Consolidated Appropriations Act Provides Many Tax Provisions for 2020

On December 20, 2019, the 715-page Consolidated Appropriations Act, 2020 (H.R. 1865) was signed into law. H.R. 1865 is a federal government spending bill that:

  • Extends more than 30 expired or expiring tax provisions;
  • Repeals the provision that taxed exempt organizations for providing parking as a fringe benefit to their employees;
  • Repeals three Affordable Care Act (ACA) tax provisions;
  • Makes numerous changes to retirement plan rules; and
  • Provides tax relief for victims of natural disasters.

An agreement was not reached on technical corrections to the Tax Cuts and Jobs Act (TCJA) of 2017, expansion of refundable tax credits or new green energy tax provisions.

Tax Extenders

The bill extends many tax provisions that had previously expired, including:

  • 108(a)(1)(E), which excludes canceled debt that is also qualified principal residence indebtedness (i.e., defaulting on a mortgage taken out to buy, build or substantially improve a home) from gross income;
  • 163(h)(3)’s treatment of mortgage insurance premiums (sometimes called PMI) as qualified residence interest, which permits taxpayers with income below set thresholds to deduct premium costs on mortgage insurance that was purchased in connection with acquisition indebtedness on their principal residence;
  • 213(f), which provides for a 7.5% (instead of 10%) adjusted-gross-income floor for medical expense deductions;
  • 222, which provides an above-the-line deduction for qualified tuition and related expenses; and
  • 954(c)(6) – the controlled foreign corporation (CFC) look-through rule, which recognizes that there should be no U.S. tax penalty when American companies redeploy foreign capital among their foreign subsidiaries.

Various incentives related to employment, economic growth, energy production and efficiency were also extended.

Several credits that were set to expire in 2019 were extended through 2020. These include:

  • 45D – new markets tax credit;
  • 45S – employer credit for paid family and medical leave;
  • 51 – work opportunity credit;
  • 35 – credit for health insurance costs of eligible individuals; and
  • 144 – certain provisions related to beer, wine and distilled spirits (see info on the Craft Beverage Modernization and Tax Reform Act).

Parking as Unrelated Business Income Tax

The bill repealed TCJA’s Sec. 512(a)(7), which imposed an unrelated business income tax on nonprofit organizations for transportation fringe benefits and parking.

This repeal is effective retroactive to December 22, 2017, so any exempt organization that previously paid taxes related to 512(a)(7) is eligible for a refund. Unless the IRS establishes a streamlined process for addressing the retroactive repeal, affected organizations may want to file an amended return to request a refund.

Healthcare Taxes

The bill repealed three healthcare taxes that were enacted to fund the Patient Protection and the ACA – more commonly referred to as Obamacare – which was signed into law in March 2010. All three of these taxes were previously suspended or postponed. The repealed taxes include:

1. Sec. 49801 – excise tax on certain high-cost employer health plans (popularly referred to as the Cadillac tax). This tax had previously been delayed until 2022.

2. Sec. 4191 – medical device excise tax. This 2.3% tax was formerly suspended through December 31, 2019.

3. Sec. 9010‘s annual fee on health insurance providers (also contained in the ACA). This had previously been suspended for 2019.

The repeals of the Cadillac tax and the medical device excise tax went into effect on January 1, 2020. The repeal of the Health Insurance Tax does not go into effect until 2021.

Retirement Plan Changes

Additionally, the bill included the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.

The bill aims to encourage retirement savings and simplify the administrative requirements for employers to offer retirement plans. The bill:

  • Increases the age when required minimum distributions (RMD) from certain retirement accounts must begin to 72 (up from 70½);
  • Repeals the maximum age for IRA contributions (currently 70½);
  • Amends Sec. 408, reducing the amount of deductible charitable IRA contributions allowed to taxpayers over 70½ by the aggregate IRA contribution deductions allowed to them after they turn 70½;
  • Modifies requirements for multiple-employer plans to make it easier for small businesses to offer such plans to their employees;
  • Reduces Pension Benefit Guaranty Corporation premiums for certain multiple-employer defined benefit plans of cooperatives and charities;
  • Permits new parents to take penalty-free withdrawals up to $5,000 from qualified retirement plans and IRAs for births and adoptions;
  • Grants part-time employees the ability to participate in retirement plans;
  • Allows for consolidated filings of Forms 5500, Annual Return/Report of Employee Benefit Plan, for similar plans;
  • Authorizes certain home healthcare workers to contribute to a defined contribution plan or IRA;
  • Eliminates the so-called “stretch IRA,” which allowed beneficiaries of IRAs and qualified plans to withdraw all money from inherited accounts over their lifetime. Distributions must now be taken within 10 years; and
  • Increases the Sec. 6651 failure-to-file penalty to $435.

Additionally, the Sec. 1 (j)(4) new kiddie tax in the TCJA’s P.L. 115-97 has been repealed, effective starting with the 2020 tax year. However, taxpayers are allowed to elect to have it apply to the 2018 and 2019 tax years. This portion of the TCJA had created a tax increase on survivors of fallen service members and first responders who died in the line of duty.

Disaster Tax Relief

Any victim of a natural disaster occurring in 2018, 2019 and up to 30 days after enactment of the bill are now provided tax relief. Eligible taxpayers are permitted to make tax-favored withdrawals from their retirement plans. The bill also enacts an employee retention credit for eligible employers in the amount of 40% of qualified wages, which are wages paid to an employee during the time the employer’s business ceases to operate (up to 150 days) due to a natural disaster.

The bill also implements special rules for personal casualty losses related to natural disasters, as well as for determining earned income for the Sec. 32 earned income tax credit. Additionally, the bill introduces automatic 60-day filing extensions for taxpayers affected by federally declared disasters.

Contact BSSF Today

If you have any questions about H.B. 1865 and the implications for your personal or business taxes, contact BSSF and speak with one of our tax experts today.