The Tax Increase Prevention Act of 2014 (TIPA) renewed through 2014 a long list of business federal income tax breaks that had been allowed to expire at the end of 2013. This article provides a quick summary of the most important business extenders that were just resurrected -- and a few that were not.
More Benefits for Certain Industries and Taxpayers
There are a number of extended tax breaks that are only applicable to certain industries and groups:
Seven-Year Depreciation for Motorsport Property. The new law extends the seven-year depreciation privilege for land improvements and support facilities at motorsports entertainment complexes to cover qualifying property placed in service in 2014.
Three-Year Depreciation for Race Horses. The three-year depreciation privilege for qualifying race horses is extended to cover horses placed in service in 2014, regardless of their age on the placed-in-service date.
Expensing for Film and TV Productions. TIPA extends the election to claim current deductions (within limits) for qualified film and television production costs to cover productions commencing in 2014.
Expensing for Mine Safety Equipment. The new law extends the 50 percent first-year expensing deduction for advanced underground mine safety equipment to cover qualifying equipment placed in service in 2014.
Mine Rescue Team Training. TIPA also extends the tax credit of up to $10,000 for mine rescue team training programs to cover tax years beginning in 2014.
Railroad Track Maintenance. The tax credit for qualifying expenditures to maintain railroad tracks is extended to cover tax years beginning in 2014.
Credit for Indian Reservation Employees. The new law extends the credit for employing enrolled members of Indian tribes and their spouses who live and work on or near Indian reservations to cover tax years beginning in 2014.
Faster Depreciation for Indian Reservation Property. A provision allowing shorter depreciation periods for qualified Indian reservation property is extended to cover property placed in service in 2014.
These Provisions Were NOT Extended
The new law did not extend:
DEPRECIATION AND COST RECOVERY PROVISIONS
The new law extends 50 percent first-year bonus depreciation for an additional year to cover qualifying new assets that are placed in service in calendar year 2014. Used assets do not qualify.
However, the placed-in-service deadline is extended to December 31, 2015 for certain assets that have longer production periods, including transportation equipment and aircraft. Under the extended deadline privilege, only the portion of a qualifying asset's basis that is allocable to costs incurred before January 1, 2015 is eligible for 50 percent bonus depreciation.
For a new passenger auto, new light truck or new light van that is subject to the luxury auto depreciation limitations, the 50 percent bonus depreciation provision increases the maximum first-year depreciation deduction by $8,000 for vehicles that are used 100 percent for business.
For new autos placed in service in 2014, the extension of bonus depreciation increases the maximum first-year depreciation deduction to $11,160 ($3,160 plus $8,000).
For new light trucks and light vans placed in service in 2014, the extension of bonus depreciation increases the maximum first-year depreciation deduction to $11,460 ($3,460 plus $8,000).
Corporate Election to Claim Credits in Lieu of Bonus Depreciation
Previous legislation allowed corporations that are otherwise eligible to claim bonus depreciation to elect to forego bonus depreciation and instead "free up" otherwise unusable minimum tax credit carryovers. Credit carryovers freed up by this election are refundable (meaning they can be collected even if they exceed the electing corporation's tax liability).
The new law extends the election for qualified bonus-depreciation-eligible assets that are placed in service by December 31, 2014 or by December 31, 2015 for certain assets that have longer production periods including transportation equipment and aircraft. Therefore, additional freed-up credits can be claimed in lieu of 2014 bonus depreciation deductions that would have otherwise have been allowed. Special rules apply to taxpayers that have previously taken advantage of this election.
Key Point: Making the election does not result in any lost depreciation deductions. It just postpones depreciation deductions for affected assets.
Generous Section 179 Deduction Rules
For qualifying new and used assets that are placed in service in tax years beginning in 2014, the new law extends the maximum Section 179 deduction amount of $500,000 (same as for tax years beginning in 2010 through 2013). Without this change, the maximum deduction for 2014 would have been only $25,000. The new law also extends the Section 179 deduction phase-out threshold of $2 million to cover tax years beginning in 2014 (same as for tax years beginning in 2010 through 2013). Without this change, the phase-out threshold for 2014 would have been $200,000.
Finally, the new law extends the Section 179 deduction allowance of up to $250,000 to cover qualifying real property placed in service in tax years beginning in 2014 (same as for tax years beginning in 2010 through 2013).
Key Point: For tax years beginning in 2015, the maximum Section 179 deduction is scheduled to be only $25,000, the deduction phase-out threshold is scheduled to fall to only $200,000, and the Section 179 deduction for real estate is scheduled to fall completely off the table.
Fifteen-Year Depreciation for Leasehold Improvements, Restaurant Property and Retail Space Improvements
The new law extends the 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail space improvements to cover eligible property that is placed in service in 2014.
Key Point: Without the favorable 15-year depreciation rule, leasehold improvements, restaurant building improvements, restaurant buildings, and retail space improvements generally would have to be depreciated straight-line over 39 years.
SMALL BUSINESS CORPORATION PROVISIONS
100 percent Gain Exclusion for Qualified Small Business Corporation Stock
The new law extends the 100 percent gain exclusion privilege (within limits) for sales of qualified small business corporation (QSBC) stock issued in 2014. Note that QSBC shares must be held for more than five years to be eligible for the gain exclusion privilege. Also, many companies won't meet the definition of a QSBC so consult your tax adviser about your situation.
Break for S Corporation Built-In Gains
When a C corporation converts to S corporation status, the corporate-level built-in gains tax generally applies when built-in gain assets (including receivables and inventories) are turned into cash or sold within the recognition period. The recognition period is normally the 10-year period that begins on the conversion date.
Previous legislation established an exception for built-in gains if the fifth year of the recognition period had gone by before the beginning of the tax year in question. Gains that fell under this exception were not hit with the built-in gains tax. The new law extends the five-year recognition period deal for tax years beginning in 2014. In other words, for gains recognized in tax years beginning 2014, the built-in gains tax won't apply if the fifth year of the recognition period had gone by before the start of the year.
EMPLOYEE BENEFIT PROVISION
Parity for Employer-Provided Parking and Transit Benefits
For 2014, employer-provided parking allowances are tax-free up to a monthly limit of $250. Thanks to the new law, an employee can be given up to the same tax-free amount in 2014 for transit passes or vanpooling. For example, an employee could be given up to $250 per month to pay for the park-and-ride plus up to another $250 per month to pay for train passes. Without the new law, the monthly limit on employer-provided transit passes and vanpooling for 2014 would have been only $130.
GENERAL BUSINESS TAX CREDIT PROVISIONS
The research credit has now been extended to cover qualifying expenses paid or incurred in 2014. This credit equals the sum of:
1. 20 percent of any excess of the qualified research expenses (QREs) for the tax year over a base amount (unless the taxpayer elected an alternative simplified research credit),2. The university basic research credit, which is generally 20 percent of the basic research payments, and
3. 20 percent of the taxpayer's expenditures on qualified energy research undertaken by an energy research consortium.
Important Note: There are many additional rules attached to the research credit. Your tax adviser can assist you in getting the most benefit out of this valuable tax break.
Work Opportunity Credit
The new law extends the general deadline for employing eligible individuals for purposes of claiming the Work Opportunity Tax Credit (WOTC) to cover qualifying hiring that occurs in 2014.
This credit allows employers that hire members of certain targeted groups to get an tax credit for a portion of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). If the employee is a long-term family assistance recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee.
The maximum WOTC for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000 or $24,000, depending on various factors. Examples include whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date. However, the credit only applies to eligible veterans and non-veterans who begin work for the employer before January 1, 2015. Consult with your tax adviser to see if your organization qualifies.
Military Service Differential Pay Credit for Small Employers
The credit for eligible small employers that provide differential pay to employees while they serve in the military is extended to cover payments made in 2014. The credit equals 20 percent of differential pay of up to $20,000 paid to each qualifying employee during the year.
New Markets Credit
TIPA extends through 2014 the credit for qualified equity investments in certain community development entities.
BUSINESS CHARITABLE CONTRIBUTION PROVISIONS
Enhanced Deduction for Food Inventory Donations
The new law extends through 2014 the enhanced charitable contribution deduction for non-C corporation businesses that donate food (it must be apparently wholesome when donated). This provision is intended for non-C corporation businesses that have food inventories, such as restaurants. For non-C corporation taxpayers, deductions for donated food are normally limited to the taxpayer's basis in the food or FMV, whichever is lower. In contrast, the enhanced deduction equals the lesser of:
1. Basis plus one-half the value in excess of basis or
2. Two times the basis (the same enhanced deduction rule has been available to C corporations for years). The taxpayer's total charitable contribution deduction for food donations under this provision generally cannot exceed 10 percent 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
Liberalized deduction rules are extended for qualified conservation contributions to cover eligible contributions made in tax years beginning in 2014. 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 is increased from the normal 10 percent of adjusted taxable income to 100 percent of adjusted taxable income. Qualified conservation contributions in excess of what can be written off in the year of the donation can be carried forward for 15 years.
Favorable Rule for S Corporation Donations of Appreciated Assets
TIPA extends the favorable shareholder basis rule for stock in S corporations that make charitable donations of appreciated assets to cover tax years beginning in 2014. For affected donations, each shareholder's tax basis in the S corporation's stock is only reduced by the shareholder's pro-rata percentage of the company's tax basis in the donated assets. Without the extended provision, a shareholder's basis reduction would equal 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). The extended provision is taxpayer-friendly because it leaves shareholders with higher tax basis in their S corporation shares, which is almost always beneficial to shareholders.
Credit for Building Energy-Efficient Homes
The new law extends the $2,000 per home contractor tax credit for building new energy-efficient homes in the U.S. (including manufactured homes) to cover homes that are sold in 2014. The credit can also be claimed for substantially reconstructing and rehabilitating an existing home and making it more energy-efficient. Homes that don't fully meet the energy-efficiency standards may qualify for a reduced $1,000 credit. To qualify for this credit, a home must be sold by December 31, 2014 for use as a residence.
Energy Efficient Commercial Buildings Tax Deduction
The special deduction allowed for the cost of energy-efficient commercial building property is extended to cover qualified property placed in service in 2014. The maximum deduction is $1.80 per square foot reduced by any deductions claimed in earlier years.
Credits for Renewable Energy Production Facilities
Credits for facilities that produce energy from certain renewable resources, including wind, are extended to cover facilities that started construction in 2014.
Biodiesel and Renewable Diesel Fuel Credits
The new law extends the income tax and excise tax credits for biodiesel and renewable diesel fuels to cover qualifying fuels produced, sold or used in 2014.
Alternative Fuel Credits
The alternative fuel and alternative fuel mixture excise tax credits are extended to cover qualifying fuels, including those related to hydrogen, that are sold or used in 2014.
FOREIGN AND POSSESSION PROVISIONS
Subpart F Exception for Active Financing Income
TIPA extends the exclusion of active financing income from the definition of Subpart F income to cover tax years of foreign corporations beginning in 2014 and tax years of U.S. shareholders with which or within which such tax years of foreign corporations end.
Look-Through Rule for Payments between Related CFCs
The "look-through" treatment for payments of dividends, interest, rents and royalties between related controlled foreign corporations is extended to cover tax years of foreign corporations beginning in 2014 and tax years of U.S. shareholders with which or within which such tax years of foreign corporations end.
Domestic Producer Deduction for Puerto Rico
The new law extends through tax years beginning in 2014 the provision that allows taxpayers to treat Puerto Rico as part of the U.S. for purposes of calculating the Section 199 domestic producer deduction.