Tax Groundhog Day

Ever have that feeling you are Bill Murray’s character Phil Connors from the classic movie, Groundhog Day? You may soon get an opportunity to live the real-life version if Congress can come to an agreement on a host of tax provisions frequently known as tax extenders.

Late last month, the House Ways and Means Committee voted to pass a bill which aims to temporarily extend several tax incentives that have either already expired or are due to expire at the end of 2019. The proposed legislation would retroactively extend some previously expired provisions, meaning taxpayers that have already filed 2018 tax returns would need to review their returns to determine if amended returns should be filed to claim benefits of any retroactively extended tax provisions. Hence, Groundhog Day. 

While temporary, these tax incentives have been a part of the tax Code for many years and Congress has routinely extended these year after year. However, certain incentives were not extended with the passage of the Tax Cuts and Jobs Act (TCJA) of 2017. Since most of the provisions have already expired, the bill poses to retroactively enact them, making them effective January 2018 through December 2020.

The extended tax breaks include provisions for both businesses and individuals―and would impact numerous taxpayers. Some key extenders in the bill include:

• Railroad Track Maintenance Credit (Expired 12/31/2017) 
• Deduction for Qualified Tuition (Expired 12/31/2017) 
• Empowerment Zone Tax Incentives (Expired 12/31/2017) 
• Several credits for biofuel and renewable energy (Expired 12/31/2017) 
• Several cost recovery incentives for special industries (Expired 12/31/2017) 
• Work Opportunity Tax Credit (Expires 12/31/2019) 
• Employer Credit for Paid Family and Medical Leave (Expires 12/31/2019) 

A separate but related bill, which passed the House Ways and Means Committee last month, would also repeal the controversial inclusion of certain fringe benefit expenses in the calculation of unrelated business taxable income for applicable not-for-profit entities required to file tax returns and pay tax on these fringe benefits. This requirement was included in the Tax Cuts and Jobs Act of 2017. 

To offset the cost of these extenders, the bill proposes to accelerate the expiration of the lower estate tax exemption amounts that were enacted as part of the TCJA. The expiration would be moved from 2025 to 2022. 

Notably absent from the proposed legislation are any technical corrections to correct drafting errors which became law as a part of TCJA. Arguably the most necessary technical correction would be to reinstate the accelerated cost recovery, frequently known as bonus depreciation, of qualified improvement property. It is believed the TJCA assigned these improvements a longer cost recovery period than originally intended and as a result, these improvements are no longer eligible for immediate expensing under the Code. There is bipartisan consensus that this (and a number of other technical corrections) are necessary, but the corrections are likely to become a part of negotiations for other tax and non-tax related legislation.

Predicting where this goes in Congress is like trying to predict whether Punxsutawney Phil will see his shadow on Groundhog Day. Democrats and Republicans each have their tax priorities and while there is consensus on a number of these tax provisions, there are many others where consensus has yet to be reached. Stay tuned for whether Congress sees its shadow and business continues as usual, or whether tax changes are coming.