In a flurry of year-end activity, Congress approved and President Obama has signed into law the Tax Increase Prevention Act of 2014 (HR 5771). The new law extends so-called “tax extenders” retroactively for one year (through 2014).
The one-year retroactive extension of the tax extenders effectively allows taxpayers to claim the popular but temporary incentives on their 2014 returns filed in 2015. Without this, individuals would be unable to claim, for example, the state and local sales tax deduction, higher education tuition deduction, and the exclusion for discharge of mortgage debt. Business and energy incentives, most notably the research tax credit, bonus depreciation and the production tax credit, would otherwise be unavailable.
INDIVIDUAL EXTENDERS
The Tax Increase Prevention Act renews the individual extenders through 2014. These extenders include:
State And Local Sales Tax Deduction
After December 31, 2013, the election to claim an itemized deduction for state and local general sales taxes in lieu of state and local income taxes expired. The extenders package extends the election through 2014.
IMPACT
The election is not only potentially beneficial to taxpayers in states without an income tax. Taxpayers who make a big ticket purchase, such as a motor vehicle, before year-end could benefit by weighing the deduction for state and local general sales taxes against their deduction for state and local income taxes.
Higher Education Deduction
The higher education deduction allows taxpayers to deduct — above-the-line — qualified tuition and fees for post-secondary education. The extenders package extends the deduction through 2014.
IMPACT
The maximum deduction is $4,000 for taxpayers with AGI not exceeding $65,000 ($130,000 for a joint return), $2,000 for taxpayers with AGI $65,000-$80,000 ($130,000—$160,000 for joint filers) and $0 for other taxpayers. Under regulations, expenses paid by year-end for an academic term starting on or before March 31 of the following year qualify for the deduction in the year paid.
Teachers’ Classroom Expense Deduction
The teachers’ classroom expense deduction allows primary and secondary education professionals (grades K-12, including school administrators and assistants) to deduct — above-the-line — qualified expenses up to $250 paid out-of-pocket during the year. Qualified expenses must be reduced by any reimbursements from the taxpayer’s employer. The extenders package extends the teachers’ classroom expense deduction through 2014.
IMPACT
Substantiation for qualified expenses remains a requirement. Expenses beyond the $250 limit may be deducted as an itemized deduction only, subject to the overall 2 percent adjusted gross income floor on miscellaneous itemized deductions.
Mortgage Debt Exclusion
Unless excluded, cancellation of indebtedness income is included in income. The Tax Increase Prevention Act of 2014 excludes from income cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for a married taxpayer filing a separate return) through 2014.
IMPACT
Without an extension, debt that is forgiven in 2014 through a foreclosure, short sale or loan modification could be treated as taxable income. The existing insolvency exclusion, as well as an exclusion when mortgage debt is considered nonrecourse, continues to remain available.
Mortgage Insurance Premium Deduction
This provision in the extenders package treats mortgage insurance premiums as deductible interest that is qualified residence interest subject to AGI phaseout. The extenders package extends this special treatment through 2014.
Charitable Distributions From IRAs
Individuals age 70 1/2 and older will continue to be allowed to make tax-free distributions from individual retirement accounts (IRAs) to a qualified charitable organization. The treatment is capped at a maximum of $100,000 per taxpayer each year. This incentive is now extended through 2014.
IMPACT
If a taxpayer is married and files a joint income tax return, his or her spouse can also have a qualified deduction and exclude up to $100,000. Amounts in excess of $100,000 must be included in income but may be taken as an itemized charitable deduction, subject to the usual AGI annual caps for contributions.
Contribution Of Real Property For Conservation Purposes
A special rule allows contributions of capital gain real property for conservation purposes, with the contribution to be taken against 50 percent of the contribution base. The extenders package extends this special rule through 2014.
BUSINESS EXTENDERS
The Tax Increase Prevention Act extends many business tax incentives for one year retroactively to January 1, 2014. These extenders include:
Bonus Depreciation
Bonus depreciation allows taxpayers to claim an additional first-year depreciation deduction. The Tax Increase Prevention Act of 2014 extends 50-percent bonus depreciation through 2014 (through 2015 for certain property with a longer production period and certain aircraft).
IMPACT
Qualified property must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. Property must be new and placed in service before January 1, 2015 (January 1, 2016 for certain longer production period property and certain aircraft). The extension of 50-percent bonus depreciation effectively results in an $8,000 increase in first year depreciation caps for vehicles purchased in 2014. As a result of this extender, the luxury auto depreciation limit under Code Sec. 280F for passenger automobiles placed in service in 2014 is now $11,160 (rather than only an inflation-adjusted $3,160); and for trucks and vans first placed in service during the 2014 calendar year, it is now $11,460 (rather than only $3,460) for 2014.
Code Sec. 179 Expensing
Enhanced Code Sec. 179 allows taxpayers to immediately deduct, rather than gradually depreciate, the cost of qualified assets, subject to certain limitations. The extenders package sets the Code Sec. 179 dollar limit at $500,000 for 2014 with a $2 million overall investment limit.
IMPACT
Absent Congressional action, the dollar limit for Code Sec. 179 expensing was $25,000 for 2014 with an investment limit of $200,000. Code Sec. 179 expensing has been at the $500,000/$2 million level since 2010. It returns to the $25,000/$200,000 level in 2015 without further action by Congress. The Tax Increase Prevention Act of 2014 also extends through 2014 the special rule allowing off-the-shelf computer software to be treated as Code Sec. 179 property.
Qualified Leasehold/Retail Improvements, Restaurant Property
Qualified leasehold improvements, qualified retail improvements and qualified restaurant property may be treated as Code Sec. 179 property, but with a lower dollar cap. The extenders package extends this treatment through 2014.
IMPACT
Under the extenders package, taxpayers may elect to treat up to $250,000 of qualified leasehold/retail improvement, restaurant property as Code Sec. 179 property.
Research Tax Credit
The research tax credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The Tax Increase Prevention Act of 2014 extends the research tax credit through 2014.
IMPACT
The research credit generally allows taxpayers a 20-percent credit for qualified research expenses or a 14 percent alternative simplified credit. Although there had been last-minute discussions of enhancing the credit, the extenders package contains no enhancements, leaving them to the 114th Congress.
Work Opportunity Tax Credit
Employers that hire military veterans and other qualified individuals may be eligible for the Work Opportunity Tax Credit (WOTC). The credit amount is generally equal to 40 percent of up to $6,000 (higher for some veterans) in qualified first-year wages. The Tax Increase Prevention Act of 2014 extends the WOTC through 2014, for employees who begin work for the employer before January 1, 2015.
100-Percent Exclusion For Gain On Qualified Small Business Stock
The 100-percent exclusion allowed for gain on the sale or exchange of qualified small business stock held for more than five years by non-corporate taxpayers has been extended for one more year, applicable to stock acquired before January 1, 2015.
Built-in Gain Recognition Period
The Tax Increase Prevention Act of 2014 extends to sales of assets occurring during 2014, the five-year recognition period for built-in gain following conversion from a C to an S corporation. The period, normally 10 years, generally begins with the first day of the first tax year for which the corporation is an S corporation.
IMPACT
A corporate-level tax, at the highest marginal rate applicable to corporations (currently, 35 percent), is imposed on an S corporation’s net recognized built-in gain (for example, gain that arose prior to the conversion of the C corporation to an S corporation and is recognized by the S corporation during the recognition period).
More Business Extenders
A lengthy list of other business extenders expired after 2013. The Tax Increase Prevention Act of 2014 includes one-year, retroactive extensions for 2014 dealing with the:
– New Markets Tax Credit;
– Employer wage credit for activated military reservists;
– Subpart F exceptions for active financing income;
– Look through rule for related controlled foreign corporation payments;
– Railroad track maintenance credit;
– Classification of certain race horses as three-year property;
– Seven-year recovery period for motorsports entertainment complexes;
– Enhanced deduction for charitable contributions of food inventory;
– Tax incentives for empowerment zones;
– Indian employment credit;
– Accelerated depreciation for business property on Indian reservations;
– Special expensing rules for qualified film and television productions;
– Mine rescue team training credit;
– Election to expense advanced mine safety equipment;
– Qualified zone academy bonds;
– Low-income tax credits for non-federally subsidized new buildings;
– Low-income housing tax credit treatment of military housing allowances;
– Treatment of dividends of regulated investment companies (RICs);
– Treatment of RICs as qualified investment entities;
– S corporations making charitable donations of property;
– Puerto Rico domestic production activities deduction;
– Cover over of rum excise taxes; and
– Economic development credit for American Samoa.
SOME EXTENDERS NOT EXTENDED
The Tax Increase Prevention Act does not extend:
– Plug-in Electric Vehicle Credit
– Energy-Efficient Appliance Credit
– Placed-In-Service Date For Partial Expensing Of Certain Refinery Property
– New York Liberty Zone Tax-Exempt Bond Financing
– Health coverage credit for displaced workers
ENERGY EXTENDERS
Incentives for energy conservation and the production of alternative fuels expired after 2013. The Tax Increase Prevention Act of 2014 extends the following incentives through 2014:
Code Sec. 25C Credit
The Code Sec. 25C nonbusiness energy property credit rewards taxpayers who make qualified energy efficiency improvements to residential property. The Tax Increase Prevention Act of 2014 extends the Code Sec. 25C credit through 2014.
IMPACT
Examples of qualified Code Sec. 25C property are improvements such as adding insulation, energy efficient exterior windows and energy efficient heating and air conditioning systems.
Production Tax Credit
The production tax credit (PTC) provides a per-kilowatt-hour tax credit for electricity generated by qualified energy resources and sold by the taxpayer to an unrelated person. The Tax Increase Prevention Act of 2014 extends the PTC through 2014.
Biodiesel And Renewable Diesel
The Tax Increase Prevention Act of 2014 extends through 2014 the production credit for biodiesel and the production credit for diesel fuel from biomass. The small agribiodiesel producer credit is also extended.
More Energy Extenders
Other energy incentives extended by the Tax Increase Prevention Act of 2014 include:
– Second generation biofuel producer credit;
– Production credit for Indian coal facilities;
– Credit for energy-efficient new homes;
– Second generation biofuel plant property;
– Deduction for energy-efficient commercial buildings;
– Special rules for sales of electric transmission property;
– Excise tax credits for alternative fuels; and
– Credit for alternative fuel vehicle refueling property.