The start of year 2018 presents a time to reflect on the past 12 months and, based on what has gone before, predict what may happen next. Here is a list of the top 10 developments from 2017 that may prove particularly important as we move forward in 2018:
#1: Tax Cuts and Jobs Act
A sweeping rewrite of the nation’s tax laws passed Congress in late 2017. The Tax Cuts and Jobs Act (the Act) permanently lowers the corporate tax rate and temporarily lowers the individual tax rates. Shareholders, partners, and sole proprietors are poised to reap unprecedented rate cuts due to new pass-through rules. The Act also temporarily enhances the child tax credit, the medical expense deduction, bonus depreciation, small business expensing, and more. Lawmakers, however, did not repeal the federal estate or the alternative minimum tax (AMT) for individuals, although they did add temporary benefits to these provisions.
#2: Regulatory Resets and Reform
Since taking office, President Trump has issued several Executive Orders (EO) on regulations. EO 13789 directed the Treasury Department to review all significant tax regulations issued since January 1, 2016. In July, the Treasury Department identified eight recent tax regulations for reevaluation. The Treasury Department later withdrew two regulations: Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG-163113-02) and Proposed Regulations under Section 103 on Definition of Political Subdivision (REG-129067-15).
#3: Audit Coverage
The IRS’s latest Data Book, released in 2017, shows that the IRS audited 0.7 percent of all individual income tax returns in calendar year (CY) 2015, an all-time low. Approximately two-thirds of those individual audits were correspondence audits and one-third were field audits. The Treasury Inspector General for Tax Administration (TIGTA) later reported that the IRS examined one of every 143 individual income tax returns in fiscal year (FY) 2016. This reflected a 16% decline compared to FY 2015, according to TIGTA. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, represented a decline of 29% compared to FY 2015.
#4: Health Care
After dominating the first half of the 2017 news cycle, Congressional efforts to repeal and replace the Affordable Care Act eventually failed when the Senate Republicans’ “skinny repeal” legislation, the Health Care Freedom Bill, failed during a dramatic past-midnight vote on July 28. However, Republican efforts returned and were partially effective as the Tax Cuts and Jobs Act repealed the individual mandate by removing the penalty. In the meantime, however, the 3.8% net investment income tax (NII tax) and its “companion” 0.9% Additional Medicare Tax on compensation, which were enacted as part of the Affordable Care Act, have not yet been repealed.
#5: The Gig or Sharing Economy
The IRS is taking notice of the gig, or sharing, economy. The Service opened a Sharing Economy Tax Center on its website and is educating agents on relevant examination techniques. Activities in the sharing economy can vary and can range from selling goods online, advertising or other revenue from a website or blog, creating a crowdfunding site, short-term renting out a residence, or driving others for hire. More of these activities have come to the attention of the IRS as new Form 1099-K reporting requirements emerge for online and credit card transactions, as well as the use of Form 1099-MISC by large facilitators for service or goods providers.
2017 saw the IRS reporting that it finally is turning the tide against fraudulent claims for refunds. The agency is working closely with software providers and using IT to more closely monitoring patterns in filed tax returns. Delaying 2017 refunds for taxpayers claiming the earned income tax credit and the additional child tax credit also saw results. Even though the situation surrounding refund fraud is improving, the IRS has emphasized it is far from eliminating this activity.
#7: Virtual Currency
Bitcoin has become the virtual currency of choice worldwide in just a short period of time. Bipartisan legislation was introduced in September in Congress to allow consumers to make small purchases with virtual currency (also known as cryptocurrency currency) of up to $600 without needing to satisfy current reporting requirements (the Cryptocurrency Tax Act of 2017). Meanwhile, many stakeholders said that IRS policy needs updating.
#8: Partnership Audit Rules
The new centralized partnership audit regime under the Bipartisan Budget Act of 2015 (BBA) replaces the current TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) procedures beginning for 2018 tax year audits, with an earlier “opt-in” for electing partnerships. These rules dramatically change the way that audit adjustments are imposed on the partnership and its partners. With an estimated one million-plus partners under the U.S. tax system, the importance of the centralized partnership audit regime cannot be underplayed. Partnerships and their partners, if they have not done so, should review partnership agreements to address these new issues.
#9: Bonus Depreciation/IRC Section 179 Expensing
Because of their widespread applicability to businesses, especially those that are capital intensive, the new enhanced write-offs permitted under the new bonus depreciation and IRC Section 179 expensing rules enacted in the Act deserves special mention. The new law increases the 50% “bonus deprecia-tion” allowance to 100% for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft). A 20% phase-down schedule would then set in. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.
The IRC Section 179 dollar limitation is increased to $1 million and the investment limitation is increased to $2.5 million for tax years beginning after 2017. The definition of qualified real property eligible for expensing is redefined to include improvements to the interior of any nonresidential real property (“qualified improvement property”), as well as roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems installed on such property. What is more, the exclusion from expensing for property used in connecting with lodging facilities, such as residential rental property, is eliminated.
#10: Disaster Relief
President Trump signed the Disaster Tax Relief Act in September. The new law provides targeted and temporary tax relief to victims of Hurricanes Harvey, Irma, and Maria. The IRS also postponed certain tax deadlines for affected taxpayers. The IRS response to the various wildfires that have ravaged parts of California has been equally as expansive; and, in December, the IRS issued safe harbor methods of calculating casualty and theft loss deductions.
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