With the Tax Cuts and Jobs Act (TCJA) being such a comprehensive bill, there is often some uncertainty over various provisions and how they are to be interpreted. While the IRS has offered some guidance over the past year, one resource that tax practitioners often look forward to is a report issued by the Staff of the Joint Committee on Taxation (JCT). This group is the team of attorneys, accountants, economists, and more that works with Congressional leaders in drafting tax legislation and estimating the effects of the proposed changes. The JCT Staff issued on December 20, 2018 its “General Explanation of Public Law 115-97” (Tax Cuts and Job Act – TCJA), which was almost one year ago to the day of when the tax bill was signed into law. This report is often titled the “Blue Book” (as the paper copy of this report by the government printing office comes out on light blue paper). The Blue Book addresses various provisions in last year’s tax bill and presents Congress’ intent on all the items in the bill as they were drafted. It is used by taxpayers, tax practitioners, the IRS, and others in understanding and interpreting the bill. This is a useful reference tool (please click here to view this JCT report).
Initial Observations on Explanations Offered in the Blue Book
There is much to digest in the Blue Book. It runs over 450 pages, and there are nearly two thousand footnotes. There are often some useful explanations and guidance found in these footnotes, so it is important to read these closely. In reviewing portions of the Blue Book, there were several items in which the discussion offered in the Blue Book differed from the guidance the IRS had already provided on the matter. For instance, here are four illustrations where the Blue Book runs counter to what the IRS had provided in other guidance issued during this past year:
- Meals & Entertainment. The first item relates to the new rules on entertainment which is no longer deductible in 2018; however, meals remain 50% deductible. When both are involved, the IRS guidance from earlier this year (IRS Notice 2018-76 issued on October 3, 2018) indicated that meals would be allowed if the cost could be substantiated separate from the entertainment. The Blue Book description is not as kind, and instead views the meals as part of the entertainment and thus non-deductible. It is uncertain if the IRS will revise the treatment outlined in its Notice.
- Fiscal Year Taxpayers with New 20% QBI Deduction and Prior 9% DPAD Deduction. Next, for flow-through taxpayers (owners of pass-through businesses) that use a fiscal year – the question surfaced whether these taxpayers might be eligible for both the new Section 199A 20% QBI deduction and the prior 9% deduction under Section 199 for DPAD. Earlier IRS guidance in the proposed regulations for Section 199A and the instructions for DPAD (Form 8903) seemed to indicate that impacted fiscal year taxpayers could take both deductions. The Blue Book again, is not so generous, and states in these situations that no Section 199 DPAD deduction is available if the Section 199A deduction is claimed.
- Section 199A Deduction with Several Trades or Business and Netting of Losses. Another difference with the new Section 199A 20% deduction involves how to treat situations when a taxpayer owns several businesses (some with income and some with losses). The netting format in the Blue Book differs from the format in the proposed regulations and may result in a lower overall deduction under Section 199A. Again, it is unsure what the IRS may do with these Section 199A differences.
- New Limitation on Excess Losses for Individuals. Further, there is a new limitation on excess or large losses for individuals. It limits net losses from trades or businesses for individuals to $250,000 (and $500,000 for married filing jointly). The IRS released materials earlier this week on their website and a draft of new Form 461 and instructions (Form 461 will handle this new loss limitation) that would treat a taxpayer’s wages as being from a trade or business. The Blue Book on the other hand indicates that wages are not considered as part of a trade or business. This is another example where the IRS is offering a more favorable application than the Blue Book on how impacted taxpayer should apply and interpret this new provision.
There are likely many other differences spelled out in the Blue Book from other guidance and explanations offered this year by the IRS. It will be interesting to see what changes the IRS may make in these cases. We will continue to provide the latest tax developments on the TCJA, including any Blue Book updates. Please contact your Sikich tax advisor with questions you may have.