On December 20, 2019, the President signed into law the “Taxpayer Certainty and Disaster Tax Relief Act of 2019” (the “Disaster Act”) as part of an omnibus spending package, the “Further Consolidated Appropriations Act, 2020” The Disaster Act extends over 30 Code provisions, generally through 2020. Following are the sections of the law that would impact most business entities and individual taxpayers.
Exclusion from gross income of discharge of qualified principal residence indebtedness
Under pre-Disaster Act law, discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately), was, in tax years beginning before Jan. 1, 2018, excluded from gross income.
New law. The Disaster Act retroactively extends this exclusion to discharges of indebtedness before Jan. 1, 2021. (Code Sec. 108(a)(1)(E), as amended by Disaster Act Sec. 101(a))
The Disaster Act also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged pursuant to a binding written agreement entered into before Jan. 1, 2021. This applies to discharges of indebtedness after Dec. 31, 2017. (Code Sec. 108(h)(2), as amended by Disaster Act Sec. 101(b))
Treatment of mortgage insurance premiums as qualified residence interest
Under pre-Disaster Act law, mortgage insurance premiums paid or accrued before Jan. 1, 2018 by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer’s qualified residence were treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The amount allowable as a deduction was phased out ratably by 10% for each $1,000 by which the taxpayer’s adjusted gross income exceeded $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return). Thus, the deduction wasn’t allowed if the taxpayer’s AGI exceeded $110,000 ($55,000 in the case of married individual filing a separate return).
New law. The Disaster Act extends this treatment through 2020 for amounts paid or incurred after Dec. 31, 2017. (Code Sec. 163(h)(3)(E)(iv)(I), as amended by Disaster Act Sec. 102)
Reduction in medical expense deduction floor
The Code provides that, individuals, for 2017 and 2018, could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceeded 7.5% of AGI.
New law. The Disaster Act extends this threshold of 7.5% for tax years beginning after Dec. 31, 2018 and before Jan. 1, 2021. (Code Sec. 213(f), as amended by Disaster Act Sec. 103)
Deduction of qualified tuition and related expenses
The Code provides an above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).
New law. The Disaster Act retroactively extends this deduction through 2020. This applies to tax years beginning after Dec. 31, 2017. (Code Sec. 222(e), as amended by Disaster Act Sec. 104)
Empowerment zone tax incentives
The designation of an economically depressed census tract as an “Empowerment Zone” renders businesses and individual residents within such a Zone eligible for special empowerment zone tax incentives, including: the 20% wage credit under Code Sec. 1396; liberalized Code Sec. 179 expensing rules ($35,000 extra expensing and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment-based phaseout of expensing); tax-exempt bond financing under Code Sec. 1394; and deferral under Code Sec. 1397B of capital gains tax on sale of qualified assets sold and replaced.
Under pre-Disaster Act law, Empowerment Zone designations expired on Dec. 31, 2017.
New law. The Disaster Act extends through Dec. 31, 2020, the period for which the designation of an empowerment zone is in effect. (Code Sec. 1391(d)(1)(A)(i), as amended by Disaster Act Sec. 118(a))
The Disaster Act also provides that where a nomination of an empowerment zone included a termination date of Dec. 31, 2017, termination will not apply with respect to the designation if, after Dec. 20, 2019, the entity that made such nomination amends the nomination, in such manner as the IRS may provide, to provide for a new termination date. This applies to tax years beginning after Dec. 31, 2017. (Disaster Act Sec. 118(b)
Nonbusiness energy property
The Code provides a credit for purchases of nonbusiness energy property. The Code allows a credit of 10% of the amounts paid or incurred by the taxpayer for qualified energy improvements to the building envelope (windows, doors, skylights, and roofs) of principal residences. The Code allows credits of fixed dollar amounts ranging from $50 to $300 for energy-efficient property including furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans, and is subject to a lifetime cap of $500.
New law. The Disaster Act retroactively extends this credit through 2020. This applies to property placed in service after Dec. 31, 2017. (Code Sec. 25C(g)(2), as amended by Disaster Act Sec. 123)
Qualified fuel cell motor vehicles
The Code provides a credit for purchases of new qualified fuel cell motor vehicles. The Code allows a credit of between $4,000 and $40,000, depending on the weight of the vehicle, for the purchase of such vehicles. Other vehicles, depending on their fuel efficiency, may qualify for an additional $1,000 to $4,000 credit.
New law. The Disaster Act extends this credit through 2020. (Code Sec. 30B(k)(1), as amended by Disaster Act Sec. 124)
Credit for electricity produced from certain renewable resources
An income tax credit is allowed for the production of electricity from qualified energy resources at qualified facilities (the “renewable electricity production credit”). Qualified energy resources mean wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Qualified facilities are, generally, facilities that generate electricity using qualified energy resources.
Under pre-Disaster Act law, qualifying facilities generating electricity using closed-loop biomass, open-loop biomass, geothermal energy, land fill gas and trash (both of which used municipal solid waste), qualified hydropower, and marine and hydrokinetic renewable energy facilities had to have begun constructions before Jan. 1, 2018, to claim the credit.
In addition, under pre-Disaster Act law, taxpayers could elect to have qualified property which is part of a Code Sec. 45 qualified facility, which were placed in service after 2008 and the construction of which begins before Jan. 1, 2018, treated as property eligible for an energy credit under Code Sec. 48.
New law. The Disaster Act extends the date by which construction of a qualifying facility must begin, to before Jan. 1, 2021, for the following facilities: qualifying closed-loop biomass, open-loop biomass, geothermal energy, land fill gas and trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities. (Code Sec. 45(d)(2)(A), Code Sec. 45(d)(3)(A), Code Sec. 45(d)(4)(B), Code Sec. 45(d)(6), Code Sec. 45(d)(7), Code Sec. 45(d)(9), and Code Sec. 45(d)(11)(B), as amended by Disaster Act Sec. 127(a))
In addition, the Disaster Act extends the above qualified facilities eligible to be treated as property for an energy credit under Code Sec. 48, to facilities which were placed in service after 2008 and the construction of which begins before Jan. 1, 2021. (Code Sec. 48(a)(5), as amended by Disaster Act Sec. 127(c)(2)(B))
For wind facilities the construction of which begins in calendar year 2020, the Disaster Act reduces the credit by 40%. (Code Sec. 45(b)(5), as amended by Disaster Act Sec. 127(c)(2)(A))
Energy efficient homes credit
The Code provides a credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria.
New law. The Disaster Act extends the credit for energy-efficient new homes to homes acquired before Jan. 1, 2021. (Code Sec. 45L(g), as amended by Disaster Act Sec. 129)
Energy efficient commercial buildings deduction
The Code provides a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings. This includes a $1.80 deduction per square foot for construction on qualified property. A partial $0.60 deduction per square foot is allowed if certain subsystems meet energy standards but the entire building does not, including the interior lighting systems, the heating, cooling, ventilation, and hot water systems, and the building envelope.
New law. The Disaster Act extends these deductions to property placed into service before Jan. 1, 2021. (Code Sec. 179D(h), as amended by Disaster Act Sec. 131)
Employer tax credit for paid family and medical leave
The Code provides an employer credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year.
New law. The Disaster Act extends this credit through 2020. (Code Sec. 45S(i), as amended by Disaster Act Sec. 142)
Work Opportunity Tax Credit
The Code provides an elective general business credit to employers hiring individuals who are members of one or more of ten targeted groups under the Work Opportunity Tax Credit program.
New law. The Disaster Act extends this credit through 2020. (Code Sec. 51(c)(4), as amended by Disaster Act Sec. 143)
Look-through rule for related controlled foreign corporations
The Code provides look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations.
New law. The Disaster Act extends this look-through treatment through 2020. (Code Sec. 954(c)(6)(C), as amended by Disaster Act Sec. 145)
Credit for health insurance costs of eligible individuals
The Code provides a refundable credit (commonly referred to as the health coverage tax credit or “HCTC”) equal to 72.5% of the premiums paid by certain individuals for coverage of the individual and qualifying family members under qualified health insurance.
New law. The Disaster Act extends the HCTC through 2020. (Code Sec. 35(b)(1)(B), as amended by Disaster Act Sec. 146)