2019 Year-End Tax Legislation Enacted

UPDATE: This tax legislation was signed by the President on December 20, 2019 so it is now enacted into law.

The Glitch that Stole Christmas

Congress completes its work for the year this week. As usual, a major spending bill with a looming government shutdown is in focus. It seems like nothing is getting done for months in Congress, then major legislation is pushed through in a matter of a few days. This year is no different.  

The House and Senate needed to pass this spending bill by December 20, 2019 to avert a government shutdown; this is viewed as must-pass legislation. Thus, there has been speculation for months that several tax bills stalled in Congress would be attached to any year-end legislation. There was much uncertainty, however, as to what tax legislation would be included in a year-end package and what would be left out.

There were at least a half a dozen separate tax bills that were waiting all year for Congress to act on. While much smaller in scope than the recent comprehensive “Tax Cuts and Jobs Act,” (“TCJA”) there still were many significant items on the table, which we addressed in an article earlier this summer: Sikich Tax Update: A Legislative Update from Washington You Head Off on Your Summer Vacation.

Tax Provisions in the Year-end Spending Bill

With the sound of the clock ticking in the background and a deadline weighing on their minds, Congress did in fact announce the tax provisions to be included in this massive year-end spending bill in the last few days. These tax items would likely not pass on their own as a separate piece of legislation but will not draw much debate if attached to the much larger spending bill.

The large spending bill was broken down into two major related spending bills, one of which contained the tax provisions. The House approved this spending legislation (which included the tax provisions) on December 17, 2019 and the Senate followed with its approval on December 19, 2019. The President then signed the bill into law on December 20, 2019.

Summary of Tax Provisions in 2019 Year-end Spending Bill

You can find more information on the budget impact of the tax items in this spending bill released on December 17, 2019 by the Joint Committee on Taxation (JCT) in Congress. Here is a summary of the tax provisions that Congress included in this 2019 year-end spending bill:

• Three ACA (“Affordable Care Act”) Tax Measures will be Repealed. These include:

1. The 40% excise tax on high cost employer-sponsored health insurance (more commonly known as the “Cadillac Tax”). This tax had been already delayed by Congress but will now be fully repealed.
2. The 2.3% Medical Excise Tax will be repealed.
3. The Annual Fee on Health Care Providers will also be repealed. This health insurance tax (or “HIT” under Section 9010) is a fee placed on specific health insurers based on their market share. As with the medical device tax, a hold was adopted on collecting this HIT tax in 2017 and 2019, but collections were scheduled to resume in 2020. This repeal will be effective beginning in 2021. The repeal of these ACA taxes had bipartisan support.

• SECURE (“Setting Every Community Up for Retirement Enhancement”) Retirement Bill. This bill passed the House earlier this Summer by a wide margin but languished in the Senate. It is now included in this spending bill. There were no changes from what was included in the initial House passed version, notes on which you can find in this article: Tax Legislation Update – House Passes Retirement Bill and Includes Return of the Pre-TCJA “Kiddie Tax.”  
• Extender Items. This was one of the last items added to the spending bill. Congressional leaders added several extenders items. These items are a wide-ranging collection of tax provisions that have been given a short shelf life of one to two years which causes Congress to deal with these nearly every year. In some cases, these have expired, but Congress later gets around to extending these items, sometimes retroactively. In this case, the extender items had expired on December 31, 2017. Many of these will be extended retroactively by this legislation for 2018 and 2019, and many of these will be renewed through 2020. Several of these will be extended through 2022. Here is a partial list of the extender items included in this legislation:

1. Extension of the exclusion from gross income for discharge of indebtedness on qualified principal residence;
2. Extension of mortgage insurance premiums treated as qualified residence interest;
3. Extension of medical expense deduction for expenses in excess of 7.5% of adjusted gross income;
4. Extension of above-the-line deduction for qualified tuition and related expenses;
5. Biodiesel and renewable diesel incentives – extend present-law income tax credits, excise tax credit, and outlay payments;
6. Extension of credit for Section 25C non-business energy property:
7. Extension of alternative motor vehicle credit for qualified fuel cell motor vehicles;
8. Extension of credit for construction of energy-efficient new homes;
9. Extension of energy-efficient commercial buildings deduction (Section 179D);
10. Extension and clarification of excise tax credits relating to alternative fuels;
11. Extension of employer credit for paid family and medical leave;
12. Extension of Work Opportunity Tax Credit (“WOTC” or Jobs Credit);
13. Extension of certain provisions related to beer, wine, and distilled spirits;
14. Extension of look-through treatment of payments between related CFCs under foreign personal holding company income rules;
15. Extension of credit for health insurance costs of eligible individuals.

• Disaster Relief. Certain tax relief for recent natural disasters.
• Private Foundations. Included in the disaster relief items noted above was a change in the tax rate for private foundations. For tax years beginning after this legislation is enacted, the tax rate on investment income for a private foundation will drop from 2% to 1.39%. The lower 1% tax rate if certain distributions are made by the private foundation, however, will be repealed.
• Technical Corrections from the TCJA. One of the major items that has been percolating in Congress over the past year has been making technical corrections to certain provisions in the Tax Cuts and Jobs Act. There were a number of items that had drafting errors in them when the TCJA was enacted in December 2017. Legislators and staff agree that these were drafted incorrectly, but the IRS indicated it could not change these items but needed Congress to remedy the matter. Congress needs to make these TCJA changes and they have not been able to come to any agreement over the past nearly two years. One such item that has drawn the most attention relates to Qualified Improvement Property (“QIP”). This involves certain additions and capital improvements a business makes to its property that was intended to qualify for the 100% bonus depreciation. But due to a drafting error, this glitch led to QIP instead receiving a 39-year straight line depreciation life. There has been much discussion and lobbying efforts to get this fixed, including many retailers who often incur large CapEx amounts that would be treated at QIP and thus could be entitled to 100% bonus depreciation if this glitch is fixed. But if not, these businesses receive a 39-year depreciation life. A QIP fix was not part of this year-end spending bill. So, this “retail glitch” will not be fixed this year and will need to wait until 2020 to see if Congress can resolve this matter. Yes, this is how the glitch stole Christmas this year for many retailers.
• Repeal of Tax on Fringe Benefits for Tax-Exempt Groups. While not really a technical correction, one of the unintended consequences of the TCJA was a tax imposed on certain tax-exempt organizations for certain fringe benefits. This even applied to employee parking costs and was often referred to as the “parking tax.” This led to much uncertainty and controversy for these organizations and tax practitioners. This legislation, however, would repeal this parking tax (the tax on unrelated business taxable income for certain fringe benefit expenses). The change would be effective as if it was not part of the TCJA when it was enacted in 2018. This change is welcome relief to many tax-exempt groups.

That’s it for year-end tax legislation in 2019. Much smaller in scope than the comprehensive TCJA in 2017, but still some significant changes. We will have more on this in the coming weeks. Please contact your Sikich tax advisor with any questions you may have.

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