The Internal Revenue Service expects more taxpayers than ever before will have chosen to wait to file their 2018 individual tax returns until the Oct. 15, 2019 extended deadline. This is presumably due to the many changes brought about by the Tax Cuts and Jobs Act and the continuing flow of guidance from the IRS in response to the legislation, according to Mark Luscombe, CPA, principal federal tax analyst at Wolters Kluwer Tax & Accounting.
Not only will an extension provide additional time to process all of those changes, this year a number of developments have occurred since April 15 that should be taken into account when filing an extended return, Luscombe suggested. These include:
- Additional guidance on the 20 percent deduction for pass-through entities;
- Additional guidance on Qualified Opportunity Zones;
- Additional guidance on the state and local tax deduction limit, including a safe harbor;
- Expanded waiver of the underpayment of estimated tax penalty;
- IRS letters sent to taxpayers who may have engaged in virtual currency transactions;
- Additional federal disaster declarations;
- Pending corrections to the TCJA still not undertaken by Congress;
- Pending actions on expired tax provisions still not undertaken by Congress; and
- Several areas of business-related guidance that could affect sole proprietors, partners, and S corporation shareholders.
“The 20 percent deduction for pass-throughs has been the hottest topic for tax return preparers, and the one that has caused the most difficulty,” Luscombe observed. “It has created more work because it applies to so many taxpayers. The IRS has been coming out with a fairly steady stream of guidance since April 15. Recent guidance focused on the treatment of cooperatives. There was a lot of uncertainty surrounding the issue of what is a trade or business and what is qualified business income.”
This led to the one technical correction to the Tax Cuts and Jobs Act that was passed relating to the deduction for farm cooperatives, Luscombe noted. “The deduction for farm cooperatives was originally written in such a way that farmers could only get the deduction if they sold grain to a cooperative,” he said. “Archer Daniels Midland and Cargill lobbied to get the provision changed, so a ‘grain glitch’ fix was passed that addresses this.”
“And most recently, the IRS released guidance on a safe harbor for treating real estate as a qualified trade or business for purposes of the 20 percent deduction for pass-through entities,” he added.
The IRS has issued proposed guidance on Qualified Opportunity Zones since April, and has indicated that it may combine two separate pieces of guidance into one set of final regs before the end of the year.
“Some of the deadlines are fast approaching,” Luscombe cautioned. “Dec. 31, 2019, is the deadline for qualifying for the maximum 15 percent offset on the tax on capital gains. There may be some pressure for people to get gains into qualified opportunity funds by year end. But there’s some sense that a lot of development funding moving into blighted areas would happen anyway. Now it makes it more attractive to continue expansion into those areas — it gives a little more financial reward for developments that would have happened anyway.”
SALT caps, estimated withholdings, and more
The TCJA places a $10,000 limit on the deduction for state and local taxes. A number of high-tax states have considered “workarounds” to enable their residents to avoid the sting of this provision.
“The IRS came out with the position that if you’re in a state that created a state tax credit to reduce income tax by donating to a state charity, the charitable deduction would not be allowed to the extent of the state tax credit,” Luscombe noted. “They did create a safe harbor — if taxpayers are under the $10,000 cap for the state and local tax deduction, they can still claim a deduction to the extent of the $10,000 cap.”
The regulations, issued in June 2019, apply to contributions made after Aug. 27, 2018.
Earlier this year, the IRS expanded the penalty waiver for those whose estimated tax withholding and estimated tax payments fell short in 2018. The threshold to qualify for relief, originally lowered from 90 percent to 85 percent in January, was further lowered to 80 percent.
“The most recent IRS guidance is that if you have failed to claim a waiver of the penalty, the IRS will automatically review returns and send you a check if they determine you are entitled to a refund,”said Luscombe. “If you haven’t filed your return yet for 2018, you’re still supposed to file a 2210 form to claim a waiver based on the 80 percent threshold.”
When a taxpayer’s return information doesn’t match data received from third parties, the IRS will send the taxpayer a Notice CP 2000. “Recently, the IRS has sent CP 2000 letters to cryptocurrency investors based on information received from third-party intermediaries that process cryptocurrency transactions,” Luscombe said. “There may be taxpayers who view crypto as another form of dollars and not subject to tax, but that’s not the way the IRS views it.”
“Throughout the year, there were a number of additional disaster declarations,” he observed. “It’s something that should be watched if a taxpayer hasn’t filed yet, since a casualty loss deduction can be claimed on either a current year or a prior year return. The preparer should look at the relative merits of claiming the deduction on a 2018 return versus a 2019 return.”
Still in limbo
Aside from the “grain glitch” fix, which was passed by Congress, there are a number of corrections to the TCJA that haven’t yet been passed that might affect 2018 returns, Luscombe indicated. The primary issue still to be corrected is the expensing of qualified improvement property.
Due to an apparent drafting error, the TCJA excluded qualified improvement property from 100 percent bonus depreciation. “Congress intended to make it eligible but failed,” said Luscombe. “Senate Republicans have sent a letter to the IRS assuring that they intend to correct the issue, but there’s been no letter from the Democrat,"
“Then there are the extenders — provisions that expired at the end of 2017 that Congress is still talking about retroactively extending,” said Luscombe. "There are more than 30 of these, and if they see any action, it will likely be in the form of an attachment to must-pass legislation such as a funding bill, observers believe.”
And finally, there are a number of business-related items that might affect individual returns of sole proprietors, partners, and S corporation shareholders, Luscombe noted: “These include guidance on [Global Intangible Low Tax Income] for domestic partnerships and S corporations; proposed regulations on the classification of cloud and digital content transactions; final regulations with respect to a safe harbor for partnership allocations of creditable foreign tax expenditures; and final regulations dealing with lessees claiming the investment tax credit and the disallowance of basis increases for partners and S corporation shareholders making income inclusions.”
