By Mark G. Kmiecik
On December 19, 2014, President Obama signed into law the Tax Increase Prevention Act of 2014 (HR 5771). Otherwise known as the “Tax Extenders” Act, this law retroactively extended through the end of 2014, over 50 tax breaks that expired on December 31, 2013. While there were discussions of making permanent a number of these extenders, particularly the Bonus Depreciation and Section 179 deductions, Congress ultimately passed on making any of these provisions permanent and punted the fate of the extenders to 2015 and the incoming 114th Congress. So, yes, that means that these very same provisions expired as of December 31, 2014, leaving tax practitioners with the same tax planning uncertainties in 2015.
Though passed sufficiently early to allow the IRS to prepare its return processing systems for the new law, there is a strong belief that this Act, coupled with a separate bill passed on December 13, 2014 that cut the IRS budget by roughly $346 million, will delay the start of the income tax filing season. The budget cuts to the IRS budget could mean even longer wait times when calling the IRS and additional delays in responses to inquiries. There is also an expectation that these changes may slowdown the release and update of tax forms and instructions. Consequently, it is important to take stock of how these actions will impact the upcoming tax season and plan accordingly in anticipation of these upcoming slowdowns. Some of the most popular individual and business extenders that taxpayers may claim on their 2014 return filed in 2015 include:
- State and Local Sales Tax Deduction. The election to claim an itemized deduction for state and local sales tax deduction instead of state and local income taxes is beneficial for taxpayers who made a big-ticket purchase in 2014, such as a new vehicle.
- Charitable Distributions from IRAs. Individuals over 70 ½ years of age may make tax-free distributions up to $100,000 directly from their retirement accounts to qualified charities. Remember this so-called charity rollover counts toward required minimum distributions.
- Mortgage Insurance Premium Deduction. Mortgage Insurance Premiums are treated as deductible interest that is qualified residence interest subject to the AGI phase out.
- Bonus Depreciation and Section 179 Deductions. Bonus Deprecation allows taxpayers to claim an additional first-year depreciation deduction. This act extended the 50-percent bonus depreciation through 2014. Section 179 allows taxpayers to immediately expense, rather than gradually deduct, the cost of qualified assets, subject to certain limitations. The Section 179 limit is set at $500,000 for 2014.
- These breaks allow taxpayers to deduct over half (bonus depreciation) or all (Section 179) of the cost of fixed assets that are otherwise capitalized, with their deductions spread over 3 to 20 years. To qualify, the asset must be paid for and placed in service in 2014.
- Qualified Leasehold Improvements, Retail Improvements, and Restaurant Property may be treated as Section 179 property, but the limit is lower at $250,000.
- This election is made on the income tax return (i.e., 2015), but the transaction must be completed in 2014.
- Research Tax Credit. The research tax credit for increases in business research expenditures and for increases in payments to universities, colleges, and other qualified organizations has been extended. This extender allows taxpayers a 20% deduction for qualified research expenditures.
- Work Opportunity Tax Credit. Employers who hire military veterans may be eligible for the Work Opportunity Tax Credit which is equal to 40-percent of up to $6,000 in qualified first-year wages.
- One Hundred Percent Exclusion For Gain On Qualified Small Business Stock. Non-corporate taxpayers who sell appreciated small business stock held for over five years can exclude 100% of the gain.
In addition to the tax extenders highlighted above, there are a number of other planning concepts that are critical for businesses in 2015. For example, the Domestic Production Activity Deduction (DPAD) is a key planning opportunity for many north–eastern Wisconsin businesses and is often overlooked because the computations behind claiming the deduction can be daunting. In addition, the total asset requirement for filing the so-called “Schedule UTP” fell to $10 million from $50 million in 2014. On this schedule, many businesses are being required by the IRS to report their “Uncertain Tax Positions”. Care must be taken when filling out this schedule to avoid disclosing more than the taxpayer is required to disclose.
A lengthy list of other individual and business extenders can be found in the text of the Tax Increase Prevention Act of 2014. If you have any questions as to how the passage of this Act impacts your tax position in 2014, please do not hesitate to call your Davis & Kuelthau attorney or the author, Mark G. Kmiecik, at 414.225.1406 / firstname.lastname@example.org to schedule a tax conference appointment.
This article was published in the January 2015 edition of The Business News. For additional details, please reference our November 24, 2014 article, “Year-End Strategies Pave the Way for Minimizing Your Tax Burden in 2015”.