House Republicans released a full list of proposed technical corrections to the Tax Cuts and Jobs Act shortly after the Joint Committee on Taxation (JCT) offered new information for interpreting many of the provisions.
At the end of each Congress, JCT provides a general explanation of any enacted tax provisions in a report commonly referred to as the Bluebook. The Bluebook provides more expansive explanations that often cover issues not explicitly addressed in either the statute or previous JCT summaries. Its guidance can help the IRS and practitioners determine how ambiguous issues should be interpreted, and is commonly cited as legislative history in IRS guidance, taxpayer positions and judicial opinions.
The 2018 Bluebook provides significant information on several key provisions, including:
- Net operating losses (NOLs) – An example on NOLs indicates that pre- and post-2018 NOLs are meant to stack in a way that pre-2018 NOLs (not subject to the new taxable income limits) will reduce taxable income for purposes of determining how much post-2018 NOLs can be used.
- Section 199A – The Bluebook’s explanation of the definition of trade or business implies that a single entity should not be divided into separate trades or business unless separate books and records are kept. The Bluebook also contradicts the IRS’s narrow interpretation of a trade or business that relies on the reputation or skill or employees or owners and the IRS’s QBI loss-netting regime in the proposed regulations.
- Floor plan financing – The Bluebook indicates that exception for floor-plan financing investment from the Section 163(j) interest limitation, which precludes a taxpayer form also taking bonus depreciation, is meant to be elective.
- International provisions – The Bluebook expands on several provisions not included in the legislative history and details several areas where technical corrections are needed.
The Bluebook contradicts broadly held practitioner views and even IRS proposed regulations in some areas, and many of its descriptions on legislative intent carry the caveat that a “technical correction may be necessary to reflect this intent.” Although the Bluebook provides important guidance, its view may not be definitive in many areas, particularly without statutory clarifications.
House Ways and Means Committee ranking minority member Kevin Brady, R-Texas, released his full draft of proposed technical corrections to TCJA shortly after the Bluebook was released. It includes many of the suggested corrections in the Bluebook, but also offers provisions represent real policy changes. Significant provisions in the package would:
- Make qualified improvement property (QIP) eligible for bonus depreciation
- Provide that the IRS is not required to apply overpayments of tax to future year installment payments of the one-time transition tax under Section 965.
- Clarify that Section 383 limitations do not apply to refundable AMT credits
- Exclude NOLs from the new active loss limit rules under Section 461(l)
- Allow a Qualified Opportunity Zone fund to defer capital gains if it reinvests the processes in a qualifying property
- Provide for the NOL treatment reflected in the Bluebook as described above
- Narrow the attribution for rules for determining CFC status
The treatment afforded by some of these provisions, such as for AMT credits and the active loss rules, may be allowed even without the statutory corrections. For others, including the (QIP) provision, the IRS has already determined it cannot fix through guidance.
Democrats have so far been unwilling to discuss passing large package of technical corrections for a tax reform bill they generally opposed and would like to substantially re-write. However, they may be willing to consider a limited set of technical corrections that have the support of many in their caucus, including the QIP fix. New House Ways and Means Committee Chair Richard Neal, D-Mass., plans to hold hearings on TCJA before considering any changes, but the hearings could take place as early as this month.
Managing Director, Washington National Tax Office
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