Last week Congress passed the “Tax Increase Prevention Act of 2014,” which President Obama signed into law on Friday December 19, 2014. Referred to as the “extenders package,” it extends certain tax provisions that had expired on December 31, 2013. The extension of almost all provisions is through December 31, 2014, which is of course a very welcome development for those who will see benefits relating to their 2014 activity. However, for those who have been waiting to take action until the passage of extender legislation, it leaves very little time to get things done.
The more universally applicable provisions which have been extended are summarized below.
Individual Tax Provisions. The following individual tax provisions, which were in effect during 2013, have been extended through December 31, 2014.
• Nontaxable IRA “Rollovers” to Eligible Charities – Taxpayers who are age 70½ or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 during 2014. These distributions aren't subject to the charitable contribution percentage limits, since they are neither included in gross income nor claimed as a deduction on the taxpayer's return.
• Nonbusiness Energy Credit – With respect to qualified energy property placed in service during 2014, a taxpayer may claim a credit up to a $500 (with no more than $200 from windows and skylights), to the extent the $500 was not used during prior tax years ending after Dec. 31, 2005. The credit equals the sum of: (1) 10% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during the tax year, and (2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during the tax year. However, there are further limits on certain types of qualified energy property.
• Liberalized Rules for Qualified Conservation Contributions – A taxpayer's aggregate qualified conservation contributions (i.e., contributions of appreciated real property for conservation purposes) are allowed as a deduction during 2014 up to the excess of 50% of the taxpayer's contribution base over the amount of all other allowable charitable contributions (100% for qualified farmers and ranchers), with a 15-year carryover of such contributions in excess of the applicable limitation.
• State and Local Sales Tax Deduction Extended – Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes during 2014.
• Above-the-Line Deduction for Higher Education Expenses – For the 2014 tax year, eligible individuals can deduct “qualified tuition and related expenses” of the taxpayer, his spouse, or the taxpayer’s dependents — as an adjustment to gross income to arrive at adjusted gross income. The maximum deduction is $4,000 for an individual whose AGI for the tax year doesn't exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for individuals who don't meet the above AGI limit, but whose adjusted gross income doesn't exceed $80,000 ($160,000 in the case of a joint return).
• Exclusion for Discharged Home Mortgage Debt – Discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately) may be excluded from gross income if discharged during 2014.
• Above-the-Line Deduction for Educator Expenses – During 2014, eligible elementary and secondary school teachers may claim an above-the-line deduction for up to $250 of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom.
• Increase in Excludible Employer-Provided Mass Transit and Parking Benefits –For 2014, the monthly exclusion for employer-provided transit and vanpool benefits is increased to $250—the same as for the exclusion for employer-provided parking benefits.
• Mortgage Insurance Premiums as Deductible Qualified Residence Interest – For 2014, mortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence are treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer's adjusted gross income (AGI). The amount allowable as a deduction is phased out ratably by 10% for each $1,000 by which the taxpayer's adjusted gross income exceeds $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return). Thus, the deduction isn't allowed if the taxpayer's AGI exceeds $110,000 ($55,000 in the case of married individual filing a separate return).
Business Tax Provisions. The following are selected business tax provisions that were in effect during 2013, and which have been extended through December 31, 2014.
• First-Year Bonus Depreciation – In 2014, an additional first-year depreciation deduction (also called bonus first-year depreciation) will be allowed up to an amount equal to 50% of the adjusted basis of qualified property acquired and placed in service before January 1, 2015. The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax (AMT) purposes, but is not allowed for purposes of computing earnings and profits for C corporations.
• Increased Expensing of Equipment Purchases – A taxpayer, other than an estate, a trust, or certain non-corporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of eligible property placed in service during the tax year in excess of a specified investment ceiling. The amounts are increased by the Act for 2014, as follows: (1) the dollar limitation on the expensing deduction is $500,000; and (2) the investment-based reduction in the dollar limitation begins to take effect when property placed in service during exceeds $2,000,000 (the investment ceiling). The Act also provides that during 2014 (i) off-the-shelf computer software is eligible property for expensing, (ii) up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) is eligible for expensing. • Research Tax Credit – The research credit is extended through 2014, and equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount (unless the taxpayer elected an alternative simplified research credit); (2) the university basic research credit (i.e., 20% of the basic research payments); (3) 20% of the taxpayer's expenditures on qualified energy research undertaken by an energy research consortium. The alternative simplified credit is similarly extended through 2014.
• Work Opportunity Credit – The work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees), though it may be different for certain types of veterans, certain part-time workers, and certain long-term family assistance recipients. The credit will now apply to wages paid during 2014.
• New Markets Credit – A new markets tax credit applies for qualified equity investments to acquire stock in a community development entity (CDE). The credit is calculated as follows: (1) 5% for the year in which the equity interest is purchased from the CDE and for the first two anniversary dates after the purchase (for a total credit of 15%), plus (2) 6% on each anniversary date thereafter for the following four years (for a total of 24%). Under pre-Act law, there was a $3.5 billion cap on the maximum annual amount of qualifying equity investments for 2010, 2011, 2012 and 2013. However, a carryover was allowed where the credit limitation for a calendar year exceeded the aggregate amount allocated for the year, but no amount could be carried over to any calendar year after 2018. • Reduced S Corporation Built-In Gains Recognition Period – For corporations that were formed as C corporations and then elect to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a recognition period. During 2012 and 2013, the recognition period was set at 5 years following the S corporation election effective date, but was to return to 10 years. The extender package continues the 5 year recognition period for S corporation conversions that become effective during 2014.
• Exclusion of Gain on Qualified Small Business Stock – A taxpayer may now exclude all of the gain on the disposition of qualified small business stock acquired after Sept. 27, 2010 and before Jan. 1, 2015. None of the excluded gain is subject to the alternative minimum tax.
• Look-Through Rule for Transfers Between Related CFCs – For tax years ending on or before December 31, 2014, dividends, interest, rents, and royalties received by one controlled foreign corporation (CFC) from a related CFC are not treated as foreign personal holding company income (FPHCI) to the extent attributable or properly allocable to non-subpart-F income, or income that was not effectively connected with the conduct of a U.S. trade or business of the payer (look-through treatment).
• Basis Adjustments for In-Kind Charitable Contributions by S Corporations – Before the Pension Protection Act of 2006 had changed the law to provide that the amount of a shareholder's basis reduction in S stock by reason of a charitable contribution made by the corporation is equal to his pro rata share of the adjusted basis of the contributed property. That change expired on December 31, 2013, and has been extended through December 31, 2014.
There are additional provisions that have been extended as well, and include the differential wage payment credit for active military service employees, second generation biodiesel fuel producer credit, biodiesel and renewable diesel credit, renewable electricity production credit, Indian coal facilities credit, Indian employment credit, new energy efficient home credit for contractors, energy efficient commercial building deduction, Subpart F exception relating to financing income of foreign subsidiaries, Puerto Rican domestic production activities deduction, enhanced deduction for donation of food inventories, empowerment zone tax breaks, and certain other biodiesel and alternative fuels provisions.