Income Tax Extenders - Disaster Act
Dear Clients and Friends:
On December 20, 2019, Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the Disaster Act) was passed into law, and it extends over 30 Code provisions retroactive to January 1, 2018, generally through 2020. Below is a summary of some of the extended provisions.
Exclusion from gross income of discharge of qualified principal residence indebtedness
Discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately) is excluded from gross income if the qualified principal residence indebtedness is discharged pursuant to a binding written agreement entered into before January 1, 2021.
Treatment of mortgage insurance premiums as qualified residence interest
Under pre-Disaster Act law, mortgage insurance premiums paid or accrued before January 1, 2018 by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence were treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer's adjusted gross income (AGI). The amount allowable as a deduction was phased out ratably by 10% for each $1,000 by which the taxpayer's adjusted gross income exceeded $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return). Thus, the deduction wasn't allowed if the taxpayer's AGI exceeded $110,000 ($55,000 in the case of married individual filing a separate return). The Disaster Act extends this treatment through 2020 for amounts paid or incurred after December 31, 2017.
Reduction in medical expense deduction floor
The Code provides that, individuals, for 2017 and 2018, could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceeded 7.5% of AGI. The Disaster Act extends this threshold of 7.5% for tax years beginning after December 31, 2018 and before January 1, 2021.
Deduction of qualified tuition and related expenses
The Code provides an above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers). The Disaster Act retroactively extends this deduction through 2020.
Work Opportunity Tax Credit
The Code provides an elective general business credit to employers hiring individuals who are members of one or more of ten targeted groups under the Work Opportunity Tax Credit program. The Disaster Act extends this credit through 2020.
Nonbusiness energy property
The Code provides a credit for purchases of nonbusiness energy property. The Code allows a credit of 10% of the amounts paid or incurred by the taxpayer for qualified energy improvements to the building envelope (windows, doors, skylights, and roofs) of principal residences. The Code allows credits of fixed dollar amounts ranging from $50 to $300 for energy-efficient property including furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans, and is subject to a lifetime cap of $500. The Disaster Act retroactively extends this credit through 2020.
Energy efficient homes credit
The Code provides a credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria. The Disaster Act extends the credit for energy-efficient new homes to homes acquired before January 1, 2021.
Energy efficient commercial buildings deduction
The Code provides a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings. This includes a $1.80 deduction per square foot for construction on qualified property. A partial $0.60 deduction per square foot is allowed if certain subsystems meet energy standards but the entire building does not, including the interior lighting systems, the heating, cooling, ventilation, and hot water systems, and the building envelope. The Disaster Act extends these deductions to property placed into service before January 1, 2021.
New Markets Tax Credit
The Code provides a New Markets Tax Credit which is available to both individual and corporate taxpayers and is equal to 39% of the capital invested in a qualified community development entity, a for profit or nonprofit entity that commits to the rules of the program, which in turn must loan to or invest substantially all of such capital in qualified businesses operating in low-income communities. The Disaster Act provides a $5 billion New Markets Tax Credit allocation for 2020. The Disaster Act also extends for one year, through 2025, the carryover period for unused New Markets Tax Credits.
Employer tax credit for paid family and medical leave
The Code provides an employer credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year. The Disaster Act extends this credit through 2020.
Black lung liability trust fund excise tax
The Code imposes an excise tax of $1.10 per ton for coal from underground mines and $0.55 per ton for coal from surface mines, each up to 4.4% the sale price effective beginning on the first day of the first calendar month after date of enactment. The Disaster Act extends these excise taxes through 2020, and the extension shall apply on and after Jan. 1, 2020.
Indian employment credit
The Code provides a credit on the first $20,000 of qualified wages and qualified employee health insurance costs paid to or incurred by the employer with respect to each qualified employee who works on an Indian reservation. Generally, a qualified employee is someone who is an enrolled member of an Indian tribe or the spouse of an enrolled member; who performs substantially all of the services for the employer within an Indian reservation; and whose principal place of abode is on or near the reservation in which the services are performed. The credit is equal to 20% of the excess of eligible employee qualified wages and health insurance costs incurred during the current year over the amount of such wages and costs incurred by the employer during 1993. The Disaster Act extends this credit to tax years beginning before January 1, 2021.
Railroad track maintenance credit
The Code provides a credit for 50% of qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer. Qualified railroad track maintenance expenditures are gross expenditures for maintaining railroad track (including roadbed, bridges, and related track structures) owned or leased as of January 1, 2015, by a Class II or Class III railroad. Determined by the Surface Transportation Board, a Class II railroad has annual operating revenues of less than $447,621,226 but in excess of $35,809,698, and a Class III railroad has annual operating revenues of $35,809,698 or less. The credit cannot exceed the product of $3,500 times the number of miles of railroad track owned or leased by the eligible taxpayer as of the close of the tax year. The Disaster Act extends this credit through 2022.
Mine rescue team training credit
The Code provides employers a credit equal to the lesser of 20% of the training program costs incurred, or $10,000, with respect to the training program costs of each qualified mine rescue team employee. The Disaster Act extends this credit through 2020.
Classification of certain racehorses as 3-year property
The Code assigns a 3-year recovery period for racehorses two years old or younger. The Disaster Act extends the 3-year recovery period to racehorses two years old or younger placed in service before 2021.
7-year recovery period for motorsports entertainment complexes
The Code provides a 7-year recovery period for motorsports entertainment complexes. A motorsports entertainment complex is defined as a racing track facility that is permanently situated on land and that hosts one or more racing events within 36 months of the month it is placed in service. The Disaster Act extends the 7-year recovery period through 2020, applicable to property placed into service after December 31, 2017.
Accelerated depreciation for business property on Indian reservation
The Code provides accelerated depreciation for qualified Indian reservation property. To qualify, property must be predominantly used for business purposes within a reservation, owned by someone unrelated to previous owner, and unrelated to gaming practices. The depreciation deduction allowed also extends to the alternative minimum tax.
The Disaster Act extends the use of this accelerated depreciation through 2020, applicable to property placed into service after December 31, 2017.
Extension of expensing rules for certain film productions & Empowerment zone tax incentives
The designation of an economically depressed census tract as an Empowerment Zone renders businesses and individual residents within such a Zone eligible for special empowerment zone tax incentives, including: the 20% wage credit under Code Sec. 1396; liberalized Code Sec. 179 expensing rules ($35,000 extra expensing and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment-based phaseout of expensing); tax-exempt bond financing under Code Sec. 1394; and deferral under Code Sec. 1397B of capital gains tax on sale of qualified assets sold and replaced. The Disaster Act extends through December 31, 2020, the period for which the designation of an empowerment zone is in effect.
The Disaster Act also provides that where a nomination of an empowerment zone included a termination date of December 31, 2017, termination will not apply with respect to the designation if, after December 20, 2019, the entity that made such nomination amends the nomination, in such manner as the IRS may provide, to provide for a new termination date. This applies to tax years beginning after December 31, 2017.
American Samoa economic development credit
There is provided a credit to certain corporations in American Samoa that may be claimed against U.S. corporate income tax in an amount equal to the sum of certain percentages of a domestic corporation's employee wages, employee fringe benefit expenses, and tangible property depreciation allowances for the tax year in respect of the active conduct of a trade or business in American Samoa. The Disaster Act extends this credit through 2020.
Biodiesel and renewable diesel
The Code provides a $1.00-per-gallon tax credit for biodiesel and biodiesel mixtures, and the small agri-biodiesel producer credit of 10 cents per gallon. The Disaster Act extends the biodiesel fuels income tax credit and the excise tax credits through 2020.
Second generation biofuel producer credit
Under pre-Disaster Act law, a producer of qualified biofuel produced after December 31, 2008, could claim a credit, as part of the alcohol fuel credit, for each gallon of qualified second generation biofuel production. The credit was equal to the applicable amount ($1.01) for each gallon of qualified second generation biofuel production. Under pre-Disaster Act law, this credit didn't apply to second generation biofuel produced after December 31, 2018. The Disaster Act extends the credit for production before January 1, 2021.
Qualified fuel cell motor vehicles
The Code provides a credit for purchases of new qualified fuel cell motor vehicles. The Code allows a credit of between $4,000 and $40,000, depending on the weight of the vehicle, for the purchase of such vehicles. Other vehicles, depending on their fuel efficiency, may qualify for an additional $1,000 to $4,000 credit. The Disaster Act extends this credit through 2020.
Alternative fuel refueling property credit
A taxpayer can claim a 30% credit for the cost of installing non-hydrogen alternative vehicle refueling property for use in the taxpayer's trade or business (up to $30,000 maximum per year per location) or installed at the taxpayer's principal residence (up to $1,000 per year per location). The Disaster Act extends this credit so that it applies to property placed in service before January 1, 2021.
2-wheeled plug-in electric vehicle credit
The Code provides a 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500). Battery capacity within the vehicles must be greater than or equal to 2.5 kilowatt-hours. The Disaster Act extends this credit so that it applies to vehicles acquired before January 1, 2021.
Credit for electricity produced from certain renewable resources
An income tax credit is allowed for the production of electricity from qualified energy resources at qualified facilities (the renewable electricity production credit). Qualified energy resources means wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Qualified facilities are, generally, facilities that generate electricity using qualified energy resources. The Disaster Act extends the date by which construction of a qualifying facility must begin, to before January 1, 2021, for the following facilities: qualifying closed-loop biomass, open-loop biomass, geothermal energy, land fill gas and trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities. In addition, the Disaster Act extends the above qualified facilities eligible to be treated as property for an energy credit under Code Sec. 48, to facilities which were placed in service after 2008 and the construction of which begins before Jan. 1, 2021. For wind facilities the construction of which begins in calendar year 2020, the Disaster Act reduces the credit by 40%.
Production credit for Indian coal facilities
Under pre-Disaster Act law, a credit based on the production of Indian coal was available to producers of Indian coal at Indian coal facilities during the 12-year period beginning on January 1, 2006 (i.e., before 2018). For 2018, the credit had expired. The Disaster Act extends the credit for three years, i.e., it provides a credit for producers of Indian coal at Indian coal facilities during the 15-year period beginning on January 1, 2006 (i.e., before January 1, 2021).
Special allowance for second generation biofuel plant property
The Code provides an additional first-year 50% bonus depreciation for cellulosic biofuel facilities. The Disaster Act extends this additional first-year 50% bonus depreciation to property placed into service before January 1, 2021.
Extension and clarification of excise tax credits relating to alternative fuels
A 50¢-per-gallon (or gasoline gallon equivalent for non-liquid fuel) excise tax credit was allowed against the Code Sec. 4041 retail fuel excise tax liability for alternative fuel sold for use or used by a taxpayer. A credit was also allowed against the Code Sec. 4081 removal at terminal excise tax liability for alternative fuel used to produce an alternative fuel mixture for sale or use in the taxpayer's trade or business. A taxpayer could claim an excise tax refund (or, in some cases, a credit against income tax) to the extent the taxpayer's alternative fuel or mixture excise tax credit exceeded the taxpayer's Code Sec. 4041 or Code Sec. 4081 liability. The Disaster Act extends these incentives through 2020.
Oil spill liability trust fund rate
The Code imposes an excise tax of $0.09 per barrel on crude oil received at a refinery and petroleum products entered into the United States and deposited into the Oil Spill Liability Trust Fund. The Disaster Act extends this excise tax through 2020, effective beginning on January 1, 2020.
Certain rules related to beer, wine, and distilled spirits
The Disaster Act extends the reduction of certain excise taxes related to beer, wine, and distilled spirits.
Look-through rule for related controlled foreign corporations
The Code provides look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations. The Disaster Act extends this look-through treatment through 2020.
Credit for health insurance costs of eligible individuals
The Code provides a refundable credit (commonly referred to as the health coverage tax credit or "HCTC") equal to 72.5% of the premiums paid by certain individuals for coverage of the individual and qualifying family members under qualified health insurance. The Disaster Act extends the HCTC through 2020.
Please contact our office with questions.
YOUNG & ASSOCIATES, LLC