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Doubt is Growing on Whether Expiring Tax Provisions Will Be Extended
(Parker Tax Publishing November 21, 2013)
Dozens of temporary tax provisions are scheduled to expire at the end of 2013. Most of the expiring provisions have been part of past temporary tax extension legislation, often referred to as "tax extenders." However, interest in tax reform has led key members of Congress and the Obama administration to propose that the extenders be addressed as part of a larger tax reform process. On this issue, Republicans in Congress and the President seem to be more or less on the same page, with the Republicans pushing for tax reform and Obama pushing to make permanent certain extenders but saying that the remainder should be part of a tax reform package.
OBSERVATION: Given the political climate in Washington, it's anybody's guess as to when an agreement on tax reform or the extenders might be reached. The American Taxpayer Relief Act of 2012, which was signed on January 1, 2013, retroactively extended certain credits and deductions that expired at the end of 2011 - most notably the R&D tax credit and the Section 179 expensing provision.
President Obama's budget for fiscal year 2014 identifies several expiring provisions that the Administration would like to see permanently extended (and in some cases substantially modified), including the research and experimentation (R&D) tax credit, enhanced expensing for small businesses, the new markets tax credit (NMTC), the work opportunity tax credit (WOTC), the exclusion of discharge of principal residence indebtedness, and the tax deduction for energy efficient commercial buildings.
But unlike previous budget proposals, the President's budget does not propose or assume that some set of expiring provisions is temporarily extended. The provisions that are scheduled to expire at the end of 2013 are diverse in purpose, including provisions for individuals, businesses, the charitable sector, energy, community assistance, and disaster relief. Among the individual provisions scheduled to expire are deductions for teachers' out-of-pocket expenses, state and local sales taxes, qualified tuition and related expenses, and mortgage insurance premiums.
On the business side, tax provisions set to expire include the increased expensing and bonus depreciation allowances, the R&D tax credit, the WOTC. Charitable provisions scheduled to expire include the enhanced deduction for contributions of food inventory and provisions allowing for tax-free distributions from retirement accounts for charitable purposes. The renewable energy production tax credit (PTC) is set to expire at the end of 2013, along with a number of other incentives for energy efficiency and renewable and alternative fuels.
EXPIRING TAX PROVISIONS AFFECTING INDIVIDUALS
Deduction for State and Local General Sales Taxes
Under Code Sec. 164(b)(5), for tax years beginning after 2003 and before January 1, 2014, taxpayers can elect to deduct state and local general sales taxes, instead of state and local income taxes, as an itemized deduction. This deduction is particularly important to individuals who live in a state that doesn't have an income tax. Taxpayers who elect to deduct state and local sales taxes may deduct either actual sales taxes paid or incurred, as evidenced by appropriate records, or an amount determined under tables provided by the IRS.
OBSERVATION: If a taxpayer had a large purchase during the year, such as a vehicle or materials for a home improvement project, using the actual sales tax paid will generally result in a larger deduction.
The deduction is not available for years beginning after 2013. See Parker Tax ¶83,130.
Premiums for Mortgage Insurance Deductible as Qualified Residence Interest
Under Code Sec. 163(h)(3)(E), for years 2007 through 2013, taxpayers can treat amounts they paid during the year for qualified mortgage insurance as qualified residence interest. The insurance must be in connection with acquisition debt for a qualified residence. Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance.
No deduction is allowed for amounts paid or accrued after December 31, 2013, or for amounts properly allocable to any period after that date. See Parker Tax ¶83,515.
Deduction for Certain Expenses of Elementary and Secondary School Teachers
Under Code Sec. 62(a)(2)(D), for tax years 2002 through 2013, eligible educators (i.e., teachers) can deduct from gross income up to $250 of qualified expenses they paid during the year. If spouses are filing jointly and both were eligible educators, the maximum deduction on the joint return is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. A school for this purpose is any school that provides elementary or secondary education, as determined under state law.
Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. Qualified expenses do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education.
This provision does not apply to tax years beginning after 2013. See Parker Tax ¶80,135.
Deduction for Qualified Tuition and Related Expenses
Under Code Sec. 222, taxpayers with modified adjusted gross income within certain limits may deduct up to $4,000 of qualified education expenses paid during the year for themselves, their spouses, or their dependent. The maximum tuition and fees deduction for any tax year is $4,000, $2,000, or $0, depending on the amount of the taxpayer's modified adjusted gross income.
The provision does not apply to tax years beginning after 2013. See Parker Tax ¶80,145.
Tax-free Distributions from Individual Retirement Plans for Charitable Purposes
Under Code Sec. 408(d)(8), a qualified charitable distribution from an individual's IRA is excluded from the individual's gross income. A distribution is a qualified charitable distribution (QCD) only if all three of the following requirements are met: (1) the distribution is made directly by the trustee of an individual's IRA (other than a SEP or SIMPLE IRA) to an organization eligible to receive tax-deductible contributions, other than supporting organizations and donor advised funds; (2) the contribution would otherwise qualify for a charitable contribution deduction; and (3) the individual was at least age 70-1/2 when the distribution was made. The total QCDs for the year cannot be greater than $100,000.
OBSERVATION: The QCD provision can be beneficial for a couple reasons. First, the distribution is taken into account for purposes of determining if the taxpayer has met the minimum distribution requirements but it is not included in the taxpayer's income. Second, while no charitable deduction is allowed for any amount that was contributed to the IRA tax free, this can be a much more tax efficient way of donating for certain types of taxpayers. For example, donating this way reduces a taxpayer's adjusted gross income. This, in turn, potentially reduces the percentage of social security income that is taxed from 85 percent to 50 percent and increases certain deductions by reducing the effects of the limitations on personal exemptions, itemized deductions, and charitable contributions that are tied to higher adjusted gross income amounts.
This special distribution provision is not available for distributions after 2013. See Parker Tax ¶134,560.
Discharge of Indebtedness on Principal Residence Excluded from Gross Income of Individuals
Under Code Sec. 108(a)(1)(E), for years 2008 through 2013, discharge-of-indebtedness income related to a discharge of qualified principal residence debt (i.e., mortgage on the taxpayer's home) is generally excludable from gross income. Qualified principal residence debt is debt that is incurred to buy, build, or substantially improve the principal residence of the taxpayer and that is secured by that residence. It also includes debt secured by the taxpayer's principal residence that is used to refinance qualified principal residence debt, but not in excess of the outstanding principal amount of the debt that is refinanced. It does not apply to refinanced debt used for other purposes - for example, to pay off credit card debt.
This provision does not apply to indebtedness discharged after 2013. See Parker Tax ¶76,125.
Parity for Exclusion from Income for Employer-Provided Mass Transit and Parking Benefits
Under Code Sec. 132(f), the general rule provides that the amount of transportation-related fringe benefits that are provided by an employer to any employee and that are excludible from gross income cannot exceed (1) $100 per month in the case of the aggregate of the benefits relating to employer-provided mass transit (e.g., transit passes and van pooling), and (2) $175 per month in the case of qualified parking, with both amounts subject to annual indexing for inflation. An exception is provided for years before January 1, 2014, in which the same dollar amount applies to employer-provided mass transit benefit as applies to qualified parking. Thus, for 2013, the indexed combined maximum amount an employee can exclude from income for employer-provided mass transit benefits $245 a month - the same as the indexed limit for qualified parking.
Beginning in 2014, the amount of employer-provided mass transit benefits that are excludible from income will revert to $100 per month, subject to indexing. After indexing, the exclusion amount for mass transit benefits for 2014 is $130 a month. The monthly limit for qualified parking for 2014 is $250. See Parker Tax ¶123,140.
Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property
Under Code Sec. 1367(a)(2), the decrease in shareholder basis in S corporation stock by reason of a charitable contribution of property is equal to the shareholder's pro rata share of the adjusted basis of such property. For other years, the general rule applies, and the amount of the basis reduction is the shareholder's pro rata share of the fair market value of the contributed property.
OBSERVATION: This adjustment is favorable because it keeps the shareholder's stock basis higher than it would otherwise be, thus allowing for additional losses to be taken. In addition, if the taxpayer sells the stock, the higher stock basis will result in less gain being recognized.
This basis adjustment rule expires for contributions made in tax years beginning after 2013. See Parker Tax ¶32,825.
Other Expiring Provisions Affecting Individuals
Other provisions expiring at the end of 2013 include:
1. the special rules under Code Sec. 1202 for excluding gain on qualified small business stock;
2. the credit under Code Sec. 35(a) for health insurance costs of eligible individuals;
3. the special expensing rules under Code Sec. 181(f) for certain film and television productions;
4. the credit under Code Sec. 25C for certain nonbusiness energy property;
5. the credit under Code Sec. 30C for alternative fuel vehicle refueling property;
6. the credit under Code Sec. 30D for two- or three-wheeled plug-in electric vehicles; and
7. the credit under Code Sec. 40A for incentives for biodiesel and renewable diesel.
EXPIRING TAX PROVISIONS AFFECTING BUSINESSES
Section 179 Expensing Deduction
One of the biggest tax incentives used by businesses, the Code Sec. 179 expensing election, will be substantially scaled back for tax years beginning after 2013. Under Code Sec. 179, for tax years 2010 through 2013, a taxpayer can elect to deduct up to $500,000 of the cost of certain qualifying property in the tax year the property is placed in service. The amount of this dollar limitation must be reduced dollar for dollar (but not below zero) by any amount by which the cost of Section 179 property placed in service during the year exceeds $2 million.
Caution: A special dollar limitation applies to sport utility vehicles (SUVs) and certain other vehicles.
Beginning in 2014, the aggregate dollar limitation is $25,000, and the reduction threshold amount is $200,000.
The scaled-back Code Sec. 179 deduction takes effect for purchases in tax years beginning after 2013. See Parker Tax ¶94,700.
Bonus Depreciation
A number of favorable depreciation provisions are scheduled to expire after 2013, including the popular bonus depreciation provision. Under Code Sec. 168(k), for certain property acquired after 2007 and before 2014, a taxpayer can claim a special additional depreciation allowance to recover part of the cost of the property placed in service during the tax year. The allowance, referred to as "bonus depreciation," applies only for the first year the taxpayer places the property in service. The bonus depreciation is equal to 50 percent of the adjusted basis of qualified property. The bonus depreciation then reduces the basis of the qualified property before any additional depreciation is calculated. The allowance is an additional deduction the taxpayer can take after any Code Sec. 179 deduction and before calculating regular depreciation under MACRS for the year the taxpayer places the property in service.
The bonus depreciation provision is generally not available for property placed in service after 2013. See Parker Tax ¶94,120.
Election to Accelerate AMT Credits in Lieu of Additional First-Year Depreciation
Under Code Sec. 168(k)(4), corporations and certain automotive partnerships can elect for their first tax year ending after March 31, 2008, to accelerate pre-2006 unused research credits or minimum tax credits in lieu of claiming the bonus depreciation allowance for certain eligible qualified property. Generally, this election applies to eligible qualified property acquired after March 31, 2008, and placed in service before January 1, 2014. Once made, the election cannot be revoked without IRS consent. See Parker Tax ¶94,120.
Tax Credit for Research and Experimentation Expenses
Under Code Sec. 41, taxpayers can take a credit for certain research expenses paid or incurred in a trade or business. Generally, the research credit is allowed for increasing research activities. The research credit is equal to the sum of the following three components: (1) 20 percent of the excess of qualified research expenses over the base amount; (2) 20 percent of the excess of basic research payments over the qualified organization base period amount; and (3) 20 percent of amounts paid to an energy research consortium for energy research.
The research credit is scheduled to expire for amounts paid or incurred after 2013. See Parker Tax ¶104,900.
Work Opportunity Tax Credit
Under Code Sec. 51, employers generally are allowed a 40 percent credit for qualified first-year wages paid or incurred during the tax year to individuals who are members of a targeted group of employees. In computing the work opportunity credit, the amount of the qualified wages that may be taken into account for any employee for a year is generally limited to $6,000. However, the limitation on qualified wages is different for certain targeted groups of employees. The limitation on qualifies wages is: (1) $12,000, $14,000, or $24,000 for certain qualified veterans; (2) $3,000 for qualified summer youth employees; and (3) $10,000 per year for long-term family assistance recipients.
The work opportunity credit terminates for amounts paid or incurred for employees who begin work for an employer after December 31, 2013. See Parker Tax ¶104,500.
Reduction in S Corporation Recognition Period for Built-in Gains Tax
Under Code Sec. 1374(d)(7), for purposes of determining the net recognized built-in gain for tax years beginning in 2012 or 2013, the American Taxpayer Relief Act of 2012 revised the holding period so that the recognition period is five years rather than 10. This rule applies separately with respect to any C corporation asset transferred in a carryover basis transaction to the S corporation.
After 2013, the recognition period returns to 10 years. See Parker Tax ¶31,785.
15-year Straight-line Cost Recovery for Qualified Leasehold Improvements, Qualified Restaurant Buildings and Improvements, and Qualified Retail Improvements
Under Code Sec. 168, a statutory 15-year recovery period and straight-line method is provided for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements placed in service after December 31, 2008, and before January 1, 2014.
In addition, also under Code Sec. 168, qualified property that meets the definition of both qualified leasehold improvement property and qualified restaurant property or qualified retail improvement property is eligible for the bonus depreciation deduction (assuming all other requirements are met).
These provisions expire for property placed in service in tax years beginning after 2013. See Parker Tax ¶94,315 and ¶94,710.
New Markets Tax Credit
Under Code Sec. 45D, a taxpayer is allowed a credit for a percentage of the amount it pays for a qualified equity investment in a qualified community development entity. This credit is called the "new markets credit" and is allowed to the taxpayer on the date the taxpayer makes the initial investment and each of the next six anniversary dates.
The amount of the credit on each of the credit allowance dates is equal to the amount of the qualified equity investment multiplied by a specified percentage. The specified percentage is 5 percent for the original investment date and the first two anniversary dates and 6 percent for the next four anniversary dates. There is a national limitation of $3.5 billion on the total amount of new markets credits that can be claimed by taxpayers in each calendar year.
The credit expires at the end of 2013. See Parker Tax ¶106,200.
Energy Efficient Commercial Buildings Deduction
Under Code Sec. 179D, a deduction is allowed for all or part of the cost of energy-efficient commercial building property. The deduction cannot exceed the excess (if any) of the product of $1.80 and the square footage of the building, over the aggregate amount of the energy efficient commercial building deductions allowed with respect to the building for all prior tax years. The basis of that property is reduced by the amount of the deduction allowed.
The deduction does not apply to property placed in service after December 31, 2013. See Parker Tax ¶96,555.
Credit for Construction of New Energy Efficient Homes
Under Code Sec. 45L(g), certain contractors are allowed a credit for constructed or manufactured qualifying energy efficient homes in the year such homes are sold or leased to other persons for use as a residence. The amount of this energy efficient home credit is $2,000 or $1,000, depending on whether the home is constructed or manufactured and on the energy saving standards satisfied.
The credit expires for qualified new energy efficient homes sold or leased after December 31, 2013. See Parker Tax ¶107,800.
Credit for Energy Efficient Appliances
Under Code Sec. 45M(b), manufacturers of energy efficient dishwashers, clothes washers, and refrigerators are allowed a credit equal to the sum of the credit amounts figured separately for each type of appliance produced during the calendar year ending with or within its tax year. The amount of the credit varies and depends on the appliance and the energy consumption the appliance uses.
The energy efficient appliance credit expires for appliances manufactured after 2013. See Parker Tax ¶107,900.
Other Expiring Provisions Affecting Businesses
Other provisions expiring at the end of 2013 include:
1. the employer wage credit under Code Sec. 45P for activated military reservists;
2. the Indian employment tax credit under Code Sec. 45A(f);
3. special rules under Code Sec. 170 for contributions of capital gain real property made for conservation purposes;
4. the enhanced charitable deduction under Code Sec. 170 for contributions of food inventory;
5. the seven-year recovery period for motorsports entertainment complexes;
6. the three-year depreciation period under Code Sec. 168 for race horses two years old or younger;
7. the election under Code Sec. 179E to expense advanced mine safety equipment;
8. the deduction allowable under Code Sec. 199 with respect to income attributable to domestic production activities in Puerto Rico;
9. the exceptions under Subpart F for active financing income;
various empowerment zone tax incentives; and
10. the mine rescue team training credit under Code Sec. 45N.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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