind energy property, geothermal heat pump property, qualified solar electric property, and solar water heating property. This credit was extended through 2021.
- Sec. 30B, which provides a credit for qualified fuel cell motor vehicles.
- Sec. 30C, which provides a 30% credit for the cost of alternative (non-hydrogen) fuel vehicle refueling property.
- The Sec. 30D 10% credit for plug-in electric motorcycles and two-wheeled vehicles.
- Sec. 40(b)(6), which provides a credit for each gallon of qualified second-generation biofuel produced.
- The Sec. 40A credit for biodiesel and renewable diesel, which includes the biodiesel mixture credit, the biodiesel credit, and the small agri-biodiesel producer credit.
- The Sec. 45(e)(10)(A)(i) production credit for Indian coal facilities.
- The Sec. 45 credits for facilities producing energy from certain renewable resources.
- Sec. 45L, which provides a credit for each qualified new energy-efficient home constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year.
- The Sec. 48 credits for fiberoptic solar lighting system, geothermal heat pump, small wind energy, and combined heat and power properties and the credit for qualified fuel cell and microturbine plant property. The credits are extended through 2021, subject to a phaseout.
- Sec. 168(l), which provides a depreciation allowance equal to 50% of the adjusted basis of qualified second-generation biofuel plant property.
- The Sec. 179D deduction for energy-efficient commercial buildings.
- The Sec. 451(i) special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities.
- The Sec. 6426(c) excise tax credits for alternative fuels and the Sec. 6427(e) outlay payments for alternative fuels.
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.