Brady s year-end tax bill clears House, but no Senate action expected

Tax News & Views Capitol Hill briefing. In this issue: Brady s year-end tax bill clears House, but no Senate action expected... 1 JCT Releases Blue Book for 2017 tax cut law... 4 Shutdowns, tax bills, and a note on our publication schedule... 4 Brady s year-end tax bill clears House, but no Senate action expected The House of Representatives voted 220-183 on December 20 to approve an updated version of legislation (H.R. 88) from Ways and Means Committee Chairman Kevin Brady, R-Texas, that, among other things, would clarify congressional intent on a handful of provisions from last year s massive tax cut law, provide temporary tax relief to victims of recent US natural disasters, create new retirement savings incentives for businesses and individuals, and overhaul IRS operations. URL: https://docs.house.gov/billsthisweek/20181217/bills-115sahr88-rcp115-87.pdf The final tally was almost entirely along party lines, with just three Republicans breaking ranks to join Democrats in opposition. Passage of the legislation Brady s last tax bill before he cedes the Ways and Means Committee gavel to Democrat Richard Neal of Massachusetts in January came after two earlier versions fizzled with a number of House Republicans. But the victory is generally considered symbolic, as the Senate has shown no interest in passing the bill as stand-alone legislation or attaching it to the must-pass government funding bill that is seen as the last order of business before Congress closes out the post-election lame duck session. Tax News & Views Page 1 of 5 Copyright 2018 Deloitte Development LLC

Treading on familiar ground The latest version of H.R. 88, which Brady unveiled on December 17, includes what is by now a familiar amalgam of provisions drawn from the two earlier drafts one released November 26 and one released December 10 that never made it to the chamber floor. Among other things, the House-approved bill would: Make technical corrections and other modifications to the 2017 tax cut law known informally as the Tax Cuts and Jobs Act (TCJA) to address inadvertent drafting errors and remove ambiguities in the statutory language (for example, by adding qualified improvement property to the list of property eligible for 15-year depreciation under MACRS, clarifying the effective date for new rules on the treatment of net operating losses, and clarifying a TCJA provision disallowing deductibility of legal fees for a payment or settlement related to sexual harassment or sexual abuse that is subject to a nondisclosure agreement). Permanently extend the railroad track maintenance credit under section 45G (with a reduced credit amount) and phase out the incentives for biodiesel and renewable diesel fuel by renewing them through 2024 (with a phased-down credit amount) and eliminating them beginning in 2025. The railroad track maintenance credit and the biodiesel and renewable diesel incentives both expired at the end of 2017. The bill as approved does not address the two dozen or so remaining temporary tax deductions, credits, and incentives that expired in 2017 or are set to expire at the end of this year. Suspend, further delay, or repeal several taxes that were enacted as part of the Patient Protection and Affordable Care Act of 2010. Provide temporary tax relief to businesses and individuals affected by several recent US natural disasters and a permanent automatic 60-day extension of tax filing deadlines for taxpayers in any federally declared disaster area. Modify the rules around defined contribution pension plans and individual retirement accounts to make it easier for employers to offer retirement savings plans to their employees and for individuals to save for retirement. Provide new nonretirement savings incentives to help families cover expenses associated with education and the birth or adoption of a child. Revamp the Internal Revenue Service s organizational structure, enhance its information technology and cybersecurity operations, revise its enforcement policies, and improve customer service, all in an effort to make the agency more efficient and taxpayer-friendly and to combat tax-related identity theft. (The House on December 20 separately approved a freestanding bill H.R. 7227, sponsored by Ways and Means Committee members Lynn Jenkins, R-Kan., and John Lewis, D-Ga. that incorporates many of these provisions. The measure cleared the chamber under an expedited procedure known as suspension of the rules, which requires a two-thirds majority vote for passage. H.R. 7227 is not expected to receive Senate consideration in the current Congress, although its prospects seem brighter than those of the broader Brady tax bill.) URL: https://www.congress.gov/115/bills/hr7227/bills-115hr7227eh.pdf Offer targeted relief to tax-exempt organizations (for example, by repealing a TCJA provision that subjects certain fringe benefits provided by tax-exempt organizations to the tax on unrelated business income, providing that certain purchases of employee-owned stock are disregarded for purposes of the foundation tax on excess business holdings, and repealing the Johnson amendment, which bans section 501(c)(3) charitable organizations from participating in political speech. For details on the earlier drafts of the legislation, see Tax News & Views, Vol. 19, No. 36, Nov. 30, 2018, and Tax News & Views, Vol. 19, No. 38, Dec. 14, 2018. A section-by-section summary of the newest version is available from the Ways and Means Committee staff. URL: http://newsletters.usdbriefs.com/2018/tax/tnv/181130_1.html URL: http://newsletters.usdbriefs.com/2018/tax/tnv/181214_1.html URL: https://rules.house.gov/sites/republicans.rules.house.gov/files/115-2/sa%20hr%2088/section-by-section%20wm.pdf The Joint Committee on Taxation staff estimates the bill as approved would reduce federal receipts by nearly $99.2 billion between 2019 and 2028. URL: https://www.jct.gov/publications.html?func=startdown&id=5151 End of the line Ways and Means Chairman Brady told reporters December 19 that it was important for House Republicans to be on record as supporting the provisions in H.R. 88 even though the measure was highly unlikely to be taken up in the Tax News & Views Page 2 of 5 Copyright 2018 Deloitte Development LLC

Senate, where it would need support from at least nine Democrats to win approval and move to President Trump s desk this year. (Republicans currently control only 51 Senate seats, and a three-fifths supermajority typically 60 votes is required to overcome a filibuster threat and allow the legislation to advance.) Senate Democrats, like their House counterparts, have been in lockstep against Brady s proposal from the release of his initial draft. TCJA corrections have been a particular sore point for Democrats in both chambers, who contend they were locked out of the drafting process for the 2017 tax cut law and will not approve fixes without having a seat at the negotiating table. Democrats also feel they will have greater leverage in shaping TCJA fixes and other tax law changes next year when they control one chamber of Congress. (Incoming Ways and Means Committee Chairman Neal has said he will not move technical corrections through his panel without first holding hearings.) For his part, Senate Majority Leader Mitch McConnell, R-Ky., has never cited action on Brady s bill or any tax legislation, for that matter as one of his priorities for the lame duck session. There was some speculation earlier this week that the Senate might peel off elements of Brady s proposal that had a measure of bipartisan support the IRS reforms, for example and attach them to must-pass legislation to keep the government open after the current agreement funding government operations expires at midnight on December 21. But Finance Committee Republican Charles Grassley of Iowa, who will chair the panel in the 116th Congress, told reporters December 19 that Senate Republican leaders were unlikely to pursue that strategy. You put one thing on, you re going to put 50 things on, he said. The continuing resolution that the Senate approved and sent to the House on December 19 would simply fund the government at its current levels through February 8, 2019, with no extraneous spending or revenue provisions. But the path forward for that legislation was upended when President Trump, reversing an earlier position, announced on December 20 that he would not sign a funding plan that did not also include $5 billion for his proposed wall along the southern US border. That development essentially reopened negotiations between congressional leaders and the White House on a new government funding agreement that were continuing as of press time. While it is possible negotiators will craft a compromise in the coming hours or days to bypass this standoff, that is far from guaranteed. And even if a plan emerges that can garner support in the House and Senate and secure the signature of the president, it appears unlikely that lawmakers would further inflame an already contentious process by adding tax provisions into the debate. (A proposal approved by the House December 20 would continue government funding at current levels through February 8 but would add $5.7 billion for border security and some $8.7 billion in nontax disaster relief provisions.) Possibilities for next year? If the Senate, as expected, does not take up H.R. 88 this year, the bill will expire as active legislation when the 115th Congress officially adjourns on January 3 and would need to be reintroduced in the next Congress and go through the legislative process once again. Although incoming Ways and Means Chairman Neal is unlikely to take up the bill in its current form, he and the Democratic House majority in the new Congress may well revive provisions that had bipartisan support in 2018. Among the areas deemed most likely to be considered again in the new year are IRS reform and retirement savings incentives. Bipartisan bills addressing both of these were either introduced or approved in the Ways and Means and Senate Finance committees this year, although there are some differences that would need to be worked out between the two chambers. Lawmakers are also expected to take up TCJA technical corrections in the next Congress. A select number of the provisions to correct obvious drafting errors in the 2017 legislation such as the treatment of qualified improvement property and the effective date for the new NOL rules are seen as ripe for action, although Neal, as already noted, has said he intends to hold hearings before moving forward with any fixes. The release on December 20 of the Joint Committee on Taxation staff s Blue Book on the 2017 tax legislation, which identified over 70 technical corrections that may be necessary, could help smooth the path forward on cleaning up the bill in the new year. It is also possible, though, that the technical corrections process could become bogged down if, for example, Democrats demand extraneous concessions from Republicans in exchange for various TCJA fixes. (See separate coverage in this issue for additional details on the Blue Book.) Tax News & Views Page 3 of 5 Copyright 2018 Deloitte Development LLC

Neal has promised that the Ways and Means Committee will move quickly to address expired tax extenders provisions in the new Congress. Just how to approach the extension of myriad expired and expiring temporary tax credits, deductions, and incentives has been a subject of disagreement between House and Senate Republicans in recent years: Brady and many House Republicans have preferred to examine each provision with an eye toward determining which should be made permanent, which should be phased out over time, and which should be stricken from the tax code; Republican senators generally have taken a more traditional approach to extenders by proposing a blanket short-term extension of most temporary provisions. With control of the two congressional taxwriting committees split between Democrats and Republicans for the next two years, the dynamic between the two chambers over extenders may reflect partisan policy differences over issues such as the extension of renewable energy sources a key Democratic priority that does not necessarily enjoy broad support among Republicans. Michael DeHoff and Storme Sixeas Tax Policy Group JCT Releases Blue Book for 2017 tax cut law The Joint Committee on Taxation (JCT) staff on December 20 released its general explanation of the massive tax cut legislation enacted late last year (P.L. 115-97, known informally as the Tax Cuts and Jobs Act or TCJA). URL: https://www.jct.gov/publications.html?func=startdown&id=5152 URL: https://www.congress.gov/115/plaws/publ97/plaw-115publ97.pdf The publication, commonly referred to as a Blue Book, summarizes all of the changes made to the tax code by the TCJA and explains the prior law. The Blue Book does not, however, serve as contemporaneous legislative history or explain why a change was made. This information can be found in the House Ways and Means Committee Report (H. Rep. 115-409), Senate Budget Report (S. Prt. 115-20), or the Conference Report for the TCJA (Rep. No. 115-466). URL: https://www.congress.gov/115/crpt/hrpt409/crpt-115hrpt409.pdf URL: https://www.govinfo.gov/content/pkg/cprt-115sprt27718/pdf/cprt-115sprt27718.pdf URL: https://www.congress.gov/115/crpt/hrpt466/crpt-115hrpt466.pdf The Blue Book also identifies 70-plus provisions of the TCJA for which a technical correction may be needed to achieve the legislative intent of Congress. Some of the more notable provisions cited as needing clarification include the effective date of new rules governing the treatment of net operating losses, the depreciation period for qualified improvement property, and the treatment of installment overpayments under the new repatriation tax. The Blue Book was prepared by the JCT staff in consultation with the staffs of the House Ways and Means and Senate Finance committees. Jacob Puhl Tax Policy Group Shutdowns, tax bills, and a note on our publication schedule As we go to press, the House and Senate are enmeshed in negotiations on a spending deal to keep the federal government open after the current continuing resolution (CR) funding government operations expires at midnight on December 21. The major outstanding issue is whether to provide funds for a wall along the US southern border something President Trump has identified as a nonnegotiable priority. Where things stand The Senate approved legislation December 19 that would fund the government at its current levels through February 8, 2019, without funding for the wall. The House approved its own CR on December 20 that includes current-level Tax News & Views Page 4 of 5 Copyright 2018 Deloitte Development LLC

funding through February 8, plus $5.7 billion for border security and $8.7 billion in nontax disaster relief spending. However, Senate Minority Leader Chuck Schumer, D-N.Y., and House Minority Leader Nancy Pelosi, D-Calif., continue to indicate they will not accept any legislation that advances Trump s border wall policy and Senate Democrats have effective veto power over any legislation GOP leaders attempt to move given the 60-vote threshold needed to advance most legislation in that chamber. (Republicans control 51 Senate seats.) Moreover, Senate Majority Leader Mitch McConnell, R-Ky., indicated December 21 that there is not enough Republican support to invoke the so-called nuclear option and approve a rule change that would allow the chamber to pass a CR with border wall funding by a simple majority. If lawmakers cannot agree on a plan that the president will sign into law by the December 21 deadline, the government will go into a partial shutdown and Congress may need to resume negotiations over the coming weekend and/or during the week of December 24, when the House and Senate otherwise would be in recess, although it is possible Washington will be so deadlocked that further action on this will be held off until after January 3, when the new Congress convenes with a Democratic majority in the House. Who would be affected A shutdown would affect the nine federal departments such as Transportation, Justice, Homeland Security, Agriculture, and Treasury and dozens of agencies including the Internal Revenue Service, the Food and Drug Administration, and the Environmental Protection Agency that fall within the ambit of the seven appropriations bills for fiscal year 2019 that Congress has not yet completed. (The other five fiscal 2019 appropriations bills including those funding the departments of Defense, Education, Labor, and Health and Human Services were completed in advance of the October 1, 2018, start of the fiscal year.) An IRS official told reporters December 12 that a temporary government shutdown, by itself, likely would not cause the agency to delay the start of the 2018 filing season. The same official noted, however, that testing of systems changes related to the 2017 tax cut law may mean the IRS begins accepting returns somewhat later than in prior years. No further tax bills likely Although government funding remains in flux, it appears that substantive work on tax legislation is done for the year and we do not expect any tax provisions to make their way into an eventual spending deal. So barring any significant developments on the tax policy front, the next edition of Tax News & Views will be published after the 116th Congress convenes on January 3, 2019. Jon Traub Managing Principal, Tax Policy About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the Deloitte name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms. Copyright 2018 Deloitte Development LLC. 36 USC 220506 Tax News & Views Page 5 of 5 Copyright 2018 Deloitte Development LLC