Congress Provides Tax Relief

Just before adjourning on December 16, the Senate passed the Tax Increase Prevention Act of 2014 (TIPA), which was passed by the House on December 3. The White House announced that President Obama will sign the law, which renews more than 50 expired tax breaks.

This gives taxpayers just 10 days — excluding the federal holiday and weekends — to complete their last-minute tax planning maneuvers.

The law extends through December 31, 2014, certain tax relief provisions that expired at the end of 2013. Several of these provisions can produce significant savings for taxpayers on their 2014 income tax returns, but quick action (before January 1, 2015) may be needed to take advantage of some of them.

Here’s a brief overview of the extended breaks that might benefit you or your business.

Individual Tax Breaks

State and Local Sales and Use Taxes. Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes — instead of state and local income taxes — for tax years beginning before January 1, 2015.

Tuition and Fees Deduction. Eligible individuals can deduct “qualified tuition and related expenses” paid on behalf of the taxpayer, as well as his or her spouse and dependents.

No deduction is allowed for an individual whose AGI exceeds certain AGI limitations; for a married individual who does not file a joint return; or for an individual for whom a personal exemption deduction may be claimed by another taxpayer for the tax year.

IRA Transfers to Eligible Charities. Taxpayers who are age 70 1/2 or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year in tax years beginning before January 1, 2015. These distributions aren’t subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer’s return.

Home Mortgage Debt Forgiveness Exclusion. Discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately) may be excluded from gross income. This exclusion now applies to home mortgage debt discharged before January 1, 2015.

Exclusion of Gain on Certain Small Business Stock. Thanks to the new law, a taxpayer may exclude all of the gain on the disposition of qualified small business stock acquired after September 27, 2010 and before January 1, 2015. None of the excluded gain is subject to the alternative minimum tax.

Educator Expenses. Eligible elementary and secondary school teachers can claim an above-the-line deduction for up to $250 per year of expenses paid or incurred in tax years through 2014 for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom.

Business Tax Breaks

The new law also retroactively extends, for one year, a host of business tax breaks for amounts paid or accrued before January 1, 2015, including:

Bonus Depreciation and Enhanced Section 179 Deductions. Many taxpayers put their equipment and vehicle purchases on hold, waiting to see if this year’s Section 179 and expanded bonus depreciation deductions would make it worth their while. In light of the recently extended tax breaks under the new law, some business owners will make an eleventh hour dash to purchase qualifying fixed assets before year end.

Background. Prior to TIPA, the maximum Section 179 deduction for tax years beginning in 2014 would have been only $25,000. No Section 179 deductions would have been permitted for real estate improvements. And the 50 percent first-year bonus depreciation deduction would not have been allowed for fixed assets placed in service in 2014.

Thankfully, the new law restored the $500,000 maximum Section 179 deduction, as well as the Section 179 deduction for qualifying real estate improvements and the 50 percent first-year bonus depreciation deduction for tax years beginning in 2014.

Read the fine print. Qualifying assets can’t just be ordered or delivered on your loading dock on December 31, 2014. Assets must be placed in service (that is, hooked up, plugged in and otherwise ready for business use) by the end of the tax year to be eligible for Section 179 and the expanded bonus depreciation deduction.

The current favorable Section 179 and bonus deprecation rules can be big tax-savers for eligible small and medium-sized businesses. But there are several tax law restrictions. Consult your tax adviser for details on how to most effectively take advantage of today’s taxpayer-friendly Section 179 and bonus depreciation rules.

Transit Benefit Parity. Prior to TIPA, an employee could exclude from 2014 gross income up to: $250 per month for qualified parking, and $130 a month for transit passes and commuter transportation in a commuter highway vehicle, including van pools.

However, notwithstanding the applicable statutory limits on the exclusion of qualified transportation fringes (as adjusted for inflation), for any month beginning before January 1, 2014, a parity provision required that the monthly dollar limitation for transit passes and transportation in a commuter highway vehicle had to be applied as if it were the same as the dollar limitation for that month for employer-provided parking ($245 for 2013).

TIPA extends for one year the parity provision through 2014. It increases the monthly exclusion for employer-provided transit and vanpool benefits to $250 in 2014 — the same as for the exclusion for employer-provided parking benefits.

Research Credit. 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: There are many additional rules attached to the research credit. If your business has already filed returns for a fiscal year that includes part of 2014, ask your tax adviser about filing an amended return to claim a refund for the amount of any additional tax paid because of not claiming amounts now eligible for the research credit.

Work Opportunity Credit (WOTC). This credit allows employers that hire members of certain targeted groups to get an income tax credit for a percentage 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.

Generally, the percentage of qualifying wages is 40 percent of first-year wages. It’s 25 percent for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For long-term family assistance recipients, it includes an additional 50 percent of qualified second-year wages.

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, this credit only applies to eligible veterans and non-veterans who begin work for the employer before January 1, 2015.

There’s More

These are only some of the tax breaks that were extended in the new law. Others include certain energy-related tax breaks, charitable deductions for certain contributions made by businesses, the new markets tax credit, and much more. We will comprehensively cover the major provisions in additional articles in the future.

You May Have to Move Quickly

Since these tax breaks generally are extended only through the end of this year, you may need to act quickly to benefit from them. If you would like more information, or to help determine how you can make the most of the tax relief provided in the new law, please contact us.