Signed into law February 9, the Bipartisan Budget Act of 2018 provided funding for the federal government through March 23 and extended more than 30 tax provisions that expired at the end of 2016. On March 23, President Donald Trump signed the Consolidated Appropriations Act, 2018 (the Act) into law, avoiding a government shutdown. Commonly referred to as “the omnibus,” the Act includes a wide variety of spending provisions and sets up federal funding through September 30, 2018. The Act also addressed a handful of technical tax issues left unresolved in previous legislation.
Fix for Grain Glitch
Since the enactment of the Tax Cuts and Jobs Act (TCJA), the new pass-through deduction under Internal Revenue Code Section 199A has garnered significant buzz among business owners and their advisors. The TCJA provided a special carve-out within the new deduction for entities formed as cooperatives. This expanded benefit was notably discussed as favoring farmers who sell grain to cooperatives instead of other organizations and was dubbed one of several glitches in the new law. As originally written, the pass-through deduction would apply to a cooperative’s gross income instead of net taxable income under the default rule. Also, cooperatives wouldn’t be subject to limitations imposed on specified service businesses. Read our BKD Thoughtware® article for more information on how the pass-through deduction originally was designed for qualified cooperative dividends.
The resolution for the so-called grain glitch is retroactive to January 1, 2018, and essentially reverts specified agricultural and horticultural cooperatives to the tax treatment under the previously repealed §199, i.e., a deduction from taxable income of 9 percent of the lesser of qualified production activities income or taxable income for the year. The Act also removes language from the original §199A provision that effectively allowed other cooperative dividends to bypass the wage and specified service business limitations. Some aspects of the new §199A deduction are retained for cooperatives, which would allow them to use the deduction either at the entity or member levels. In addition, the fix allows cooperative members a deduction based on their individual income as well as income received from the cooperative, subject to limitation.
Low-Income Housing Tax Credit
As a result of negotiations in Congress to allow for the grain glitch fix, the omnibus bill also contained a provision to expand the low-income housing tax credit. The credit is allowed for businesses investing in residential rental property that qualifies as low-income housing under certain statutory requirements and is calculated based on an applicable percentage of the qualified basis of each qualified low-income building. The Act increases the total credit allocation through 2021 by 12.5 percent. The Act also provides an additional method for determining whether a property qualifies as low-income housing.
Other Tax Provisions Within the Act
The Act provides several funding allotments for the IRS to carry out specific activities. One such activity is implementation of the TCJA, for which the Act makes available $320 million through September 30, 2019. This funding is intended to help the IRS make crucial updates to the various schedules, forms and internal systems affected by provisions within the new law.
Also included in the omnibus is a section titled the Tax Corrections Act of 2018, which houses several technical corrections for pre-TCJA tax legislation. Furthermore, the Act codifies several provisions previously held in regulations, including those that would allow partnerships to push out tax adjustments from IRS audits to the ultimate owner. For more on the new partnership audit rules, read this BKD Thoughtware article.
What’s not in the Act also is notable. Various other fixes and general guidance regarding the TCJA and its implementation are still needed. Specifically, the cost recovery treatment for qualified improvement property and the mismatched effective dates for the new rules governing net operating losses are among the glitches that remain unresolved.
Be sure to frequently visit BKD’s Tax Reform Resource Center to stay on top of the latest developments. If you have questions about tax reform and how it may affect your personal tax situation, contact Julia or your trusted BKD advisor.