[REN #463] New Tax Law Glitches & Typos Force a Rewrite

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The new tax reform bill is apparently full of mistakes that will need fixing. A few glitches can be expected with such a massive piece of legislation, but some say there are an unusually high number of errors this time. Republicans will need help, but may have a tough time getting Democratic support to patch it all up.

President Trump signed the massive Republican tax cut bill just before Christmas after a whirlwind effort by lawmakers to finish it before the end of the year. Experts say the errors are probably the result of this breakneck accomplishment.

Tax expert, David Miller, told the Independent that the last time Congress re-wrote the tax laws, it took three years, and that’s with the help of both parties. This time, Republicans worked on it behind closed doors, without Democratic input, and they did it in just a few months.

Miller said, lawmakers pushed it through Congress without bipartisan collaboration, and without comments from outside experts. There were also many last-minute changes, which may have contributed to the number of issues that are popping up. Not a single Democrat voted for the bill.
 

Tax Bill Boo-Boos

The tax law may have simplified the tax filing process for individual taxpayers, but it has apparently made it more complex for businesses, especially with these problems. Media reports said, there are dozens of issues that will affect everything from real estate investments to multinational corporations to farmers.

One of the issues is a typo that would force businesses from deducting the cost of renovations over a short amount of time. Instead, the code indicates that businesses need to deduct those expenses over 39 years. Among the affected businesses are real estate companies trying to recoup costs for renovations and remodeling. Ironically, that boo-boo could have a significant impact on the President’s own real estate holdings.

Another glitch would benefit Wall Street hedge funds and private equity firms. The tax law is supposed to crack down on the “carried interest” tax break, but, according to Politico, a glitch in the new code allows them to get around that requirement, and “to pay much lower tax rates on some of their income than ordinary wage earners.” The tax code was apparently meant to excuse C corporations from the crackdown, but lawyers said the law could be construed to include S corporations as well, which was unintended (1).

There are also conflicting start dates on restrictions that affect businesses deducting losses. The Legislation says the restrictions start in taxable years after December 31, 2017. The text of the law says it takes effect for taxable years that end after December 31, 2017. Politico said, it’s a big deal for companies that have to align their fiscal years with the calendar. That’s especially important for publicly-traded companies because they have to account for their tax liabilities in official documents. It said, “For a business with a fiscal year ending on, say, January 31st, 2018, it either means they were subject to the new rules for the past dozen months or it means they didn’t have to begin worrying about them until January 1st of this year.”

Lawmakers will be hearing from farmers as well. Right now, there’s an issue with farmers who supply food to cooperatives. The tax law gives them a 20% deduction off their gross income while other farmers get 20% off their net income. That puts those other farmers at a disadvantage, according to a Forbes article.
 

Fixing the Tax Bill Screw-Ups

Now, Republicans are faced with the problem of fixing the bill and would like to get that done as soon as possible. According to Politico, they want to address the issues next month, as part of government funding legislation. But, experts say they’ll need help from Democrats, who were shut out of the process of writing the legislation in the first place and may not be eager to help.

Some Democrats say, they want to do more than clean up whatever problems there are. Democratic Sen. Sherrod Brown told Politico, “We’re not going to say to Republicans, ‘Oh tell us what you want to do’.” She said, “We want to make the bill better — not just correct whatever technical fix is needed.”

Then there’s that little issue of the Republicans refusing to help Democrats fix the Affordable Care Act. It may follow that Democrats won’t be in a big hurry to help Republicans with their own tax law issues.

Midterm elections are also coming up this fall. Democrats are hoping to get more of their candidates elected. If they do that, they would have more leverage when it comes time to negotiate any changes.

Politico writes that the Treasury may be able to fix simple problems like typos, but may not have the authority to do much more. The Treasury is supposed to interpret the law, not make it.
 

IRS Clarifies Rules for Home Equity Loans

The IRS did issue some guidance on another confusing part of the tax bill regarding interest deductions for home equity loans. The Internal Revenue Service issued a bulletin last week that says interest on home equity loans is “often” still deductible under the new law.

So, what does that mean? The IRS said, the tax law suspends the deduction from 2018 through 2026 unless the loan is used to “buy, build, or substantially improve the taxpayer’s home that secures the loan.” If the money is used for other purposes, it is not deductible. The deduction is still limited by that $750,000 cap on SALT deductions, however. That deduction bucket includes first mortgages, second mortgages, and home equity loans (2).
 

Taxpayer Support for Tax Bill Fixes

Democrats are making their stance known on how they’d like to approach this problem. Representative Richard Neal, who’s the top Democrat on the Ways and Means Committee, said in the blog, “We’re not going to willy-nilly into this with, all of a sudden, a technical corrections bill that has not been sufficiently aired.” He said, “There needs to be an acknowledgment that this was done in haste and that there were many mistakes.”

Former tax official for the George W. Bush administration, Pam Olson, said, lawmakers may also be “weary” of the tax issue at this point, especially if it involves another political debate. She doesn’t think they’ll get to it this year. But, Senator Thune is optimistic about getting some of the work done. He said many of the glitches will have strong taxpayer support for fixing them so Democrats may bow to that pressure.

For now, Republicans are working on a list of things that need fixing, according to Politico. Chairman of the Ways and Means Committee, Kevin Brady, said, “We expect to develop a punch list of provisions that need to be addressed either administratively or through changes in the code itself.”

Meanwhile, if you’d like to learn more about the new tax bill and how it affects you, we just hosted a free webinar this week with one of our top tax advisors. You can watch the recorded webinar on our website under the learn tab (3).

Links:

(1) Politico Article

(2) IRS Clarification

(3) RealWealth Tax Webinar

 

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