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1 NEW LEGISLATION ADDITIONAL 13 Land Grant University Tax Education Foundation New Legislation Additional Foreign Tax Matters Table of Expiration Dates LEARNING OBJECTIVES After completing this session, participants will be able to do the following: Advise clients about the tax laws that were enacted or changed late in 2017 and in 2018 Understand how the new foreign tax laws under the Tax Cuts and Jobs Act may apply to individual taxpayers with foreign investments Identify individual and business income tax exclusions, deductions, and credits that expired in 2017; provisions that are available for 2018 tax returns under current law; and exclusions, deductions, and credits that are expiring in future years INTRODUCTION Tax legislation enacted late in 2017 and in 2018 affects a variety of tax provisions. This chapter first describes these new tax laws and regulations. It also reports notices and procedures issued to provide guidance and clarifications on the recently enacted legislation. The chapter then explains two new tax laws that apply to individual taxpayers with foreign investments. It also highlights some of the foreign tax law changes enacted by the Tax Cuts and Jobs Act of Finally, the chapter lists the expiration dates of tax provisions that expired in 2017 or are set to expire in Cross-Reference Tax Cuts and Jobs Act This chapter discusses the foreign tax provisions of the Tax Cuts and Jobs Act, regulations, and other new legislation. See the New Legislation Individual and the New Legislation Business chapters in this book for a discussion of other changes made by the 2017 Tax Cuts and Jobs Act Land Grant University Tax Education Foundation, Inc. 487

2 NEW LEGISLATION ADDITIONAL This section explains new laws, regulations, and procedures. This section discusses the following new legislation, notices, and procedures: Disaster Tax Relief and Airport and Airway Extension Act of 2017 Federal Register Printing Savings Act of 2017 Bipartisan Budget Act of Consolidated Appropriations Act Rev. Proc , I.R.B. 286 Rev. Proc , I.R.B. 290 REG New Form 1040 Rev. Proc , I.R.B. 320 REG REG Notice , I.R.B. 347 T.D REG Disaster Tax Relief and Airport and Airway Extension Act of 2017 Pub. L. No ; I.R.C. 72t, 170 The Disaster Tax Relief and Airport and Airway Extension Act of 2017 provides tax relief for victims of Hurricanes Harvey, Irma, and Maria. Section 501 of the Disaster Tax Relief and Airport and Airway Extension Act provides the following definitions: 1. Disaster zones are that portion of the disaster area determined by the president to warrant individual or individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. 2. Disaster areas are areas with respect to which a major disaster has been declared by the president before September 21, 2017 (extended to October 17, 2017 by the Bipartisan Budget Act). Early Withdrawals Section 502 of the act provides special rules for retirement distributions. I.R.C. 72t (the additional tax on early retirement withdrawals) does not apply to a qualified hurricane distribution from an eligible retirement plan. The following rules apply: 1. Up to $100,000 total distributions are eligible (including prior tax years). 2. The taxpayer can repay amounts to the plan within 3 years. 3. Unless the taxpayer elects out, any amount required to be included in gross income is included ratably over a 3-year period. 4. The taxpayer can recontribute withdrawals for home purchases canceled due to eligible disasters. The retirement distribution rules apply to distributions made due to Hurricane Harvey on or after August 23, 2017, and before January 1, Distributions due to Hurricane Irma must be made or after September 4, 2017, and before January 1, 2019; and distributions due to Hurricane Maria must be made on or after September 16, 2017, and before January 1, Employee Retention Credit Section 503 of the act provides for employer credits. It grants an employee retention credit for employers affected by the hurricanes (businesses that were inoperable at the employee s principal place of employment in the designated hurricane disaster zone). The credit is for 40% of qualified wages up to $6,000 for each eligible employee. Charitable Contributions Section 504a of the act temporarily suspends the limit on charitable contributions under I.R.C. 170 for contributions paid 488 NEW LEGISLATION ADDITIONAL

3 between August 23, 2017 and December 31, 2017; in cash; and COPYRIGHT 9/7/2018 LGUTEF to an organization described in I.R.C. 170(b)(1)(A) for relief efforts in the Hurricane Harvey disaster area, the Hurricane Irma disaster area, or the Hurricane Maria disaster area. The taxpayer must obtain contemporaneous written acknowledgment that such contribution was used (or is to be used) for relief efforts, and the taxpayer must elect the application of this subsection. Personal Casualty Losses Section 504b of the act provides the following rules for personal casualty losses: For uncompensated losses arising in the disaster areas, there is no requirement that losses exceed 10% of AGI. The net disaster loss can increase an individual taxpayer s standard deduction and the taxpayer does not have to itemize deductions to claim the loss. Section 504c of the act provides that for 2017, taxpayers can use earned income from the prior year to determine the earned income tax credit and child tax credit. Cross-Reference Disaster Tax Relief See the Individual Issues chapter in this book for an additional discussion of disaster tax relief. Federal Register Printing Savings Act of 2017 Pub. L. No , various I.R.C. provisions The Federal Register Printing Savings Act of 2017 (FRPS) was enacted to end the government shutdown and fund the government through February 8, It suspends several Affordable Care Act (ACA) taxes. Cadillac Tax FRPS 4002; Patient Protection and Affordable Care Act 9001(c) For tax years beginning after December 31, 2019, a 40% excise tax was scheduled to apply to any excess benefit provided to any employee who is covered under any applicable employer-sponsored coverage. The FRPS delays this Cadillac tax to tax years beginning after December 31, Medical Device Excise Tax FRPS 4001; I.R.C For tax years beginning after December 31, 2017, there was a 2.3%-of-sales-price excise tax on the sale of any taxable medical device by the device s manufacturer, producer, or importer. The FRPS delays the medical device excise tax so it applies to sales after December 31, Practitioner Note New Form 4684 The IRS issued a new draft of the Form 4684, Casualties and Thefts, and the draft instructions for that form. The draft form and instructions reflect the relief provided by the Disaster Tax Relief and Airport and Airway Extension Act of 2017 for victims of 2017 Hurricanes Harvey, Irma, and Maria. Fee on Health Insurance Providers FRPS 4003; Patient Protection and Affordable Care Act 9010(j) The annual fee on health insurance providers is suspended for However, it remains in effect for Federal Register Printing Savings Act of

4 Bipartisan Budget Act of 2018 Pub. L. No ; I.R.C. 72t, 170 The Bipartisan Budget Act of 2018 (BBA) was enacted to fund the federal government through March 23. This 2-year budget retroactively extends numerous taxrelated provisions and includes tax relief for victims of the California wildfires and Hurricanes Harvey, Irma, and Maria. California Wildfire Disasters The BBA provides relief for victims of California wildfire disasters. BBA provides the following definitions: California wildfire disaster zones are that portion of the California wildfire disaster area that the president determines to warrant individual or individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. California wildfire disaster areas are areas in which the president declared a major disaster between January 1, 2017, and January 18, Early Withdrawals BBA provides special rules for disasterrelated use of retirement funds. The I.R.C. 72t additional tax on early retirement withdrawals does not apply to a qualified wildfire distribution from an eligible retirement plan. The following rules apply: 1. Up to $100,000 total distributions are eligible (including prior tax years). 2. The taxpayer can repay amounts to the plan within 3 years. 3. Unless the taxpayer elects out, any amount required to be included in gross income is included ratably over a 3-year period. 4. The taxpayer can recontribute withdrawals and the recontribution is treated as a transfer to an eligible retirement plan in a direct trustee-to-trustee transfer within 60 days of the distribution. 490 NEW LEGISLATION ADDITIONAL A qualified wildfire distribution is any distribution from an eligible retirement plan made on or after October 8, 2017, and before January 1, 2019, to an individual whose main home during any portion of the period from October 8, 2017, to December 31, 2017, is in the California wildfire disaster area and who has sustained an economic loss because of the wildfires. The relief from the early withdrawal penalty also applies to distributions for home purchases or home construction that was canceled because of the California wildfires. Taxpayers can recontribute certain retirement plan withdrawals that were made to purchase or construct a principal residence in the California wildfire disaster area if the withdrawal was received after March 31, 2017, and before January 15, 2018; the home purchase or construction was canceled because of the California wildfire disaster; and the recontribution is made between October 8, 2017, and June 30, Plan Loans For plan loans to a qualified individual (defined later) between February 9, 2018, and December 31, 2018, the maximum amount that a participant or beneficiary can borrow from a qualified employer plan is increased from $50,000 to $100,000. The amount of the loan is limited by the present value of the nonforfeitable accrued benefit of the employee under the plan (instead of one-half the present value). The BBA also allows an additional year to repay a loan from a qualified plan to a qualified individual for any repayment on a loan that was due between October 8, 2017, and December 31, A qualified individual is any individual whose main home during any portion of the period from October 8, 2017, to December 31, 2017, was in the California wildfire disaster area and who sustained an economic loss because of the wildfires. Plan Amendments If the BBA provisions involving employee retirement plans and IRAs apply to a plan or annuity contract, such plan or contract is treated as being operated in accordance with the terms of the plan (that is, as if the plan was amended to reflect the

5 new provisions). For the amendment to be retroactive, the amendment to the plan or contract must be made on or before the last day of the first plan year beginning on or after January 1, 2019, or such later date as the IRS prescribes. For a governmental plan [as defined in I.R.C. 414(d)], the amendment must be made on or before the last day of the first plan year beginning on or after January 1, For an amendment to be retroactively effective, the amendment to the plan or contract must apply retroactively and the plan or contract must be operated as if the amendment was in effect. Employee Retention Credit BBA grants an employee retention credit for employers affected by the California wildfires (businesses that were inoperable at the employee s principal place of employment in the designated wildfire disaster zone). The credit is for 40% of qualified wages up to $6,000 qualified wages for each eligible employee. An eligible employee is an employee whose principal place of employment on October 8, 2017, with an eligible employer was in the California wildfire disaster zone. An eligible employer is any employer that conducted an active trade or business on October 8, 2017, in the California wildfire disaster zone, and the business was inoperable on any day after October 8, 2017, and before January 1, 2018, because of damage from the wildfires. Qualified wages are wages paid or incurred by an eligible employer with respect to an eligible employee on any day after October 8, 2017, and before January 1, The wages must have been paid while the trade or business was inoperable at its principal place of employment because of the wildfires. Charitable Contributions BBA 20104(a) temporarily suspends the I.R.C. 170 limits on charitable contributions for contributions paid between October 8, 2017 and December 31, 2018; in cash; and to an organization described in I.R.C. 170(b)(1)(A) for relief efforts in the California wildfire disaster area. The taxpayer must obtain contemporaneous written acknowledgment that the contribution was used (or is to be used) for relief efforts, and the taxpayer must elect the application of this rule. Personal Casualty Losses BBA 20104(b) provides special rules for California wildfires qualified disaster-related personal casualty losses. If the taxpayer has an individual net disaster loss for any tax year, there is no requirement that losses exceed 10% of AGI, the threshold limitation in I.R.C. 165(h)(1) is $500, and the taxpayer can add the loss to the standard deduction. A net disaster loss is the excess of qualified disaster-related personal casualty losses over personal casualty gains. Qualified disaster-related personal casualty losses are losses described in I.R.C. 165(c)(3), which arise in the California wildfire disaster area on or after October 8, 2017, and which are attributable to the wildfires. Special Rule for Determining Earned Income If the earned income of a qualified individual for the tax year that includes any portion of the period from October 8, 2017, to December 31, 2017, is less than the individual s earned income for the preceding tax year, the taxpayer can use the earned income from the prior year to determine the earned income tax credit and child tax credit. A qualified individual is any individual whose main home during any portion of the period from October 8, 2017, to December 31, 2017, was located in the California wildfire disaster zone or in the California wildfire disaster area, and the individual was displaced from his or her main home because of the wildfires. Tax Relief for Hurricanes Harvey, Irma, and Maria BBA changes section 501 of the Disaster Tax Relief and Airport and Airway Extension Act so that the time for declaration of a disaster area is extended from September 21, 2017, to October 17, The BBA states that rules like 13 Bipartisan Budget Act of

6 I.R.C. 280C(a) apply to the employee retention credit. The amendments are retroactive. BBA provides additional Hurricane Maria relief for Puerto Rico and the Virgin Islands Medicaid programs. It increases spending caps, disregards certain expenditures from the spending caps, and requires the secretary of Health and Human Services to report back to Congress. Extenders The BBA retroactively extended several tax provisions through Exclusion of Qualified Principal Residence Indebtedness BBA 40201; I.R.C. 108 The BBA extends the exclusion from gross income of discharge of qualified principal residence indebtedness from January 1, 2017, to January 1, The amendment applies to discharges of indebtedness after December 31, Deduction of Mortgage Insurance Premiums BBA 40202; I.R.C. 163 The BBA retroactively extends the period in which mortgage insurance premiums are treated as qualified residence interest. Premiums paid or accrued by December 31, 2017, may be deductible qualified residence interest. Deduction for Qualified Tuition BBA 40203; I.R.C. 222 COPYRIGHT 9/7/2018 LGUTEF The above-the-line deduction for qualified tuition and related expenses is retroactively extended for amounts paid or accrued after December 31, 2016, and before January 1, Business Extenders The BBA retroactively extends the following business provisions through 2017: I.R.C. 45A(f) Indian employment tax credit I.R.C. 45G(f) railroad track maintenance credit I.R.C. 45N(a) mine rescue team training credit I.R.C. 168(e)(3)(A)(i) classification of certain race horses as 3-year property I.R.C. 168(i)(15)(D) 7-year recovery period for motor sports entertainment complexes I.R.C. 168(j)(9) accelerated depreciation for business property on an Indian reservation I.R.C. 179E(g) election to expense mine safety equipment I.R.C. 181(g) special expensing rules for certain film, television, and theatrical productions I.R.C. 199(d)(8)(C) deduction for income attributable to domestic production activities in Puerto Rico I.R.C. 1201(b) special rule for qualified timber gain I.R.C. 1391(d)(1) empowerment zone tax incentives Tax Relief and Health Care Act of 2006, 119, American Samoa economic development credit Energy Extenders The BBA retroactively extends, and in some cases modifies, the following energy provisions: I.R.C. 25C(g)(2) nonbusiness energy property credit is retroactively extended through I.R.C. 25D(h) credit for residential energy property is retroactively extended through December 31, 2021, and it includes the applicable percentage of qualified solar electric property expenditures, qualified solar water heating property expenditures, qualified fuel cell property expenditures, qualified small wind energy property expenditures, and qualified geothermal heat pump property expenditures. I.R.C. 30B(k)(1) credit for qualified fuel cell motor vehicles is retroactively extended through NEW LEGISLATION ADDITIONAL

7 I.R.C. 30C(g) alternative fuel vehicle refueling property credit is retroactively extended through I.R.C. 30D(g)(3)(E)(ii) credit for 2-wheeled plug-in electric vehicles is retroactively extended through I.R.C. 40(b)(6)(J)(i) second-generation biofuel producer credit is retroactively extended through I.R.C. 40A, 6426(c)(6), and 6427(e)(6)(B) biodiesel and renewable diesel incentives are retroactively extended through For 2017 claims there is a 180-day period for the submission of the claims. The IRS must pay the claims not later than 60 days after receipt. I.R.C. 45(e)(10)(A) production credit for Indian coal facilities is retroactively extended through I.R.C. 45(d) credits for facilities producing energy from certain renewable resources are retroactively extended through I.R.C. 45L(g) credit for energy-efficient new homes is retroactively extended through I.R.C. 48(a)(3)(A) solar and thermal energy property credit is extended to the construction of property that begins before January 1, There is a new phaseout of the 30% credit rate for fiber optic solar, qualified fuel cell, and qualified small wind energy property. If construction begins after December 31, 2019, and before January 1, 2021, the energy percentage is 26%, and if construction begins after December 31, 2020, and before January 1, 2022, it is 22%. If the property is not placed in service before January 1, 2024, the energy percentage is 0%. I.R.C. 48(a)(5)(C)(ii) election to treat qualified facilities as energy property is retroactively extended through I.R.C. 168(l)(2)(D) special allowance for second-generation biofuel plant property is retroactively extended through I.R.C. 179D(h) deduction for energy-efficient commercial buildings is retroactively extended through I.R.C. 451(k)(3) special rule for sales or disposition to implement FERC or state electric restructuring policy for qualified electric utilities is retroactively extended through I.R.C and 6427 excise tax credits for alternative fuels are retroactively extended through A special rule for 2017 imposes a 180-day period for submission of a claim for an alternative fuel credit and the IRS has 60 days to pay the claim. I.R.C. 4611(f)(2) oil spill liability trust fund financing rate is extended through Amounts Received by Wrongfully Incarcerated BBA 41103; Protecting Americans from Tax Hikes Act of 2015, 304(d) The BBA extends the waiver on the statute of limitations for filing a refund claim for an overpayment of tax resulting from the exclusion under I.R.C. 139F for damages received because of wrongful incarceration. The 1-year period is extended to 3 years. Improper Levy on Retirement Plan BBA 41104; I.R.C Effective for tax years beginning after December 31, 2017, the BBA adds new I.R.C. 6343(f), which holds individuals harmless from a wrongful levy on a retirement plan. In general, if the IRS determines that an individual s account or benefit under an eligible retirement plan [as defined in I.R.C. 402(c)(8) (B)] has been wrongfully levied upon and the IRS returns property or an amount of money to the individual, the amount returned plus interest is an eligible contribution. The contribution must be made no later than the due date (not including extensions) for filing the tax return for the tax year in which the property or money is returned. The distribution because of the levy and any recontribution are treated as a rollover. The contribution is treated as having been made for the tax year in which the levy distribution occurred, and the interest paid is treated as earnings within the plan and is not included in gross income. Bipartisan Budget Act of

8 In general, if any amount is includable in gross income for a tax year because of a wrongful levy distribution and any portion of the distribution is treated as a rollover contribution, then no income tax will be assessed on that portion. If tax was assessed then it will be abated, and if tax was collected it will be credited or refunded as an overpayment. Cross-Reference Liens and Levies See the Tax Practice chapter in this book for a discussion of IRS liens and levies, including an explanation of wrongful levies. Installment Agreement User Fees BBA 41105; I.R.C Effective for installment agreements entered into on or after April 10, 2018, the BBA provides that the IRS cannot raise the fee on an installment agreement higher than the fee that was in effect on February 9, If a taxpayer s AGI, as determined for the most recent year for which such information is available, does not exceed 250% of the applicable poverty level (as determined by the IRS) and the taxpayer agreed to make payments under the installment agreement by electronic payment through direct debit, there is no fee on an installment agreement. If the taxpayer cannot make payments under the installment agreement by direct debit, the IRS must repay the fee to the taxpayer when the installment agreement is complete. Form 1040SR for Seniors BBA COPYRIGHT 9/7/2018 LGUTEF The IRS is directed to publish Form 1040SR, for use by seniors to file individual income tax returns. The form is supposed to be as similar as practicable to the former Form 1040EZ, except that the form is available only to individuals who have 494 NEW LEGISLATION ADDITIONAL attained age 65 as of the close of the tax year, and the form may be used even if income for the tax year includes the following: 1. Social security benefits 2. Distributions from qualified retirement plans [as defined in I.R.C. 4974(c)] 3. Annuities or other such deferred payment arrangements 4. Interest and dividends 5. Capital gains and losses taken into account in determining adjusted net capital gain The form will be available regardless of the amount of any item of taxable income or the total amount of taxable income for the tax year. The form is to be made available for tax years beginning after February 9, Practitioner Note No Form 1040EZ or 1040A for 2018 According to information posted at the draft tax forms link on July 16, 2018, the IRS is not developing Forms 1040A and 1040EZ for the 2018 tax year. All filers will use the new Form 1040 with the applicable schedules. See the 2018 Form 1040 draft form and schedules later in this chapter. Attorney s Fees for Whistleblower Awards BBA and 41108, I.R.C For tax years beginning after December 31, 2017, there is an above-the-line deduction for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with a whistleblower award under I.R.C. 7623(b) and certain other awards. The deduction may not exceed the amount includable in the taxpayer s gross income for the tax year because of the award. Whistleblower awards are based on collected proceeds. Under the BBA, proceeds include penalties, interest, additions to tax, and additional amounts provided under the internal revenue laws; and any proceeds arising from laws that the IRS is authorized to administer, enforce, or investigate, including criminal fines and civil

9 forfeitures, and violations of reporting requirements. The new definition applies if a final determination for an award has not yet been made as of February 9, Hardship Distributions COPYRIGHT 9/7/2018 LGUTEF BBA and 41114; I.R.C. 401(k) By February 9, 2019, the IRS is directed to modify Treas. Reg (k)-1(d)(3)(iv) (E) to delete the 6-month prohibition on making elective contributions or employee contributions to a plan following receipt of a hardship distribution. The revised regulations will apply to plan years beginning after December 31, The BBA also adds I.R.C. 401(k)(14) special rules for hardship withdrawals from cash or deferred arrangements. Under this provision the following amounts may be distributed upon hardship of the employee: 1. Contributions to a profit-sharing or stock bonus plan to which I.R.C. 402(e)(3) applies 2. Qualified nonelective contributions, as defined in I.R.C. 401(m)(4)(C) 3. Qualified matching contributions described in I.R.C. 401(k)(3)(D)(ii)(I) 4. Earnings on any contributions described in 1, 2, or 3 A distribution will not be treated as failing to be made upon the hardship of an employee solely because the employee does not take an available loan under the plan. Cross-Reference Hardship Distributions See the Retirement Issues chapter in this book for a discussion of the plan requirements for hardship distributions. Puerto Rico Opportunity Zones BBA Each population census tract in Puerto Rico that is a low-income community is deemed to be certified and designated as a qualified opportunity zone, effective on the date of the enactment of the Tax Cuts and Jobs Act (December 22, 2017). Tax Home BBA 41116; I.R.C. 911(d) For tax years beginning after December 31, 2017, the tax home for a US citizen or resident serving in a combat zone is the foreign country. Third-Party Network Transactions BBA 41117; I.R.C. 6050W Effective for calendar years beginning after December 31, 2017, I.R.C. 6050W(d)(1) (B) is amended by adding that a person with only a foreign address is not treated as a participating payee with respect to any payment settlement entity solely because the person receives payment in dollars. Corporate Estimated Tax BBA 41118; Trade Preferences Extension Act 803 The Trade Preferences Extension Act of 2015 is amended by deleting section 803 (relating to time for payment of corporate estimated taxes). This repeals the accelerated 2020 estimated tax payment for large corporations. 13 Bipartisan Budget Act of

10 2018 Consolidated Appropriations Act Rev. Proc , I.R.B. 286 Pub. L. No ; I.R.C 42, 199A The 2018 Consolidated Appropriations Act (CAA) is a $1.3 trillion spending bill that funds the federal government through September 30, Deduction for Cooperatives CAA 101; I.R.C. 199A Effective for tax years after December 31, 2017, the CAA modifies the deduction for qualified business income of a specified agricultural or horticultural cooperative under I.R.C. 199A(g) to instead provide a deduction for qualified production activities income (QPAI) of a specified agricultural or horticultural cooperative that is like the deduction for QPAI under former I.R.C Cross-Reference QBI and Cooperatives See the Agricultural and Natural Resource Issues chapter in this book for a full discussion of the deduction as it applies to cooperatives and their patrons. State Housing Credit Ceiling CAA 102; I.R.C. 42 For 2018, 2019, 2020, and 2021, I.R.C. 42(h)(3)(I) is amended to increase the state housing credit ceiling by 12.5%. The increase applies after any cost of living adjustment. I.R.C. 165 Effective December 13, The IRS provides safe harbor methods for determining nonbusiness casualty losses. Rev. Proc provides safe harbor methods that individual taxpayers may use to determine the amount of a casualty or theft of personal use residential real property and personal belongings. It also provides additional safe harbor methods that the taxpayer can use in the case of casualty and theft losses occurring because of any federally declared disaster. Use of the safe harbor is not mandatory, but the IRS will not challenge a taxpayer s determination of the decrease in fair market value (FMV) of the property if the taxpayer qualifies for and uses one of the safe harbor methods. Personal Use Residential Real Property Personal use residential real property is real property, including improvements (such as buildings and ornamental trees and shrubbery), that is owned by the individual who suffered a casualty or theft loss and that contains at least one personal residence. Personal use residential real property does not include a personal residence if any part of the personal residence is used as rental property or contains a home office used in a trade or business or transaction entered into for profit. A personal residence is a single-family residence, or a single unit within a contiguous group of attached residential units (for example, a townhouse or duplex), owned by the individual who suffered the loss. It includes any structures attached to the residence. It does not include a condo, cooperative apartment, mobile home, or trailer. Estimated Repair Cost Safe Harbor Under the estimated repair cost safe harbor method, to determine the decrease in the FMV of the taxpayer s personal use residential real property, the taxpayer may use the lesser of two repair estimates prepared by two separate and 496 NEW LEGISLATION ADDITIONAL

11 independent contractors, licensed or registered in accordance with state or local regulations. The two repair estimates must show the itemized costs to restore the personal use residential real property to the condition existing immediately prior to the casualty. The costs of any improvements or additions that increase the value of the personal use residential real property above its precasualty value, such as the cost to elevate the personal residence to meet new construction requirements, must be excluded. The estimated repair cost safe harbor method is available for casualty losses of $20,000 or less, prior to application of the limitations under I.R.C. 165(h). De Minimis Safe Harbor Method Under the de minimis safe harbor method, the taxpayer determines the decrease in the FMV of his or her personal use residential real property by estimating the cost of repairs required to restore the property to the condition existing immediately before the casualty. The costs of any improvements or additions that increase the value of the property are excluded. The estimate must be a good-faith estimate, and the taxpayer must keep records that show the method used to estimate the loss. The taxpayer can use this safe harbor method for casualty losses of $5,000 or less, prior to application of the section 165(h) limits. Insurance Safe Harbor Method Under the insurance safe harbor method, the taxpayer determines the decrease in the FMV of his or her personal use residential real property using the estimated loss determined in reports prepared by the taxpayer s homeowners or flood insurance company. Safe Harbor Methods for Federally Declared Disasters For losses because of federally declared disasters, the taxpayer can determine the decrease in the FMV of his or her personal use residential real property using the contractor safe harbor method, in which a licensed contractor specifies the cost of repairs. The taxpayer can also use the disaster loan appraisal safe harbor method. Under this method, the taxpayer determines the decrease in value using an appraisal that was prepared for a federal loan or loan guarantee. Personal Belongings A personal belonging is an item of tangible personal property that is owned by the individual who suffered a casualty or theft loss and that is not used in a trade or business or in a transaction entered into for profit. Personal belongings do not include a boat, aircraft, mobile home, trailer, vehicle, or an antique or other asset that maintains or increases its value over time. De Minimis Safe Harbor Method Under the de minimis safe harbor method, the taxpayer can make a good-faith estimate of the decrease in the FMV of his or her personal belongings. The taxpayer must keep records that describe the personal belongings and show the method used to estimate the loss. This method is available for casualty or theft losses of $5,000 or less, prior to application of the section 165(h) limits. Safe Harbor Methods for Federally Declared Disasters For losses because of federally declared disasters, the taxpayer can determine the decrease in the FMV of his or her personal belongings using the replacement cost safe harbor method. This method starts with the current cost to replace the belongings, and then discounts that cost by 10% for each year the taxpayer owned the personal belonging. The predisaster FMV for a belonging that the taxpayer owned 9 or more years is 10% of the current cost. The taxpayer then subtracts the post-disaster FMV from the predisaster FMV. If a personal belonging was destroyed or stolen because of a federally declared disaster, its FMV after the disaster is zero. A taxpayer cannot use this method for a boat, aircraft, mobile home, trailer, vehicle, or an antique or other asset that maintains or increases its value over time. For purposes of this revenue procedure, a vehicle is an automobile, motorcycle, motor home, recreational vehicle, sport utility vehicle, off-road vehicle, van, or truck. The taxpayer can determine the predisaster value of a boat, aircraft, mobile home, trailer, or vehicle by consulting established pricing sources. 13 Rev. Proc , I.R.B

12 Rev. Proc , I.R.B. 290 I.R.C. 165 COPYRIGHT 9/7/2018 LGUTEF Effective December 13, The IRS provides a cost indexes safe harbor method that individual taxpayers can use to determine the amount of their casualty losses for their personal use residential real property occurring because of the 2017 hurricanes. This revenue procedure provides the cost indexes safe harbor method that individual taxpayers may use in determining the amount of their casualty losses for personal use residential real property that was damaged or destroyed by Hurricanes Harvey, Irma, and Maria. Under the cost indexes safe harbor method, the taxpayer can use one or more of the cost indexes, as applicable, provided in section 4 of Rev. Proc to determine the decrease in FMV of personal use residential real property, including the personal residence, detached structures, and decking. Cost indexes are provided for three size categories of personal residences based on the square footage of the personal residence, and for seven geographic areas. REG Prop. Treas. Reg , Effective on the date the final regulations are issued, but not before January 1, Proposed regulations aggregate information returns for purposes of determining if a taxpayer must file electronically. Under existing rules, a filer must file information returns (Forms 1099 and W-2) electronically if the filer files at least 250 returns during the calendar year. The 250-return threshold applies to each type of return. Proposed regulations would require a filer to take all information returns, regardless of type, into account in determining whether the filer meets the 250-return threshold and must file the returns electronically. Thus, different types of forms would be aggregated for determining the 250-return threshold. The proposed regulations would also require any person required to file information returns electronically to file corrected information returns electronically, regardless of the number of corrected information returns being filed. New Form 1040 The new Form 1040, U.S. Individual Income Tax Return, is intended to simplify return preparation. The new form replaces Forms 1040, A, and 1040 EZ. The new draft 2018 Form 1040 is shown in Figure The form is two halfpages, but there are six accompanying schedules. The schedules are shown in Figure NEW LEGISLATION ADDITIONAL

13 FIGURE Draft Form New Form

14 FIGURE Draft Form 1040, Schedules NEW LEGISLATION ADDITIONAL

15 FIGURE Draft Form 1040, Schedules 1 6 (Continued) 13 New Form

16 FIGURE Draft Form 1040, Schedules 1 6 (Continued) Rev. Proc , I.R.B. 320 I.R.C. 263A, 446, 447, 448, 460, 471 The IRS provides guidance on the procedures that a small business taxpayer uses to obtain automatic consent to change its method of accounting to reflect the recent statutory changes. Rev. Proc adds several small business taxpayer changes to the list of changes that can use the automatic consent procedure. Change to Cash Method Rev. Proc amends Rev. Proc to add a small business taxpayer changing to the overall cash method to the list of changes that qualify for the automatic consent procedure. It does not include banks changing to a cash/hybrid method, or farming businesses changing to the cash method. Cross-Reference Accounting Methods See the Business Issues chapter in this book for a discussion of the new rules that expand the number of small business taxpayers eligible to use the cash receipts and disbursements method of accounting, exempt small business taxpayers from the requirements to capitalize costs, including for certain home construction contracts, under I.R.C. 263A, to account for certain long-term contracts under I.R.C. 460, and to account for inventories under I.R.C Rev. Proc , I.R.B. 419 [as clarified and modified by Rev. Proc , I.R.B. 1067, as modified by Rev. Proc , I.R.B. 1, and as modified by Rev. Proc , I.R.B. 543], provides the general procedures by which a taxpayer may obtain automatic consent for a change in method of accounting. Rev. Proc , I.R.B. 637, contains the list of changes for which the taxpayer can use the automatic consent procedure. Practitioner Note Banks and Farmers Section of Rev. Proc allows automatic consent for banks changing to cash/hybrid, and section of Rev. Proc allows use of the automatic consent procedure for farmers changing to the overall cash method. A special rule requires a small business taxpayer changing to the cash method to include open accounts receivable (generally due in full in 120 days or less) as they are actually or constructively received. The eligibility rule in section 5.01(1)(e) of Rev. Proc that states the taxpayer cannot use the automatic consent procedure if the taxpayer made or requested an overall method change during any of the 5 tax years ending with the year of change does not apply to this change for a taxpayer s first, second, or third tax year beginning after December 31, There are reduced filing requirements. A taxpayer is required to complete only the following 502 NEW LEGISLATION ADDITIONAL

17 information on Form 3115, Application for Change in Accounting Method, to make this change: 1. The identification section of page 1 (above Part I) 2. The signature section at the bottom of page 1 3. Part I 4. Part II, all lines except line Part IV, all lines except line Schedule A, Part I, all lines except lines 3, 4, and 5 Change from Capitalizing Rev. Proc amends Rev. Proc to add that a small business taxpayer that capitalizes costs under I.R.C. 263A and wants to change to a method of accounting that no longer capitalizes costs under section 263A qualifies for the automatic consent procedure. This change does not apply to a small business taxpayer that chooses to no longer capitalize costs under section 263A for home construction contracts, as defined in I.R.C. 460(e)(1)(A). The eligibility rule in section 5.01(1)(f) of Rev. Proc that states the taxpayer cannot use the automatic consent procedure if the taxpayer made or requested a change for the same item during any of the 5 tax years ending with the year of change does not apply for a taxpayer s first, second, or third tax year beginning after December 31, There are reduced filing requirements. A taxpayer is required to complete only the following information on Form 3115 to make this change: 1. The identification section of page 1 (above Part I) 2. The signature section at the bottom of page 1 3. Part I 4. Part II, all lines except line Part IV, all lines except line 25 Change from Inventories Rev. Proc amends Rev. Proc to add a small business taxpayer that wants to change its I.R.C. 471 method of accounting for inventory items. The eligibility rule in section 5.01(1)(f) of Rev. Proc does not apply to this change for a taxpayer s first, second, or third tax year beginning after December 31, The reduced filing requirements (discussed under a change from uniform capitalization) apply. Long-Term Contracts Rev. Proc amends Rev. Proc to add a small business taxpayer that (1) wants to change its method of accounting for exempt longterm construction contracts described in I.R.C. 460(e)(1)(B) from the percentage-of-completion method of accounting described in Treas. Reg (b) to an exempt contract method of accounting described in Treas. Reg (c), or (2) chooses to stop capitalizing costs under section 263A for home construction contracts defined in I.R.C. 460(e)(1)(A). This change is made on a cut-off basis and applies only to long-term construction contracts entered into after December 31, 2017, in tax years ending after December 31, Accordingly, an I.R.C. 481(a) adjustment is neither permitted nor required. The eligibility rule in section 5.01(1)(f) of Rev. Proc does not apply to this change for a taxpayer s first, second, or third tax year ending after December 31, A taxpayer is required to complete only the following information on Form 3115 to make this change: 1. The identification section of page 1 (above Part I) 2. The signature section at the bottom of page 1 3. Part I 4. Part II, all lines except line Part IV, line Schedule D, Part I Transition Rule If, before August 3, 2018, a taxpayer properly filed a Form 3115 under the nonautomatic change procedures in Rev. Proc requesting the Commissioner s consent for a change in method of accounting described in section 3 of this revenue procedure, and the Form 3115 is pending with the national office on August 3, 2018, the taxpayer may choose to make the change in method of accounting under the automatic change procedures in Rev. Proc , if the taxpayer is otherwise eligible to use this revenue procedure and the automatic change procedures in Rev. Proc Special deadlines and procedures apply. 13 Rev. Proc , I.R.B

18 REG Prop. Treas. Reg (k)-2 Proposed regulations provide guidance about additional first-year depreciation for property placed in service after September 27, These regulations are proposed to apply to qualified property placed in service or planted or grafted, as applicable, by the taxpayer during or after the taxpayer s tax year that includes the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Pending the issuance of the final regulations, a taxpayer may choose to apply these proposed regulations to qualified property acquired and placed in service or planted or grafted, as applicable, after September 27, 2017, by the taxpayer during tax years ending on or after September 28, Practitioner Note Regulations Use AFYD This discussion uses the term additional first-year depreciation rather than bonus depreciation to be consistent with the terminology in the new proposed regulations. Introduction COPYRIGHT 9/7/2018 LGUTEF The TCJA increased additional first-year depreciation (AFYD) from 50% to 100%; expanded the property eligible for AFYD to include certain used depreciable property and certain film, television, or live theatrical productions; and extended the placed-in-service dates. The placed-in-service date is extended from before January 1, 2020, to before January 1, 2027 [from before January 1, 2021, to before January 1, 2028, for longer production period property or certain aircraft property described in I.R.C. 168(k)(2)(B) or (C)]; and the date on which a specified plant is planted or grafted by the taxpayer is extended from before January 1, 2020, to before January 1, The proposed regulations describe and clarify the statutory requirements that must be met for depreciable property to qualify for the AFYD deduction provided by I.R.C. 168(k). Further, 504 NEW LEGISLATION ADDITIONAL the proposed regulations instruct taxpayers how to determine the AFYD deduction and the amount of depreciation otherwise allowable for this property. The proposed regulations update existing regulations in Treas. Reg (k)-1 by providing a new section 1.168(k)-2 for property acquired and placed in service after September 27, 2017, and make conforming amendments to the existing regulations. This section gives an overview of some of the proposed regulations. Eligibility Requirements The proposed regulations follow I.R.C. 168(k) (2), as amended by the TCJA to provide that depreciable property must meet the following four requirements to be qualified property for the AFYD: 1. The depreciable property must be of a specified type (discussed next). 2. The original use of the depreciable property must commence with the taxpayer or used depreciable property must meet the seven acquisition requirements of I.R.C. 168(k)(2) (E)(ii). 3. The depreciable property must be placed in service by the taxpayer within a specified time period or must be planted or grafted by the taxpayer before a specified date. 4. The depreciable property must be acquired by the taxpayer after September 27, Property of a Specified Type The proposed regulations follow the definition of qualified property in I.R.C. 168(k)(2)(A)(i) and (k)(5) and provide that qualified property must be one of the following: 1. MACRS property that has a recovery period of 20 years or less 2. Qualified leasehold improvement property, qualified restaurant property, or qualified retail improvement property acquired after September 27, 2017, and placed in service after September 27, 2017, and before January 1, Computer software as defined in and depreciated under I.R.C. 167(f)(1)

19 4. Water utility property as defined in I.R.C. 168(e)(5) and depreciated under section Qualified improvement property as defined in Treas. Reg (b)-1(a)(5)(i)(C) and (a)(5)(ii) and depreciated under I.R.C A qualified film or television production as defined in I.R.C. 181(d) and for which a deduction would have been allowable under I.R.C. 181 without regard to I.R.C. 181(a) (2) and (g) or section 168(k) 7. A qualified live theatrical production as defined in I.R.C. 181(e) and for which a deduction would have been allowable under section 181 without regard to section 181(a) (2) and (g) or section 168(k) 8. A specified plant as defined in I.R.C. 168(k)(5)(B) and for which the taxpayer has made an election to apply I.R.C. 168(k)(5). [Prop. Treas. Reg (k)-2(b)(2)(i)] The proposed regulations provide that qualified property does not include the following: 1. Property excluded from the application of section 168 because of I.R.C. 168(f) (for example, automobiles for which the taxpayer uses the optional business standard mileage rate) 2. Property that is required to be depreciated under the alternate depreciation system (ADS) 3. Any class of property for which the taxpayer elects not to deduct the AFYD under I.R.C. 168(k)(7) 4. A specified plant placed in service by the taxpayer in the tax year and for which the taxpayer made an election to apply section 168(k)(5) for a prior year under I.R.C. 168(k)(5)(D) 5. Any class of property for which the taxpayer elects to apply I.R.C. 168(k)(4) [this exclusion applies to property placed in service in any tax year beginning before January 1, 2018, because section 12001(b)(13) of the act repealed section 168(k)(4) for tax years beginning after December 31, 2017] 6. Property described in I.R.C. 168(k)(9)(A) or (B). I.R.C. 168(k)(9) provides that qualified property does not include (a) any property that is primarily used in a trade or business described in I.R.C. 163(j)(7)(A)(iv), or (b) any property used in a trade or business that has had floor plan financing indebtedness [as defined in I.R.C. 163(j)(9) if the floor plan financing interest related to such indebtedness was taken into account under section 163(j)(1)(C)] [Prop. Treas. Reg (k)-2(b)(2)(ii)] New and Used Property Under Prop. Treas. Reg (k)-2(b)(3)(ii), the property must meet the original use requirements or the used acquisition requirements to qualify for AFYD. Depreciable property will meet the original-use requirements if the original use of the property commences with the taxpayer. Generally, original use means the first use to which the property is put, regardless of whether that use corresponds to the taxpayer s use of the property. Special rules apply to a conversion from personal use or inventory use to business or income producing use, and to fractional interests in property. The proposed regulations provide that the acquisition of used property is eligible for the AFYD deduction if such acquisition meets the following requirements: 1. The property was not used by the taxpayer or a predecessor at any time prior to the acquisition. 2. The property was not acquired from a related party, by gift or inheritance, or otherwise acquired in a transaction in which the taxpayer takes a carryover basis [as set forth in I.R.C. 179(d)(2)(A), (B), and (C); and Treas. Reg (c)(1)(ii), (iii), and (iv), or (c)(2)]. 3. The acquisition of the property meets the cost requirements of I.R.C. 179(d)(3) and Treas. Reg (d), which provide that the cost of property does not include any part of the basis of the property that is determined by reference to the basis of other property held at any time by the person acquiring such property. The proposed regulations provide that the property is treated as used by the taxpayer or a predecessor at any time before its acquisition of the property only if the taxpayer or the predecessor had a depreciable interest in the property at any time before the acquisition, regardless of whether the taxpayer or the predecessor claimed REG