The Tax Times: 2014

This past Friday, December 19, 2014, President Obama signed into law the Tax Increase Prevention Act of 2014 (HR 5771) which passed the the Senate on December 16th, 2014, that retroactively extended certain tax incentives which had expired on December 31, 2013 for one year.

Individual Tax Extenders:

Research and experimentation credit;

50% first-year bonus depreciation;

Increased expensing limits ($500,000/$2 million) for section 179 property;

15-year depreciation life for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;

Work Opportunity Tax Credit;

Exclusion of gains on certain qualified small business stock;

Reduced recognition period for S corporation built-in gains tax;

Deduction for state and local sales taxes;

Exclusion of Cancellation of Indebtedness on Principal Residence; and

Deduction of mortgage insurance premiums.

Business Tax Extenders:

Extension of research credit - The legislation extends the research credit through 2014.

Extension of temporary minimum low-income housing tax credit rate for non-federally subsidized buildings - The legislation extends application of the temporary 9% minimum credit rate for the low income housing tax credit for non-Federally subsidized new buildings to allocations made before January 1, 2015.

Extension of military housing allowance exclusion for determining whether a tenant in certain counties is low-income - The legislation extends through 2014 the exclusion of military basic housing allowances from the calculation of income for determining eligibility as a low-income tenant for purposes of low-income housing tax credit buildings.

Extension of Indian employment tax credit - The business tax credit for employers of qualified employees that work and live on or near an Indian reservation is extended through 2014.

• Extension of new markets tax credit - The legislation extends the new markets tax credit through 2014. The carryover of any unused limitation is extended for one year.

• Extension of railroad track maintenance credit - The legislation extends through 2014 the railroad track maintenance credit.

• Extension of mine rescue team training credit - The credit for training mine rescue team members is extended through 2014.

• Extension of employer wage credit for employees who are active duty members of the uniformed services - The legislation would extend for one year (through 2014) the provision that provides eligible small business employers with a credit against the taxpayer's income tax liability for a taxable year in an amount equal to 20% of the sum of differential wage payments to activated military reservists.

• Extension of work opportunity tax credit - The Work Opportunity Credit, which provides businesses with a tax credit for hiring employees from specified groups that historically have had difficulty finding employment, is extended through 2014.

• Extension of qualified zone academy bonds - The legislation authorizes the issuance of $400 million of Qualified Zone Academy bonds during 2014. The bond proceeds may be used for school renovations, equipment, teacher training, and course materials at a qualified zone academy so long as 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.

• Extension of classification of certain race horses as 3-year property - The legislation extends the 3-year recovery period for race horses to property placed in service during 2014.

• Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements - The special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements for property placed in service in 2014 is extended.

• Extension of 7-year recovery period for motorsports entertainment complexes - The legislation extends through 2014 the special 7-year cost recovery period for property used for land improvement and support facilities at motorsports entertainment complexes for property placed in service in 2014.

• Extension of accelerated depreciation for business property on an Indian reservation - The placed-in-service date for the special depreciation recovery period for qualified Indian reservation property is extended through 2014.

• Extension of bonus depreciation - The legislation extends 50% bonus depreciation to property acquired and placed in service during 2014 (2015 for certain property with a longer production period). Taxpayers may continue to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2014. A special accounting rule involving long-term contracts and a special rule for regulated utilities also continues through 2014. (The legislation labels qualifying property as “round 4 extension property”).

• Extension of enhanced charitable deduction for contributions of food inventory - The provision allowing businesses to claim an enhanced deduction for contributions of food inventory of wholesome food for non-corporate business taxpayers is extended through 2014.

• Extension of increased expensing limitations and treatment of certain real property as §179 property - The legislation extends through 2014 the small business expensing limitation and phase-out amounts in effect from 2010 to 2013 – i.e., $500,000 and $2 million, respectively - to property placed in service during 2014. The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property also are extended through 2014. [I.R.C. §179]

• Extension of election to expense mine safety equipment - The election to expense mine safety equipment is extended to property placed in service during 2014. This election allows mining companies to expense 50% of the cost of qualified mine safety equipment in the year the equipment is placed into service. [I.R.C. §179E]

• Extension of special expensing rules for certain film and television productions - The provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States is extended through 2014.

• Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico - The domestic production activities deduction attributable to activities in Puerto Rico is extended through 2014.

• Extension of modification of tax treatment of certain payments to controlling exempt organizations - The special rules for interest, rents, royalties and annuities received by a tax-exempt entity from a controlled entity are extended through 2014.

• Extension of treatment of certain dividends of regulated investment companies - The 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 are extended through 2014.

• Extension of RIC qualified investment entity treatment under FIRPTA - The provision that treats a RIC as a qualified investment entity is extended through 2014. (The provision would not apply with respect to any payment made before the date of enactment that was actually withheld upon).

• Extension of subpart F exception for active financing income - The exception from Subpart F of the Code for active financing income is extended through 2014.

• Extension of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules - The look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations is extended through 2014.

• Extension of temporary exclusion of 100% of gain on certain small business stock - The exclusion of 100% of the gain on certain small business stock for non-corporate taxpayers is extended to stock acquired before January 1, 2015, and held for more than five years. The provision also extends for one year the rule that eliminates such gain as an AMT preference item.

• Extension of basis adjustment to stock of S corporations making charitable contributions of property - The provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder's adjusted basis in the S corporation is extended through 2014.

• Extension of reduction in S corporation recognition period for built-in gains tax- The rule reducing to five years (rather than 10 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 is extended to sales of assets occurring during 2014.

• Extension of empowerment zone tax incentives - The ability to designate certain economically depressed census tracts as empowerment zones is extended through 2014. The tax benefits available include tax-exempt bonds, employment credits, increased expensing, and gain exclusion from the sale of certain small-business stock.

• Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands - The provision providing for payment of $13.25 per gallon to cover over a $13.50 per proof gallon excise tax on distilled spirits produced in or imported into the United States is extended through 2014.

• Extension of American Samoa economic development credit - The credit for taxpayers currently operating in American Samoa is extended through 2014.

Energy Tax Extenders

• Extension of credit for nonbusiness energy property - The 10% credit (maximum of $500) for purchases of nonbusiness energy property is extended through 2014.

• Extension of the alternative fuel vehicle refueling property credit - The 30% credit for the cost of qualified alternative fuel vehicle refueling property placed in service during the tax year is extended through 2014.

• Extension of second generation biofuel producer credit - The cellulosic biofuels producer credit is extended through 2014.

• Extension of incentives for biodiesel and renewable diesel - The $1.00 per gallon production tax credit for biodiesel and the small agri-biodiesel producer credit of 10 cents per gallon is extended through 2014. The $1.00 per gallon production excise tax credit for diesel fuel created from biomass also is extended through 2014.

• Extension of credits with respect to facilities producing energy from certain renewable resources - The production tax credit (PTC) for wind and certain other renewable sources of electricity is extended to facilities for which construction has commenced by the end of 2014.

• Extension of credit for energy-efficient new homes - The credit for the construction of energy-efficient new homes is extended through 2014.

• Extension of special allowance for second generation biofuel plant property - The 50% bonus depreciation allowance for cellulosic biofuel facilities is extended through 2014.

• Extension of energy efficient commercial buildings deduction - The “above-the-line” deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings is extended through 2014.

• Extension of special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities - The deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies is extended for sales prior to January 1, 2015. Rather than recognizing the full amount of gain in the year of sale, this provision allows gain on such sales to be recognized ratably over an 8-year period.

• Extension of excise tax credits relating to certain fuels - The $0.50 per gallon alternative fuel tax credit and alternative fuel mixture tax credit is extended through 2014.

Multiemployer Pension Plans

• Extension of automatic extension of amortization periods - The automatic grant of a 5-year extension to multiemployer defined benefit pension plans that apply for additional time to amortize funding shortfalls extended through 2015. Note: This provision, originally extended through 2015 under this bill, was made permanent with the enactment of H.R. 83, Division O, §101, which repealed the sunset provision of 2006 PPA.

• Extension of shortfall funding method and endangered and critical rules - Under the 2006 PPA, there are three categories of underfunding for multiemployer defined benefit pension plans that are significantly underfunded (endangered, seriously endangered, and critical), with specific obligations for plans in each category. The 2006 PPA also generally permitted multiemployer plans to start or stop using the shortfall funding method without obtaining approval from the IRS. Set to expire at the end of 2014, this provision is extended through 2015. Note: This provision was made permanent with the enactment of H.R. 83, Division O, §101, which repealed the sunset provision of 2006 PPA.

ABLE Programs and Accounts

ABLE Accounts - The 2014 legislation allows states to create qualified ABLE programs beginning in 2015. Similar to the popular §529 accounts, contributions to ABLE program accounts would grow tax free. Accounts would be available only to individuals diagnosed with a disability before age 26. Beneficiaries would be limited to one ABLE account and would have to be residents of the state administering the program.

Earnings on an ABLE account would be exempt from income tax; distributions also would be exempt so long as they are used for qualified disability expenses. Qualified expenses would include education, housing, transportation, employment training and support, health, assistive technology, legal fees and funeral expenses. Beneficiaries would, either directly or indirectly, dictate how contributions or earnings in an account are invested, but no more than twice a year.

Money distributed from an account that is not used for a qualified purpose would be taxed as ordinary income and would be subject to an additional 10% tax.

Individuals would not be able to deduct their contributions for income tax purposes and any contribution amounts that exceed the annual limit would be subject to a 6% excise tax imposed on the beneficiary.

Contributions would qualify for the annual gift tax exclusion ($14,000 for 2015) and would be exempt from the generation-skipping transfer (GST) tax. Distributions also generally would be exempt from gift and GST taxes. [I.R.C. §529A (new)]

Treatment of ABLE accounts under certain federal programs - ABLE accounts generally would not count against income limits for means-tested benefits, such as Supplemental Security Income (SSI) and Medicaid. If the beneficiary's resources from an account exceed $100,000, SSI benefits would be suspended until the account balance is less than that amount. Such a suspension would not affect an individual's eligibility for Medicaid.

Treatment of ABLE accounts in bankruptcy - In the case of a bankruptcy, contributions by a parent or grandparent of a beneficiary would be protected as long as they were made more than a year before the bankruptcy filing.

While all of these are currently available for the 2014 tax year, they are set to expire again in less than two weeks, so anyone to whom they may apply is urged to take advantage of them now.

It is unknown if the new congress will act to extend the incentives once again for 2015, so again, anyone who qualifies is urged to act now before the December 31, 2014 extension expires.

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