How Does the New Act’s Key Tax Extenders Potentially Impact Your Individual and Business Returns?

Eli Noff, Esq., Partner

EXECUTIVE SUMMARY

New Act Provides Key Business Extenders:

  • Incentives for investments in empowerment zones are retroactively reinstated back to tax year 2017 and prospectively extended throughout tax year 2020.
  • One-year extension of employer credit for paid family and medical leave.
  • New markets tax credit limitation increased to $5,000,000,000 for tax year 2020. No unused amount may be carried to any calendar year after 2025.

New Act Provides Key Individual Extenders:

  • Taxpayers may continue to exclude the discharge of principal residence indebtedness from their gross income throughout tax year 2020. This is now also applicable to discharges of indebtedness after December 31, 2017.
  • Effective for amounts paid or accrued after December 31, 2017, qualified taxpayers may continue throughout tax year 2020 to deduct the cost of their mortgage insurance premiums purchased in connection with acquisition indebtedness.
  • Taxpayers may continue to deduct medical expenses if the expenses exceed 7. 5% of adjusted gross income (AGI), rather than the previous higher AGI floor of 10%.
  • The above-the-line deduction for qualified tuition and related expenses is now extended throughout tax year 2020 and effective for taxable years beginning after December 31, 2017.

On December 20, 2019, the president enacted the Further Consolidated Appropriations Act, 2020 (FCAA).[1]Although it primarily acts to avoid a government shutdown by funding the government through September 30, FCAA includes numerous notable tax law changes, including retroactive and prospective tax extenders for various business and individual credits and deductions. Additionally, FCAA contains within itself another act-the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which significantly changes retirement plan funding and distribution.[2]Finally, the FCAA repeals certain excise taxes implemented via the Patient Protection and Affordable Care Act (ACA) and makes some technical corrections to the Tax Cuts and Jobs Act of 2017 (TCJA).[3]

Part 1 of our FCAA coverage focuses on the Act’s key tax extenders potentially impacting both business and individual returns. Importantly, FCAA reinstates certain previously expired tax incentives for a three-year period making those provisions bothretroactivelyeffective for 2018 and 2019 and prospectively extended through the end of 2020. As such, taxpayers are well advised to meet with a tax professional to determine whether they could benefit from the extended provisions and whether their 2018 return should be amended accordingly.

Part 2 of our FCAA coverage will discuss the SECURE Act and changes to the ACA and TCJA.

Extenders-The Basics

Briefly, “extenders” may be understood best as “temporary” tax credits and other tax provisions that periodically expire, but subsequently are extended. Typically, individual and business extenders only experience extension periods of one or two years. Occasionally, some of these temporary extenders become permanent.[4]

Many extenders which expired at the end of 2017 and 2018, were not addressed in either the TCJA or the Bipartisan Budget Act of 2018.[5]As such, they expired and were unavailable to taxpayers in the 2018 and 2019 tax years. Again, the FCAA reinstates some of these previously expired tax incentives for a three-year period-retroactivelyeffective for 2018 and 2019 andprospectivelyextended through the end of 2020.

Key FCAA Business Extenders

Among the numerous FCAA business extender provisions, key ones include: (1) the New Markets credit; (2) the employer credit for paid family and medical leave; and (3) the empowerment zone tax incentives. More specifically, these extenders have changed as follow:

  1. The FCAA increases the IRC §45D new markets tax Credit limitation to $5,000,000,000 for tax year 2020. It also amends the section such that no unused amount discussed in IRC §45D(f)(3) may be carried to any calendar year after 2025. These changes are applicable to calendar years beginning after December 31, 2019.[6]
  2. The FCAA provides a one-year extension of the IRC§45S(i) employer credit for paid family and medical leave such that the credit is available throughout tax year 2020.[7]This change is applicable to wages paid in taxable years beginning after December 31, 2019.
  3. Significantly, the IRC §1391 incentives for investments in empowerment zones have been both retroactively reinstated back to tax year 2017 and prospectively extended throughout tax year 2020.[8]

Key FCAA Individual Extenders

Key FCAA individual extender provisions include: (1) the discharge of indebtedness income exclusion under IRC §108(a)(1)(E); (2) the deduction of mortgage insurance premiums; (3) the more taxpayer-friendly medical expense deduction limitation; and (4) the deduction of tuition and education expenses. Specifically, these extenders have changed as follows:

  1. The FCAA extends IRC §108(a)(1)(E) through 2020; thus, taxpayers may continue to exclude the discharge of principal residence indebtedness from their gross income throughout tax year 2020.[9]Note that this is applicable to discharges of indebtedness after December 31, 2017.
  2. Effective for amounts paid or accrued after December 31, 2017, the FCAA amends IRC §163(h)(3) such that qualified taxpayers may continue throughout tax year 2020 to deduct the cost of their mortgage insurance premiums purchased in connection with acquisition indebtedness.[10]
  3. 3. The more favorable IRC §213(f) medical expense deduction, which allows taxpayers to deduct medical expenses if the expenses exceed 7. 5% of adjusted gross income (AGI), rather than the previous higher AGI floor of 10%, is extended through tax year 2020.[11]This is effective for taxable years ending after December 31, 2018.
  4. 4. The IRC §222 above-the-line deduction for qualified tuition and related expenses is now extended throughout tax year 2020 and effective for taxable years beginning after December 31, 2017.[12]

Conclusion

In this Part 1 of our FCAA coverage, we have highlighted the key business and individual extenders impacted by the legislation. However, many more extenders, not discussed herein, were also impacted by the FCAA-including those incentivizing energy production and efficiency. Especially considering that the FCAA actually reinstates some already expired tax incentives for a three-year period making those provisions bothretroactivelyeffective for 2018 and 2019 andprospectivelyextended through the end of 2020, taxpayers should consult a tax professional to see if they would benefit from amending their previously filed 2018 tax returns.

If you have would like to discuss how the new tax legislation may work in your favor, contact Frost Law today at 410-497-5947.

[1]Pub. L. No. 116-94.

[2]Id.Pub. L. No. 111-148.

[3]Pub. L. No. 115-97.

[4]For example, the R&D Tax Credit, which had been a “temporary” provision that was repeatedly extended for over 30 years, ultimately achieved permanency under theProtecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114-113, Div. Q, §121(a).

[5]Pub. L. No. 115-123.

[6]Pub. L. 116-94, Div. Q,§141.

[7]Pub. L. No. 116- 94, Div. Q, §142.

[8]Pub. L. 116-94, Div. Q,§118(a).

[9]Pub. L. 116-94, Div. Q,§101(a), (b).

[10]Pub. L. 116-94, Div. Q,§102(a).

[11]Pub. L. 116-94, Div. Q,§103(a).

[12]Pub. L. 116-94, Div. Q,§104(a).

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