The Further Consolidated Appropriations Act, 2020, (HR 1865) was must-pass legislation or the government would close down on Dec. 21, 2019. Tacked onto the critical appropriation bill were many year-end tax changes — some retroactive. Included in the new law are extenders, pension reform, disaster tax relief, and the repeal of a few ACA taxes.
Below is a summary of the most significant extender provisions (Division Q starting on Page 694) included in the Appropriations Act:
INDIVIDUAL & FAMILY
Medical Expense Deduction 7.5% AGI Limit Extended
For taxable years ending before Jan. 1, 2021, the threshold for deducting medical expenses is 7.5% (was 10%) for all taxpayers. This threshold applies for purposes of AMT in addition to regular tax. In 2021, the AGI threshold increases to 10%.
Mortgage Insurance Premium (MIP) Deduction Retroactively Extended
Premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer are treated as qualified residence interest. The MIP treated as interest is reduced by 10% of such amount for each $1,000 ($500 in the case of a married individual filing a separate return) (or fraction thereof) that the taxpayer’s AGI exceeds $100,000 ($50,000 in the case of a married individual filing a separate return) and is entirely phased out at $110,000.
Amended return. The MIP deduction had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client paid mortgage insurance premiums in 2018, check to see if an amended return should be filed.
Tuition Deduction Retroactively Extended
Qualified taxpayers are allowed an above-the-line deduction for qualified higher education expenses paid by the taxpayer during a taxable year. Taxpayers with AGI not exceeding $65,000 ($130,000 in the case of married taxpayers filing joint returns) are entitled to a maximum higher education tax deduction of $4,000 and taxpayers with AGIs that don’t exceed $80,000 ($160,000 in the case of married taxpayers filing joint returns) are entitled to a maximum deduction of $2,000. Taxpayers with AGI above these thresholds are not entitled to the tuition deduction. This deduction is not allowed if the American Opportunity Tax Credit produces a lower tax.
Amended return. The tuition deduction had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client paid qualifying tuition in 2018, check to see if an amended return is required.
The SECURE Act (Division O, Page 647 of the Appropriations Act) provides relief for kiddie tax. For tax years beginning after Dec. 31, 2019, the unearned income of certain children is again taxed at the parents’ tax rate. In 2018 and 2019, the Tax Cuts and Jobs Act taxed the unearned income of children using the much higher trust tax rates. The law is changed to allow a taxpayer to elect (at such time and in such manner as the IRS may provide) for the change to also apply to taxable years beginning in 2018, 2019, or both (as specified by the taxpayer in his or her election).
COD Income Exclusion on Foreclosure of Personal Residence Retroactively Extended
A taxpayer subject to foreclosure might end up homeless and still face a nasty tax bill from Uncle Sam for cancellation of debt income. To address this frightening tax dilemma, Congress temporarily added a §108 exclusion to cancellation of debt income. The exclusion for discharges of indebtedness is effective on or after Jan. 1, 2007, and before Dec. 31, 2020, §108(a)(1)(E) excludes from a taxpayer’s gross income any discharge (in whole or in part) of qualified principal residence acquisition indebtedness up to $2 million.
Amended return. The COD exclusion had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client reported income from a foreclosure of his or her personal residence in 2018, check to see if an amended return should be filed.
EMPLOYMENT, ECONOMIC GROWTH, COMMUNITY DEVELOPMENT
3-year Recovery Period for Race Horses Retroactively Extended through Dec. 31, 2020
The term “3-year property” includes any race horse which is placed in service before Jan. 1, 2021 and which is more than two years old at the time such horse is placed in service by the purchaser. It also includes any horse other than a race horse which is more than 12 years old at the time it is placed in service.
Amended return. The 3-year recovery period for race horses had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client has race horses, check to see if an amended return should be filed.
7-year Recovery Period for Motorsports Entertainment Complexes Retroactively Extended through Dec. 31, 2020
The term “motorsports entertainment complex” means a racing track facility which is permanently situated on land, and during the 36-month period following the first day of the month in which the asset is placed in service, hosts one or more racing events for automobiles (of any type), trucks, or motorcycles which are open to the public for the price of admission. The term Motorsports Entertainment Complex does not include any transportation equipment, administrative services assets, warehouses, administrative buildings, hotels, or motels.
Amended return. The 7-year recovery period for motorsports entertainment complexes had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client has a motorsports entertainment complex, check to see if an amended return should be filed.
Expensing Rules for Certain Qualified Film and Television and Live Theatrical Productions Retroactively Extended Through Dec. 31, 2020
A taxpayer may elect to treat the cost of any qualified film or television production, and any qualified live theatrical production, as an expense which is not chargeable to capital account. Any cost so treated is allowed as a deduction. This election does not apply to so much of the aggregate cost of any qualified film or television production or any qualified live theatrical production as exceeds $15,000,000. This amount increases to $20,000,000 if produced in a low-income community or a distressed county.
No other deduction or amortization deduction allowable. With respect to the basis of any qualified film or television production or any qualified live theatrical production to which an election is made, no other depreciation or amortization deduction is allowable.
Amended return. The expensing rules for certain qualified film and television and live theatrical productions had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client produces film and television, and live theater, check to see if an amended return should be filed.
Empowerment Zone Tax Incentives Retroactively Extended Through Dec. 31, 2020
Any employer who pays "qualified zone wages" to a "qualified zone employee" can claim the credit. The credit is equal to 20% of the qualified zone wages (including training and education expenses treated as qualified zone wages), limited to $15,000 for each employee each calendar year. The deduction on the income tax return for salaries and wages and certain education and training costs must be reduced by the amount of your empowerment zone employment credit. An empowerment zone is an economically distressed community eligible to receive tax incentives and grants from the Federal government under the Empowerment Zones and Enterprise Communities Act of 1993.
Amended return. The empowerment zone tax incentives had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client hires workers from an empowerment zone, check to see if an amended return should be filed.
ENERGY PRODUCTION, EFFICIENCY, GREEN ECONOMY JOBS
Nonbusiness Energy Property Credit Retroactively Extended Through Dec. 31, 2020
An individual is allowed as a credit against tax for the taxable year an amount equal to the sum of 10% of the amount paid or incurred for qualified energy efficiency improvements installed during such taxable year, and the amount of the residential energy property expenditures paid or incurred by the taxpayer during such taxable year. The credit allowed cannot exceed the excess (if any) of $500 over the aggregate credits allowed for all prior taxable years ending after Dec. 31, 2005.
Amended return. The nonbusiness energy property credit had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client installed energy property, check to see if an amended return should be filed.
2-wheeled Plug-in Electric Vehicle Credit Retroactively Extended Through Dec. 31, 2020
In the case of a qualified 2- or 3-wheeled plug-in electric vehicle, there is allowed as a credit against tax for the taxable year an amount equal to the sum of the applicable amount with respect to each such qualified 2- or 3-wheeled plug-in electric vehicle placed in service by the taxpayer during the taxable year, and the amount of the credit allowed. The applicable amount is the lesser of 10% of the cost of the qualified 2- or 3-wheeled plug-in electric vehicle, or $2,500.
Amended return. The 2- or 3-wheeled plug-in electric vehicle credit had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client purchased a 2- or 3-wheeled plug-in electric vehicle, check to see if an amended return should be filed.
Energy Efficient Homes Credit for Contractors Retroactively Extended
In the case of an eligible contractor, the new energy efficient home credit for the taxable year is the applicable amount for each qualified new energy efficient home which is constructed by the eligible contractor, and acquired by a person from such eligible contractor for use as a residence during the taxable year. The applicable amount in the case of a dwelling unit is $2,000, and for a manufactured home is $1,000.
Amended return. The energy efficient homes credit for contractors had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client builds homes, check to see if an amended return should be filed.
Energy Efficient Commercial Buildings Deduction Retroactively Extended
There is allowed as a deduction an amount equal to the cost of energy efficient commercial building property placed in service during the taxable year. The deduction with respect to any building for any taxable year may not exceed the excess (if any) of the product of $1.80, and the square footage of the building, over the aggregate amount of the deductions with respect to the building for all prior taxable years.
Amended return. The energy efficient commercial buildings deduction had expired Dec. 31, 2017. The expiration is now Dec. 31, 2020. If your client made energy efficient improvements to his or her commercial building, check to see if an amended return should be filed.
Work Opportunity Credit Extended for One Year
Eligible employers may claim the Work Opportunity Tax Credit (WOTC) for all targeted group employee categories, including qualified veterans and long-term unemployed recipients, if the individual began or begins work for the employer after Dec. 31, 2014 and before Jan. 1, 2021 (was before Jan. 1, 2020).
Pre-screening and certification. An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850 with their respective state workforce agency within 28 days after the eligible worker began work (watch for “transitional relief” from the IRS). Employers should contact their individual state workforce agency with any specific processing questions for Form 8850. For details on the WOTC, see the IRS explanations here (remembering that the website might not have been updated for the extended expiration date.)
Employer Credit for Paid Family and Medical Leave Extended One Year
An eligible employer is allowed to claim a 12.5% general business credit of the amount of wages paid while an employee is on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to an employee. The credit is available for wages paid in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2021 (was before Jan. 1, 2020). The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any employee for any taxable year is 12 weeks. For details on the family and medical leave credit, see the IRS FAQs.
Increase in Unrelated Business Taxable Income for Certain Fringe Benefit Expenses Paid by Exempt Organization Retroactively Repealed
Unrelated business taxable income (UBIT) of an organization does not include any amount for any qualified transportation fringe, any parking facility used in connection with qualified parking, or any on-premises athletic facility. This is a retroactive change. A 2018 amended return may be required for the non profit organization.
Affordable Care Act
The Appropriations Act repealed the medical device tax, the high cost (Cadillac) employer-sponsored health insurance excise tax, and the annual fee on health insurance providers.
The mistake in The Tax Cuts and Jobs Act relating to the recovery period of leasehold, retail and restaurant improvements was not corrected. Thus, this category of “qualified improvement property” has a 39-year recovery period (instead of 15-year) and thus does not qualify for bonus depreciation.
Note. Our summary includes only some of the many extender provisions included in the Appropriations Act. For other extenders not included above, check the index to Division Q starting on page 693 of the bill.