Tax Increase Prevention Act of 2014 Revives Tax Breaks, But Only for 2014.
The year has concluded with much debate and discussion regarding the future of several tax breaks upon which small businesses have come to depend. After several permanent provisions were floated and rejected, the Tax Increase Prevention Act of 2014 (H.R. 5771) was finally signed into law on December 19, 2014. For the most part, this highly anticipated legislation merely extends the expiration of numerous 2013 provisions through the end of 2014, and is hardly the certainty for which taxpayers were hoping. Nonetheless, H.R. 5771 did revive several important provisions for the upcoming tax filing season. This article highlights several provisions of particular interest to farm producers.
Section 179 Deduction and Bonus Depreciation
Among a number of key tax breaks that expired at the end of 2013 was the enhanced I.R.C. §179 deduction, which in 2013 allowed farmers and small businesses to currently deduct up to $500,000 of the tax basis of certain business property or equipment during the year in which the property was placed in service. For 2014, the amount of the §179 deduction decreased to $25,000 with the investment ceiling set at $200,000. H.R. 5771 retroactively restored the enhanced I.R.C. §179 to the beginning of 2014, but the law again expires at the end of 2014. In other words, the deduction was restored a mere 12 days before it again expires. As was the case in 2013, the overall investment limit for I.R.C. §179 eligibility is $2 million. This means that the available deduction is decreased dollar-for-dollar for each investment dollar in qualified property exceeding $2 million.
Producers, in particular, can take advantage of the I.R.C. §179 deduction for purchases of machinery and equipment, office equipment, livestock, grain bins, and single purpose agricultural structures such as a hog barn. It does not apply, however, to a multi-use building. For example, if the producer uses the “hog barn” to raise poultry, it is not qualifying property. The I.R.C. §179 deduction applies to purchases of new or used equipment. The equipment or property, however, must have been placed in service in 2014 – ready for use in the taxpayer’s trade or business. Also, extended through 2014 is the ability to make or revoke an I.R.C. §179 election on an amended return for an open tax year. While the statute states that the provision applies to revocations, the IRS has clarified that taxpayers are entitled to also make elections on amended returns.
Absent further legislation, the 2015 I.R.C. §179 maximum amount will revert to $25,000.
H.R. 5771 also extended through 2014 the special rules under I.R.C. 179 for certain categories of “qualified real property” – qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. These categories of real estate are eligible for up to $250,000 of I.R.C. §179 depreciation (as part of the overall $500,000 limitation).
Also restored for 2014 was 50 percent bonus depreciation. Under this provision, producers can claim an additional first-year tax deduction equal to 50 percent of the value of qualifying property. The bonus depreciation deduction, which is available only for new property, applies to farm buildings in addition to equipment. Although it completely disappeared in 2014, H.R. 5771 restored it as it existed in 2013. Unlike the §179 expensing allowance, there is no limit on the overall amount of bonus depreciation that a producer may claim. If an item of property qualifies for both I.R.C. §179 and bonus depreciation, the I.R.C. §179 amount is computed first, and then bonus depreciation is taken based on the item’s remaining income tax basis. Also, I.R.C. §179 is based on when the taxpayer’s tax year begins and bonus depreciation is tied to the calendar year.
This extension provision for bonus depreciation expires at the end of 2014. Absent further legislation, 50 percent bonus depreciation will not be available for property place in service in 2015 or later.
State and Local Sales Tax Deduction
Another expiring provision resurrected by H.R. 5771 was the option allowing taxpayers to claim state and local sales tax instead of state and local income tax as an itemized deduction. Although this provision generally benefits those taxpayers from states without a state or local income tax, it could also potentially benefit taxpayers who made a large purchase in 2014.
Tax-Free Charitable IRA Distribution
Proposed legislation to permanently extend the ability of taxpayers ages 70.5 and older to make tax free distributions from their IRAs to a qualified charity failed to pass. H.R. 5771, however, does extend this tax break through the end of 2014. This provision applies to distributions up to $100,000 per taxpayer (per spouse for married taxpayers that file as married filing jointly). Distributions in excess of the dollar limit still qualify as an itemized charitable deduction. The taxpayer, however, must claim the distribution as income.
Contribution of Capital Gain Real Property To Charity For Conservation Purposes
H.R. 5771 extends through 2014 the provision that allows a charitable deduction for contributions of qualified real estate to charity that qualify as a “qualified conservation contribution" and are made by a qualified farm or ranch corporation.
Small Business Stock
H.R. 5771 extends through 2014 the ability to exclude from income the gain associated with the sale of qualified small business stock.
Extended through 2014 is the five-year recognition period governing built-in gains of S corporations. In other words, tax on the built-in gain of a C corporation that elected S-corporate status is not triggered when the S corporation liquidates in 2014 if the S election had been in place for at least five years. Without further legislation the built-in gain recognition period reverts to 10 years after 2014.
Included in H.R. 5771 is a permanent provision, the Achieving a Better Life Experience Act (ABLE Act). Similar to IRC §529 (for establishing college savings plans), the ABLE Act allows states to create programs under which tax-free savings accounts can be established for the benefit of individuals with disabilities. The money in these accounts can grow tax-free and can be used to cover qualified expenses such as housing, education, medical expenses, assistive technology, and transportation. ABLE account funds would supplement, not replace, benefits the individual receives through other sources such as Medicaid. Furthermore, the funds in an ABLE account would not impact a person’s eligibility to receive assistance through federal benefits programs.
A person with disabilities may have one ABLE account created on his or her behalf. Multiple people, however, including the beneficiary, can contribute to the account. Money in the account can grow tax free.
To qualify for the ABLE account, a person must have a significant disability where the age of onset was before 26. Total annual contributions to the account (from all sources) cannot exceed $14,000.
To implement this program, the Treasury Department must issue final regulations implementing the details. States will then be free to implement their programs. It is hoped that ABLE accounts will be up and running in some states by the end of 2015.
H.R. 5771 extended a number of other short-term tax breaks, but again, only through 2014. Unfortunately, 2015 will usher in another round of uncertainty and more legislative wrangling over the future of these provisions.
Other provisions that were extended through 2014 include:
- The deduction for certain expenditures of elementary and secondary school teachers;
- The exclusion from income for the discharge of indebtedness associated with a principal residence;
- The deduction for mortgage insurance premiums;
- The deduction for qualified tuition and related expenses;
- The classification of race horses as three-year property for MACRS purposes; and
- Various energy tax provisions including the wind energy production tax credit
To read the entire law, click here https://www.congress.gov/bill/113th-congress/house-bill/5771
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