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Tax reform legislation widely known as the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) was signed into law on December 22, 2017. The TCJA brought forth the most sweeping overhaul of the U.S. tax code in over 30 years. However, widespread efforts to implement the TCJA amidst ongoing tax-related global developments continue to this day. Now, two years following its enactment, Treasury, the IRS, and the tax community remain steadfast in working toward understanding and communicating congressional intent under the new law.

The Tax Council Policy Institute (TCPI), a nonprofit, non-partisan public policy research and educational organization, will devote its 21st Annual Tax Policy & Practice Symposium to reviewing the current state of U.S. tax law and how it may continue to evolve, when it presents "Hindsight is 2020: What the TCJA and Global Developments Tell us About the Future of Tax" (February 13-14, 2020).

Wolters Kluwer Tax & Accounting sat down recently with two principal organizers of this year’s TCPI Symposium to preview some of the issues that will be discussed. Lynda K. Walker, Esq., is executive director and general counsel of TCPI. John Gimigliano is principal-in-charge of legislative and regulatory services in the Washington National Tax practice of KPMG LLP and former senior tax counsel for the House Ways and Means Committee. KPMG is program manager for the 2020 TCPI Symposium.

Wolters Kluwer: As the name of this year’s symposium reflects, hindsight is 20/20. Are there any particular policy choices made two years ago under the TCJA that standout now as being either well-matched or less than ideal for the functionality of the current U.S. tax system as it relates to domestic as well as multinational business?

Lynda K. Walker: Tax law is constantly evolving, and it seems now more rapidly than ever. Congress and the business community worked for years to advance some of the concepts in the TCJA, particularly the necessity of lower rates for global competitiveness. Enactment of the major overhaul of the business tax system within that legislation was met with much enthusiasm, but it is not the end of the challenge. Promulgation of regulations—an ongoing process—as well as implementation of those rules and the administration of them are major areas of focus for tax executives and will be covered extensively at our upcoming conference. We have designed this symposium’s program to examine how well the tax system is working to meet the goals that Congress was looking to achieve given the passage of time and the practical application of the law. The experts speaking at the symposium are from various fields and bring varying perspectives. We hope to provide our attendees with the gamut of expert thought on the issues of current interest. The program also strives to bring some new understanding to both external and internal pressures on our tax system(s) in the U.S. and globally, not only currently but prospectively.

John Gimigliano: In some ways it is almost too early to know, being only one complete tax filing season in, but that is part of what we are trying to explore by bringing together the experts at the symposium. Although the TCJA was a partisan piece of legislation and there were people that claimed it did or did not do certain things, hopefully we can now put that aside and evaluate what the law does and does not do, and maybe we now have enough experience with it to make those determinations.

Wolters Kluwer: As you mentioned, internal and external pressures on the federal tax system will be examined during the symposium. What are some examples of internal and external forces that affect tax policy generally?

John Gimigliano: You can look at budgetary and political pressures as key internal forces that affect all tax policy. As I said, the TCJA was a Republican bill, and Democrats have made it pretty clear that they have issues with not only how it was enacted but also the substance of the bill. We saw these internal, political pressures manifest especially because we had an election since the enactment of the TCJA, and the House has gone from Republican to Democratic-controlled. That is not to suggest cause and effect, but it does change the potential for changes to the system that was enacted in December of 2017. And, of course there is another big election looming that could change that political calculus again. As for external pressures, the most notable one is the work being done at the Organisation for Economic Co-operation and Development (OECD) to address the digital economy and the opportunity to change international tax rules pretty dramatically in a way that was not envisioned when the TCJA was negotiated, drafted, and enacted. Additionally, there are external trade pressures at work on the tax system. There has always been a fine line between tax and trade policy, and if we have dramatic changes in trade policy, it could certainly trickle over to the tax side.

Lynda K. Walker: Currently, we are seeing a recognition of the correlation between tax and trade policy that is vastly different from a few years ago. Among our peers in the tax policy community, we now talk about tax and trade as related in a way that seems to have more common acceptance than in the past. There is a convergence of these other global issues on tax policy in a very distinguishable way that is a big potential external pressure.

Wolters Kluwer: Can you touch upon the importance of businesses staying informed of the direction the OECD will go with regard to reforms to international tax standards?

Lynda K. Walker: It is really important that businesses pay very close attention to what is going on in the OECD, the European Union (EU), and other economic blocks around the world, perhaps now more than ever. During the time we were debating tax reform in this country, other countries began to move in their efforts to broaden their tax bases. We were occupied with tax reform, and their tax proposals and efforts were moving forward. Moreover, tax executives need certainty—and the whole debate and movement toward multilateral agreements from bilateral and unilateral jurisdictional action could be a forbearer to another regime in global taxation. It is important that taxpayers be part of the dialogue and that business has a seat at the table with government as matters that could have a sweeping impact on where and how business is conducted are discussed and determined.

Wolters Kluwer: As TCPI materials noted, the symposium is expected to highlight the "real world" effects of the TCJA and how it has changed thinking about global investment. What might a preview of this discussion include?

John Gimigliano: Now stepping away from the theoretical of enactment and all the things the TCJA may or may not do, it is important to examine what it means now to be a tax professional. With two years of experience with the TCJA, what does it really do, and how does it change the decisions that tax directors have to make as to whether, when, or where to buy equipment or to develop intellectual property? Those are the kind of questions we are hoping to address with this real world application of our experience with the TCJA.

Wolters Kluwer: Generally, have the regulations promulgated since passage of the TCJA succeeded in clarifying complex provisions of the statute?

Lynda K. Walker: The TCJA is so broad and impacts so much of the tax code, it really does seem like we are relying heavily on regulations, which we always do in the tax world, but we still need a lot more explanation on some of the TCJA provisions. I am sure it has been a challenge for the IRS, and we are very happy that we will have Michael J. Desmond, IRS chief counsel, with us for this symposium to provide some insight into how the IRS has proceeded and plans to continue to move forward with guidance.

John Gimigliano: This is the challenge of being in the executive branch and getting a piece of legislation handed to you and trying to make it work. As a former tax writer, it is often easier to write these provisions in the abstract, but it is so much more challenging in various ways to make sure that it works for taxpayers and that it is administrable by the IRS. You do not want to put the IRS in a position to fail with a provision that ultimately is impossible to administer. These are the challenges that the IRS has, and so far, by all accounts, both Treasury and the IRS have done a pretty good job. But there’s still so much left to do.

Wolters Kluwer: As for any particular provisions, especially those with final regulations, that may still carry uncertainty for taxpayers and practitioners, what might generally be the way to approach the conundrum?

John Gimigliano: I could point to many of the TCJA regulations that are finalized and still say that there are unanswered questions and that people are going to have to make judgment calls. That has always been the case with tax; there are always judgment calls to be made. There is no statute and no regulation that can ever anticipate every fact pattern. So, people will do their best to analyze the rules and examples provided but will ultimately have to make judgment calls.

Wolters Kluwer: How should U.S. businesses prepare for potential changes in tax policy after the elections?

Lynda K. Walker: Businesses should stay engaged in the process with policy makers and groups like TCPI. Tax executives should engage in the discussion, and never think tax law is static. Taxpayers should be prepared for government to revisit the tax code as fiscal and economic needs change, and be prepared to navigate those waters as they shift.

Wolters Kluwer: Can the current corporate tax rate really be considered "permanent" just because it was enacted as such under the TCJA, or is it a relatively impermanent feature of the tax code just like others, largely dependent upon which Party has the White House and majority in Congress?

Lynda K. Walker: It is definitely fair to say that there will be pressure put on the rate as well as the tax code in general, because both Parties have objectives that require money. I do not know that anyone believes anything in the tax code is absolutely written in stone. That is part of the challenge for business in that they need some level of certainty to make long-term business and investment decisions, and to have major changes on an ongoing basis does not provide that certainty.

John Gimigliano: Permanence is an illusion; nothing is permanent. And even temporary policy is somewhat misleading. Take for example the R&D tax credit that was finally made permanent after being considered temporary tax policy for over 30 years. These are all relative terms.

Wolters Kluwer: What are you hoping the symposium accomplishes?

Lynda K. Walker: We hope that this program accomplishes our mission, which is to bring about a stronger and better understanding of federal tax policies and how they impact business and the economy as a whole. We hope this brings some careful study to the forefront through active evaluation and open discussion so that people leave more engaged and perhaps more aware. In our programs, our goal is always to have as inclusive a dialogue as possible by engaging all the critical stakeholders, including government, business, and academia. We work diligently to elevate the discourse on issues where we all might not have exactly the same frame of reference but hopefully the same goal, which is a thriving economy where business can operate under fair and transparent tax laws.

John Gimigliano: I hope we can advance taxpayers’ and practitioners’ understanding of the TCJA. We have all had so many questions since its enactment in late 2017. Now with a little bit of time, hopefully by gathering these experts together and in keeping with TCPI’s mission, it will advance everyone’s understanding of the law—where it is working, where it is not, and what changes are likely to come.

For more information on the 2020 TCPI Symposium, go to https://www.tcpi.org/event/21st-annual-tax-policy-and-practice-symposium/.

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On February 11, the White House released President Donald Trump’s fiscal year (FY) 2021 budget proposal, which outlines his administration’s priorities for extending certain tax cuts and increasing IRS funding. Treasury Secretary Steven Mnuchin testified before the Senate Finance Committee (SFC) on February 12 regarding the FY 2021 budget proposal.

Extension of TCJA’s Individual Tax Cuts
Trump’s FY 2021 budget proposal indicates that tax cuts for individuals and passthrough entities under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), which are set to expire at the end of 2025, would be extended. This extension is estimated to cost $1.4 trillion over 10 years, and is reportedly being used as a "placeholder" in the budget for Trump’s forthcoming "Tax Cuts 2.0" plan.

Infrastructure
Trump’s budget proposal also calls for a $1 trillion infrastructure package, although funding details remain scarce at this time. In January, House Democrats unveiled their infrastructure proposal, which also lacked funding details.

IRS Funding
Additionally, Trump’s budget proposes $12 billion in base funding for the IRS "to modernize the taxpayer experience and ensure that the IRS can fulfill its core tax filing season responsibilities." The budget proposal would boost IRS funding from currently enacted levels of $11.5 billion.

Further, the budget would provide $300 million to continue the IRS’s modernization efforts. Specifically, the budget proposal states that IRS funding would help to:

digitize more IRS communications to taxpayers, so they can respond quickly and accurately to IRS questions;
create a call-back function for certain IRS telephone lines, so taxpayers do not need to wait on hold to speak with an IRS representative; and
make it easier for taxpayers to make and schedule payments online.

Hill Reaction
"The Trump Economy stands firm on the proven pro-growth pillars of tax cuts, deregulation, energy independence, and better trade deals," the budget proposal states. However, Democratic lawmakers, while highlighting criticisms of the TCJA, are all but promising Trump’s budget request will not become law.

"Repealing incentives to reduce carbon emissions will hinder our fight against climate change and deter the kind of innovation our planet needs. And extending misguided tax cuts for the richest Americans will only deepen the deficit and further concentrate wealth at the top," House Ways and Means Committee Chairman Richard Neal, D-Mass., said in a statement after the budget proposal was released.

"It [Trump’s budget proposal] doubles down on the failed 2017 GOP tax law, extending expiring provisions and adding $1.5 trillion more to debt over the last six years of the budget window. Most of this extension’s tax breaks go to the richest one-fifth of households," House Budget Committee Democrats said in a committee report during the week of February 10.

However, it is worth noting that Trump’s budget proposal is merely an annual starting point for budget negotiations as Congress has the "power of the purse." Additionally, many of Trump’s requests, particularly those that include extending TCJA tax cuts, would have little chance of successfully clearing the currently Democratic-controlled House.

SFC Hearing; Wyden Bill
Secretary Mnuchin spent much of the SFC hearing praising and defending the TCJA and Treasury’s implementation of the GOP law. "Tax cuts, regulatory reform, and better trade deals are improving the lives of hardworking Americans," Mnuchin told lawmakers. "Unemployment remains historically low at 3.6 percent and is at or near all-time lows for African Americans, Hispanic Americans, and veterans. The unemployment rate for women recently reached its lowest point in nearly 70 years," he added.

Likewise, SFC Chairman Chuck Grassley, R-Iowa praised the TCJA and pointed to the same statistics mentioned by Mnuchin as evidence of its success. "Statistics like these show the tax reform is a success. The Treasury Department’s work to implement the new tax law has been an important part of that success," Grassley said.

However, SFC ranking member Ron Wyden, D-Ore., did not mince words when criticizing Mnuchin’s leadership of Treasury, the TCJA, and related regulations. "It sure looks like corporate special interests are going to make off with new loopholes worth $100 billion in addition to their outlandish share of the original $2 trillion Trump tax law," Wyden said during his opening statement. "When people say the tax code is rigged and the Trump administration has made it worse, what I’ve described is a textbook case of what they are talking about."

In that vein, Wyden introduced a bill on February 12 which would block Treasury’s "exception to the new tax on foreign earnings that allows multinationals to essentially choose the lowest available tax rate," as noted in Wyden’s press release. During the hearing, Wyden accused Treasury of creating a new "corporate tax loophole." Generally, Wyden’s bill would amend the tax code to clarify that high-taxed amounts are excluded from tested income for purposes of determining global intangible low-taxed income (GILTI) only if such amounts would be foreign base company income or insurance income.

Recently, Democrats have been criticizing Treasury for proposing related GILTI regulations based on corporate interests, but Mnuchin vehemently denied that claim. "Our job is to implement the legislation, not to make the legislation," he told lawmakers during the hearing. "Our job has been to implement that part of the tax code consistent with the intent and as prescribed by the law and that is what we have done."

Energy Tax Policy
Meanwhile, on the other side of the Capitol, in a February 11 letter to Senator Grassley, nearly 30 Democratic senators called for prompt committee action on energy tax policy. "Despite numerous opportunities, including in the recent tax extenders package, the Finance Committee has failed to take action on the dozens of energy tax proposals pending before it," the senators wrote in the letter led by Wyden. "Energy tax incentives have played a key part in shaping U.S. energy policy for more than 100 years, and members have shown clear interest in re-examining that ongoing role."

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House Committee on Transportation & Infrastructure, "Moving Forward Framework"; House Ways and Means Committee, January 29 hearing witnesses’ testimony

House Democrats on January 29 unveiled their framework for a $760 billion infrastructure plan. Meanwhile, the House Ways and Means Committee held a hearing the same day to examine proposals for funding infrastructure and various "tools" within the Tax Code to encourage investment.

Democratic Infrastructure Framework
Notably, House Democrats’ infrastructure framework, which also contains proposals related to climate change, is considered on Capitol Hill as an opening bid. It is not legislative text, and it does not include any specificities on how to fund infrastructure.

"I think it is really important that we not volunteer a revenue stream until the administration reaches an agreement with us," House Ways and Means Committee Chairman Richard Neal, D-Mass., said in a January 29 news conference. President Donald Trump and Treasury Secretary Steven Mnuchin have both expressed a readiness to move forward on infrastructure.

Ways and Means Infrastructure Hearing
Among some of the funding proposals presented during the January 29 hearing, Neal emphasized his preference for tax-preferred bonds. "Tax-preferred bonds are one of our most powerful tools. When we invest in infrastructure, it results in a significant economic multiplier," Neal said in his opening statement at the hearing. To that end, some witnesses also testified in support of reinstating a program known as Build American Bonds (BABs) on a permanent basis to help finance infrastructure. Neal likewise expressed his support for reinstating BABs.

Additionally, some Democratic lawmakers have discussed raising taxes to help fund infrastructure, namely the federal gas excise tax. Although the move would be met with resistance by lawmakers on both sides of the aisle, Republicans are particularly vocal in their opposition. The last gas tax increase occurred in 1993.

"Workers who are driving used cars shouldn’t be paying higher taxes at the pump so that the wealthy can claim a tax credit for their $75,000 electric vehicles," ranking member Kevin Brady, R-Tex., said during the hearing. "Both will drive on roads and bridges but only the blue-collar worker will pay any taxes to maintain them."

Looking Ahead
Although infrastructure is indeed a priority among congressional tax writers and the Trump administration, the Democratic framework is largely seen as a campaign-related proposal ahead of the 2020 elections, quite similar to Republicans’ talk of "Tax Cuts 2.0." While lawmakers on both sides of the aisle and the U.S. Capitol are certainly eager to address these tax-related issues, it remains to be seen if requisite bipartisan agreement will be reached during an election year and a shortened legislative calendar.

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House Democratic and Republican tax writers debated the effects of tax reform’s corporate income tax cut during a February 11 hearing convened by Democrats. Democratic lawmakers have consistently called for an increase in the corporate tax rate since it was lowered from 35 percent to 21 percent in 2017 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

During the House Ways and Means Committee hearing, Democrats largely criticized low federal income tax receipts from corporations following the TCJA’s corporate tax rate cut, while Republicans focused on highlighting the resulting economic growth and global competitiveness.

Corporate Tax Revenue
House Ways and Means Committee Chairman Richard Neal, D-Mass., opened the hearing by criticizing corporate tax revenues for being at their lowest level in history. "Some large corporations pay zero year after year. It is therefore not surprising that we collect less corporate tax revenue than all but one of the other OECD nations," Neal said during opening statements.

Similarly, Jason Furman, an economic policy professor in the Harvard Kennedy School and Department of Economics at Harvard University, told lawmakers during the hearing that the low levels of corporate tax revenue are a major reason why overall federal revenue is also low. Additionally, Furman told lawmakers that there is no evidence that the TCJA has made a "substantial contribution to investment or longer-term economic growth."

Inversions
However, Douglas Holtz-Eakin, president of the American Action Forum, testified that corporate tax receipts were falling before the TCJA ever took effect. He credited the TCJA’s corporate tax cut for essentially ceasing corporate inversions. A corporate inversion, in very general terms, is a process in which U.S.-based companies relocate operations outside of the country to reduce their tax burden.

"After years of having five to six prominent companies annually depart the United States, inversions have simply stopped," Holtz-Eakin testified. "Multinationals are bringing operations back to the United States, and many acquisitions of U.S. businesses now are made by U.S. firms, rather than foreign buyers," he added.

Further, Holtz-Eakin issued a reminder that "everyone bears the burden" of corporate income taxes. "Corporations are not walled off from the broader economy, and neither are the taxes imposed on corporate income. Taxes on corporations fall on stockholders, employees, and consumers alike."

JCT
The Joint Committee on Taxation (JCT), Congress’s nonpartisan scorekeeper, detailed in its February 10 report several contributing variables in understanding the corporate income tax equation and its relation to federal revenue. Generally, a corporation’s income tax liability is determined by applying a 21-percent rate to its taxable income.

As the JCT notes in its report, prior to the TCJA, the corporate income tax involved a four-step graduated tax rate schedule, with a top corporate tax rate of 35 percent on taxable income in excess of $10 million. The corporate income tax also included "an alternative minimum tax (AMT) that was payable (in addition to all other tax liabilities) to the extent that it exceeded the corporation’s regular income tax liability." However, the TCJA eliminated the graduated corporate rate structure and repealed the corporate AMT, effective in 2018.

More Hearings Expected
While this particular hearing convened by Democrats was generally seen on Capitol Hill to serve more of a messaging purpose rather than legislative purpose, more TCJA-related hearings are expected this year. "We’re going to be doing a series of hearings on the [GOP] tax bill," Neal told the press after the hearing. "People frequently pay a lot of attention to the spending side, and we are saying that there is also a revenue question here."

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The IRS will allow a farmer that is exempt from the uniform capitalization (UNICAP) rules by reason of having average annual gross receipts of $25 million or less to revoke a prior election out of the UNICAP rules made under Code Sec. 263A(d)(3) with respect to pre-productive plant expenditures. The guidance also explains how a farmer may make an election out under Code Sec. 263A(d)(3) in a tax year in which the farmer is no longer exempt from the UNICAP rules as a qualifying small business taxpayer with $25 million or less in average annual gross receipts.

Revocation of the prior election out is beneficial because a farmer that makes the election must depreciate farm property placed in service during any tax year the election is in effect using the MACRS alternative depreciation system (ADS). ADS requires use of the straight-line method over depreciation periods that are generally longer than those that apply under the MACRS general depreciation system (GDS) if the election out is not made ( Code Sec. 263A(e)(2)). If the election out is revoked, a qualifying small business farmer remains exempt from the UNICAP rules under the $25 million gross receipts test but is no longer required to use ADS on existing or newly acquired property by reason of the prior election out.

In addition, a rule that treats all plants produced by the farmer as section 1245 property, and requires ordinary income recapture to the extent of deductions otherwise required to be capitalized, no longer applies to new plantings after revocation of the election out is made ( Code Sec. 263A(e)(1)).

Eligible Farmers
The election out may be revoked by a farmer that:

is exempt from the UNICAP rules by reason of the $25 million average gross receipts test for qualifying small business taxpayers (as described in Code Sec. 448(c) and provided by Code Sec. 263A(i), as added by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), effective for tax years beginning after 2017);
previously made the election out of UNICAP under Code Sec. 263A(d)(3); and
wants to apply the $25 million gross receipts exemption for small business taxpayers in the same tax year that it revokes the Code Sec. 263A(d)(3) election out.

Revocation Procedure
An eligible small business farmer receives IRS consent to revoke a prior election out by continuing not to capitalize costs under the UNICAP rules on its original tax return (including extensions) for the tax year of the revocation of the election out, continuing to treat plantings in prior tax years as section 1245 property, and changing the depreciation method of farm property from ADS to GDS as explained below.

Special rule for 2018 tax year. A small business farmer that already filed a timely 2018 return may revoke the election out in the 2018 tax year by filing an amended 2018 return (an administrative adjustment request in the case of certain partnerships) before filing a 2019 return. Alternatively, Form 3115, Application for Change in Accounting Method, may be filed with a timely income tax return for the first, second, or third tax year following the 2018 tax year.

Changing From ADS to GDS
A farmer revoking the election out may cease using ADS to depreciate its existing farming property beginning in the year the election out is revoked, and ADS will not apply to farm property placed in service in the revocation year or thereafter. The switch from ADS to GDS is made using the MACRS change in use rules ( Reg. §1.168(i)-4(d)) and, therefore, the GDS method applies prospectively on the remaining basis of the farm property. The change in use rules, however, allow a farmer to elect to continue to depreciate its existing property using ADS. Property switched from ADS to GDS is not eligible for bonus depreciation. A farmer may make an ADS election for classes of newly acquired property under the usual ADS election rules.

A farmer revoking the election out has adopted an impermissible accounting method if it continues to use ADS in the revocation year and the following tax year (unless the election to continue using ADS was made under the change in use rules). In this case, a farmer must file Form 3115 and compute a section 481 adjustment as if the switch from ADS to GDS had been made in the revocation year. Similarly, a farmer that depreciates newly acquired property using ADS in the revocation year and the following year has adopted an impermissible method that must be corrected by filing Form 3115 unless a valid ADS election was made.

Losing Exemption Under Gross Receipts Test
The guidance allows a small business farmer to make a Code Sec. 263A(d)(3) election out of the UNICAP rules in the first tax year the farmer no longer qualifies for exemption under the $25 million average gross receipts test. The election out is made on the original tax return (including extensions) using the currently prescribed election Code Sec. 263A(d)(3) procedures, and by continuing not to capitalize costs under the UNICAP rules.

The electing farmer must use ADS to depreciate property placed in service in the election out year and subsequent years. Bonus depreciation may not be claimed on this property. An election out is not valid if ADS is not used to depreciate this property. ADS does not apply to property placed in service during tax years prior to the election out year.

Effective Date
The guidance is generally effective on February 21, 2020. Transition guidance is provided for taxpayers that filed a Form 3115 on or before February 21, 2020, to obtain consent to revoke a Code Sec. 263A(d)(3) election.

Rev. Proc. 2019-43, I.R.B. 2019-48, 1107, which lists the automatic accounting method changes, is modified to included certain accounting method changes described in the guidance.

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Taxpayers claiming the low-income housing credit should apply the "average income" minimum set aside test by reference to the "very low-income" limits calculated by the U.S. Department of Housing and Urban Development (HUD) for purposes of determining eligibility under the HUD Section 8 program. HUD determinations for very low-income housing families are currently used to calculate the low-income housing credit income limits under the alternate "20-50" and "40-60" minimum set-aside tests.

Rev. Rul. 89-24, 1994-2 C.B. 5, as modified and superseded in part by Rev. Rul. 94-57, 1994-2 C.B. 5, is amplified.

Average Income Test
A taxpayer claiming the low-income housing credit under Code Sec. 42 must elect to satisfy one of three minimum-set aside tests:

the "20-50" test, under which at least 20 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 50 percent or less of the area median gross income (AMGI);
the "40-60" test, under which at least 40 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 60 percent or less of AMGI; or
the "average income" test under Code Sec. 42(g)(1)(C), which was added by the Consolidated Appropriations Act of 2018 ( P.L. 115-141).

The average income test is satisfied if 40 percent or more of the residential units in the project (25 percent or more in the case of a project located in a high cost housing area) are both rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit. The imputed income limitation for any unit must be 20, 30, 40, 50, 60, 70 or 80 percent of AMGI. The average of the designated imputed income limitations may not exceed 60 percent of AMGI.

Application of HUD Calculation
HUD uses three different principal income level calculation categories:

"low-income," which is limited at 80 percent of AMGI;
"very low-income," which is limited at 50 percent of AMGI; and
"extremely low-income," which is limited at the higher of 30 percent of AMGI or the “Federal Poverty Level.”

Under the IRS guidance, HUD’s "very low-income" calculation, as adjusted for family size and consistent with the methods provided in Rev. Rul. 89-24, is used as the basis for determining the full range of percentage-based income limits under the new average-income set-aside test.

Specifically, the income attributable to a family in a unit may not exceed an applicable percentage of the HUD income limit for a very low income family of the same size in accordance with the following schedule for the percentage-based imputed income limit chosen for the unit within the 20 through 80 percent range:

20 percent limit: 40 percent or less of the income limit for a very low-income family of the same size;
30 percent limit: 60 percent or less of the income limit for a very low-income family of the same size;
40 percent limit: 80 percent or less of the income limit for a very low-income family of the same size;
50 percent limit: 100 percent or less of the income limit for a very low-income family of the same size;
60 percent limit: 120 percent or less of the income limit for a very low-income family of the same size;
70 percent limit: 140 percent or less of the income limit for a very low-income family of the same size;
80 percent limit: 160 percent or less of the income limit for a very low-income family of the same size.

A list of income limits released by HUD may be relied upon until 45 days after HUD releases a new list of income limits, or HUD’s effective date for the list expires.

Prospective Application
Special relief is provided to a taxpayer who receives a low-income housing credit allocation prior to February 18, 2020. The taxpayer must have unambiguously indicated in its application that it will elect the average-income set aside test, and also specified a dollar amount as an expected designated imputed income limitation for a unit that is higher than allowed by the new guidance. If the dollar amount is reasonable it may be relied upon for the entire compliance period of the building, and is also used to determine whether the tenant initially meets the income limitation for the unit.

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Final regulations increase a vehicle’s maximum value for eligibility to use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule. The regulations provide transition rules for certain employers. The final regulations are effective on February 5, 2020, the date of publication in the Federal Register.

TCJA Increased Maximum Vehicle Values
Before the Tax Cuts and Job Act (TCJA) ( P.L. 115-97), the maximum base fair market value of a vehicle for use of the fleet-average valuation rule was $16,500, as adjusted annually for inflation (in 2017: $21,100 for a passenger automobile, and $23,300 for a truck or van). The pre-TCJA maximum base fair market value of a vehicle for use of the vehicle cents-per-mile valuation rule was $12,800, as adjusted annually for inflation (in 2017: $15,900 for a passenger automobile, and $17,800 for a truck or van). The TCJA increased these amounts to $50,000, adjusted for inflation.

To implement the changes, the IRS issued Notice 2019-8, I.R.B. 2019-3, 354, to provide interim guidance for 2018 on new procedures for calculating the price inflation adjustments to the maximum vehicle values for use with the fleet-average valuation rule in Reg. §1.61-21(d) and the vehicle cents-per-mile valuation rule in Reg. §1.61-21(e) using amended Code Sec. 280F(d)(7). In Notice 2019-34. I.R.B. 2019-22, 1257, the IRS provided (among other things) that the inflation-adjusted maximum value of an employer-provided vehicle (including cars, vans, and trucks) first made available to employees for personal use in calendar year 2019 for which the vehicle cents-per-mile valuation rule or the fleet-average valuation rule may be used is $50,400. This guidance also provided information about the manner in which the Treasury Department and the IRS intended to publish the maximum vehicle value in the future.

In August 2019, a notice of proposed rulemaking was published that was consistent with Notice 2019-8 and Notice 2019-34 and reflected changes made by TCJA to the depreciation limitations in Code Sec. 280F. The final regulations update the fleet-average and vehicle cents-per-mile valuation rules to conform to the changes made by the TCJA.

Trucks and Vans Not Separately Valued
Before the TCJA, inflation adjustments were determined using the Consumer Price Index (CPI), which contained both a new car and a new truck component. Accordingly, separate inflation adjustments were released for cars using the car component of the CPI, and for trucks and vans using the truck component of the CPI.

Under the TCJA, the price inflation amount for automobiles (including trucks and vans) is calculated using both the CPI automobile component and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) automobile component. There is no separate C-CPI-U component for trucks and vans. As a result, the IRS will publish only one maximum value of a vehicle for use with the fleet-average and vehicle cents-per-mile valuation rules.

Transition Rules
Consistent with Notice 2019-34 and the proposed regulations, the final regulations provide several transition rules.

For the Fleet-Average Valuation Rule: If an employer did not qualify to use the fleet-average valuation rule prior to January 1, 2018, because the automobile’s fair market value exceeded the inflation-adjusted maximum value requirement for the year the automobile was first made available to the employee for personal use, the employer may adopt the fleet-average valuation rule for 2018 or 2019, provided the fair market value of the automobile does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

For the Vehicle Cents-Per-Mile Valuation Rule: An employer that did not qualify to adopt the vehicle cents-per-mile valuation rule for a vehicle first made available to an employee for personal use before calendar year 2018, may first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year for the vehicle if:

the employer did not qualify to adopt the vehicle cents-per-mile valuation rule because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the vehicle was first used by the employee for personal use; and
the vehicle’s fair market value does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

Similarly, if the commuting valuation rule ( Reg. §1.61-21(f)) was utilized when the vehicle was first used by an employee for personal use, the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year if:

the employer did not qualify to switch to the vehicle cents-per-mile valuation rule on the first day on which the commuting valuation rule was not used because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the commuting valuation rule was first not used; and
the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

An employer that adopts the vehicle cents-per-mile valuation rule must continue to use the rule for all subsequent years in which the vehicle qualifies for use of the rule. However, the employer may use the commuting valuation rule for the vehicle for any year during which use of the vehicle qualifies for the commuting valuation rule.

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The IRS has provided guidance on qualifying for the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit that is intended to be a financial boost for families with low to moderate incomes.

Due to changes in marital, parental or financial status, millions of workers may qualify for EITC for the first time this year. The IRS urges individuals who (1) work for someone else or have their own businesses or farm, and (2) earned $55,952 or less in 2019, to see if they qualify by using the "EITC Assistant" on the IRS’s website ( https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/use-the-eitc-assistant).

Taxpayers must file a Form 1040, U.S. Individual Income Tax Return, and attach a completed Schedule EIC, Earned Income Credit Qualifying Child Information, to the tax return for a qualifying child, in order to claim EITC. A taxpayer must have a valid Social Security number for themselves, their spouses if they are filing a joint return, and each qualifying child before they file their return.

The IRS expects most EITC-related refunds to be available in taxpayers’ bank accounts or on debit cards by the first week of March, if they choose direct deposit and there are no other issues with their tax return.

Eligibility for EITC
In order to qualify, the worker must have earned income an adjusted gross income with certain limits and meet certain basic rules. The worker also must meet the rules for those without a qualifying child, or must have a child who meets all the qualifying child rules. Only one person can use a particular child to claim the EITC, if that child meets the rules to be a qualifying child for more than one person. Under a special rule, those who receive combat pay may choose to count it as taxable income for the purposes of EITC; this may or may not increase the amount of EITC.

Credit Limits for 2019
For tax year 2019, those who qualify for EITC can get a credit up to:

$529 with no qualifying children,
$3,526 with one qualifying child,
$5,828 with two qualifying children, and
$6,557 with three or more qualifying children.

Free Tax Help
Since EITC is complex and many special rules apply, the IRS encourages workers to do their taxes using the IRS Free File program, by choosing a trusted tax professional, or at a local free tax preparation site. The IRS also reminds taxpayers that they are always be responsible for the accuracy of their own tax return, even if someone else may have prepared it, because filing a tax return with an error on the EITC claim could have lasting impacts.

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The IRS has proposed regulations with guidance for employers on withholding federal income tax from employee’s wages.

The IRS has proposed regulations with guidance for employers on withholding federal income tax from employee’s wages. The proposed regulations:

implement recent changes made to Code Secs. 3401 and 3402 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
reflect the redesigned 2020 Form W-4, Employee’s Withholding Certificate, and the related wage withholding tables and computational procedures published in IRS Pub. 15-T, Federal Income Tax Withholding Methods.

TCJA Changes
The TCJA made many Code amendments affecting income tax withholding on wages. Among other things, the TCJA:

repealed the rule that, for purposes collecting income tax at source on wages, the "number of withholding exemptions claimed" meant the number of withholding exemptions claimed in a withholding exemption certificate in effect, except that if no such certificate was in effect, the number of withholding exemptions claimed was considered zero;
permanently modified the wage withholding rules and replaced "withholding exemptions" with a "withholding allowance" prorated to the payroll period, to reflect the reductions in the personal exemption amount to zero due to the temporarily repeal of the personal and dependency exemption deduction for tax years 2018–2025;
changed the list of factors on which the withholding allowance is based, and entitled an employee to take into account the number of individuals for which the employee expects to take an income tax credit for other dependents, instead of the number of individuals for whom the employee reasonably expects to claim an personal and dependency exemption deduction;
changed an employee’s entitlement to take into account the standard deduction from an amount generally equal to one withholding exemption to the standard deduction allowable to the employee (one-half of the standard deduction for a married employee whose spouse is an employee receiving wages subject to withholding);
added a provision that the employee’s withholding allowance also takes into account whether the employee has withholding allowance certificates in effect for more than one employer;
added the Code Sec. 199A qualified business income deduction to the list of deductions that an employee may take into account in determining the additional withholding allowance that the employee is entitled to claim on Form W-4;
struck references to payments made under certain divorce or separation instruments; and
changed the rules for withholding from periodic payments under Code Sec. 3405(a) when no withholding allowance certificate has been furnished.

IRS Guidance
After the TCJA was enacted, the IRS issued guidance for 2018 and 2019 to implement the changes (e.g., Notice 2018-14, I.R.B. 2018-7, 353; Notice 2018-92, I.R.B. 2018-51, 1038; Notice 2020-3, I.R.B. 2020-3, I.R.B. 2020–3, 330). The IRS also released a draft 2019 Form W-4 and instructions, which made significant changes intended to improve the accuracy of income tax withholding and to make the withholding system more transparent for employees. In response to comments received, Treasury and the IRS postponed implementing the redesigned form until 2020. The final redesigned 2020 Form W-4 was released on December 4, 2019, and was then rereleased on December 31, 2019, to reflect the amendment to the medical expense deduction threshold for 2020 made by the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94).

In 2019, the IRS also released drafts of IRS Pub. 15-T, which provided percentage method tables, wage bracket withholding tables, and other computational procedures for employers to use to compute withholding for the 2020 calendar year. IRS Pub. 15-T was finalized and released on December 24, 2019. Withholding tables previously published in IRS Pub. 15, (Circular E), Employer’s Tax Guide, IRS Pub. 15-A, Employer’s Supplemental Tax Guide, and IRS Pub. 51, Agricultural Employer’s Tax Guide, are now published in IRS Pub. 15-T. The IRS also discontinued publishing several other withholding tables in 2020.

Proposed Regulations
The proposed regulations incorporate the TCJA changes to Code Secs. 3401 and 3402, and provide flexible and administrable rules for wage withholding that work with both the 2020 Form W-4 and the related tables and computational procedures described in IRS Pub. 15-T, as well as Forms W-4 and related tables and computational procedures provided in 2019 and earlier years. The proposed regulations are generally compatible with the income tax withholding system in effect for 2019, as well as the system in effect for 2020, and may be relied on by employers for withholding until final regulations are published.

W-4 Issues
An employee is not required to furnish a new Form W-4 solely because of the form’s redesign, regardless of when the employee’s Form W-4 currently in effect was furnished. Similarly, an employer must generally continue to compute the amount of tax to be withheld from an employee’s wages based on a valid Form W-4 furnished by the employee regardless of when the employee furnished the Form W-4.

The 2020 IRS Pub. 15-T provides guidance on how employers will withhold income tax using Forms W-4 furnished and in effect on or before December 31, 2019. An employer can ask all employees who were first paid wages before 2020 to furnish a 2020 Form W-4, but if it does, the employer should explain that:

employees are not required to furnish a new Form W-4; and
if the employee does not furnish a 2020 Form W-4, the tax to be withheld from the employee’s wages will continue to be based on the last valid Form W-4 previously furnished.

Similar to the current regulations, the proposed regulations generally provide that Forms W-4 that took effect under prior law generally remain in effect until another Form W-4 is furnished. There are special rules regarding when a Form W-4 furnished by an employee subject to a "lock-in letter" stops being effective.

Periodic Payments
The proposed regulations do not address withholding under Code Sec. 3405(a) on periodic payments from pensions, annuities, or certain other deferred income. Instead, Notice 2020-3 describes the withholding rules for the 2020 calendar year.

Proposed Applicability Date
The proposed regulations are generally proposed to apply on the date that a Treasury Decision adopting them as final regulations is published in the Federal Register. Taxpayers may rely on the rules set forth in the notice of proposed rulemaking until that date. However, Proposed Reg. §31.3402(f)(2)-1(g) is proposed to apply on February 13, 2020 (i.e., the date the notice of proposed rulemaking was published in the Federal Register), Proposed Reg. §31.3402(f)(5)-1(a)(3) is proposed to apply on March 16, 2020 (i.e., 30 days after the date the notice of proposed rulemaking was published in the Federal Register), and a proposed removal of Reg. §31.3402(h)(4)-1(b) relating to the combined income tax withholding and employee FICA tax withholding tables is proposed to apply on and after January 1, 2020. Except for the removal of Reg. §31.3402(h)(4)-1(b), taxpayers may choose to apply the rules on or after January 1, 2020.

Comments and Requests for Hearing
Before the proposed regulations are adopted as final regulations, the IRS will consider any electronic and written comments that are submitted timely to the IRS. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at http://www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of its date, time, and place will be published in the Federal Register.

Electronic submissions are made via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-132741-17) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking portal, comments cannot be edited or withdrawn. The Treasury Department and the IRS will publish for public availability any comment received to their public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: CC:PA:LPD:PR (REG-132741-17), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.

All comments and requests for a public hearing must be received by April 13, 2020.

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2011 year end tax planning for individuals lacks some of the drama of recent years but can be no less rewarding. Last year, individual taxpayers were facing looming tax increases as the calendar changed from 2010 to 2011; particularly, increased tax rates on wages, interest and other ordinary income, and higher rates on long-term capital gains and qualified dividends.

Thanks to legislation enacted at the end of 2010, tax rates are stable for 2011 and 2012, although the uncertainty will return as 2013 approaches, as political pressure in Washington builds to do something quickly for the economy. Ordinary income tax rates for individuals currently are 10, 15, 25, 28, 33 and 35 percent; capital gains rates are zero and 15 percent.

President Obama has proposed to preserve these tax rates for taxpayers with income below $200,000 (individuals) and $250,000 (married couples filing jointly) and to raise the rates for taxpayers in these higher-income brackets. If Congress is gridlocked and takes no action, everybody’s rates will rise, but again, not until 2013.

Expiring tax breaks

Unfortunately, not all is quiet on the tax front despite no dramatic rate changes until 2013. There are some specific tax provisions that will terminate at the end of 2011, unless Congress and the President agree to extend them. These include the tuition and fees above-the-line deduction for high education expenses, which can be as high as $4,000. Another expiring provision is the deduction for mortgage insurance premiums, which covers premiums paid for qualified mortgage insurance.

Several other benefits (“extenders”) are also scheduled to expire after 2011:

The state and local sales tax deduction;
The classroom expense deduction for teachers;
Nonbusiness energy credits;
The exclusion for distributions of up to $100,000 from an IRA to charity;
A higher deduction limit for charitable contributions of appreciated property for conservation purposes.

Retirement accounts

An old standby that makes sense from year-to-year is maximizing contributions to an IRA. The contribution is deductible up to $5,000 ($6,000 for taxpayers over 50), depending on some specific taxpayer income levels and circumstances. Taxpayers in a 401(k) plan can reduce their income by contributing to their employer plan, for which the limit in 2011 is $16,500.

In 2010, it was particularly important to consider whether to convert a traditional IRA to a Roth IRA, because the income realized on conversion could be recognized over two years. While a conversion continues to be worthwhile to consider (because distributions from a Roth IRA are not taxable), there are no longer any special break to defer a portion of the income from the conversion.

Alternative minimum tax

The AMT has been “patched” for 2011. The exemptions have been temporarily increased from the normal statutory levels to the “patched” levels:

From $33,750 to $48,450 for single individuals;
From $45,000 to $74,450 for married couples filing jointly and surviving spouses; and
From $22,500 to $37,335 for married couples filing separately.

The amounts return to the “normal levels” of $33,750/$45,000/$22,500, respectively, in 2012 unless Congress takes action to maintain the patch. Elimination of the AMT is a goal of long-term tax reform, but the loss of revenue has been considered too high in the past. Without the “patch,” the Congressional Budget Office estimates that an additional 20 million middle-class taxpayers would suddenly become subject to an AMT once designed only for millionaires.

While planning for the AMT is difficult, taxpayers may want to consider realizing AMT income, such as capital gains, in 2011, when the patch is higher, rather than in 2012.

Conclusion

Taxpayers can take advantage of 2011 provisions to realize last-minute tax benefits. Some of these benefits may not be available in 2012. It is worthwhile to look at these planning opportunities as part of an overall year-year financial strategy.

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Many tax benefits for business will either expire at the end of 2011 or become less valuable after 2011. Two of the most important benefits are bonus depreciation and Code Sec. 179 expensing. Both apply to investments in tangible property that can be depreciated. Other sunsetting opportunities might also be considered.

Bonus depreciation

Bonus depreciation is 100 percent for 2011. A business can write-off, in the first year, the entire cost of its investment in new depreciable property. Under current law, bonus depreciation will decrease to 50 percent in 2012 and will terminate after 2012. (These deadlines are extended one year for certain transportation property and property with a longer production period). President Obama has proposed to extend 100 percent bonus depreciation through 2012. Normally, this would have a good chance of being approved, but with the focus on deficit reduction and the linking of tax benefits to tax increases, it is not at all clear what will happen.

So, if a business has income in 2011 and plans to invest in depreciable property, it is worthwhile to consider making that investment in 2011, while the available write-off is at its highest. Under normal depreciation rules, a business will still be able to claim accelerated write-offs, but this may be 50 percent or less of the cost of the property, with the balance written-off over several years, instead of all in one year.

Planning for bonus depreciation is important because the property must satisfy placed-in-service and acquisition date requirements. Property is placed in service when it is in a condition or state of readiness on a regular ongoing basis for a specifically assigned function in a trade or business. The acquisition date rules may vary. For 2011, property is acquired when the taxpayer incurs or pays its cost. This could occur when the property is delivered, but it could also be when title to the property passes. For 2012, property is acquired when the taxpayer takes physical possession of the property.

Code Sec. 179 expensing

Code Sec. 179 expensing (first-year writeoff) has been around for awhile, but at higher amounts more recently. While there is no limit on bonus depreciation, expensing is limited to a statutory amount. For 2011, this amount is $500,000. It is scheduled to drop to $125,000 in 2012 and to $25,000 after 2012 (adjusted for inflation). Moreover, the cap is reduced for the amount of total investment in Code Sec. 179 property. The phaseout threshold is $2 million for 2011, dropping to $500,000 for 2012 and $200,000 for 2013 and subsequent years. For businesses who want to invest in depreciable property, the payoff is definitely greater in 2011. Taxpayers taking advantage of expensing should write off assets that would otherwise have the longest recovery periods.

Other 2011 benefits

Some other important benefits expire at the end of 2011 or become less valuable. A significant benefit in 2011 is the 100 percent exclusion for small business stock. After 2012, the normal exclusion rate will drop to 50 percent, although it has been 75 percent in recent years. The exclusion is based on the year the stock is acquired; the stock must be held for five years before sold and satisfy other requirements.

Another important benefit is the 20 percent research credit. The credit has been extended one year at a time for a long period, so it is likely to be extended again. Nevertheless, until Congress acts, there is some uncertainty for research expenses incurred after 2011.

Conclusion

To maximize the benefits of 2011 year-end tax planning, a business must be proactive in determining what upcoming capital investments might be accelerated into this year and what investments become cost effective because of the immediate tax benefits that they offer. Some business-related tax benefits will be less valuable after 2011; for others, it is not clear what Congress and the administration will do in terms of surprising taxpayers with a year-end tax bill. Please contact this office if you have any questions over how year-end tax strategies that begin now and continue through December can help maximize tax benefits for your business.

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