In December 2014 Congress approved the Tax Increase Prevention Act of 2014 (HR 5771). The new law extends the “tax extenders” retroactively for one year (through 2014). This allows taxpayers to claim the temporary incentives on their 2014 tax returns that are filed in 2015. It also includes the Achieving a Better Life Experience (ABLE) Act, creating tax-favored savings accounts for individuals with disabilities along with some tax-related offsets. Congress also approved an Omnibus Spending Agreement for fiscal year 2015, which cuts funding for the IRS. There were discussions of making a number of the extenders permanent, however, the Tax Increase Prevention Act does not make any permanent, nor extends them for the usual two-year time period. The final fate of the extenders will be determined in 2015.
State and Local Sales Tax Deduction
The provision extends through 2014 the option to take an itemized deduction for State and local general sales taxes in lieu of an itemized deduction for State and local income taxes. The taxpayer may either deduct the actual amount of sales tax paid in the tax year, or, alternatively, an amount prescribed by the IRS.
Higher Education Deduction
The provision extends through 2014 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers). 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.
Teacher’s Classroom Expense Deduction
The provision extends through 2014 the above-the-line deduction for the eligible expenses of elementary and secondary school teachers (grades K-12, including school administrators and assistants). The deduction is capped at $250 and covers expenses that otherwise would have to be itemized.
Mortgage Debt Exclusion
The provision extends through 2014 the exclusion from gross income of a discharge of qualified principal residence indebtedness. The Act 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.
Mortgage Insurance Premium Deduction
The provision extends through 2014 the treatment of qualified mortgage insurance premiums as deductible interest. This deduction phases out ratably for taxpayers with adjusted gross income of $100,000 to $110,000 (half those amounts for married taxpayers filing separately).
Charitable Distributions from IRAs
The provision extends through 2014 the ability of individuals at least 70½ years of age to make tax-free distributions from Individual Retirement Accounts (IRAs) to a qualified charitable organization. The exclusion may not exceed $100,000 per taxpayer each year.
Transit Benefits Parity
The provision extends through 2014 the maximum monthly exclusion amount for transit passes and van pool benefits so that these benefits match the exclusion for qualified parking benefits at $250/month. These benefits are excluded from an employee’s wages for payroll tax purposes, and from gross income for income tax purposes.
Contribution of Real Property for Conservation Purposes
The provision extends through 2014 an enhanced deduction for contributions of capital gain real property for conservation purposes, with the contribution to be taken against 50% of the contribution base. This provision also would extend the enhanced deduction for certain individual and corporate farmers and ranchers. A qualified conservation contribution is a contribution of a real property interest to a qualified organization, exclusively for conservation purposes.
Bonus depreciation allows taxpayers to claim an additional first-year depreciation deduction. The provision extends 50% bonus depreciation to property acquired and placed in service during 2014 (2015 for certain property with a longer production period). This provision continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2014. The provision would also continue a special accounting rule involving long-term contracts and a special rule for regulated utilities.
Code Section 179 Expensing
The provision extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2013 ($500,000 and $2 million) to property placed in service during 2014. These amounts currently are $25,000 and $200,000, respectively. It allows taxpayers to immediately deduct, rather than gradually depreciate, the cost of qualified assets, subject to certain limitations. The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property also would be extended through 2014.
Qualified Leasehold/Retail Improvements, Restaurant Property
The provision extends the 15-year straight-line recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property to property placed in service during 2014. Qualified leasehold improvements, qualified retail improvements and qualified restaurant property up to $250,000 may be treated as Code Section 179 property, but with a lower dollar cap.
Research Tax Credit
The provision extends through 2014 the research and development (R&D) tax credit. The R&D credit generally allows taxpayers a 20% credit for qualified research expenses or a 14% alternative simplified 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.
Work Opportunity Tax Credit
The provision extends through 2014 the work opportunity tax credit (WOTC). Employers that hire military veterans and other qualified individuals may be eligible for the WOTC credit. The credit amount is generally equal to 40% of up to $6,000 in qualified first-year wages. Employees must begin work for the employer before January 1, 2015.
100% Exclusion for Gain on Qualified Small Business Stock
The provision extends the exclusion of 100% of the gain on certain small business stock for non-corporate taxpayers applicable to stock acquired before January 1, 2015, and held for more than five years. This provision also would extend the rule that eliminates such gain as an AMT preference item.
Reduced Recognition Period for S Corporation Built-In Gains Tax
The provision extends, to sales of assets occurring during 2014, the rule reducing to five years (rather than ten years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains. The period begins with the first day of the first tax year for which the corporation is an S corporation.
New Markets Tax Credit
The provision authorizes the allocation of an additional $3.5 billion of new markets tax credits for 2014. The credit encourages taxpayers to make loans to, or invest in, businesses in low-income communities.
Employer Wage Credit for Employees Who are Active Duty Members of the Uniformed Services
The provision extends through 2014 the 20% employer wage credit (only available to employers with 50 or fewer employees) for employees called to active military duty.
Qualified Zone Academy Bonds
The provision authorizes the issuance of $400 million of qualified zone academy bonds during 2014. The bond proceeds are used for school renovations, equipment, teacher training, and course materials at a qualified zone academy, provided that private entities have promised to donate certain property and services to the academy with a value equal to at least 10% of the bond proceeds.
Enhanced Charitable Deduction for Contributions of Food
The provision extends through 2014 the enhanced deduction for charitable contributions of inventory of apparently wholesome food for non-corporate business taxpayers.
Classification of Certain Race Horses as 3-Year Property
The provision extends the 3-year recovery period for race horses to property placed in service during 2014.
Special Expensing Rules for Certain Film and Television
The provision extends through 2014 the special expensing provision for qualified film and television productions. In general, only the first $15 million of costs may be expensed.
Treatment of Certain Dividends of Regulated Investment Companies
The provision extends through 2014 provisions allowing for the pass-through character of interest-related dividends and short-term capital gains dividends from regulated investment companies to non-resident aliens.
Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property
The provision extends through 2014 the rule providing that a shareholder’s basis in the stock of an S corporation is reduced by the shareholder’s pro rata share of the adjusted basis of property contributed by the S corporation for charitable purposes.
Empowerment Zone Tax Incentives
The provision extends through 2014 the tax benefits for certain businesses and employers operating in empowerment zones. Empowerment zones are economically distressed areas, and the tax benefits available include tax-exempt bonds, employment credits, increased expensing, and gain exclusion from the sale of certain small-business stock.
Energy Tax Extenders
Code Section 25C Credit
This provides an extension of credit for nonbusiness energy property. The provision extends through 2014 the credit for purchases of nonbusiness energy property. The provision allows a credit of 10% of the amount paid or incurred by the taxpayer for qualified energy improvements, up to $500. It rewards taxpayers who make qualified energy efficiency improvements to residential property.
Production Tax Credit
The provision extends the production tax credit (PTC) – a per-kilowatt-hour - for wind and certain other renewable sources of electricity to facilities for which construction has commenced by the end of 2014.
Biodiesel and Renewable Diesel
The provision extends through 2014 the $1.00 per gallon production tax credit for biodiesel, and the small agri-biodiesel producer credit of 10 cents per gallon. The provision also extends through 2014 the $1.00 per gallon production tax credit for diesel fuel created from biomass.
Second Generation Biofuel Producer Credit
The provision extends through 2014 the cellulosic biofuels producers credit.
Credit for Energy-Efficient New Homes
The provision extends through 2014 the tax credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria.
Special Allowance for Second Generation Biofuel Plant Property
The provision extends through 2014 50% bonus depreciation for cellulosic biofuel facilities.
The provision extends through 2014 50% bonus depreciation for cellulosic biofuel facilities.
The provision extends through 2015 the above-the-line deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings.
Special Rule for Sales or Dispositions to Implement FERC or State Electric Restructuring Policy for Qualified Electric Utilities
The provision extends through 2014 a rule that permits taxpayers to elect to recognize gain from qualifying electric transmission transactions ratably over an eight-year period beginning in the year of sale (rather than entirely in the year of sale) if the amount realized from such sale is used to purchase exempt utility property within the applicable period.
Excise Tax Credits Relating to Certain Fuels
The provision extends through 2014 the $0.50 per gallon alternative fuel tax credit and alternative fuel mixture tax credit.
Multiemployer Defined Benefit Pension Plan Extenders
Automatic Extension of Amortization Periods
The provision extends through 2015 the ability of multiemployer pension (ME) plans to take an additional five years to amortize funding shortfalls. The proposal was enacted in the Pension Protection Act of 2006 (PPA), but expires at the end of 2014. ME plans generally have 15 years to amortize shortfalls and can seek Treasury approval for an additional ten years. A plan receiving such Treasury approval may not combine the two extensions.
Exclusion of Shortfall Funding Method and Endangered and Critical Rules
The provision extends through 2015 the special rules for three categories of severely underfunded ME plans. It also would extend through 2015 the ability of ME plans to generally start or stop using the shortfall funding method without obtaining approval from Treasury. Endangered (yellow zone) plans are either less than 80% funded or projected not to meet minimum required contributions within seven years. A plan is seriously endangered (orange zone) if both are the case. In general, critical (red zone) plans generally must be either less than 65% funded or projected to be unable to meet minimum required contributions or pay promised benefits within four to 10 years. Yellow and orange zone plans must adopt a funding improvement plan under which the plan is projected to reduce underfunding by one-third or one-fifth over ten or 15 years, respectively. Red zone plans must adopt a rehabilitation plan under which the plan is projected to emerge from critical status in ten years, or if not possible using all reasonable measures, use all reasonable measures to postpone insolvency. Yellow zone and orange zone plans are generally prohibited from increasing benefits or reducing contributions. Red zone plans are permitted to cut certain ancillary vested benefits. In addition, red zone plans are effectively exempt from the minimum required contribution rules. Plans using the shortfall funding method amortize shortfalls on a different basis than a number of years, such as units of production, which could result in a longer amortization period than is otherwise applicable (generally 15 years, although plans may take an additional 5 years, as noted above). Before PPA, plans were generally required to obtain Treasury approval to start or stop using the shortfall funding method.
Under current law, there are numerous provisions that relate to past tax years (and generally are no longer applied in computing taxes for open tax years), involve situations that were narrowly defined and unlikely to recur, or otherwise have outlived their usefulness. These types of provisions are often referred to as “deadwood” provisions. The provision would repeal these current-law deadwood provisions. These provisions generally would be effective on the date of enactment, although the tax treatment of any transaction occurring before that date, of any property acquired before that date, or of any item taken into account before that date, would not be affected by these provisions.
Joint Committee on Taxation
Increased Refund and Credit Threshold for Joint Committee on Taxation (JCT) Review of C Corporation Return
Generally, the IRS may not issue a refund or credit of any income or certain other taxes in excess of $2 million until JCT staff reviews the facts surrounding the proposed refund or credit and communicates any concerns back to the IRS, which can then modify the refund or credit at its discretion. Under the provision, the threshold for JCT review of refunds or credits with respect to returns filed by C corporations would be increased to $5 million. The provision would be effective on the date of enactment, except with respect to pending refund or credit reports that have been transmitted by the IRS to JCT prior to such date.