Lawmakers enacted an omnibus spending bill (H.R. 1625) on March 23 that extends aviation taxes, enhances the low income housing tax credit (LIHTC), amends the partnership audit rules and makes scores of tax technical corrections covering everything but the December tax reform bill.
The Consolidated Appropriations Act, which President Donald Trump signed on March 23 after briefly threatening a veto, funds the government through the end of the fiscal year. It may be one of the last major legislative vehicles before the midterm elections in November, and it represented a rare opportunity for lawmakers to clarify many of the technical glitches and ambiguous areas in the Tax Cuts and Jobs Act (TCJA). In the end, Democrats only allowed a single change. The bill amends the pass-through deduction under Section 199A to soften a bias in favor of grain cooperatives.
The inability of Republicans to include more TCJA fixes is a bad sign for hopes that Congress can settle some of the uncertainties this year. Republicans will have a few more legislative vehicles before the elections, but Democrats appear to expect significant concessions any time a change is made. Taxpayers and the IRS may be left to interpret the ambiguous sections without much help from Congress for the near future.
Apart from TCJA, the bill does include technical corrections for nearly every other tax bill dating back to 2004. Most of the changes are minor and highly technical, but the partnership audit changes are more significant. They follow draft technical corrections closely in many areas, but with some notable departures.
Below are more detailed descriptions for the aviation tax extensions, partnership audit changes, LIHTC enhancements, and agricultural cooperative issue.
Partnership audit changes
The technical corrections affect the centralized partnership audit rules under the Bipartisan Budget Act of 2015 (BBA) that have taken effect for partnership tax years beginning after Dec. 31, 2017. BBA replaces the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) audit regime to allow for the IRS to collect an underpayment directly from the partnership itself. There are provisions in the law to allow for the partnership to “push out” the imputed underpayment to its partners.
Technical corrections to the BBA were introduced in the 114th Congress, but were not enacted. The technical corrections included as part of this legislation are in many ways similar to the legislation introduced previously, but there are several modifications.
The enacted technical corrections clarify that the partnership audit rules under the BBA do not apply to taxes imposed, or amounts required to be deducted or withheld under Chapters 2, 2A, 3, or 4 of the Code, unless specifically provided. However, the partnership adjustments under the BBA may result in adjustments to the assessment of those other taxes, which would then be collectible under a process that is outside the BBA. With respect to Chapters 3 and 4 withholding, the technical corrections create a timing rule where the tax is determined with respect to the reviewed year of the audited partnership and imposed with respect to the adjustment year.
The technical corrections also address the situation of a pass-through partner (whether direct or indirect) of an audited partnership that has itself elected to push out adjustments under Section 6226. If such a pass-through partner receives a statement in a push-out from the audited partnership, that partner must (1) file with the IRS a partnership adjustment tracking report that contains certain identifying information of the pass-through partner’s partners, and (2) decide whether to pay the imputed underpayment on its own or make its own push-out to its partners under rules similar to of Sections 6225 and 6226.
The technical corrections for the BBA also address the following issues:
- Netting in the determination of imputed underpayments under Section 6225(a) and (b)
- Alternative procedure to filing amended returns for purposes of modifications to imputed underpayments
- Treatment of a failure of a partnership or S corporation to pay imputed underpayment and assessment and collection authority with respect to imputed underpayments
- Amendment of statements to partners
- Partnership adjustment tracking reports and administrative adjustment requests not treated as an amended return
- Authority by the IRS to require electronic filing of returns and forms for partnerships
- Clarification of assessment authority in a push-out
- Treatment of partnership adjustments that result in a decrease in tax in a push-out
- Coordination of adjustments related to foreign tax credits
- Clarification of assessments of imputed underpayments
- Time limit for notice of proposed partnership adjustments
- Deposit to suspend interest on imputed underpayment
- Period of limitations on making adjustments
The IRS has yet to issue final regulations with respect to the BBA, but acknowledged in the preamble to the proposed regulations (REG-136118-15) that the Congress had introduced the previous technical corrections bill. The legislative changes could delay final regulations, but H.R. 1625 does not delay the effective date for the BBA. Partnerships that are subject to the centralized audit regime must consider amendments to partnership agreements—to the extent necessary—to comply with this law.
As enacted originally in TCJA, the pass-through deduction under Section 199A provided a bias toward selling agricultural products to a cooperative. The 20% deduction was available for the patronage dividends received from a cooperative. The patronage dividend is typically equivalent to the sales proceeds for selling through a cooperative, meaning farmers would receive the 20% deduction on gross income for selling to a cooperative versus on net income after deductions for selling to a private buyer.
The legislation replaces the treatment in TCJA with a deduction for qualified production activities of agricultural and horticultural cooperatives that is more similar to the deduction allowed under former Section 199. The new deduction is complex, but will remove much of the bias in favor of cooperative sales.
Aviation tax extensions
The legislation extends the aviation fuel and ticket taxes from March 31, 2018, through Sept. 30, 2018. The extensions cover the following taxes:
- A 19.3-cents-per-gallon excise tax rate on noncommercial aviation gasoline
- A 21.8-cents-per-gallon excise tax rate on noncommercial aviation kerosene
- A 7.5% tax on the base ticket price
- A $4.10-per-person domestic segment tax for a single takeoff and landing (indexed for inflation)
- An $18-per-person international travel facilities tax for flights that begin or end in the United States, indexed for inflation ($9 for a flight that begins or ends in Alaska or Hawaii)
- A 6.25% tax on the amount paid for transporting property by air
The legislation makes a pair of enhancements to the LIHTC. First, the LIHTC credit ceiling is increased by 12.5% in each of 2018, 2019, 2020, and 2021. The bill also creates a new optional income test for fulfilling the requirement that the building qualify as a low-income housing unit.
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