The new tax law was enacted at warp speed. President Trump signed the legislation on December 22, 50 days after a bill was first introduced in the House. So, it’s no surprise that it’s full of slipups, snafus and drafting mistakes unintended by tax writers.
Congressional GOP members want to fix the errors by passing what are called technical corrections. But Democrats may not be keen to go along. They’re loath to give Trump another legislative victory when it comes to tax changes. Also, Republicans can’t use the same budget reconciliation procedures to bypass the 60-vote requirement in the Senate that they used to pass the package.
That doesn’t mean Republicans won’t try. Staff members are drafting language with the hope that they can attach it to this month’s spending bill or another vehicle in order to rally some Democratic votes. Chances of success are uncertain at this time.
Mistakes in the law.
Let’s start with depreciation for restaurant, retail and leasehold remodeling. It’s now consolidated under the grouping of qualified improvement property (QIP). Congressional Republicans intended to give QIP a 15-year depreciable life and to make it eligible for 100% bonus depreciation. But the new statutory language doesn’t’ reflect this intent, accidentally making QIP ineligible for bonus depreciation.
The rule barring net operating loss carrybacks contains an oversight. The statutory language says that the general prohibition on NOL carrybacks applies to NOLs arising in tax years ending after December 31, 2017, while the conference committee used an effective date for NOLs arising in years beginning after December 31, 2017. The law as currently written allows calendar-year filers to carry back 2017 losses, but fiscal-year taxpayers with 2017 losses are prohibited from doing the same.
There’s a big loophole in the tax treatment of hedge fund managers. The new law requires fund managers who take a share of partnership profits as compensation for services to hold their partnership interest for at least three years for the profits to be long-term capital gains. The law exempts partnership interests held by corporations, and fund managers say that includes S corporations. However, the Revenue Service recently announced that it will issue regulations to clarify that the exemption applies only to C corporations. Some tax advisers question whether IRS has overstepped, saying that only Congress can fix this.
As I predicted, this hurried tax legislation was not unlike the Tax Reform Act of 1976 that resulted in The Technical Corrections Act of 1977 to fix the errors in the domestic tax issues and an entire new legislation enacted in 1978 called the Foreign Earned Income Act of 1978 which also failed to address or foresee future misinterpretations and abuses both by the IRS and unscrupulous taxpayers.