For many individuals and businesses, ringing in the New Year has been bittersweet. That's because some of their favorite federal income tax breaks expired on December 31, 2013. Continue reading to see which deductions and credits are gone, unless Congress votes to retroactively extend them for 2014.
Several federal income tax breaks for individuals and businesses expired at the end of 2013. Although we're solidly into 2014, Congress has, so far, failed to extend many of tax savings opportunities that you've become accustomed to. (Some observers predict that Congress won't act for months — perhaps even until after the November mid-term elections.)
When Will Congress Vote?
Congress isn't likely to vote soon on the tax breaks that expired on December 31, 2013, according to Senator Orrin Hatch (R-UT), a ranking member of the Senate Finance Committee.
On January 9, Hatch said lawmakers need time to look at each of the nearly 60 tax breaks to determine if they should renew them. In other words, he is not inclined to just retroactively reinstate all of them. "I'm going to insist that we cut back rather than just keep all of them," Hatch added.
Meanwhile, Dave Camp (R-MI.), the chairman of the House Ways and Means Committee, announced that a comprehensive overhaul of the tax system — rather than extending expired tax breaks — is his 2014 priority.
Here's a summary of some noteworthy deductions and credits that won't be available, or will be significantly reduced, in 2014. Many of these federal income tax breaks were available (at varying levels) for several years before expiring on New Year's Eve.
Expired Tax Breaks for Individuals
Option to Deduct State and Local Sales Taxes
In 2013, individuals had the option of claiming an itemized deduction for general state and local sales taxes instead of claiming an itemized deduction for state and local income taxes. This option was beneficial for taxpayers who live in states with no personal income taxes and taxpayers who pay only minimal state income taxes.
Tax-Free Treatment for Forgiven Principal Residence Mortgage Debt
For federal income tax purposes, cancelled debts generally count as taxable cancellation of debt (COD) income. However a temporary exception applied to COD income from cancelled mortgage debt that was used to acquire a principal residence. Under the temporary provision, up to $2 million of COD income from principal residence acquisition debt that was cancelled between 2007 and 2013 was treated as a tax-free item for federal income tax purposes.
Charitable Donations from IRAs
Individual retirement account (IRA) owners who had reached age 70 1/2 by December 31, 2013, were allowed to make charitable donations of up to $100,000 directly out of their IRAs in 2013. The donations counted as IRA required minimum distributions.
So, charitably-inclined seniors who had more IRA funds than needed could reduce taxes by arranging for IRA donations to take the place of taxable required minimum distributions in 2013.
Deduction for Higher Education Tuition and Related Fees
In 2013, you could deduct up to $4,000 (or up to $2,000 for higher-income folks) for qualifying higher education tuition and related feeds paid for you, your spouse or your dependents.
$500 Energy-Efficient Home Improvement Credit
For 2013, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence.
Salary Reduction for Transit Passes
Your employer may allow you to sign up to reduce your taxable salary to pay for mass transit passes to commute to and from work. In 2013, the maximum monthly amount you could set aside on a tax-free basis was $245. The maximum monthly amount for 2014 will be only $130 unless Congress decides to allow a larger amount. (If that happens, the larger amount would be $250.)
$250 Deduction for Teachers' School Expenses
For 2013, teachers and other personnel at K-12 schools could deduct up to $250 of school-related expenses they paid out of their own pockets, regardless of whether they itemized or not.
Deduction for Home Mortgage Insurance Premiums
In 2013, eligible taxpayers were allowed to treat qualifying personal residence mortgage insurance premium amounts as deductible home mortgage interest.
Charitable Qualified Conservation Contributions
Charitable qualified conservation contributions are donations of real property interests (including remainder interests and easements) that restrict the use of real property. For individuals, the maximum write-off for 2013 qualified conservation contributions of long-term capital gain property was increased from the normal 30% to 50% of adjusted gross income.
Delayed Start of the 2013 Tax Season for Individuals
The 2013 federal tax season for individuals starts on Friday, January 31, 2014. This start date (delayed ten days by October's government shutdown) also applies to sole proprietors, landlords and farmers who file a Form 1040. The due date for filing 2013 personal tax returns remains Tuesday, April 15, 2014.
In addition, qualified conservation contributions were not counted when calculating an individual's allowable 2013 write-offs for other charitable contributions. Qualified conservation contributions in excess of what could be written off in 2013 could be carried forward for 15 years (only a five-year carryover period is allowed under the normal rules). For an individual who was a qualified farmer or rancher, the qualified conservation contribution write-off for 2013 donations of farm or ranch real property could be as much as 100% of the donor's adjusted gross income.
Zero Percent Tax Rate on Future Gains from Qualified Small Business Stock
For qualified small business corporation (QSBC) stock that was issued in calendar year 2013, a 100% federal gain exclusion break is potentially available. That equates to a 0% federal income tax rate on future profits from selling QSBC shares down the road. You must hold the shares for more than five years to be eligible, and many companies will fail to meet the definition of a QSBC. Also, C corporation shareholders are ineligible. For QSBC shares issued in 2014, the "normal" gain exclusion percentage of 50% will apply unless Congress restores the 100% gain exclusion deal.
Personal Credit for Alternative Fuel Vehicle Refueling Property
In 2013, individuals could claim a federal tax credit for up to 30% of the cost of installing non-hydrogen alternative fuel vehicle refueling property. This credit could be claimed for expenditures such as equipment to recharge electric-powered car batteries at a principal residence. For individuals, the annual cap for this credit was only $1,000. A credit for hydrogen refueling property is allowed through 2014.
Expired Tax Breaks for Businesses
Research and Development Credit
Business are no longer eligible for a long-standing tax break for increasing qualifying R&D expenditures (QREs), including wages, supplies, and certain consulting and contract research fees related to qualified research activities. In 2013, this credit generally equaled 20% of the amount by which current-year QREs exceeded a base-period amount (subject to a 6.5% maximum).
50% First-Year Bonus Depreciation Deduction
For qualifying new (not used) assets that were placed in service (hooked up and ready for use) in calendar year 2013, taxpayers could write off 50% of the cost in the asset's first year of service. Qualifying assets included most software, certain "heavy" passenger vehicles, non-passenger vehicles, and equipment.
Expanded Section 179 Deductions
For tax years that began in 2013, eligible small and medium-sized businesses could immediately write off up to $500,000 of qualifying new and used assets, including most software, certain "heavy" passenger vehicles, non-passenger vehicles, equipment, and up to $250,000 of qualifying real estate improvements. Assets had to be placed in service (hooked up and ready for business use) by the end of the tax year that began in 2013 to be eligible.
The maximum Section 179 deduction for tax years beginning in 2014 will be only $25,000. And no Section 179 deductions will be permitted for real estate improvements.
15-Year Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvements
Generally, taxpayers must depreciate non-residential real property straight-line over 39 years for federal tax purposes. But 15-year straight-line depreciation was allowed for the cost of qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail space improvements that were placed in service in 2013 (but not expensed under Section 179 or eligible for the 50% first-year bonus depreciation deal in 2013).
New Markets Credit
Delayed Start of the 2013 Tax Season for Businesses
The 2013 federal tax season for businesses officially starts on Monday, January 13, 2014. This is the date that the IRS will begin accepting electronically filed and paper-filed 2013 business tax returns for C corporations, S corporations, and partnerships. This start date also applies to various federal excise and payroll tax returns. The due dates for 2013 business tax returns are not affected by the government shutdown.
In 2013, individuals and corporate taxpayers could receive a federal tax credit for qualified equity investments in certain community development entities. Examples of projects that might qualify for the credit include small business financing and daycare centers improvements in low-income communities. In 2013, the credit generally equaled 39% of the qualified equity investment and could be claimed during a seven-year credit period.
Credit for Building Energy-Efficient Homes
In 2013, homebuilders were eligible for a $2,000 tax credit for each new energy-efficient home they built in the United States, including manufactured homes. Firms could also claim this credit for substantially reconstructing and rehabilitating an existing home and making it more energy efficient. Homes that did not fully meet the energy-efficiency standards could qualify for a reduced $1,000 credit. A home had to be sold by December 31, 2013 for use as a residence to qualify for the credit.
Credit for Manufacturing Energy-Efficient Appliances
The credit for manufacturing energy-efficient dishwashers, clothes washers, and refrigerators in the U.S. expired at the end of 2013. The credit amounts per unit were $75 for qualifying dishwashers, $200 for qualifying refrigerators and $225 for qualifying clothes washers.
Business Credit for Alternative Fuel Vehicle Refueling Property
In 2013, businesses could claim a federal tax credit for up to 30% of the cost of installing non-hydrogen alternative fuel vehicle refueling property. This credit could be claimed for expenditures such as a gas station's costs to install ethanol, compressed natural gas, or hydrogen refueling pumps or equipment to recharge electric-powered car batteries. For businesses, the annual cap for each location for this credit was $30,000. A credit for hydrogen refueling property is allowed through 2014.
S Corporation Built-In Gains Tax Exemption
If you operate a corporation that recently converted from C to S status, a corporate-level built-in gains tax (also known as the BIG tax) may apply when certain S corporation assets, including receivables and inventories, are converted to cash or sold within the "recognition period." The recognition period is normally the 10-year period that begins on the date when the corporation converted from C to S status.
For eligible built-in gains that were recognized in tax years beginning in 2013, however, there was an exemption from the BIG tax. The exemption applied if the fifth year of the S corporation's recognition period had gone by before the start of the tax year that began in 2013.
Enhanced Charitable Deduction for Food Donations
Businesses that were not operated as C corporations were entitled to an enhanced charitable contribution if they donated food to qualified charities in 2013. This provision was intended for non-C corporation businesses that have food inventories, such as restaurants and grocery stores. These deductions are normally limited to the taxpayer's basis in the food or its fair market value, whichever is lower. But in 2013 the temporarily enhanced deduction equaled the lesser of:
- The taxpayer's basis in the food plus one-half the value in excess of basis or
- Two times the taxpayer's basis in the food.
The same enhanced deduction rule has been available to C corporations for years, and still is. The taxpayer's total charitable contribution deduction for food donations under this provision generally could not exceed 10% of net income for the tax year from sole proprietorships, S corporations, or partnerships (or other non-C corporation entities) from which the food donations are made.
Favorable Rules for C Corporation Farm and Ranch Qualified Conservation Contributions
Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. For qualified C corporation farming and ranching operations, the maximum write-off for qualified conservation contributions was increased from the normal 10% of adjusted taxable income to 100% of adjusted taxable income in 2013. Qualified conservation contributions in excess of what could be written off in 2013 could be carried forward for 15 years.
Favorable Rule for S Corporation Donations of Appreciated Assets
For tax years beginning in 2013, a favorable shareholder basis rule applied for stock in S corporations that made charitable donations of appreciated assets. For such donations, each shareholder's tax basis in the S corporation's stock was only reduced by the shareholder's pro-rata percentage of the company's tax basis in the donated assets.
Without this provision, a shareholder's basis reduction would have equaled the passed-through write-off for the donation (a larger amount than the shareholder's pro-rata percentage of the company's tax basis in the donated asset). This provision was taxpayer-friendly because it left shareholders with higher tax basis in their S corporation shares, which is almost always beneficial to shareholders.
Expired Tax Breaks for Income from Foreign Countries and U.S. Territories
Subpart F Exception for Active Financing Income
For tax years beginning in 2013, active financing income was excluded from the definition of Subpart F income.
Look-Through Rule for Payments between Related CFCs
For tax years beginning in 2013, so-called look-through treatment was allowed for payments of dividends, interest, rents, and royalties between related controlled foreign corporations (CFCs).
Domestic Producer Deductions for Puerto Rico Operations
For tax years beginning in 2013, Puerto Rico could be treated as part of the United States for purposes of calculating the Section 199 domestic producer deduction.
For further questions regarding expired or current tax breaks, please contact an EHTC tax professional.