Tax Extenders You Can Count On
Tax extenders, temporary tax provisions that are reinstated by Congress on a regular basis, have been a recurring part of the tax arena for years. Most of the current group up for debate have expired at the end of 2013, and their eventual extension will be retroactive, but not all will be extended. Here are the best bets.
Beware of Expiring Tax Breaks
Even though the tax extenders have been known since the end of last year, and there is general bipartisan agreement that they need to be acted on, there is no guarantee as to when they will be passed.
The Senate passed a comprehensive extenders bill, the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, in April 2014. The bill would extend for two years over 50 expired provisions. The House, on the other hand, has focused on permanent extension of tax provisions in a series of bills. Added to the mix, of course, is President Obama, who has threatened to use his “veto pen” on legislation he doesn’t like.
Businesses would like to know for tax planning purposes, and the IRS would like to know so they can get out the forms and program their systems on time. Preparers would like to know so tax season begins on time. Following is a list of extenders most likely to be passed, either in the upcoming lame-duck session or early next year.
R&D Credit
This perennial extender, also known as the research tax credit or the research and experimentation tax credit, was available as either a 20% traditional research tax credit or a 14% alternative simplified credit.
Section 179 Expensing
For tax years beginning in 2012 and 2013, the maximum Section 179 deduction was $500,000. The maximum dropped to $25,000 for tax years after 2013. Extender legislation would restore the enhanced amount and phase-out threshold under Section 179, as it was prior to 2014.
50% Bonus First-Year Depreciation
This tax break was available at a 50% rate for qualified property placed in service prior to 2014.
Food Donation Tax Deduction
This deduction, the enhanced charitable deduction for contributions of inventory, was enacted in response to Hurricane Katrina in 2005. It allowed a deduction for the contribution of food inventory by taxpayers that are not C corporations.
Option to Deduct State and Local Sales Taxes
Prior to 2014, taxpayers were allowed to deduct state and local sales and use taxes in lieu of state and local income taxes on Schedule A.
Work Opportunity Tax Credit
The WOTC allowed businesses to claim a tax credit of 40% of the first $6,000 of wages paid to new hires of one of eight targeted groups, including members of families receiving benefits under the Temporary Assistance to Needy Families program, qualified ex-felons, qualified veterans, designated community residents, vocational rehabilitation referrals, qualified summer youth employees, qualified food and nutrition recipients, qualified SSI recipients and long-term family assistance recipients.
Qualified Small Business Stock
The holder of such stock, acquired at original issue by a non-corporate taxpayer and held for more than five years, could exclude 100% of gain from its sale, rather than 50% of the gain, if acquired prior to 2014.
Credit for Energy Efficient Improvements to Existing Homes
The 10% credit for purchases of energy efficient improvements to existing homes allowed up to $150 for an energy efficient furnace, up to $200 for energy efficient windows, and up to $300 for other improvements such as insulation, with the total credit capped at $500 per taxpayer.
Above-the-Line Deduction for Higher Education Expenses
This deduction was $4,000 for taxpayers with adjusted gross incomes of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns).
Tax-free Distributions from IRAs for Charitable Purposes
IRA owners older than 70 1/2 could exclude up to $100,000 per year in distributions made directly from the IRA to public charities.
Offshore Tax Break
One extender that is unlikely to be passed is the look-through treatment of payments between related CFCs [controlled foreign corporations], according to Dean Sonderegger, executive director of product management for Bloomberg BNA Software. “It allows corporations to more easily move off-shore earnings across different borders,” he said. “If they move money back to the US, they have to pay tax. The rule is a way to get around some of the taxes. It’s very popular with international businesses, but I can’t see it making it through the legislative process in today’s environment.”
- 50% Bonus depreciation on new equipment acquisitions
- §179 expensing limitations:
- $250K qualified real property §179 limit
- R&D credit
- Tuition and fees "Above-the-line" deduction
- Itemized deduction for state and local general sales taxes
- Itemized deduction for mortgage insurance premiums (PMI) (MIP) treated as qualified residence interest
- Qualified principal residence discharge of indebtedness exclusion from gross income
- Charitable distributions from IRAs (up to $100,000 per taxpayer per year) of individuals at least 70 1/2 years of age
- Educator's $250 tax deduction of qualified out-of-pocket expense
- 15 year recovery period for qualified leasehold improvements, restaurant property and retail improvements
An In-Depth Look: House Passes Tax Extenders Bill, Possibly Breaking Year-Long Impasse. (Parker Tax Publishing December 05, 2014)
On December 03, 2014, the House of Representatives made the latest move in this year's tax extenders drama, passing a bill that would extend numerous expired tax provisions through the end of 2014. HR 5771 (12/03/2014).
Titled the "Tax Increase Prevention Act of 2014", the House bill would extend retroactively for one year, through the end of 2014, virtually all of the tax breaks that had previously been temporarily extended by the American Taxpayer Relief Act of 2012 (ATRA). In addition to the extensions, HR 5771 corrects numerous technical and clerical errors in the tax code, as well as eliminating many superfluous provisions (known as "deadwood").
To become law, HR 5771 still needs to pass the Senate and be signed by the President.
The following is a summary of the House bill's key provisions and a brief recap of the Senate and White House reactions. For a complete synopsis of the bill, see the Ways and Means Committee Tax Staff Summary of HR 5771.
Individual Tax Extenders
HR 5771 would extend eight tax relief provisions for individuals through the end of 2104. Notable provisions include:
- Extend the exclusion from gross income from the discharge of qualified principal residence indebtedness.
- Continue the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. This deduction phases out ratably for taxpayers with adjusted gross income between $100,000 and $110,000 (half those amounts for married taxpayers filing separately).
- Extend the exclusion from gross income of qualified charitable distributions from IRAs of individuals at least 70 1/2 years of age. The exclusion is for up to $100,000 per taxpayer per year.
HR 5771 would also extend the following tax breaks through the end of 2014:
- Above-the-line deduction for higher education expenses.
- Deduction for expenses of elementary and secondary school teachers.
- Increased exclusion from income for employer-provided mass transit and parking benefits.
- Deduction for state and local general sales taxes.
- Special rules for contributions of capital gain real property made for conservation purposes.
Business Tax Extenders
HR 5771 would extend forty-one tax relief provisions for businesses, including the research and development tax credit, bonus depreciation, and increased expensing limitations and the treatment of certain real property as Code Sec. 179 property. A rundown of the more important provision follows:
- Extend the research and development tax credit, which generally allows taxpayers a 20% credit for qualified research expenses or a 14 percent alternative simplified credit.
- Extend 50% bonus depreciation to property acquired and placed in service during 2014 (2015 for certain property with a longer production period). This provision would continue to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2014. The provision would also continue a special accounting rule involving long-term contracts and a special rule for regulated utilities.
- Extend increased §179 expensing limitation and phase-out amounts ($500,000 and $2,000,000 respectively; without the extension the amounts would be $25,000 and $200,000, respectively). The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property also would be extended through 2014.
Other notable tax breaks that would be extended through the end of 2014 include:
- New markets tax credit.
- Work opportunity tax credit.
- 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
- Enhanced charitable deduction for contributions of food inventory.
- Look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules.
- Temporary exclusion of 100 percent of gain on certain small business stock.
- Reduction in S-corporation recognition period for built-in gains
Energy Tax Extenders
HR 5771 also would extend multiple tax incentives for alternative and renewable energy sources, including:
- credits for nonbusiness energy property,
- an extension of the second generation biofuel producer credit,
- credits for facilities producing energy from certain renewable resources including wind power,
- credits for energy-efficient new homes, and
- deductions for energy efficient commercial buildings.
Extend the credit for purchases of nonbusiness energy property (a.k.a. residential energy credits). The provision allows a credit of 10 percent of the amount paid or incurred by the taxpayer for qualified energy improvements, up to $500.
Extend the tax credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria.
Technical Corrections and Deadwood Provisions
In addition to the tax extenders provisions, HR 5771 contains numerous corrections to various technical and clerical errors. These technical and clerical errors create confusion for taxpayers and complicate administration of the tax laws. Title II of HR 5771 the Tax Technical Corrections Act of 2014 would make technical and clerical corrections to recently enacted tax legislation, including the American Taxpayer Relief Act of 2012, the Creating Small Business Jobs Act of 2010, and the Economic Stimulus Act of 2008. Notably absent from the list of technical corrections is the Affordable Care Act (i.e. Obamacare). In general, the amendments made by these technical and clerical corrections would take effect as if included in the original legislation to which each amendment relates.
Under current law, there are numerous provisions that relate to past tax years (and generally are no longer applied in computing taxes for open tax years), involve situations that were narrowly defined and unlikely to recur, or otherwise have outlived their usefulness. These types of provisions are often referred to as "deadwood" provisions and HR 5771 would repeal these current-law deadwood provisions. This repeal generally would be effective on the date of enactment, although the tax treatment of any transaction occurring before that date, of any property acquired before that date, or of any item taken into account before that date, would not be affected.
Senate and White House Reactions
For a fairly tame piece of legislation that passed the House with overwhelming bipartisan support, HR 5771 received surprisingly bitter criticism on initial response from the Senate, which had stalled on its own tax extenders bill earlier this year.
The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act of 2014, which would have extended tax breaks for two years, was passed by the Senate Finance Committee but was blocked when it reached the Senate floor in May. Aside from the two-year time frame, the Senate bill is nearly identical in substance to the House bill.
Despite members' dissatisfaction with the House version, it appears likely that the Senate will vote to pass the year-long extension. A top Senate Democrat suggested that they may have little alternative but to accept the House's plan, as time is running out and a mindset that one year is better than none is setting in. According to Treasury Secretary Jack Lew, the Obama administration is open to the short term deal.
If the Senate does follow the House and passes the one-year bill and the President signs it into law, Congress will have set itself up to revisit the extenders again in 2015.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
Source: Parker Tax Pro Library (Staff Editor Parker Tax Publishing)
