While several major regulatory packages are slated for release in the final quarter of calendar year 2018, taxpayers should also keep their eye on potential legislative developments at year-end. It is highly unlikely that the “Tax Reform 2.0” bill passed by the House will find success in the Senate, but tax items may still be included in a year-end spending bill. Though comprehensive technical corrections are unlikely, some isolated fixes could be part of the “lame duck” Congress’s annual display of momentary bipartisanship and holiday cheer before they leave for recess.
It is expected that Congress will renew the usual list of tax extenders, though it is highly unlikely that any of the sun-setting provisions of the Tax Cuts and Job Act (“TCJA”) will be taken up in the year-end package. However, there are certain isolated fixes to the TCJA that appear to have enough support to be added to this year’s wish list. The first is the effective date glitch in the net operating loss (“NOL”) provisions. Under prior law, NOLs could generally be carried back two years and forward for 20 years. The TCJA limits the NOL deduction to 80% of taxable income, repeals the two-year carry-back, and allows for unlimited carry-forward.
The text of the statute and the Conference Report state that the 80% limitation applies to losses “arising in taxable years beginning after December 31, 2017.” However, the effective date for the modification to carry-backs and carry-forwards differs in the statute and in the Conference Report. The statute states that the amendment applies to NOLS arising in taxable years ending after December 31, 2017, while the Conference report states that it applies to NOLs arising in taxable years beginning after December 31, 2017. Absent other guidance, the statutory language controls, creating a mismatch between the 80% limitation and the ability to carry NOLs to another taxable year. There is general consensus on Capitol Hill that the Conference report accurately describes Congressional intent, as well as a bipartisan willingness to correct the statutory language.
Another provision likely to be included in year-end legislation is the treatment of Qualified Improvement Property (“QIP”) for purposes of temporary, full and immediate expensing under section 168(k). The TCJA consolidated the definitions of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property into a single definition of “QIP,” but the text of the statute omitted the new, unified category of QIP from the list of 15-year property eligible for expensing under section 168(k) (the three consolidated categories had all been treated as 15-year property). The legislative history makes clear that Congress intended to include QIP on the list of 15-year property, thus making QIP eligible for immediate expensing. Despite requests from affected taxpayers and letters received from members of Congress explaining that they intended to include QIP on the list of 15-year property, Treasury did not fix the glitch in proposed regulations released this summer. Due to the far-reaching impact of this error, Congress’ clear intent in the legislative history, and support from both sides of the aisle, it is likely that this provision will be fixed during the lame duck period.
Though passage of these two fixes is already likely, due to their obvious technical nature, several key members of the tax writing committees are retiring and may be especially eager to fix any perceived errors in the TCJA. In particular, Senator Orrin Hatch (R-UT), Chairman of the Senate Finance Committee, and Rep. Paul Ryan (R-WI), Speaker of the House and former Chairman of the House Ways and Means Committee, are both retiring this year. Both were integral to passage of the TCJA, and will likely be sympathetic to any fixes that can solidify their legacies. Several Republican members of the House Ways and Means Committee are also retiring or leaving their positions for other offices, including Sam Johnson (R-TX), Dave Reichert (R-WA), Lynn Jenkins (R-KS), Diane Black (R-TN), Jim Renacci (R-OH), and Kristi Noem (R-SD).
The long-term fate of the TCJA is highly dependent on the outcome of the midterm elections. Current projections generally show that the Democrats will pick up seats in this Fall’ s elections. However, speculation abounds as to whether Democrats will flip either or both houses of Congress. Because all of the members in the House of Representatives are up for reelection this year, the Democrats have a better chance of taking control of the House than the Senate, where only a third of the members – mostly in strong or leaning Republican states – are up for reelection. It is unclear where modifying the TCJA would rank on the Democrats’ list of priorities if they won control of the House. Even if Democrats take control of the House, bipartisanship will be required in the Senate to pass additional tax legislation because the 60-vote threshold applies and neither party is expected to win a 60-vote majority. Current Minority Leader Chuck Schumer (D-NY) has expressed interest in bipartisan tax reform, has a history of working across the aisle (with Senator Portman) and across the houses (with Speaker Ryan) on tax legislation, and has been active in studying the international provisions of the Code. In general, the Democrats have been meeting with taxpayers to understand the impact of the TCJA’s various provisions and considering what legislative changes they would propose if given the opportunity. At least some Democratic members’ offices have been candid in expressing their concerns about the TCJA’s impact on the deficit, and have noted that the corporate income tax rate may need to be raised to maintain revenue projections if other provisions in the TCJA (such as the BEAT) are revised.
If Republicans retain control of the House and Senate, it is likely that they will be open to revisiting the TCJA to make additional, and more taxpayer-friendly, modifications than can be passed in the lame duck session. Rep. Kevin Brady (R-TX), the Chairman of the House Ways and Means Committee, has already made clear that he did not view the TCJA as the last word on international tax reform and we understand that, should Rep. Brady retain his Chairmanship, amending the international provisions will be a legislative priority.
Taxpayers currently pursuing a legislative strategy to address their concerns with the TCJA should be prepared to revisit that strategy on November 7th, and revise it if necessary.