Many popular but temporary tax incentives have been extended again by the Tax Increase Prevention Act of 2014. Among them is Code Sec. 179 small business expensing, bonus depreciation, the research tax credit, and the Work Opportunity Tax Credit. This letter provides some highlights of the 2014 Tax Prevention Act as it applies to business taxpayers.
Code Sec. 179 Small Business Expensing
The 2014 Tax Prevention Act extends the enhanced Code Sec. 179 small business expensing through 2014. Therefore, the Code Sec. 179 dollar limit for tax years 2012, 2013 and 2014 is $500,000 with a $2 million investment limit. The rule allowing off the shelf computer software is also extended. For tax years beginning after 2014, the dollar limit reverts to $25,000 with a $200,000 investment limit.
The 2014 Tax Prevention Act extends 50 percent bonus depreciation through 2014. Some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2015. Bonus depreciation has been used as an economic stimulus in many tax bills in recent years. One hundred percent bonus depreciation generally expired at the end of 2011 (with certain transportation and longer period production property eligible for 100 percent bonus depreciation through 2012).
Bonus depreciation also relates to the dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile in service within a business, and for each succeeding year. If bonus depreciation had not been extended, 2013 would have been the final year in which substantial first-year write-offs for the purchase of a business automobile were available.
To be eligible for bonus depreciation, qualified property must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. These requirements encompass a wide-variety of assets. The property must be new and placed in service before January 1, 2015 (January 1, 2016 for certain longer production period property and certain transportation property).
Subject to the investment limitations, Code Sec. 179 expensing remains a viable alternative, especially for small businesses. Property qualifying under Code Sec. 179 expensing may be used or new, in contrast to bonus depreciation’s “first-use” requirement.
Research Tax Credit
The 2014 Tax Prevention Act extends through 2014 the incremental research tax credit, which expired after 2013. Commonly called the research or research and development credit, the incremental research credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research. The credit applies to excess of qualified research expenditures for the tax year over the average annual qualified research expenditures measured over the four preceding years.
Work Opportunity Tax Credit
The 2014 Tax Prevention Act extends through 2014 the Work Opportunity Tax Credit (WOTC), which rewards employers that hire individuals from targeted groups with a tax credit. Under the revived WOTC, employers hiring an individual within a targeted group (generally, otherwise hard-to-employ workers) are eligible for a credit generally equal to 40 percent of first-year wages up to $6,000. The WOTC is part of the general business credit.
Qualified Leasehold/Retail Improvements, Restaurant Property
The 2014 Tax Prevention Act extends through 2014 the 15-year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property. The cost of nonresidential real property is generally recovered under the modified accelerated cost recovery system (MACRS) using the straight-line method of depreciation over a recovery period of 39 years, using a mid-month convention. However, this incentive allows qualified leasehold improvement, restaurant and retail improvement property a reduced recovery period using the straight line method and half-year convention if placed into service within the specified time period.
S Corporation Built-In Gains Tax
An S corporation such as yours is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, income is generally passed through to the shareholders and taxed at their individual tax rates.
However, a corporate-level tax is imposed on an S corporation’s net recognized built-in gains attributable to assets held at the time it converted from a C corporation to an S corporation. The built-in gains tax also applies if an S corporation sells, during the recognition period, assets that were acquired in a carryover basis transaction; for example, a tax-free reorganization. To avoid the built-in gains tax, the S corporation must not sell the assets during the ten-year recognition period applicable to the assets.
The Tax Increase Prevention Act temporarily extends the reduced recognition period and eliminates the tax for net recognized built-in gains of S corporations if the fifth tax year in the ten-year recognition period precedes the 2014 tax year. The recognition period was initially reduced by the American Recovery and Reinvestment Tax Act of 2009 (2009 Recovery Act) if the seventh year in the ten-year recognition period preceded the 2009 or 2010 tax years. Subsequently, the Creating Small Business Jobs Act of 2010 (2010 Jobs Act) reduced the recognition period if the fifth year in the ten-year recognition period preceded the 2011 tax year. The American Taxpayer Relief Act of 2012 (2012 Tax Relief Act) extended the five year reduced recognition period to 2012 and 2013.
The built-in gains tax can be triggered by downsizing or other business survival decisions, including the disposal of unused assets to raise needed cash. Consequently, the relief provided by the 2014 Tax Prevention Act and the previous legislation discussed above may be very valuable for small family or privately-owned businesses.
A number of other business tax incentives that were due to expire after 2013 are extended through 2014 under the 2014 Tax Prevention Act. They include, among others:
1. New Markets Tax Credit
2. Employer wage credit for activated military reservists
3. Subpart F exceptions for active financing income
4. Look through rule for related controlled foreign corporation payments
5. 100 percent exclusion for gain on sale of qualified small business stock
6. Enhanced deduction for charitable contributions of food inventory
7. Treatment of certain dividends of regulated investment companies (RICs)
8. Treatment of RICs as qualified investment entities
9. Basis adjustment to S corporation stock making charitable donations of property
The 2014 Tax Prevention Act has a significant impact on all taxpayers. If you have any questions about the extenders or how it affects you, please call our office (949) 910-4255 for an appointment. We will be happy to assist you.