Earlier this week, House Republicans released the Retirement, Savings, and Other Tax Relief Act of 2018. This broad-based tax legislation includes extensions to expiring tax provisions, technical corrections to the Tax Cuts and Jobs Act, innovation and start-up incentives, changes to the tax treatment of retirement savings. This legislation was released alongside the Taxpayer First Act of 2018, which constitutes the first major reform to the Internal Revenue Service in two decades.
Retirement, Savings and Other Tax Relief Act of 2018
Expiring Tax Provisions
Of the 26 “tax extenders” in place for the 2017 tax year that Ways and Means reviewed, 24 are extended under this legislation. Tax extenders are “expiring” tax provisions that are repeatedly extended in order to allow their budget impact to appear smaller. Because the Congressional Budget Office calculates budget impact on a ten-year basis, the fact that tax extenders are technically set to expire the next year means that their real cost is obscured — Tax Foundation estimates that the ten-year budget impact of making these provisions permanent would be $92.5 billion. The National Taxpayers Union Foundation has pushed for tax extenders to be allowed to expire or, if Congress deems them to be a legislative priority, made permanent.
Congress did make positive changes to two significant tax extenders in this legislation, however. The railroad track maintenance credit, which provides a 50 percent credit for railroad maintenance, is made permanent under this legislation. This provision is less harmful than other tax extenders, as railroad track maintenance is subject to a 50 year depreciation schedule. Making this provision permanent is an appropriate step for a credit that functions as a positive step along the road to simply allowing businesses to fully expense railroad track maintenance.
The biodiesel and renewable diesel tax credit, which provided a $1.00 per gallon income tax credit for biodiesel and renewable diesel and a smaller credit for agri-biodiesel, is extended, but phased out, under this legislation. This targeted tax break would remain in place until 2021 before being reduced to $0.75, $0.50, and $0.33 per gallon in 2022, 2023, and 2024 respectively. While allowing this $35.2 billion provision to expire - or at least sunset more quickly - would have been ideal, it is encouraging to see Congress taking taxpayer concerns into account and addressing the tax extender with the most significant budget impact
The bill makes a number of improvements to the tax treatment of retirement savings. It allows penalty-free withdrawals from IRAs within one year of the birth or adoption of a child. This is a pro-family change that is very much in line with TCJA’s pro-family provisions, such as the expansion of the child tax credit.
The bill also increases flexibility for individuals at or near retirement age. It would exempt many individuals from mandatory disbursement rules that currently require holders of IRA and defined-contribution pension plans to begin drawing down their savings at age 70 ½. Under this legislation, individuals with less than $50,000 in their accounts would no longer be subject to this requirement. Individuals who are 70 ½ or older could also continue to make IRA contributions, whereby under current law they are not permitted to do so.
The legislation increases the amount of start-up expenses that new business owners can deduct from $5,000 to $20,000 and indexes this amount to inflation. The bill also allows companies to preserve net operating loss carryforwards and tax credits in the event of an ownership change.
The bill makes a number of technical corrections to TCJA. Importantly, it fixes a drafting error that limited cost recovery for a Qualified Improvement Property (QIP). TCJA intended to simplify and consolidate several provisions pertaining to the cost recovery of improvements made to a building’s interior. Due to a drafting error, it actually prolonged the recovery period. The bill would codify TCJA’s intent to assign QIP with a quicker, 15-year cost recovery period and 100 percent bonus depreciation.
Taxpayer First Act of 2018
“Division B” of the bill contains the Taxpayer First Act, proposing important changes to the system of tax administration that have been informed by the experience of the past two decades since passage of the IRS Restructuring and Reform Act. Some of the most important improvements are: strengthening protections from wrongful IRS asset seizures, clarifying the taxpayer’s right to appeal, improving the management of the IRS’s information technology (IT) systems, streamlining taxpayer-centric procedures for resolving identity theft cases, making permanent the Free File Alliance program, and limiting IRS authority to utilize outside contractors in examinations.
These commendable reforms could be augmented by several provisions contained in S. 3278, the Taxpayer Protection Act sponsored by Sens. Portman and Cardin (who as House Members had important roles in the development of the IRS Restructuring and Reform Act). Most critically, sections 601-605 of the Taxpayer Protection Act would more effectively clarify limits on IRS powers to deny taxpayers access to an independent appeals of audits. Lately, excessive use of the designated summons and designating cases for litigation have raised concerns that so-called “collection due process” is being denied to taxpayers. Furthermore, Section 101 of the bill would replace the IRS Oversight Board with a new IRS Management Board, whose mission and composition would be more effective in evaluating the tax agency’s strategic direction and respect for taxpayer rights. Congress has an excellent opportunity to meld the best parts of these two bills into an impressive package.