In the early hours of Friday morning last week, Congress passed a sweeping $400 billion budget deal that breaks through previous spending caps and suspends the debt ceiling for a year. Tucked inside the legislation are tax provisions for special interests, including small private colleges, television and film companies, and NASCAR, all of which have tremendous potential implications for the Carolinas. Here’s what you need to know.
Race Tracks and Racehorses
A key provision of the budget deal allows faster write-downs for motorsports entertainment complexes, such as NASCAR tracks. Sec. 168(i)(15), allows a seven-year recovery period for motorsports entertainment complexes. This will allow owners of complexes to write off construction and renovation costs over a condensed depreciation period, lowering their overall tax bill. Most tracks, not just those that host NASCAR events, are eligible.
Another provision in the bill extends depreciation for racehorses, which would allow owners to depreciate the value of their investment with a three-year write-off period, down from seven years.
Small private colleges
Under the tax reform bill passed last year, private nonprofit colleges are subject to a 1.4% excise tax on the net investment income of their endowments. However, the tax only affects schools which enroll more than 500 students, have endowment assets of over $500,000 per student, and enroll more than 50% of their students in the United States. Those parameters narrow the number of schools subject to the endowment tax to less than thirty. In the Carolinas, two universities are close to that $500,000 per student mark: Duke ($463,464) and Davidson ($363,184).
In the budget deal, lawmakers added an item to this long list of qualifications: the school must enroll more than 500 tuition-paying students. Though it technically does not single out a particular school, in practice, the new provision exempts just one institution from the tax: Berea College in Kentucky. The college was founded in 1855 and, with deep historical roots, its endowments, combined with federal and state grants, allows the financial stability to offer students enough financial assistance to pay for tuition as well as a laptop that students are able to keep once they graduate. In other words, Berea charges no tuition.
Duke and Davidson currently charge hefty tuitions. But with Davidson already committed to providing students a debt-free experience, you have to wonder if becoming a tuition-free school might be appealing as its endowment appears that $500,000/student mark and tax on it becomes a possibility.
Film and television
A tax provision will extend special expensing rules for film and television productions, a boost to Hollywood and also live theater productions. The Sec. 181 allows taxpayers to treat costs of any qualified film or television production, or live theatrical production, as a deductible expense.
Other provisions included in the budget deal
The following provisions were also included and will affect business and personal taxes:
- Credit for residential energy property for qualified fuel cell property, small wind energy property, and geothermal heat pump property (it will remain available for qualified solar electric property and solar water heating property). This credit was extended through 2021.
- Sec. 179D deduction for energy-efficient commercial buildings.
- Deductions for mortgage insurance premiums and debt forgiveness.
- 163(h)(3) treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer's principal residence.
- Sec. 222, which provides an above-the-line deduction for qualified tuition and related expenses.
- Creation of a new Form 1040SR, a special tax form for taxpayers over 65 that is supposed to be as simple as Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents, but allow for reporting Social Security and retirement distributions.
- The act also increases the limit on the amount of a loan from a qualified employer plan that will not be treated as a distribution, from $50,000 to $100,000. This increase applies to loans made on or after Feb. 9, 2018, through Dec. 31, 2018. The act also removes the Sec. 72(p)(2)(A)(ii) "one-half of the present value" limitation for these loans and allows for a longer repayment period.
- Repeal of Independent Payment Advisory Board created by the Affordable Care Act.
- Reduced out-of-pocket drug costs for seniors
- Higher Medicare premiums for seniors with incomes of more than $500,000/year (or $750,000 married).
Altogether, the tax provisions in the bill would add $17.4 billion to the deficit over the next decade, according to the Joint Committee on Taxation.
The act also contained a number of disaster relief provisions, many of them for victims of the California wildfires. The act also contained some special relief provisions for Puerto Rico. If you feel you may be entitled to those, reach out to us for help.
