An Overview of the Recent Tax Extenders Legislation for Businesses
January 13, 2020
On December 20, 2019, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (Tax Extenders Act) was signed into law as part of a Consolidated Appropriations Act (H.R. 1865). This legislation extends many previously existing tax provisions through 2020 or 2021. Though the extenders process has become more common over recent years, the 2019 act is interesting in that it retroactively applies some provisions to the 2018 tax year; a year for which most taxpayers have already filed their tax returns.
The following article reviews a number of extended provisions that impact businesses. Click here to read more about how it pertains to individuals and families.
*NOTE: Provisions with asterisks may impact the 2018 tax year in addition to 2019 / 2020. Amended tax returns may be necessary to take advantage of such provisions. Please consult with your Tax Advisor to understand possible positive and negative aspects of amending tax returns.
BUSINESS TAX EXTENDERS
While the Extenders Act includes a number of credits and deductions available to individual taxpayers and families, much of the legislation directly impacts businesses and employers across a variety of industries. Next, we will highlight important credits and deductions available to business entities under this new bill.
Empowerment Zone Tax Incentives *
Empowerment Zone Tax incentives are intended to drive growth and prosperity in certain economically distressed communities. The program expired as of December 31, 2017. The Extenders Act retroactively reinstates this provision for tax year 2018 and extends it to cover 2019 and 2020. Businesses operating in these designated Empowerment Zones are eligible for a variety of increased tax incentives including the employment credit, expanded Section 179 expensing, potential deferral of capital gains under IRC Section 1397B, and the ability to finance projects using certain tax-exempt bonds under IRC Section 1394.
New Markets Tax Credit
Much like the Empowerment Zone program, the New Markets Tax Credit (NMTC) program seeks to promote investment in underprivileged and low-income communities. For those taxpayers investing in certain “Community Development Entities” (CDEs), the available 39% tax credit is recognized over a 7-year period and can represent significant tax savings. The Extenders Act increased the total credits to be allocated among all qualified CDEs to $5,000,000,000 for tax year 2020, up from $3,500,000,000 per year for tax years 2010 – 2019, which shows that Congress is still seeking to incentivize investment in these low-income communities.
Employer Tax Credit for Paid Family and Medical Leave
The Employer Tax Credit for Paid Family and Medical Leave was introduced as part of TCJA, and provides a tax credit for eligible businesses that provide Family and Medical Leave (FMLA) benefits to certain employees. This employer credit was set to expire December 31, 2019 and has now been extended one year to December 31, 2020.
The credit itself is equal to 12.5% – 25% of eligible wages paid to low and medium-income employees (less than $72,000 per year) while they are on family and medical leave.
Work Opportunity Tax Credit
The Work Opportunity Tax Credit has been available to employers for over two decades and was scheduled to be terminated as of December 31, 2019. The Extenders Act extended the program one year through December 31, 2020. The program offers tax credits to employers who hire from specific targeted groups such as veterans and ex-felons. This presents a considerable incentive for employers to attract and retain employees who qualify under IRC Section 51(d).
Certain Provisions Related to Beer, Wine, and Distilled Spirits
Businesses in the beer, wine, and distilled spirits community saw a reduction in their excise taxes as a result of TCJA, effective for tax years 2018 and 2019. With the passage of the Extenders Act, these lower excise tax rates remain in effect for 2020. While there are other excise tax extenders in this legislation, perhaps none are as impactful to any specific industry as the producers of beer, wine, and distilled spirits. This industry has experienced large growth over the last decade, and it appears Congress sees the benefits in extending the reduction in these taxes for at least another year.
Look-through Rule for Related Controlled Foreign Corporations
A series of complex testing and compliance rules apply to controlled foreign corporations (CFCs), such as a foreign corporation of which more than 50% of the vote, or the value, is owned by U.S. shareholders who each own at least 10% of the voting stock. The Extenders Act includes a one-year extension to the look-through rules required by IRC Section 954(c)(6) with respect to certain types of income which would not be classified as foreign personal holding company income if the CFC either receives or accrues the income from a related CFC. The extension can be viewed as a win for taxpayers that have interests in multiple foreign operations, especially those CFCs that often need to move capital and funds across multiple entities.
GOING GREEN – ENVIRONMENTAL AND ENGERGY TAX INCENTIVES
In the past, the tax code has been used to create a host of incentives for companies to place increased emphasis on renewable energy, energy efficient operations, and other green focused initiatives. With the passage of the Extenders Act, Congress has renewed many credits and deductions for businesses that aim to tackle rising environmental concerns. Among the many extended credits and deductions are the Nonbusiness Energy Property credit and the Energy Efficient Commercial Buildings deduction.
Nonbusiness Energy Property Credit *
The Energy Policy Act of 2005 added a credit to the tax code applicable to individual taxpayers who buy and install certain nonbusiness energy property. This credit expired at the end of 2017 but the Extenders Act retroactively reinstates this provision for tax year 2018 and extends it to cover 2019 and 2020. While the credit itself is not significantly high and holds a lifetime maximum of only $500 for each taxpayer, it nevertheless covers a variety of expenses that are made to a primary residence using qualified energy efficiency improvements.
Energy Efficient Commercial Buildings Deduction *
Since its inception in 2006, the IRC Section 179D deduction for energy efficient commercial buildings has been a benefit to owners and tenants of commercial buildings. This program expired at the end of 2017 but the Extenders Act retroactively reinstates this provision for tax year 2018 and extends it to cover 2019 and 2020.
Section 179D allows for a deduction up to $1.80 per square foot for investment in certain buildings and systems installations that meet energy efficiency criteria. The deduction covers systems such as:
- Interior lighting systems,
- Heating, cooling, ventilation, and hot water systems
- Building envelope
The Extenders Act impacted over 30 tax code provisions, many of which have been in place for years. While it is not uncommon for provisions to be extended multiple times after their enactment, it is uncommon that many of the extenders have been applied retroactively to the 2018 tax year. Business owners and employers should review the applicable provisions, especially those retroactively implemented for 2018, to determine if any tax benefits may be available.
While the Extenders Act addressed many questions and concerns from taxpayers, there are still some highly anticipated technical corrections outstanding that many businesses and individuals have been anxiously awaiting. Chief among these is the current 39-year classification for qualified improvement property (QIP), which makes these assets ineligible for the 100% bonus depreciation as enacted under TCJA. This was a notable drafting error that occurred as part of the 2017 tax reform under TCJA and bi-partisan support for correcting the error has existed for several years. Practitioners and taxpayer advocacy groups had hoped that these technical corrections might have been included in the 2019 Extenders Act legislation.
SC&H Group’s Tax Teams will continue to monitor any Congressional action as it pertains to further technical corrections to TCJA and provide updates as pertinent information is available for individuals and businesses.[FULL TEXT FOR REFERENCE OR FOOTNOTE: https://www.congress.gov/bill/116th-congress/house-bill/1865/text]