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On December 19, 2014, President Obama signed H.R. 5771, the “Tax Increase Prevention Act of 2014” (TIPA), into law. Generally, the bill provides for a one year extension (through 2014) of more than 50 individual, business and energy provisions, many of which have been in place for years but would have expired after 2013 if not extended. Below is a list of highlights from the bill that may be of interest to you or your clients.
1. Nontaxable IRS Transfers to Charity – Taxpayers who are 70 1/2 or older can make tax free distributions of up to $100,000 directly to charity from an individual retirement account (IRA). A direct contribution from an IRA to charity is beneficial because the distribution will count towards an owner’s required minimum distribution for 2014 but the contribution does not count as a distribution included in gross income or subject to limitations under §170 on charitable contributions.
2. State and Local Sales Tax Deduction – Taxpayers who itemize deductions may elect to deduct state and local general sales and use taxes instead of state and local income taxes. This provision is especially important for Florida residents who do not pay state income taxes and, therefore, would otherwise be left out from claiming a deduction on their federal income tax return for state and local taxes paid.
3. Qualified Conservation Contributions. Qualified conservation contributions retain the special tax status first implemented in the Pension Protection Act of 2006. Qualified conservation contributions are grants of certain interests in real estate given to qualified charities for specific purposes. Generally, donations of real estate (a capital asset) are limited to 30% of a taxpayer’s income (10% for a corporation) and any unused deduction may be carried forward to the next five years. Under TIPA, the allowable income tax deduction for qualified charitable contributions is increased to 50% of the taxpayer’s income and any unused deduction is carried forward for fifteen years. If the taxpayer is a “qualified farmer or rancher,” then the deduction limitation is increased to 100% of a taxpayer’s income if the taxpayer retains the right to use the property for agriculture or livestock production after the contribution. For more information about qualified charitable contributions, please see our previous article.
4. Work Opportunity Tax Credit – The work opportunity tax credit permits employers who hire members of certain groups, including qualifying veterans, to claim a credit against income tax equal to a percentage of first year wages up to $6,000 per employee. The amount of the credit can vary depending upon the particular circumstances of the new employee.
5. Reduced S Corporation Built-In Gains Tax Recognition Period – Generally, when a C Corporation elects to become an S Corporation, the S Corporation will be taxed at the highest corporate rate on all built-in gains existing at the time of the conversion if the gain is subsequently recognized during the ten-year “recognition period.” For S Corporation tax years beginning in 2012 and 2013, the recognition period was reduced to five years. TIPA extends the shortened five-year recognition period for taxable dispositions involving former C Corporations.
6. Exclusion of 100% of Gain on Certain Small Business Stock – Under § 1202, 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. Prior to TIPA, the exclusion would have been limited to 50% of the gain for stock acquired in 2014.
7. Lower Shareholder Basis Adjustments for Charitable Contributions from S Corporations – Prior to the Pension Protection Act of 2006, when an S Corporation made a contribution of money or other property to a charity, each shareholder took into account his or her pro-rata share of the fair market value of the property contributed when determining his or her own income tax liability, and a shareholder’s basis in his or her stock was reduced by his or her pro-rata share of the charitable contribution. The Pension Protection Act of 2006 changed this rule to limit a shareholder’s basis reduction in S stock to his or her pro-rata share of the adjusted basis of the property contributed to charity. TIPA extends this treatment for contributions made in tax years beginning in 2014.
8. Bonus First Year Depreciation – TIPA extends the 50% first year bonus depreciation deduction under Internal Revenue Code § 168(k) to qualified property acquired and placed into service before January 1, 2015. As a result, a taxpayer can accelerate depreciation deductions for certain newly-acquired property. Other than for certain, limited exceptions, the taxpayer must be the original user of the property. The bonus depreciation deduction is allowed for both regular tax and AMT purposes, but not for purposes of calculating earnings and profits.
9. Increased § 179 Deduction – Under Internal Revenue Code § 179, a taxpayer generally may elect to claim an expense deduction rather than depreciate a certain amount of the cost of new or used tangible personal property placed into service in the taxpayer’s trade or business during the tax year. The maximum amount that may be expensed is reduced dollar-for-dollar to the extent the § 179 property placed into service during the tax year exceeds the investment cap. TIPA extends the $500,000 maximum expensing amount and the $2,000,000 investment cap for qualified property placed into service before January 1, 2015. Without this extension, the maximum amount that could have been expensed would have dropped to $25,000 and the investment cap would have dropped to $200,000.
The full text of TIPA can be found here.