September 27, 2018
by Dean Zerbe for alliantgroup
Published in Forbes

I recently wrote on the taxpayer rights/tax administration provisions that the Congress may pass before the end of the year – and now want to turn to the individual (mostly) and retirement tax provisions that Congress is considering as well.

The House Ways and Means Committee chaired by Congressman Brady (R-TX) recently passed – and the House is expected to pass shortly – three tax bills: HR 6760 – essentially an extension/permanency of the families/individual provisions from tax reform; HR 6757 – improvements in retirement savings; and, HR 6756 – a small bill to help start-ups.

While the extension of the individual provisions is a big lift and the outlook is very uncertain (with the received wisdom being that this will be put-off until down the road when the provisions are closer to expiring – 2025) – the possibilities of passing retirement provisions and the bill on start-ups has possibilities for this year in lameduck.  The Senate is interested – particularly on retirement.  The Democrats – especially in the Senate – will need to be at the table if there is going to be a deal and the expectation is that the tax extenders (especially energy provisions) will be on their ask list.  At the moment the outlook is that a deal on some tax package is possible.

Extension of Individual Provisions From Tax Reform

The legislation makes permanent the tax reform provisions for families/individuals – reduction of the rates; expansion of the brackets; expansion of child credit, AMT phaseout thresholds; doubling of estate tax exemption amount, etc.  It also makes permanent revenue raisers that partially offset the revenue loss of that tax relief – including repeal of deduction for personal exemptions; limitation on passthrough losses; and, cap of 10k on state and local taxes.

Savings/Retirement

Congressman Mike Kelly (R-PA) is the lead sponsor of a series of commonsense reforms (the Senate is roughly on the same page) to improve retirement and savings – with major provisions including: reforms to strengthen multiple employer plans and pooled employer plans; repeal the prohibition on contributions to a traditional IRA by an individual who is 70 ½; and, in general, exempt from minimum distribution rules if an IRA (and similar defined contribution plans) is below $50,000 (indexed for inflation).

On the savings side – creation of universal savings accounts – that can be established by an individual and may contributed cash up to $2500 (not to exceed the individual’s compensation) – includible in income for the year.  Contributions are not permitted for dependents.  Growth is tax-free and distributions are not included in gross income.  In short, the provision is designed to encourage savings – with no limits on what that savings can be spent on or when.

Expanding section 529 plans to allow for payment for books, supplies, equipment and fees for apprenticeship programs; allow for expenses in connection with homeschooling; permitting expenses for tutoring and special needs for elementary and secondary; and rules for allowing up to $10,000 in payments for student loans.

Finally, allowing penalty-free withdrawals from retirement accounts to help pay for birth/adoption (within one year).  Capped at $7,500 per spouse – lifetime.

Start-Up/Entrepreneur and Innovation

America is seeing a marked reduction in the number of start-ups – with serious implications for our long-time economic growth.  Congressman Vern Buchanan (R-FL) proposes legislation in response to encourage innovation/startups– with two main provisions:

First, allow a taxpayer to elect to deduct up to $20,000 in startup costs (essentially up from a possible 10k) – consolidating section 195 (individual) and organizational (section 248 and 709(b)) into one provision (with a phase-out as costs exceed $120,000 — adjusted for inflation).

Second, more generous allowance for preserving stat-up net operating losses and certain tax credits after an ownership change.

This legislation certainly deserves close consideration by the Senate.

What Else Can Be Done For Start-Ups and Innovation?

Senator Coons (D-DE) and Roberts (R-KS) put forward in the Path act an expansion of the R&D tax credit for start-ups. Previously start-ups engaged in some of our nation’s most innovative work were essentially precluded or greatly limited from utilizing the R&D tax credit.   The new legislation the Senators got signed into law has great possibilities but has been hamstrung by some of the hoops and jumps that are required for businesses to qualify.

The Senate should consider championing a few minor changes that will make the credit of greater utility and benefit for start-ups: 1) allow companies to amend open years to take the credit (as with the regular R&D tax credit) – currently startups can only take the credit in the current year; 2) modify the control group test – the current guidance is  too restrictive and limits companies with angel investors/seed capital from benefitting from the R&D tax credit – this is an especially important fix to encourage/reward investment in start-ups; 3) expand the definition of eligible companies for those in existence up to 10 years (currently 5 years); and, 4) allow for a de minimis exception or allowance for the income test.

Santa may very well have some important tax changes in his sleigh this year.