President Signs Tax Extenders Bill; Business and Individual Provisions Reinstated

On December 19, 2014, President Obama signed into law H.R. 5771, the Tax Increase Prevention Act of 2014. As mentioned in our December 17th summary article, The Act is retroactive to January 1, 2014. It provides temporary tax relief to taxpayers from many tax provisions set to expire as of the beginning of the year and also includes the Achieving a Better Life Experience (ABLE) Act, which creates tax-favored savings accounts for individuals with disabilities along with some tax-related offsets.

Additional details on Business and Individuals extenders include:

Business Tax Extender Highlights:

• Bonus depreciation – Fifty percent bonus depreciation is extended to property acquired and placed in service in 2014.  New assets with a tax life of 20 years or less qualify for the special depreciation allowance. For example, if you purchase a machine for $100,000, under bonus depreciation you would be able to deduct $50,000 – or half of the machine immediately as depreciation expense; the remaining $50,000 will be depreciated over the life of the machine.  The asset must be placed in service in 2014 to qualify.
• Increase in Section 179 expense – The Section 179 deduction has been restored to 2013 amounts. The maximum Section 179 expense deduction is $500,000; however, this limit is reduced by the cost of Section 179 property exceeding $2 million. This allows taxpayers to currently deduct some or all of the cost of certain qualifying property. Absent this Act, the dollar limit for Section 179 expensing was scheduled to be only $25,000 for 2014.
• For vehicles weighing more than 6,000 pounds and placed in service during 2014, the allowable depreciation is 50 percent of the cost (for bonus depreciation) and up to an additional $25,000 (for Section 179 expense).  For vehicles weighing less than 6,000 pounds, the additional depreciation allowed due to this Act is $8,000.
• Fifteen-year life for leasehold improvements – Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property can be depreciated over 15 years under the modified accelerated cost recovery system (MACRS).  Only qualified leasehold improvements are eligible for bonus depreciation; however, all three qualify for Section 179, but with a lower $250,000 cap.
• Research credit – The Research and Development (R&D) tax credit allows taxpayers a 20 percent credit for qualified research expenses or a 14 percent alternative simplified credit. The credit can be advantageous for businesses that develop, design or improve products, techniques, software and similar activities.  Although this credit was originally slated to be permanent, this Act only extended the R&D credit through 2014.
• Built-in-gains tax – The Act extends the reduction in S corporation recognition period for built-in-gains tax.  This provision reduces the period to five years (versus ten) for an S corporation to hold its assets following a conversion from a C corporation to avoid the tax on built-in-gains.
• Enhanced deduction for charitable contributions of food inventory – The Act allows a C corporation to take a charitable contribution deduction in excess of their cost basis for donated food inventory.

Individual Tax Extender Highlights:

• State and local sales tax deduction – Taxpayers will be able to take an itemized deduction for state and local sales taxes in lieu of deducting state and local income taxes.  For example, several states such as Nevada, Florida, Texas, Wyoming, Alaska, South Dakota, and Washington do not impose income taxes.  Residents in these states will be able to deduct actual sales tax paid or sales tax from a predetermined IRS tax table as an itemized deduction.
• Deduction for teacher’s classroom expenses – Under this provision, teachers, instructors, counselors, principals, and aides can deduct up to $250 of unreimbursed expenses on Page 1 of their 1040 instead of including the expenses in their itemized deductions, where the taxpayer may not receive a benefit.  Additional expenses may be deducted on Schedule A, subject to the overall 2 percent adjusted gross income floor on miscellaneous itemized deductions.
• Cancellation of debt income – Taxpayers will be able to exclude up to $2 (or $1 million married filing separately) of cancellation of debt income from the forgiveness or cancellation of a mortgage or debt relating to a primary residence.
• Mortgage insurance premiums – Taxpayers will be able to deduct mortgage insurance premiums paid or accrued during the year in connection with the acquisition of a primary or vacation home‘ however, this deduction will begin to phase out for high income taxpayers at $100,000.
• Tuition and fees expense – Taxpayers will be able to take an above-the-line deduction on their tax return for up to $4,000 of qualifying expenses paid.  Qualifying expenses include tuition, fees, books, supplies, and equipment.  This deduction phases out at adjusted gross income of $130,000 ($65,000 for single filers).
• Qualified charitable distributions – Individuals who are at least age 70 1/2 can use their Individual Retirement Account (IRA) to make a tax-free distribution to charity for up to $100,000.  For example, if you withdraw $100,000 from your IRA and have the distribution go directly to charity, the distribution is excluded from your taxable income.

Congress extended the expired tax provisions temporarily for one year.  Even though that one-year period expires December 31, 2014, there is still time in 2014 to implement the tax extenders into your year-end tax planning strategy.  For more information, please contact us.