The new Consolidated Appropriations Act (CAA) – signed on March 23 by President Trump – does more than avert the third government shutdown this year. This federal spending measure also provides funding for the IRS, enhances tax breaks for low-income housing and “fixes” several tax provisions found in recent tax legislation. Following is a brief summary.
IRS funding: The new law carves out more than $11 billion for the IRS, including $2.5 billion to the IRS for taxpayer services, an uptick from $2.2 billion last year. The lion’s share of this amount, $4.9 billion, is appropriated for IRS enforcement activities. Also, $206 million is granted to Taxpayer Advocate Services (TAS), of which $5.5 million goes to identity theft matters. Another large allocation, $3.6 billion, is set aside for IRS operations. This amount is roughly the same as it was last year.
In addition, the IRS is getting some money for modernizing operations and updating its computer systems, but less than it had hoped for. The CAA provides $110 million, down from $290 million from last year, for this purpose. It emphasizes improvements needed for the toll-free IRS assistance line and providing other taxpayer services.
Finally, the law allocates $320 million to accommodations required by the massive new Tax Cuts and Jobs Act (TCJA). However, the IRS is obligated to submit a spending plan to House and Senate appropriations committees before it can tap into funds needed for TCJA changes.
Low-income housing credits: A low-income housing credit is available over a ten-year credit period when a qualified building is placed in service. The amount of the credit depends on the applicable percentage of the building’s basis, taking into account a state housing credit ceiling.
Among other changes, the new law provides an increase for calculating the state credit ceiling for 2018 through 2021. It also approves a new category of low-income housing projects that may qualify for the credit.
Partnership audits: A previous spending measure, the Bipartisan Budget Act (BBA) of 2015, created a new centralized audit regime. The CAA clarifies these rules and makes certain technical corrections. For instance, the scope of the partnership audit rules is modified by eliminating references to adjustments to partnership income, gain, loss, deduction or credit. Instead it references “partnership-related items” that are relevant in determining income tax liability without regard to whether the item or amount appears on the partnership’s return.
The new law also coordinates the partnership audit regime with various other parts of the tax code.
Production activities for farmers: Prior to the TCJA, a deduction was allowed under Section 199 of the tax code for certain domestic production activity expenses. Generally, the domestic production activity deduction (DPAD) was equal to 9% of the lesser of qualified production activities income (QPAI) or taxable income. But the deduction could not exceed 50% of annual W-2 wages attributable to those activities.
Special rules applied in determining the DPAD of an agricultural or horticultural cooperative. Now the new law eliminates the so-called “grain glitch” that provided a tax break to farmers for selling crops to cooperatives, but not to private or investor-owned grain handlers.
Reminder: Congress often uses opportunities to modify the tax code when it passes spending laws and similar pieces of legislation. Watch out for these “hidden” tax-related provisions during the course of the year.
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