Congressional Holiday Gift: Certain Tax Credit Rules Extended

Just before the holidays, the House and Senate have passed the Taxpayer Certainty and Disaster Tax Relief Act of 2019 as part on an Omnibus spending package, the “Further Consolidated Appropriations Act, 2020” thereby averting a government shutdown.  President Trump signed the bill into law on December 20, 2019.  The majority of the new law lays out how the government will appropriate federal budget monies across various departments and programs.

The Act extends certain expiring provisions through the 2020 tax year, including:

Exclusion from gross income of discharge of qualified principal residence indebtedness.  This provision provides a maximum exclusion from gross income of $2M for a discharge of qualified principal residence indebtedness.  Generally, the indebtedness must be the result of acquisition, construction, or substantial improvement of primary residence.   For years beginning before January 1, 2018, qualified principal residence indebtedness that was discharged may have been excluded from gross income.  However, this exclusion did not apply to any debt discharged after December 31, 2017.

Under the new law, this exclusion is extended for two years, for discharges of indebtedness before January 1, 2021.

1. Treatment of mortgage insurance premiums as qualified residence interest.Under pre-Disaster Act law, mortgage insurance premiums paid or accrued before January 1, 2018 by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer’s qualified residence were treated as deductible qualified residence interest, subject to a phaseout based on the taxpayer’s adjusted gross income.

Under the new law, this treatment will be extended through 2020 for amounts paid or incurred after December 31, 2017.

2. Reduction in medical expense deduction floor.Individuals, in tax years 2017 and 2018, were able to deduct qualified medical expenses exceeding 7.5% of their adjusted gross income (AGI).  However, the “floor” was scheduled to increase to 10% of AGI for tax year 2019.

Under the new law, the Disaster Act extends the threshold of 7.5% for tax years beginning after December 31, 2018 and before January 1, 2021.

3. Deduction of qualified tuition and related expenses.For purposes of this deduction which expired at the end of 2017, qualified education expenses are tuition and fees required for enrollment or attendance at an eligible educational institution.

Under the new law, individuals can claim an above-the-line deduction for qualified tuition and related expenses for higher deduction.   The deduction is capped at $4K for an individual whose AGI does not exceed $65K ($130K for joint filers) or $2K for an individual whose AGI does not exceed $80K ($160K for joint filers).

4. Work opportunity tax credit.The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment.

Under the new law, the WOTC is extended through 2020.

5. New market tax credit (NMTC).The NMTC is a federal tax credit used to encourage private investment in low-income communities around the United States.  It was scheduled to expire at the end of 2019.

Under the new law, the NMTC has been extended through the end of 2020.

6. Employer credit for paid family and medical leave.Eligible employers could claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave.The Credit was due to expire at the end of 2019, but under the new law has been extended through 2020.
7. Credit for health insurance costs of eligible individuals.Qualified individuals could claim a refundable credit equal to 72.5% of the premiums paid for coverage of the individual and qualifying family members under qualified health insurance.

The credit was due to expire at the end of 2019, but under the new law has been extended through 2020.

The Act also extends through December 31, 2020, tax provisions that had previously expired on December 31, 2017, such as:

1. Indian Employment Credit.  This provision provides a credit on qualified wages and health insurance costs incurred by the employer with respect to each qualified employee working on an Indian reservation.
2. Empowerment Zone Tax Incentives.  The provision provides tax benefits for certain businesses and employers operating in empowerment zones which are specifically designated geographic areas. The tax benefits available include tax-exempt bond financing, a federal income tax credit for employers who hire qualifying employees, accelerated deprecation deduction on qualifying equipment and deferral of capital gains tax on the sale of qualified assets sold and replaced.
3. Disaster Tax Relief. Tax provisions provide forgiveness of early-withdrawal penalties for qualified disaster relief distributions and allows for the re-contribution of retirement plan withdrawals for home purchases cancelled due to eligible disasters. An employee retention credit is also allowed for employers in affected areas.
4. Credit for Electricity Produced from Certain Renewable Resources. For renewable power facilities, the provision extends for three years the beginning of construction deadline for the renewable electricity production credit and the election to claim the energy credit in lieu of the electricity production credit.
5. Section 179(D) commercial buildings energy efficiency tax deduction. This deduction primarily enables building owners to claim a tax deduction for installing energy-efficient commercial building property.
6. Extension of expensing rules for certain productions. Tax deductions for qualified film, television, and theatrical productions of up to $15M of the aggregate cost are available in the year the expenditure was incurred. The Disaster Act extends the deduction through 2020 for productions commencing after December 31, 2017.

For some taxpayers, these incentives will reduce 2019 tax liabilities, and in some instances, refund claims may be available for taxpayers in certain geographic areas.

Other Provisions

1. The Act contains several other changes impacting taxes imposed by the Affordable Care Act (ACA) and fixes to the Tax Cuts and Jobs Act of 2017.
2. The excise taxes on high cost employer-sponsored health coverage (“Cadillac” plans) and medical devices are fully repealed.
3. The Act also eliminates the unrelated business income tax which required tax-exempt employers that provide qualified transportation fringe benefits or parking to employees to pay unrelated business income tax on the amount by which a deduction was not allowable.

The Act does not correct the oversight from the Tax Cuts and Jobs Act that left leasehold improvement property outside the category of 15-year recovery property for depreciation purposes, leaving it in the 39-year recovery category.  This oversight eliminates such property from qualifying 100% bonus depreciation, which means improvements must be recovered over 40 years instead of being expensed in the year incurred.

The Further Consolidated Appropriations Act has extended many provisions that were due to expire at the end of 2019 through the 2020 tax year as well as extending certain provision that had previously expired on December 31, 2017.  In addition, the Act has also impacted certain provisions imposed by the Affordable Care Act and the Tax Cuts and Jobs Act of 2017.  Please contact the tax professionals at Louis Plung & Company so that we may discuss how these tax law changes may impact you or your business.