Significant Tax Laws are Extended

By Stanley Rose December 17, 2014

It is both interesting and comical to watch the change in young children this time of year as, often in a reversal from the norm, they are on their best behavior as Christmas nears. Our nation’s lawmakers are interesting to watch, too, and yesterday they finally found a way to “play nice” by collaborating to pass some long-expected tax law extensions. They did so by passing the Tax Increase Prevention Act of 2014 (HR 5771).

HR 5771, which the President indicated he will sign as soon as it lands on his desk, retroactively extends to the beginning of 2014 a number of taxpayer-friendly benefits that expired at the end of 2013. Many of these so-called “extenders” were expected to be enacted at various times during 2014, which of course would have aided many taxpayers with their tax and cash flow planning, but we unfortunately are in the familiar territory of having such rules renewed with all or most of the year behind us. Hopefully these changes were made early enough that the IRS can update 2014 tax forms without having to delay processing of 2014 returns, but that is not yet known. Some additional non-tax laws were also passed that may be of interest to our readers. A quick overview of some of these changes is presented below.

Tax Benefits Extended

Here is a partial list and description of tax benefits included in HR 5771. Unless otherwise noted, each benefit has been retroactively extended to the beginning of 2014 and expires at the end of 2014.

1. Bonus Depreciation – 50% of qualifying fixed asset acquisition costs may be deducted in the year property is placed into service.  With few exceptions, this was extended only through 2014.
2. Section 179 Deduction – 100% of qualifying fixed asset acquisition costs may be deducted in the year property is placed into service.  This deduction is capped at $500,000 and begins to phase out if such costs exceed $2,000,000.  This benefit was extended through 2014, after which it reverts to a cap of $25,000, with a phase-out threshold of $200,000.
3. Qualified Leasehold, Retail Improvement and Restaurant Property – The renewed Section 179 deduction described above generally applies only to property with a short life, such as machinery and office equipment.  However, this subset of the Section 179 benefit allows up to $250,000 of the overall cap of $500,000 to apply to certain qualifying real estate.
4. Credit for Increasing Research Activities – This so-called “R&D” credit provides the ability to convert a portion of research costs from a deductible expense into a credit, which is generally far more valuable.
5. Work Opportunity Credit – Employers of military veterans and other qualified employees may receive a credit of 40% for a portion (generally $6,000) of certain first-year wages.  This applies to employees who commence work prior to 2015.
6. Full Exclusion of Gain on Small Business Stock – 100% of the gain realized on the sale of qualified small business stock held by an individual for at least 5 years may be excluded from income.  This benefit was extended to include stock acquired through 2014.  Stock acquired in 2015 and later will qualify for a reduced 50% exclusion.
7. State and Local Sales Tax Itemized Deduction – If elected, sales tax, rather than state income tax, may be claimed as an itemized deduction on personal returns.  This election helps individuals who live in states that assess no income tax (Florida, for instance).
8. Higher Education Costs – Qualified tuition and other costs of post-secondary education may be deducted by individuals, whether or not they itemize deductions.  The deduction is capped at $4,000 and begins to phase out for taxpayers with income greater than $65,000 (or $130,000 if filing jointly).
9. Cancelled Mortgage Debt Exclusion – Generally any debt that is forgiven is treated as taxable income.  This rule allows cancelled mortgage debt of up to $2,000,000 ($1,000,000 for a married taxpayer fling a separate return) related to a principal residence to be excluded from income.
10. Mortgage Insurance Premium Deduction – Subject to phaseouts applicable to most itemized deductions, mortgage insurance premiums are deductible.
11. Charitable IRA Distributions – Direct transfers of up to $100,000 from an IRA to most charitable organizations may be made by individuals aged at least 70 ½.  Such transfers qualify as part of a beneficiary’s required minimum distribution, but are omitted from income and from itemized deductions.  (This is beneficial because itemized deductions are phased out for certain individuals, and certain limitations apply as income increases.  Cash taken from an IRA and contributed to a charity generally is included in both income and itemized deductions, subjecting the taxpayer to these limitations.)
12. Energy Efficiency Credit – Qualified energy efficiency improvements made to a taxpayer’s primary residence may produce a credit of up to $500.  (This is a lifetime limit, rather than an annual limit.)

I should note that of the above benefits, the ones related to bonus depreciation, Section 179 and the research credit habitually are allowed to expire but are brought back retroactively. Many practitioners expect these benefits to remain intact for the foreseeable future via additional renewals.

Many other extenders were passed which are not listed above. A full list may be found here.

ABLE Act

Extenders do not represent the only stocking-stuffer provided by Congress. A portion of HR 5771 consists of Division B, otherwise known as The Achieving a Better Life Experience Act (ABLE). It can be found here beginning on page 124. This new law provides some interesting new benefits, including the following:

1. ABLE Programs – The law creates a new category of tax-deferred savings accounts for disabled individuals, beginning with 2014.  Similar to Section 529 education plans, states are authorized to develop their own programs.  Contributions to such plans can be made annually up to $14,000.
2. Section 529 Investment Changes – Account contributors or beneficiaries can provide investment direction twice a year related to Section 529 plan holdings, beginning in 2014.

Santa takes a shovel to the reindeer stalls to fill IRS stockings

Congress also approved the Fiscal Year 2015 Omnibus Appropriations Bill, which funds the government through September of next year. The IRS was clearly in Congressional crosshairs, as the bill includes, among other things:

1. Reduction in Funding for the IRS – Funding is set at $10.945 billion, and comes with instructions that the IRS must improve its response times and the taxpayer helpline.
2. A Call to Limit Waste – The bill calls on all federal agencies funded by the bill to be “better stewards of taxpayer dollars.”  It prohibits lavish banquets and conferences (the subject of several recent media stories) and requires Inspectors General to perform random audits of grant funding.
3. Internet Sales Tax Ban – Section 624 of the bill extends a ban on internet sales tax by one year through September of 2015.

A summary of the bill can be found here, and the entirety of it (over 1,600 pages of insomnia elixir) may be found here.

It is unfortunate that all but a couple of weeks of the year have gone by before the tax-related laws described above came to fruition, as the ability to undertake any proper cash and tax planning is nearly gone. But the extenders are better late than never, and undoubtedly will reduce or defer taxes for many. We would be happy to explain the impact of these rules with our readers. If you have any questions, please contact Stan Rose or your BNN tax advisor at 800.244.7444