Tax Law Guidance ForthcomingMarch 7, 2018
The U.S. Department of Treasury and the Internal Revenue Service (IRS) have a long list of new guidance projects related to implementing the 2017 tax reform legislation that they will need to address. Last month alone, 18 new projects were added to the annual Treasury-IRS priority guidance list and most recently came the announcement of forthcoming regulations to address an issue around the new law’s carried interest provisions. However, the government’s ability to roll out all of these guidance’s in a timely manner may be further delayed due to Dana Trier, the Treasury Department’s Deputy Assistant Secretary of Tax Policy, abruptly resigning on February 23.
The new tax law has set off a regulatory and legislative chain of events that will likely take years to complete. Congressional tax-writing committees also are expected to hold oversight hearings on how quickly guidance is being issued and on technical or administrative issues that may arise.
One guidance of importance for small businesses is regarding section 199A of the new Internal Revenue Code, related to the deduction for qualified business income (QBI) for pass-through entities. The Tax Cuts and Jobs Act law provides a 20 percent deduction on QBI for pass-through entities, but excludes certain types of businesses, including accounting firms and law firms. The IRS needs to provide more clarity on the definition of the term QBI by defining what activities constitute a qualified trade or business under the new section 199A of the tax code that was added by the new law. However, clarity may have to wait. According to Acting IRS Commissioner David Kautter, his agency is working on fleshing out the deduction, but that the rules likely will not be released until late summer or early fall. This type of delay will prevent business owners from having the information they need to comply with their 2018 tax obligations, which can further hinder their cash-flow, entity structure and other tax planning issues.
The Joint Committee on Taxation (JCT) is expected to release a ‘Blue Book’ general explanation of the Tax Cuts and Jobs Act law in the coming months that should provide additional guidance to both Treasury and the IRS on Congressional intent regarding ambiguities or inconsistencies with specific provisions of the new law. In the case of the Tax Reform Act of 1986, which was enacted October 22, 1986, a JCT Blue Book was issued a little over six months later, on May 4, 1987.
On Jan.10, 2018, the IRS released its 2017 National Taxpayer Advocate Annual Report to Congress in which it states that that the implementation of major tax legislation is always a significant endeavor for the agency. The extremely short period between enactment and the effective date of the new tax reform law will immediately affect all aspects of IRS operations. The IRS has requested $397 million in additional funding for 2018 and 2019 to cover the costs associated with implementing the tax reform law. The tax return filing season for 2017 tax returns began Jan. 29, 2018 at the same time the IRS is working to update its computer systems, respond to taxpayer requests for direct assistance, draft and publish new forms and publications, revise regulations and issue other guidance, train employees on the new law and related guidance, and develop the system’s capacity to verify compliance with new requirements.
Of primary importance to the IRS will be the issuance of guidance regarding the various aspects of the 500-plus page legislation that are significant—meaning they will continue to prioritize guidance in areas that have ‘immediate impacts’ and ‘early financial statement impacts.’ Priority guidance includes the Section 163(j) limitation on net business interest expense deductibility, the Section 199A deduction for certain pass-through business income, cost recovery under Section 168, and Section 451 changes in accounting method.
Tax reform implementation guidance issued to date include:
- The IRS on Dec. 29, 2017, issued Notice 2018-07 providing preliminary guidance and indicating plans to issue regulations regarding the deemed repatriation ‘toll charge’ imposed on undistributed, non-previously taxed post-1986 foreign earnings of certain U.S.-owned corporations. This notice — the first administrative guidance released as part of the transition to the law’s new territorial tax system — addresses questions that have arisen as companies compute the toll tax for purposes of preparing their financial statements. The IRS and Treasury indicated that taxpayers would be able to provide comments on the rules described in the notice and requested that taxpayers comment on specific issues that should be addressed in future guidance.
- The IRS on Jan. 11, 2018, published Notice 1036, which updates the percentage withholding tables for income tax withholding on employee wages and provides the optional and mandatory flat rates for withholding on supplemental wages. The agency noted that the 2018 withholding tables should be implemented by employers no later than Feb. 15, 2018. The IRS has not released a new Form W-4, Employee’s Withholding Allowance Certificate. The agency plans to release a new withholding calculator on its website by the end of February to enable employees to confirm the correct amount of withholding. Employees then would be able to inform their employers of any adjustments needed to avoid under-withholding or over-withholding.
- The IRS on Jan. 19, 2018 issued Notice 2018-13, providing additional guidance for computing the ‘toll tax’ due upon the mandatory deemed repatriation of certain deferred foreign earnings. The notice — the second administrative guidance released as part of the transition to the law’s new territorial tax regime — includes regulations that the IRS intends to issue including regulations to clarify determining amounts included in a U.S. shareholder’s gross income.
The push to issue guidance on an expedited basis will involve all components of the IRS Chief Counsel’s National Office, and will likely place a strain on resources performing other functions within the Office, such as processing requests from taxpayers for private letter rulings and technical advice. Once the IRS has issued initial guidance, it will begin developing more formal regulatory guidance, including issuance of temporary and proposed regulations, eventually followed by final regulations. This is a lengthier process due to procedural requirements associated with promulgating regulations, including review by OIRA and the required periods for public notice and comment.
Further, for measures taking effect in 2018, the IRS will need a few months to update its computer systems so that it is ready for the 2019 filing season, but the agency will likely issue draft forms, instructions, and publications sooner so that taxpayers can use them throughout the year. In addition to adjusting systems, forms, and instructions, the IRS will need to educate its examination agents and other employees on how to apply the provisions of the law. Since the new legislation generally is not effective until taxable years beginning after Dec. 31, 2017, the first tax returns under the new rules will be filed in 2019, giving the IRS additional time for training.