Another Year for Bonus Depreciation: Congress Extends Expiring Tax Provisions

The good news: Both houses of Congress finally voted this week to extend nearly all of the tax provisions that had expired on December 31, 2013, providing much-needed certainty for 2014 taxes.

The bad news: The 55 tax breaks, known as “extenders,” will expire again in two weeks, on December 31, 2014. As always, their fate for the future – including the 2015 tax year – depends on political, as well as economic, factors.

Tax Increase Prevention Act of 2014

In its final sessions, Congress enacted the Tax Increase Prevention Act (H.R. 5771), which extended most of the expiring provisions for 2014. By acting at the last possible minute, Congress appears to have sidestepped two disastrous outcomes: burdening all taxpayers (including their constituents) with higher tax bills and causing a delay to next month’s beginning of the annual tax filing season.

The new law continues the congressional tradition of considering all (or most) of the expiring provisions as a group. As a result, you will not be surprised that companies will continue to benefit in 2014 from the research tax credit and that individuals (particularly in those states without an income tax) will continue to be able to take an itemized deduction for their state and local sales taxes paid in 2014.

Capital Write-off Limits

As part of the extenders package, Congress included several tax incentives designed to provide an incentive for those businesses that already purchased property and equipment in 2014, or those that intend to do so in the next two weeks.

The new law extends 50% first-year bonus depreciation for property that is placed in service in 2014 as well as the ability to claim unused alternative minimum tax credits in lieu of bonus depreciation. Since the provision is not based on net income, bonus depreciation often results in substantial present-value tax savings for businesses.

At the same time, the extenders package provides an additional break for those smaller companies that are eligible for “Section 179 expensing.” For 2014, they may continue to elect an expensing allowance of up to $500,000 for qualifying property they placed in service.

A Few Exits and One Entrance

Under the new law, very few of the expired provisions have not been extended. While a few individuals may mourn the loss of the Section 30D plug-in electrical vehicle credit, a number of local projects may now also note the departure of New York Liberty Zone tax-exempt bond funding.

In a similar vein, the legislation generally does not introduce “new” tax code provisions. However, the Tax Increase Prevention Act does include the Achieving a Better Life Experience (ABLE) Act. This new law allows states to establish and operate an ABLE program under which severely-disabled individuals (under age 26) would be able to open a section 529 savings account and make annual contributions up to the gift tax exclusion limit ($14,000 for 2014, but adjusted for inflation annually).

Going Forward

Short-term: After the President signs the bill, we will examine the statutory language – and any IRS implementation guidance – to determine if there are special provisions for those individuals who still want to seek the 2014 incentive for charitable donations from their retirement accounts. We will also inform you of what employers should do if they now want to claim the Work Opportunity Tax Credit for their new hires in 2014.

Long-term: It appears that leaders in both houses of Congress are interested in enacting 2015 tax legislation that would make permanent some of the 50+ temporary provisions. As always, we will alert you as to the potential “winners” (those provisions that are slated to be made permanent parts of the Internal Revenue Code) and the potential “losers” (those provisions that are going to be allowed to expire).