Following is courtesy of the Thomson Reuters online newsletter “Checkpoint Newsstand”
This
retrospective will address key tax developments that occurred during
the 2018 calendar year to date as well as changes going into effect for
2018, including tax laws, rulings, significant case law, and other
guidance that may affect 2018 returns. Many of the items listed below
reflect law changes made by, and guidance issued on, the Tax Cuts and
Jobs Act (TCJA; P.L. 115-97) – the sweeping tax reform law that
significantly altered the tax landscape.
Tax Rates
- For tax years beginning after 2017 and before 2026, seven tax rates
apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%; and four
tax rates apply for estates and trusts: 10%, 24%, 35%, and 37%.
- The 2018 IRS Form 1040 has been significantly reduced in size and
contains far fewer lines than any of its predecessors. But it also
includes six new accompanying schedules to which most of those removed
lines have been moved.
- The Social Security wage base for 2018 is $128,400.
- For tax years beginning after 2017, the corporate income tax rate
is 21%, and the corporate alternative minimum tax (AMT) is repealed.
- For tax years beginning after 2017, tax bracket amounts and certain
other tax parameters under the Code that are adjusted for inflation
under Code Sec. 1(f)(3) are adjusted by reference to chained CPI-U
(Consumer Price Index for "all-urban customers").
Taxable and Exempt Income
- Generally effective for stock attributable to options exercised or
restricted stock units settled after 2017, a qualified employee can
elect under Code Sec. 83(i) to defer, for income tax purposes,
recognition of the amount of income attributable to qualified stock
transferred to the employee by the employer, for up to five years after
vesting.
- For 2018, the optional standard mileage rate for valuing an employee's use of an employer-provided auto is 54.5¢ per mile.
- For 2018, an employee can exclude up to $260 a month of
employer-provided qualified parking benefits and the same amount for the
combined value of transit passes and transportation in a commuter
highway vehicle.
- The exclusion for qualified bicycle commuting reimbursements is suspended from 2018 through 2025.
- The exclusion for qualified moving expense reimbursements (except
for certain members of the Armed Forces) is suspended from 2018 through
2025.
- For 2018, the maximum exclusion for employer-provided adoption
assistance is $13,810, and the associated AGI phase-out amounts have
increased.
- For 2018, an employee's contribution to a health flexible spending
account (FSA) through salary reduction contributions can't exceed
$2,650.
- Certain exceptions to the life insurance transfer-for-value rule
don't apply to life settlement transactions for transfers after 2017.
- For 2018, the income threshold for the definition of a "highly
compensated employee" under the employer-owned life insurance rules is
$120,000.
- For 2018, the per-diem dollar threshold in computing the limits for
the exclusion of benefits from long-term care insurance is $360.
- Certain student loans that are discharged on account of death or
total and permanent disability of the student during 2018 through 2025
are excluded from gross income.
Deductions – Expenses of a Business
- New definitions of "publicly held corporation", "covered employee",
and "applicable employee remuneration" apply to the rules governing the
deduction limit for compensation paid to top officers.
- For amounts incurred or paid after 2017, employers may not deduct
the expense of a qualified transportation fringe provided to an
employee, and deductions are generally not allowed for transportation
expenses provided to an employee for travel between the employee's
residence and place of employment.
- For 2018, a high deductible health plan (HDHP) for medical savings
account (MSA) purposes is one with an annual deductible of at least
$2,300 and not more than $3,450 for individual coverage ($4,550 and not
more than $6,850 for family coverage); in addition, the maximum
out-of-pocket expenses can't exceed $4,550 for individual coverage
($8,400 for family coverage).
- For 2018, an HDHP for health savings account (HSA) purposes is a
health plan with an annual deductible that is not less than $1,350 for
individual coverage and $2,700 for family coverage. Maximum
out-of-pocket expenses for 2018 can't exceed $6,650 for individual
coverage and $13,300 for family coverage.
- The maximum annual health saving account (HSA) deductible
contribution is the sum of the monthly contribution limits, based on
eligibility and health plan coverage on the first day of the month. The
monthly limit is 1/12 of the indexed amount for self-only coverage
($3,450 for 2018) and for family coverage ($6,900 for 2018).
- For 2018, the standard mileage rate for business travel is 54.5¢.
- Business deductions for entertainment expenses are generally disallowed after 2017.
- In a Notice, IRS provided transitional guidance on the
deductibility of business meals that are purchased in an entertainment
context.
- The simplified per diem rates for post-Sept. 30, 2018 travel are
$287 for high-cost areas and $195 for all other localities. For pre-Oct.
1, 2018 travel, these amounts were $284 and $191, respectively.
- For amounts paid or incurred after 2017, cash, gift cards, and
other intangible personal property specifically don't qualify as
employee achievement awards.
- Generally, for amounts paid or incurred on or after Dec. 22, 2017, no deduction is allowed for:
- Any otherwise deductible amount paid or incurred to, or at the
direction of, a government or specified nongovernmental entity in
relation to the violation of any law or the investigation or inquiry by
such government or entity into the potential violation of any law; or
- Any settlement, payout, or attorney fees related to sexual
harassment or sexual abuse if such payments are subject to a
nondisclosure agreement.
- For tax years beginning after 2017, under Code Sec. 199A,
non-corporate taxpayers may deduct 20% of "qualified business income"
from a partnership, S corporation, or sole proprietorship (i.e., the
"pass-through" or QBI deduction).
- IRS issued proposed reliance regs that explain the operation and calculation of the Code Sec. 199A passthrough deduction.
- For tax years beginning after 2017, specified agricultural or
horticultural cooperatives may claim a deduction for a percentage of the
cooperative's qualified production activities income (QPAI), similar to
the pre-2018 domestic production activities deduction (DPAD).
- For amounts paid or incurred after on or after Dec. 22, 2017, the
business expense deduction for lobbying local governments is repealed.
- The moving expense deduction is suspended from 2018 through 2025, except for certain moves by members of the Armed Forces.
- For tax years beginning after 2017, "small resellers" for purposes
of the Code Sec. 263A uniform capitalization rules means taxpayers with
annual gross receipts of up to $25 million.
- IRS issued final regs on the simplified method uniform capitalization (UNICAP) rules for property produced or held for resale.
Interest Expense, Taxes & Losses
- For tax years beginning after 2017, subject to limited exceptions, a
taxpayer's deduction for business interest is limited to the sum of:
- The taxpayer's business interest income for the year,
- 30% of the taxpayer's adjusted taxable income for the year (but not less than zero), plus
- The taxpayer's floor plan financing interest (i.e., certain interest paid by vehicle dealers) for the tax year.
- IRS issued proposed reliance regs on the new business interest
deduction limit, including rules for C corporations, partnerships and S
corporations, the exception for small taxpayers, and various elections.
- For tax years beginning after 2017, taxpayers can't deduct any
"disqualified related party amount" (certain interest or royalties) paid
or accrued under a hybrid transaction or by, or to, a "hybrid entity".
- The aggregate amount of debt that can be treated as "acquisition
indebtedness" for a qualified residence of the taxpayer is generally
limited to $750,000 ($375,000 for a married individual filing a separate
return) for each tax year from 2018 through 2025.
- The deduction for interest on "home equity debt" has been suspended
from 2018 through 2025, but interest on a home equity loan used to buy,
build or improve a home may be deductible.
- The safe harbor for governmental homeowner assistance payments has been extended through 2021.
- From 2018 through 2025, the annual deduction for state and local property, income, etc. taxes (SALT) is limited to $10,000.
- IRS issued proposed regs that would eliminate the benefit of
certain "workarounds" implemented by states to avoid the $10,000 SALT
limitation.
- From 2018 through 2025, foreign real property tax may not be
deducted, other than taxes paid or accrued in carrying on a trade or
business or in an activity for the production or collection of income.
- From 2018 through 2025, a noncorporate taxpayer's "excess business"
loss is disallowed and treated as part of the taxpayer's net operating
loss (NOL) carryforward in subsequent tax years.
- For 2018 through 2025, all deductions for expenses incurred in
carrying out wagering transactions, and not just gambling losses, are
limited to the amount of gambling winnings.
- The deduction for personal casualty and theft losses is generally suspended from 2018 through 2025, except for:
- Personal casualty losses incurred in a Federally declared disaster; and
- Non-disaster personal casualty losses to the extent of personal casualty gains.
- For losses arising in tax years beginning after 2017, the NOL
deduction is limited to 80% of taxable income and generally cannot be
carried back but can be carried forward indefinitely.
- IRS issued proposed reliance regs that would remove the Code Sec.
385 documentation requirements (i.e., the portion of the final Code Sec.
385 regs issued in 2016 that provide rules for the documentation
necessary to determine whether certain related party interests in a
corporation are treated as stock or indebtedness for tax purposes).
Depreciation, Amortization, Property Expensing & Depletion
- For property placed in service after 2017, machinery and equipment used in agriculture is part of the 5-year MACRS class.
- For property placed in service after 2017, the categories of
qualified leasehold improvement property, qualified restaurant property,
and qualified retail improvement property are no longer eligible for
15-year MACRS depreciation (39-year MACRS applies instead).
- For property placed in service after 2017, depreciation under the
alternate depreciation system (ADS) is required for any nonresidential
real property, residential rental property and qualified improvement
property held by an electing real property trade or business (generally,
a real property trade or business that elects to not apply new
limitations on interest deductions effective for tax years beginning
after 2017). Depreciation under the ADS is also required of any MACRS
property with a recovery period of 10 years or more that is held by a
farm business that makes a similar election.
- For property placed in service after 2017, the ADS recovery period for residential rental property is 30 years.
- Generally, for property that is both
- Acquired and placed in service after Sept. 27, 2017, and
- Placed in service before 2027, bonus depreciation is increased to
100% (full expensing). Beginning in 2023, the 100% amount gradually
phases down.
- IRS issued proposed regs, on which taxpayers can rely, that clarify the post-Sept. 27, 2018 placed-in-service-and-acquisition requirement that applies to 100% bonus depreciation and to other changes in the bonus depreciation rules.
- For property placed in service after Sept. 27, 2017 and before
2027, qualified film, television, and live theatrical productions are
"qualified property" for bonus depreciation purposes.
- For qualified property that is both
- Acquired and placed in service after Sept. 27, 2017, and
- Placed in service before 2027, bonus depreciation may be claimed for most used as well as new property.
IRS issued proposed regs, on which taxpayers can rely, that provide
guidance as to how used property can qualify for bonus depreciation.
- For tax years beginning after 2017, the election trading bonus and
accelerated depreciation for otherwise-deferred AMT credits is repealed.
- For tax years beginning in 2018, the Code Sec. 179 expensing limit is $1 million.
- For tax years beginning in 2018, the investment-based phase-out level for Code Sec. 179 expensing is $2.5 million.
- The Code Sec. 179 expensing limit for heavy SUVs is $25,000 for tax years beginning in 2018.
- For property placed in service after 2017, computer or peripheral
equipment has been removed from the definition of "listed property".
- Regular (as opposed to bonus first-year) depreciation and expensing
limits for autos, trucks and vans placed in service in 2018 and used
100% for business are: $10,000 for the year in which the vehicle is
placed in service, $16,000 for the second year, $9,600 for the third
year, and $5,760 for the fourth and later years in the recovery period.
- The $8,000 increase for "qualified property" in the first-year
depreciation cap for passenger autos was extended, effective for
property both acquired and placed in service after Sept. 27, 2017 and
before 2027.
- IRS issued proposed regs providing guidance on the additional
first-year depreciation deduction, as modified by the Tax Cuts and Jobs
Act.
- Autos, trucks and vans leased in 2018 are subject to revised income inclusion amounts, as provided in IRS tables.
Charitable Contributions, Medical Expenses, Alimony, & Other Nonbusiness Deductions
- For cash contributions made in 2018 through 2025, the 50%
limitation under Code Sec. 170(b) for an individual's cash contributions
to public charities and certain private foundations is increased to
60%.
- The amounts of benefits received by charitable donors that are
considered to be inconsequential have increased for 2018. Items are
considered "inconsequential" if:
- The value of all benefits received isn't more than $108 or
- The amount contributed to the charity is at least $54 and the
donor receives only token benefits (bookmarks, calendars, mugs, posters,
tee shirts, etc.) generally costing no more than $10.80.
- For contributions made in tax years beginning after 2017, no
charitable deduction is allowed for any payment to an institution of
higher education in exchange for which the taxpayer receives the right
to buy tickets or seating at an athletic event.
- The Tax Court held that a long-term lessee of buildings couldn't contribute a facade conservation easement.
- Certain charitable deduction limitations are suspended for
individuals making "qualifying charitable contributions" for relief
efforts in the California wildfire disaster area.
- Certain charitable deduction limitations are suspended, and special
carryover rules are provided, for corporations making "qualifying
charitable contributions" for relief efforts in the California wildfire
disaster area.
- IRS issued final charitable contribution substantiation/reporting regs.
- For 2018, the "floor" beneath medical expense deductions is 7.5% for all taxpayers.
- For 2018, the maximum amount of premiums paid for a qualified
long-term care insurance contract that are deductible as a medical
expense are: for individuals age 40 or less, $420; more than 40 but not
more than 50, $780; more than 50 but not more than 60, $1,560; more than
60 but not more than 70, $4,160; and more than 70, $5,200.
- For 2018, the mileage rate for use of a car for qualified medical transportation is 18¢ per mile.
- For any divorce or separation agreement that's executed after 2018,
or executed on or before that date but modified thereafter, the
alimony-paying spouse won't be able to deduct the payments, and the
alimony-receiving spouse won't include them in gross income.
- IRS indicated that it would issue regs clarifying that Code Sec.
682, which was repealed by the Tax Cuts and Jobs Act, will generally
continue to apply with regard to trust income payable to a former spouse
who was divorced or legally separated under a divorce or separation
instrument executed before 2019.
Education Tax Breaks & ABLE Accounts
- The Lifetime Learning credit phases out over higher levels of modified AGI for 2018.
- Beginning in 2018, "qualified higher education expenses" for
qualified tuition program (QTP) purposes include up to $10,000 per
beneficiary per tax year for expenses for tuition in connection with
enrollment or attendance at an elementary or secondary public, private,
or religious school.
- The higher education exclusion for savings bond income phases out over higher levels of modified AGI for 2018.
- The deduction for interest paid on qualified higher education loans phases out at higher levels of modified AGI for 2018.
- For 2018, the maximum teachers' out-of-pocket classroom-related expenses is $250.
- For 2018, the amount of aggregate contributions from all taxpayers that a qualified ABLE account may receive is $15,000.
- For 2018 through 2025, after the general dollar limit for ABLE
account contributions is reached, an ABLE account's designated
beneficiary may contribute, subject to a number of limitations, an
additional amount, up to the lesser of
- The beneficiary's compensation for the tax year, or
- The federal poverty line for a one-person household.
- In a Notice, IRS provided guidance on the new contribution limits
for ABLE accounts and announced its intent to issue proposed regs.
Affordable Care Act Provisions
- The 2.3% medical device excise tax doesn't apply to sales during 2018 or 2019.
- The annual fee on health insurance providers remains in effect for 2018 (but is suspended for calendar year 2019).
- IRS, together with the Departments of Labor and Health and Human
Services, issued proposed regs that would, for plan years beginning on
or after Jan. 1, 2020, allow integrating health reimbursement accounts
(HRAs) and other account-based group health plans with individual health
insurance coverage, if certain conditions are met. IRS then issued a
Notice that set out potential approaches to issues raised by these regs.
- IRS, together with the Departments of Labor and Health and Human
Services, issued final regs on the coverage of certain preventive
services under the Affordable Care Act, including services relating to
the so-called "contraceptive mandate".
- IRS, together with the Departments of Labor and Health and Human
Services, issued final regs expanding the coverage period for
short-term, limited duration insurance (STLDI).
- For policy and plan years that end after Oct. 1, 2018 and before
Oct. 1, 2019, the adjusted dollar amount for the Patient-Centered
Outcomes Research Institute fee is $2.45. For policy and plan years
ending on or after Oct. 1, 2017 and before Oct. 1, 2018, the amount was
$2.39.
- In a Notice, IRS clarified the effect of the suspension of personal exemption deductions on certain health care provision.
Tax Credits
- The general business credit limitation for a corporation is applied
by treating the corporation as having a minimum tax of zero, negating
the corporate AMT (repealed after 2017) as a limit on allowable business
credits for corporations.
- For amounts paid or incurred after 2017, the rehabilitation credit
is no longer two- tiered. A single 20% credit for rehabilitating
certified historic structures is allowed over a 5-year period.
- The carbon sequestration credit has been restructured to account
for both carbon dioxide and carbon oxide, with the amount of credit
based, in part, on whether carbon oxide was captured before or after
Feb. 9, 2018.
- For 2018, a low-income housing credit for rehabilitation
expenditures is allowed only if, during any 24- month period, the
expenditures are not less than the greater of:
- 20% of the building's adjusted basis, or
- $6,800.
- For 2018, the refined coal credit is $7.03 per ton of refined credit coal, with no phaseout.
- The orphan drug credit is reduced to 25% of qualified clinical
expenses, and taxpayers may elect to take a reduced credit in lieu of
reducing otherwise allowable deductions.
- For 2018, the small employer health insurance credit is reduced if
the average annual full-time wages per employee were more than $26,800.
- The new employer-paid family and medical leave credit for 2018 and
2019 is 12.5% of the amount of wages paid to qualifying employees during
any period they're on family and medical leave if the rate of payment
is at least 50% of the wages normally paid to an employee, up to maximum
of 12 weeks of leave for any employee during the tax year. 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 the earned income tax credit (EITC) and the
credit's AGI-based phaseout thresholds have increased for 2018.
- For 2018, the maximum amount of investment income that a taxpayer can receive and still qualify for the EITC is $3,500.
- For the premium tax credit available to certain purchasers of
health insurance, an eligible employer-sponsored plan is "affordable" if
the part of the annual premium that an employee must pay for self-only
coverage is 9.56% or less of the taxpayer's household income for the
2018 plan year.
- For 2018, the adoption expense credit is $13,810.
- For 2018 through 2025, a $500 credit is available for each
dependent of the taxpayer who is a U.S. citizen, national or resident,
other than a qualifying child.
- For 2018 through 2025, the child tax credit is increased to $2,000, and the credit phaseout thresholds are increased.
- For 2018 through 2025, the refundable portion of the child tax credit for any qualifying child is limited to $1,400.
- The AGI amounts used in computing the "saver's" credit for elective deferrals and IRA contributions have increased for 2018.
- For amounts contributed in tax years beginning after Dec. 22, 2017
and before 2026, amounts contributed to an ABLE account by the account's
designated beneficiary are eligible for the saver's credit.
- For tax years beginning after 2017 and before 2022, a corporation's minimum tax credit (MTC)
- May offset regular tax liability for any tax year, and
- Is refundable for any tax year beginning after 2017 and before
2022 in an amount equal to 50% (100% for tax years beginning in 2021) of
the excess MTC for the tax year, over the amount of the credit
allowable for the year against regular tax liability.
- For purposes of the foreign tax credit limitation, for tax years
beginning after 2017, there are now additional separate categories for
"global intangible low-taxed income" and "foreign branch income".
- IRS issued proposed regs explaining the new foreign tax credit limitation categories and providing transition rules.
- For purposes of the foreign tax credit, for tax years beginning
after 2017, an 80% "deemed paid" foreign tax credit is available for
amounts included in the U.S. shareholder's income as global intangible
low-taxed income (GILTI).
- IRS issued proposed regs explaining how deemed paid credits are determined.
- For tax years beginning after 2017 and before 2028, a taxpayer may,
with respect to pre-2018 unused overall domestic loss, elect to
recapture up to 100% of its U.S. source income for the tax year.
- For distributions made after 2017, a 10% corporate U.S. shareholder
of a "specified 10% owned foreign corporation" may generally deduct
100% of the foreign-source portion of a dividend received from the
specified 10% owned foreign corporation, and the deemed-paid credit
under Code Sec. 902 no longer applies. A domestic corporation that is a
U.S. shareholder of a controlled foreign corporation (CFC) may still
claim a deemed-paid credit, but this credit is limited to 80% of foreign
taxes paid with respect to global intangible low-taxed income.
- In a Notice, IRS announced its intent to amend certain dividend
equivalent regs and to delay their effective date, and also extended
their phase-in period.
Sales & Exchanges
- Generally, for tax years beginning after 2017, an accrual basis
seller reports gain or loss not later than the year in which the income
is taken into account for financial reporting purposes.
- For exchanges completed after 2017 (subject to transition rules),
like-kind exchange treatment is limited to exchanges of real property
that is not held primarily for sale.
- Generally effective on Dec. 22, 2017, gains invested in a
"Qualified Opportunity Fund" can be temporarily deferred and, if the
investment in the Fund is held for 10 years, permanently excluded. IRS
issued proposed regs explaining the mechanics of the deferral.
- IRS issued a complete list of all population census tracts it has designated as Qualified Opportunity Zones.
- For business autos for which the optional business standard mileage
rate is used, depreciation is considered to have been allowed at a rate
of 25¢ for 2018.
Capital Gains and Losses
- For 2018, new statutory breakpoints apply for the imposition of 0%,
15% and 20% capital gains/qualified dividend rates for noncorporate
taxpayers.
- For dispositions after 2017, patents, inventions, models or designs
(whether or not patented), secret formulas or processes are excluded
from the definition of "capital assets".
- For tax years beginning after 2017, partnership interests ("carried
interests") received for the performance of substantial services in
certain specified trades or businesses must be held for more than three
years to qualify for long-term capital gains rates.
Tax Accounting & Inventories
- For 2018, a business is excepted from the general limitation on use
of the cash method if its three-year-average gross receipts are $25
million or less.
- Generally, for tax years beginning after 2017, the all-events test
for any item of gross income isn't be treated as met any later than when
the item is taken into account as revenue in an applicable financial
statement (if the taxpayer has one for a tax year) or other financial
statement specified by IRS.
- For tax years beginning after 2017, the deferral method of
accounting for advance payments for goods and services has been
codified.
- In a Notice, IRS clarified that accrual-method taxpayers may rely
on prior guidance on deferral of advance payments until guidance on
newly codified deferral rules is issued and becomes effective.
- During the 2-year period beginning Dec. 22, 2017, Code Sec. 481
adjustments that are attributable to S elections revoked by certain
corporations are taken into account ratably over a 6-tax year period
beginning with the year of change.
- IRS has updated automatic consent procedures for accounting method
changes, including many occasioned by the Tax Cuts and Jobs Act
provisions.
- IRS has updated automatic consent procedures for accounting method
changes made to conform with FASB and IASB contract revenue recognition
standards.
- For 2018, a business is exempted from use of the
percentage-of-completion long-term contract method if its
three-year-average annual gross receipts are $25 million or less.
- For 2018, a business is exempt from mandatory inventory accounting
if its three-year-average annual gross receipts are $25 million or less.
Tax Withholding
- For stock attributable to options exercised, or restricted stock
units settled, after 2017, withholding is required at the highest
individual rate when the value of stock subject to a Code Sec. 83(i)
deferral election is included in income.
- For 2018 through 2025, when the exemption amount is zero, employees
are entitled to a "withholding allowance" instead of an "exemption" for
each item under Code Sec. 3402(f)(1).
- For 2018, an employee who can be claimed as a dependent on someone
else's return can't claim an exemption from withholding if his or her
income exceeded $1,050 and includes more than $350 of unearned income.
- For 2018, the threshold amount subjecting cash payments to domestic service employees (e.g., nannies) to FICA is $2,100.
Individual Tax Computation
- For tax years beginning after 2017, an above-the-line deduction is
allowed (with limits) for attorneys' fees and court costs relating to
awards under SEC Act of '34 § 21F, a state law false or fraudulent claim
meeting the requirements of Social Security Act, §1909(b) or Commodity
Exchange Act § 23.
- Miscellaneous itemized deductions subject to the 2%-of-AGI floor are suspended from 2018 to 2025.
- The limitation on itemized deductions (the "Pease" limitation) is suspended from 2018 through 2025.
- The basic standard deduction amounts for 2018 are: $12,000 for
single or married filing separate taxpayers, $24,000 for married filing
joint and surviving spouses, and $18,000 for heads of household.
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