As time has passed since the enactment of the Tax Cuts and Jobs Act of 2017 (the 2017 Act), tax professionals have noted various drafting mistakes or unintended loopholes that could lead to undesirable taxpayer behaviors. The following is a brief discussion of selected topics that could potentially be addressed by future technical corrections.
Based on the new law as written, “qualified improvement property” is no longer eligible for bonus depreciation. The 2017 Act both enhanced the bonus depreciation deduction from 50% to 100% and broadened the types of property qualifying for bonus depreciation; however, qualified improvement property is ineligible for bonus depreciation because it is currently classified as 39-year recovery period property. Property eligible for bonus depreciation must have a recovery period of 20 years or less. The conference committee agreement intended that qualified improvement property would have a 15-year recovery period as the prior law had reflected for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. These prior categories were merged into one category as qualified improvement property under the new law.
Qualified improvement property is “any improvement to an interior portion of a building which is nonresidential real property if such property is placed in service after the date such building was first placed in service” and such property was placed in service on or after January 1, 2018.
This new law allows individuals, trusts and estates to deduct up to 20% of their “qualified business income” (QBI) from a partnership, S corporation or sole proprietorship. However, the calculation of the deduction, as well as the carve-out limitations, include many rules ripe for abuse. More specifically, the deduction phases out for certain taxpayers who own specified service trades or businesses, including businesses whose principal asset “is the reputation or skill of one or more of its employees or owners.” This deduction may also result in preferences toward independent contractors who are eligible for the deduction over employees who are not eligible. Businesses also may restructure or re-direct certain revenue streams that cause them to fall under these specified service trades or businesses.
This area is considered a top priority by the IRS, specifically as it relates to entities that had more than one trade or business who may then “drop” one of their trades or businesses so as to not be impacted by the deduction limitations. With the recent issuance of proposed regulations for Sec. 199A on August 8, 2018, taxpayers have some guidance related to claiming the available deduction. However, many questions remain.
The current law states that net operating loss (NOL) carrybacks are eliminated effective for NOLs arising in tax years ending after December 31, 2017. In the conference report, Congress intended for NOL carrybacks to be eliminated effective in years beginning after December 31, 2017. Due to the law indicating “ending after December 31, 2017” fiscal year taxpayers with tax years beginning in 2017 and ending in 2018 will not be able to carryback the NOL’s while Congressional intent was to allow such fiscal year taxpayers to carryback the NOL’s. A Joint Committee of Taxation staffer has indicated that this is one issue of three that have been mentioned as items making the list for technical corrections; however, no final decisions have been made.
For questions or more information about possible technical corrections, contact Rebecca or a member of our Real Estate Group by filling out the form below.