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Legislation that retroactively extends over 50 expired tax provisions cleared the Senate on December 16, 2014, and is headed to the President for his signature. The aptly named “Tax Increase Prevention Act of 2014” takes the idea of “just in time” extensions to a whole new level.
While the provisions were extended retroactively for the 2014, they were only extended until the end of 2014. Yes, all these provisions will again lapse when the 2014 countdown clock hits zero. Business owners who are contemplating year end asset purchases must act quickly—there are only two weeks left before the provisions expire (yet) again.
Although over 50 expired tax provisions are (temporarily) revived, most of them have little value to small businesses. However, a handful of them can make a significant difference. Here’s a quick summary of key tax provisions to help determine if you need to act, or need to work with your accountant to make sure actions already taken qualify for the extended tax breaks.
$500,000 Expensing Deduction Available in 2014
The expensing election allows you to deduct some—or all—of the costs of property in the year purchase. Without this provision, the deductions would have to be deducted over time (depreciated) with only a small about deductible in the first year. The expensing limitations had been raised to very generous limits during the Great Recession and have been dropping back down over the past several years. Congress retroactively reinstated the $500,000 limit and the $2 million annual investment limit until year-end. Without the extension, the amounts for 2014 would have plummeted to a first-year maximum of 25,000 and an investment limit of $200,000. As it stands right now, those lower limits will become effective on January 1, 2015.
First Year Bonus Depreciation of 50 Percent Still an Option
Depreciation is the method used to recover the cost of a capital asset by permitting a deduction each year over a pre-determined depreciation period for that type of asset. For example, as a highly simplified example, if your property cost $100,000 and has a depreciable period of five years, you can deduct only 20 percent (or $20,000) in each year. Bonus depreciation allows a taxpayer to claim a larger depreciation deduction in the first year. For 2014, the bonus depreciation amount will remain at 50 percent, rather than vanishing altogether as it would have absent the extenders bill. So, in the example above, using bonus depreciation, you can claim a deduction for $60,000 in the first year ($100,000 - $50,000 bonus depreciation, plus $10,000 which is 20 percent of the remaining $50,000). The remaining $40,000 will be deducted over the next four years. And, yes, the expensing election can be combined with bonus depreciation to provide an even larger first-year deduction.
There’s Good News for Restaurateurs and Retailers
While a restaurant owner or a retailer can always opt to expense all or part of the cost of the equipment used in the business, the expensing election has not always been available for improvements to the property itself. These improvements had to be depreciated over a significant period of years. For 2012 and 2013, this prohibition did not apply—although the amount that could be expensed was lower than that allowed for other property. Under these rules, up to $250,000 of the cost of updating and refurbishing a restaurant, retail store or other leased commercial property could be expensed. This special expensing provision was extended through 2014, providing a tremendous benefit to both retailers and restaurateurs whose businesses can be negatively affected by run-down or dated premises.
And, there’s more good news if you own a restaurant, retail store or hold a commercial lease. Normally improvements made to these types of property have to be depreciated over 39 years—the same period of time required for the building itself. But, the new law extends a provision that permits a 15-year recovery period for qualified leasehold, restaurant, and retail property improvements placed in service before January 1, 2015.
How does all this work together? Assume that a restaurant owner decided to completely change the premises from fast-casual to upscale fine dining, changing not only the décor, but enlarging the kitchen, installing new lighting throughout and, expanding to include a private dining area. Total cost? $800,000. Without the passage of these extender provisions, the first-year deduction would be roughly $20,500 (or 1/39th of the total cost). With the extenders, the total first year deduction could be as high as $543,333 ($250,000 (expensing election) + $275,000 (50% bonus depreciation) + $18,333 (1/15th of remaining cost after expensing and bonus depreciation). That’s more than one-half million dollars of additional deductible expenses in the first year. Now, whether it’s wise to claim that the full amount depends on a wide variety of factors which an accountant familiar with the business can help sort through.
R & D Credit Can Benefit Small Businesses in 2014
The research and development (R&D) credit was enacted to provide an incentive for new product development by allowing companies to recoup tax dollars for research costs they incurred. The credit has been retroactively extended through 2014. While the R & D credit is generally regarding as the purview of business, small companies often engage in research and development activities that may qualify for the credit. (And, since a tax credit reduces tax liability dollar-for-dollar, any credit is particularly useful in lowering your tax bill.) There is an alternative method of computing the R & D credit that can be particularly helpful for small companies. If you are engaged in any type of new product development, a conversation with a tax professional could save you a significant amount in taxes.
Incorporate Now to Leverage the 100-percent Capital Gain Exclusion
If you are contemplating incorporating your business—or converting your limited liability company to a corporation—act fast! If you incorporate before the end of 2014, will grant you a surprising break when you sell your stock in the future: You won't have to pay tax on the gain from the sale! A little-known tax provision excludes the gain from the sale of qualified small business stock that was acquired when it was originally issued and held for a required period of time. This is an especially family-business friendly provision because the tax break is preserved if the stock is transferred by gift or upon the death of the original owner. The 100 percent exclusion is good only for stock issued before January 1, 2015. Although 50 percent of the gain can be excluded from the sale of stock issued after December 31, 2014, the interplay of various tax provisions makes this far less appealing.
Other Provisions Aid Individuals and Businesses
These are just the provisions that are most likely to affect small business, but other provisions, such as tax incentives for empowerment zones, could certainly apply to many small businesses. In addition, numerous individual tax breaks, such as the deduction for state and local sales tax and the exclusion for cancellation of mortgage debt income, were extended. These individual provisions may affect the business owner—if not the business itself directly. For those interested in learning more of the details regarding the provisions, including those that are targeted at individuals and large businesses, The CCH Tax Briefing: Tax Increase Prevention Act of 2014/ABLE Act/Omnibus Funding Agreement provides a comprehensive overview.
As with the Omnibus Spending Agreement passed last week, the 76-16 vote approving tax extenders was largely bi-partisan. It took until the waning days of the 113th Congress to pass legislation with significant bi-partisan support. With the House and the Senate both adjourned, this piece of legislation marks the end of the 113th Congress. When Congress reconvenes on January 6, 2015, it will mark the start of the 114th Congress, one that will find Republicans in control of both the House and the Senate. Whether this heralds a more effective legislative branch in 2015 remains to be seen—but it should prove an interesting year.