The Tax Increase Prevention Act of 2014.
By Mark E. Battersby
The passage of the Tax Increase Prevention Act of 2014 late last year retroactively extended 54 tax breaks—but only for the 2014 tax year. The so-called “tax extenders” law opens the door for specialty fabric professionals to claim many of these popular (but temporary) tax incentives when 2014 tax returns are filed, or even after they have been filed.
While the Tax Increase Prevention Act did not make any extenders permanent—nor extend any of them for the usual two-year period that has been customary—without the new law fabricators would be unable to claim business and energy incentives such as bonus depreciation, Section 179 first-year expensing and the research tax credit, among others.
Breaks for businesses
Among the provisions most likely to have an impact:
Business property write-offs. With 50 percent bonus depreciation, any business can deduct half the cost of new capital purchases in the first year. Bonus depreciation has now been extended for the cost of equipment acquired during the 2014 tax year.
Section 179 of the tax code has also been extended, allowing businesses to deduct the cost of business assets when they’re purchased, rather than over many years. In other words, Section 179 allows a business to deduct the entire cost (100 percent) of up to $500,000 of new or used computer equipment, sewing machines, die presses and more—in fact, it includes most equipment, software and other depreciable assets with less than a 20-year life.
To some, bonus depreciation may be more valuable than the Section 179 break because the Section 179 expensing deduction is limited to the taxable income of the business. Those actively involved in running a business can claim not only losses generated by 50 percent bonus depreciation against other income, but can also carry any still-unused losses back for two years and get a refund check from the government.
You may also be able to use Section 179 expensing on improvements or modifications made to leased equipment or property placed in service by December 31, 2014. There is, however, a limit of $250,000 on these so-called “qualifying leasehold improvements.”
New life for leasehold improvements. The new law allows specialty fabric professionals to continue using a 15-year “life” for improvements made to leased property placed in service in 2014, for any costs remaining after bonus depreciation or the Section 179 expensing deduction have been taken. This replaces the usual 39-year period under the standard MACRS (Modified Accelerated Cost Recovery System) depreciation system.
Work Opportunity Tax Credit. Under the tax extender bill, a business can again apply for the Work Opportunity Tax Credit if it hires military veterans and active reservists. An even larger credit is available to a small business that hires individuals who receive Supplemental Security Income or long-term family assistance, or were long-unemployed or service-disabled veterans. Other hiring-related provisions restored for the 2014 tax year include credits for businesses that hire qualified ex-felons or qualified summer youth employees.
Small business financing. Many fabricators have used a unique “small business stock” to finance the growth of their operations. The 100 percent exclusion from capital gain that was allowed on the sale or exchange of qualified small business stock held for more than 5 years by noncorporate investors has been extended. Stock acquired by investors in a business after 2014 will be entitled to exclude only the regular 50 percent of the gain realized when disposing of their interest in the operation.
Recognizing S corporation built-in gains. As the economy improves, many businesses are replacing much of their equipment and other business assets. Unfortunately, many are also discovering a corporate-level tax that is imposed at the highest marginal rate (currently 35 percent) on the so-called “built-in gain” of a business operating as an S corporation. That built-in gain is usually gain that arose prior to the operation’s conversion from a regular C corporation to an S corporation, and arises when assets are sold. Under the new law, an S corporation’s recognition period for built-in gains tax is five years, rather than 10 years.
Energy-related tax savings. The extension of the energy-efficient commercial buildings deduction allows an above-the-line deduction for energy-efficient commercial buildings. Last year, business owners who built or renovated property featuring renewable energy technology , such as solar panels or “green” lighting equipment, were able to take advantage of a special tax deduction. Until the current bill became law, that deduction could only be claimed for property placed in service before the end of 2013. Any such property opened in 2014 would now qualify for the deduction as well.
Other extended deductions
Narrower provisions, including tax breaks for film and theater producers, NASCAR® racetrack owners, racehorse owners, and rum producers in Puerto Rico and the Virgin Islands, are included in the Tax Increase Prevention Act. Generally, however, commuters who use public transportation, teachers who spend their own money on classroom supplies, individuals who claim the state and local sales tax deduction or higher education tuition, and people who live in states without state income taxes would have been denied these tax breaks without these one-year extensions, as would businesses.
Changing your mind, and your return
The new extensions approved so late in 2014 left little time for planning and may, in fact, require changes to already filed 2014 tax returns. Fortunately, although the extended provisions are for the 2014 tax year only, once a business’s tax returns have been filed, changes can be made on an amended tax return.
Generally a business or its owner may amend previously reported income, missed deductions and retroactive tax breaks within three years from the time the original return was filed, or within two years from the time the tax was fully paid, whichever is later.
Individuals and sole proprietors, among others, should use Form 1040X, Amended U.S. Individual Tax Return. A corporation that filed Form 1120 uses Form 1120X, Amended U.S. Corporation Income Tax Return, to file an amended return; S corporations and partnerships should check a box on the Form 1120S or Form 1065.
Money now, returns later
Uncle Sam, in the form of the Internal Revenue Service, usually wants its money sooner rather than later, a requirement that usually means pre-paying estimated tax bills or fully paying the expected tax bill on or before the deadline (either March 15 or April 15 for businesses and individuals using a calendar year).Today, however, businesses can delay filing their 2014 tax return with little worry about the IRS’s strict pre-payment rules.
Using Form 4868, “Application for Automatic Extension of Time to File a U.S. Individual Tax Return,” a business owner can obtain an automatic, six-month extension of time in which to file tax returns. Incorporated businesses may obtain the automatic six-month extension by submitting Form 7004, “Application for Automatic 6-Month Extension of Time to File Certain Business, Income Tax, Information, and Other Returns.” The automatic six-month extension also applies to the returns of pass-through entities such as partnerships, S corporations and limited liability companies (LLCs).
While a delay in filing tax returns does not usually extend the deadline for payment of taxes, the Tax Increase Prevention Act of 2014 is all about reducing an operation’s tax bill, making it unlikely that additional taxes will be due. It’s always advisable to use the assistance of a tax professional in taking advantage of the tax breaks that have been extended and ensuring they are claimed properly. A lower tax bill might not be sufficient compensation for the delays and additional expenses involved if the IRS questions any tax forms filed.
Mark E. Battersby, based in Ardmore, Pa., writes extensively on business, financial and tax-related topics.