On March 23, 2018 President Trump signed into law the Consolidated Appropriations Act of 2018. The $1.3 trillion spending bill funds the federal government through September 30. This article explores the tax-related provisions included in this new law.
Low-income Housing Credit
The low-income housing credit is a credit that is available to owners of low-income residential rental buildings and can be taken over a ten-year period when certain conditions have been met. A state housing credit ceiling applies.
The act increases the state housing credit ceiling and adds an average income test for determining if a project qualifies for the credit. The provision relating to the state credit ceiling is effective for calendar years beginning after December 31, 2017 and before January 1, 2022. The provision relating to the average income test is effective for elections made after the date of enactment.
Deduction for Agricultural and Horticultural Cooperatives and their Patrons (Section 199A)
This provision, often referred to as the “Grain Glitch”, was created as part of the Tax Cuts and Jobs Act. Under this provision, farmers were allowed to claim a 20% deduction of gross sales when selling to cooperatives, while the deduction for farmers selling goods to independent buyers was limited to 20% of net income. Independent buyers complained that this “grain glitch” created an unintended market preference for producers to sell to agricultural cooperatives. This special deduction creating the “grain glitch” has been repealed.
Under the new law, farmers who sell their products to independent buyers would continue to determine their deductions based on net income (no change).
Agricultural cooperatives will determine their deduction under rules similar to the old section 199 Manufacturer’s Deduction regime. The cooperative will basically receive a 9% deduction of gross sales, reduced by COGS and other allocable expenses, which can be passed on to the patrons. The deduction is limited to 50% of the W-2 wages paid for the year.
For farmers who sell to co-ops, their deduction is limited to the lesser of 9% of those sales or 50% of the wages paid that pertain to those sales.
There are still several unanswered questions with new Section 199A including: What exactly is a specified service trade or business? What are the limits regarding related party transactions? Are wages paid to a shareholder added back into income in determining the deduction? Hopefully these and other questions will be answered by the IRS in upcoming announcements and notices.
Centralized Partnership Audit Regime
The new audit regime for partnerships, which was enacted as part of the Bipartisan Budget Act of 2015, takes effect in 2018. Generally any tax due is paid by the partnership. Small partnerships can elect out of these new rules. Partnerships can also elect to “push out“ the adjustment to their partners.
The new Act makes some technical corrections. The first is to clarify the scope of the audit to encompass “partnership-related items “, which are defined as:
Any item or amount with respect to the partnership that is relevant in determining the income tax liability of any person, without regard to whether the item or amount appears on the partnership’s return and including an imputed underpayment and an item or amount relating to any transaction with, basis in, or liability of, the partnership (Code Sec. 6241, as amended by Appropriations Act).
This means that items or amounts related to transactions between a partner and the partnership outside of their capacity as a partner are included in this definition.
The Appropriations Act clarifies that the new audit rules do not apply to taxes imposed under Code sections 2 (self-employment income), 2A (net investment income), 3 (withholding tax on nonresident aliens and foreign corporations), or 4 withholding tax for certain foreign accounts). However, any partnership adjustment determined under Section 1 (normal income tax) is taken into account for purposes of determining any tax under these chapters to the extent that such an adjustment is relevant to the determination.
The new bill also clarifies how different items are netted in determining underpayments. Generally all adjustments are netted for the reviewed year. Items of different character such as capital and ordinary income are not netted. The highest tax rate for the reviewed year is to be applied to any underpayment.
Additionally, the Act describes the procedures that allow reviewed year partners to take the adjustments personally on amended returns. The amended returns must contain all of the adjusted items which are allocated to the partner. Any tax due must be paid with the return.
The bill also addresses audit adjustments and amended returns as they relate to pass-through partners in tiered partnerships.