Realizing Opportunities from “TIPA” Tax Extender Law– December 20, 2014

President Obama officially signed the Tax Increase Prevention Act of 2014 (TIPA) into law, extending more than 50 provisions that expired at the end of 2013.

As we wrap up planning for 2014, there are a limited number of opportunities that can reasonably be taken advantage of before the end of the year. These include, for individuals, IRA distributions to charity; and, for businesses, the purchase of heavy truck/SUV fleets and computers or other assets. Given the law’s timing, most planning will involve understanding which activities during 2014 already fall into the provisions being extended.

It’s important to note that there was one new item included in TIPA — a tax favored account for people with disabilities. The Achieving a Better Life Experience (ABLE) Act seeks to aid families in covering certain expenses, such as medical, education, housing and transportation. Further guidance will need to be issued regarding the account, which will be available for tax years beginning after December 31, 2014.

Provisions Affecting Businesses

TIPA provisions most relevant to businesses include:

50% bonus depreciation. This additional first-year depreciation allows businesses to recover the costs of depreciable property more quickly for qualified assets. Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold improvement property. The provision also allows corporations to claim unused alternative minimum tax credits in lieu of bonus depreciation.

The bonus depreciation extension generally applies only to property placed in service in 2014, which, unfortunately, doesn’t leave much time if a purchase has not already been made.

Sec. 179 expensing election. TIPA extends higher limits under Sec. 179 of the Internal Revenue Code, which permits businesses to immediately deduct — or “expense” — the cost of qualified assets (such as tangible personal property and off-the-shelf computer software) purchased for use in a trade or business in the year they’re placed in service, instead of recovering the costs more slowly through depreciation deductions.

Because of the extension, a business can deduct up to $500,000 in qualified new or used assets. The deduction is subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeds $2 million, meaning smaller businesses generally reap the greatest benefit. The expensing election can be claimed only to offset net income, not to reduce net income below zero. Without the extension, the limit for 2014 would have dropped to $25,000, with a $200,000 phaseout threshold.

Depending on the actual purchase, taxpayers will want to evaluate the benefits of Sec. 179 expensing versus bonus depreciation and consider any state tax consequences as well.

Depreciation-related breaks for qualified leasehold improvement, restaurant and retail-improvement property. TIPA extends the ability to:

  • Apply up to $250,000 of the $500,000 Sec. 179 expensing limit to such property, and
  • Apply a shortened recovery period of 15 years, rather than 39 years, to such property.

R&D credit. The credit, generally equal to a portion of qualified research expenses, is complicated to calculate but can result in substantial tax savings. (Read R&D Credit: Why Your Business May Qualify)

Work Opportunity credit. This credit is available to employers hiring from certain disadvantaged groups, such as food stamp recipients, ex-felons and veterans who have been unemployed for four or more weeks. The maximum credit ranges from $2,400 for most groups to $9,600 for disabled veterans who have been unemployed for six months or more.

Transit benefit parity. TIPA extends the provision that established equal limits for the amounts that can be excluded from an employee’s wages for income and payroll tax purposes for parking fringe benefits and van-pooling / mass transit benefits. The limits for both types of benefits are now $250 per month for 2014. Without the extension of parity, the limit for van-pooling / mass transit would be only $130.

Provisions Affecting Individuals

It’s not just businesses that benefit from the tax extenders. The following extended provisions apply to individual taxpayers:

IRA distributions to charity. Taxpayers age 70½ or older can make direct contributions from their IRA to qualified charitable organizations in 2014 without incurring any income tax on the distribution, up to $100,000 per tax year. You can even use the contribution to satisfy a required minimum distribution. This presents an opportunity for both individuals and not-for-profit organizations.

State and local sales taxes deduction. Individuals can take an itemized deduction for state and local sales taxes instead of for state and local income taxes. This option can be valuable for taxpayers who live in states with no or low income tax rates or purchase major items, such as a car or boat. If you’re thinking about making a major purchase, it might be worthwhile to do so before 2015.

Small business stock gains exclusion. Gains realized on the sale or exchange of qualified small business stock (QSBS) acquired after September 27, 2010, and before January 1, 2015 (rather than January 1, 2014), will be eligible for an exclusion of 100% if the QSBS has been held for at least five years. A qualified small business is a domestic C Corporation that holds gross assets of no more than $50 million at any time (including when the stock is issued) and uses at least 80% of its assets in an active trade or business.

The QSBS gain exclusion has been especially valuable ever since the capital gains tax rate increased for high-income taxpayers. And the excluded gain is also exempt from the 3.8% net investment income tax. This offers another planning opportunity before year-end.

Qualified tuition and related expenses deduction. The above-the-line tuition and fees deduction may be beneficial to taxpayers who are ineligible for education-related tax credits, though income-based limits also apply to the deduction. The expenses must be related to enrollment at an institution of higher education during 2014 or, if the expenses relate to an academic term beginning during 2014, during the first three months of 2015.

Energy-efficiency tax credits. TIPA extends many (but not all) credits related to energy efficiency. The significant provisions extended include “beginning-of-construction date” for renewable power facilities eligible to claim the electricity production credit or investment credit in lieu of the production credit; credit for construction of energy-efficient new homes; energy-efficient commercial buildings deduction; and excise tax credits on certain fuels.

No Crystal Ball for 2015

Looking ahead, we’re still left with key business credits that will immediately expire again at the end of 2014. Although there’s been a lot of talk about comprehensive tax reform, there’s no guarantee that all of these provisions would be extended should any progress be made. We will address many of the TIPA provisions as facts and circumstances warrant. In the meantime, be sure to contact a member of your service team if you have specific questions.

We want to hear from you! We encourage you to comment below on this blog post or share it on social media.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.