Senate Finance Committee Issues Tax Extenders

by Larry K. Greenwalt, CPA, Chairman of the Board and Anita Sherman, CPA, Managing Partner

Below are the two most critical updates.  We recommend you review these extensions as they may apply to you and talk to us as to what personal and business impact they have.

Individual Provision

Tax-free distributions from individual retirement plan for charitable purposes

The bill extends for two years the provision that permits an Individual Retirement Arrangement (“IRA”) owner who is age 70-1/2 or older generally to exclude from gross income up to $100,000 per year in distributions made directly from the IRA to certain public charities. A two year extension of this provision is estimated to cost $1.8 billion over 10 years.

This is a good continuation especially for Indiana taxpayers.

Business Provision

Research and experimentation tax credit

The bill extends for two years, through 2015, the 20 percent traditional research tax credit and the 14 percent alternative simplified credit. A two year extension of this provision is estimated to cost $15.4 billion over 10 years.

What is next? 

The Senate Finance Committee is the vital starting point for extenders.  The extenders bill will now to go to the Senate floor for consideration.  It is strongly anticipated that the Senate will give a heavy vote in favor of the extenders bill – signaled by the good bipartisan voice vote (hardly a nay was heard) on final passage in the Finance Committee.  At the moment, it’s uncertain when the Senate will take up the tax extenders bill (this has to do with bigger issues of managing the Senate floor), but the strong action by the Finance Committee and the good bipartisan support speaks to it being brought forward for consideration by the Senate sooner rather than later.

The House Ways and Means Committee is switching gears from tax reform to tax extenders and will have a hearing next week on the issue.  The Committee is growing weary of continually having to do tax extenders and would like to work the good extenders into a new, revamped tax code.

It’s too early to say what the House Republicans will do. But look for the Democrats in the Senate to pass an extenders bill and then happily to start asking why the House isn’t joining them in providing popular tax relief to working families and businesses in this country.   While the popular thought is tax extenders won’t happen until after the November elections in a lame duck session, given today’s bipartisan display there is a chance extenders may be addressed prior to the elections, with both parties claiming the mantle of tax cuts.

Below is a list of other extensions that might be useful.  Again, please review these with your tax advisor to see if they are applicable.

Individual Provisions

Deduction for expenses of elementary and secondary school teachers

The bill extends for two years the $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom. A two year extension of this provision is estimated to cost $430 million over 10 years.

Mortgage Debt Relief

Under current law, taxpayers who have mortgage debt canceled or forgiven after 2013 may be required to pay taxes on that amount as taxable income. Under this provision, up to $2 million of forgiven debt is eligible to be excluded from income ($1 million if married filing separately) through tax year 2015. This provision was created in the Mortgage Debt Relief Act of 2007 to shield taxpayers from having to pay taxes on cancelled mortgage debt stemming from mortgage loan modifications through 2010. It was extended through 2013 by the Emergency Economic Stabilization Act of 2008. A two year extension of this provision is estimated to cost $5.4 billion over 10 years.

Deduction for mortgage insurance premiums

The bill extends the ability to deduct the cost of mortgage insurance on a qualified personal residence. The deduction is phased-out ratably by 10% for each $1,000 by which the taxpayer’s AGI exceeds $100,000. Thus, the deduction is unavailable for a taxpayer with an AGI in excess of $110,000. The bill extends this provision for two additional years, through 2015. A two year extension of this provision is estimated to cost $1.8 billion over 10 years.

Deduction for state and local general sales taxes

The bill extends the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes for two years. A two year extension of this provision is estimated to cost $6.5 billion over 10 years.

Above-the-line deduction for higher education expenses

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) created an above-the-line tax deduction for qualified higher education expenses. The maximum deduction was $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns). The bill extends the deduction to the end of 2015. A two year extension of this provision is estimated to cost $596 million over 10 years.

Business Provisions

New Markets Tax Credit

Through the New Markets Tax Credit (NMTC) program, the federal government is able to leverage federal tax credits to encourage significant private investment in businesses in low-income communities. The program provides a 39 percent tax credit spread over 7 years. The bill extends the New Markets Tax Credit for two years, permitting a maximum annual amount of qualified equity investments of $3.5 billion. A two year extension of this provision is estimated to cost $1.8 billion over 10 years.

Employer wage credit for activated military reservists

The bill extends for two years, through 2015, the provision that provides eligible employers with a credit against the employer’s income tax liability for a taxable year in an amount equal to 20 percent of the sum of differential wage payments to activated military reservists. A two year extension of this provision is estimated to cost $1 million over 10 years.

Work Opportunity Tax Credit

This bill extends for two years, through 2015, the provision that allows businesses to claim a work opportunity tax credit equal to 40 percent of the first $6,000 of wages paid to new hires of one of eight targeted groups. These groups include members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program, qualified veterans (including those who are unemployed, disabled, or receiving TANF), qualified ex-felons, designated community residents, vocational rehabilitation referrals, qualified summer youth employees, qualified food and nutrition recipients, qualified SSI recipients, and long-term family assistance recipients. A two year extension of this provision is estimated to cost $2.85 billion over 10 years.

Three-year depreciation for racehorses

The modification extends for two years, through 2015, the three year cost recovery period for all race horses. A two year extension of this provision is estimated to cost $9 million over 10 years.

15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements

The bill extends for two years, through 2015, the temporary 15-year cost recovery period for certain leasehold, restaurant, and retail improvements, and new restaurant buildings, which are placed in service before January 1, 2016. The extension is effective for qualified property placed in service after December 31, 2013. A two year extension of this provision is estimated to cost $4.8 billion over 10 years.

Enhanced charitable deduction for contributions of food inventory

The bill extends for two years the provision allowing businesses to claim an enhanced deduction for the contribution of food inventory. A two year extension of this provision is estimated to cost $292 million over 10 years.

Bonus depreciation

The bill extends 50 percent bonus depreciation to qualified property purchased and placed in service before January 1, 2016 (before January 1, 2017 for certain longer-lived and transportation assets). It also makes a conforming change to the percentage of completion rules for certain long term contracts. A two year extension of this provision is estimated to cost $2.85 billion over 10 years.

Acceleration of AMT credits in lieu of bonus depreciation

Under current law, a taxpayer has the option to forgo bonus depreciation in favor of accelerating corporate Alternative Minimum Tax (AMT) credits acquired in tax years prior to 2006. This provision would extend the election to accelerate AMT credits for two years, through 2015. A two year extension of this provision is estimated to cost $602 million over 10 years.

Temporarily extend increase in the maximum amount and phase-out threshold under section 179.

For taxable years beginning in 2014 and thereafter, a taxpayer may immediately expense up to $25,000 of Section 179 property annually, with a dollar for dollar phase-out of the maximum deductible amount for purchases in excess of $200,000. This proposal would increase the maximum amount and phase-out threshold in 2014 to the levels in effect in 2010 through 2013 ($500,000 and $2 million respectively). The proposal would also extend the definition of Section 179 property to include computer software and $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for two years. A two year extension of this provision is estimated to cost $3.1 billion over 10 years.
Special rules for qualified small business stock

Generally, non-corporate taxpayers may exclude 50 percent of the gain from the sale of certain small business stock acquired at original issue and held for more than five years. For stock acquired after September 27, 2010 and before January 1, 2014, the exclusion is 100 percent and the AMT preference item attributable for the sale is eliminated. The bill extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2016 and held for more than five years. A two year extension of this provision is estimated to cost $1.95 billion over 10 years.

Basis adjustment to stock of S corporations making charitable contributions of property

The bill extends for two years the provision allowing S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder’s adjusted basis in the S corporation. A two year extension of this provision is estimated to cost $104 million over 10 years.

Reduction in S corporation recognition period for built-in gains tax

If a taxable corporation converts into an S corporation, the conversion is not a taxable event. However, following such a conversion, an S corporation must hold its assets for a certain period in order to avoid a tax on any built-in gains that existed at the time of the conversion. The American Recovery and Reinvestment Act reduced that period from 10 years to 7 years for sales of assets in 2009 and 2010. The Small Business Jobs Act reduced that period to 5 years for sales of assets in 2011. The bill extends the reduced 5-year holding period for sales occurring in 2014 and 2015. A two year extension of this provision is estimated to cost $232 million over 10 years.

Energy Provisions

Plug-in Electric Motorcycles and Highway Vehicles

The bill extends for two years, through 2015, the individual income tax credit for highway-capable plug-in motorcycles. The provision is also modified to no longer allow 3-wheeled vehicles to qualify. A two year extension of this provision is estimated to cost $2 million over 10 years.

Please don’t hesitate to contact us if you have any questions.

Larry K. Greenwalt, CPA | Chairman of the Board | 317-240-4489 | lgreenwalt@greenwaltcpas.com

Anita Sherman, CPA | Managing Partner | 317-240-4486 | asherman@greenwaltcpas.com