Providing their usual timely and efficient service, Congress has finally moved to extend several tax provisions which expired at the beginning of the year. H.R.5771 was passed by the House on December 3, 2014, and was just approved by the Senate on December 16, 2014. President Obama is expected to sign it into law. The tax extenders are generally retroactive to January 1, 2014. Following are some of the key provisions in the act.
Section 179 expensing of fixed asset purchases
The biggest news for many small businesses is that the Section 179 expensing limit is increased to $500,000, as it has been for several years. Section 179 lets you deduct (subject to certain limitations) the cost of fixed assets in the current year, rather than depreciating them over a number of years. Many taxpayers with fixed asset needs have been waiting for Congress to act before deciding when and how much to purchase. Tax advisors have been running two tax planning scenarios for their clients – one with Section 179 at $25,000, and one at $500,000.
The investment-based phaseout was increased from $200,000 to $2 million. If you placed more than $2 million of assets into service in 2014, your Section 179 deduction will be limited.
Check our other posts for more details on the Section 179 deduction:
Unfortunately, these were just one year fixes. For tax years beginning after 2014, the maximum expensing amount is again scheduled to drop to $25,000 and the investment-based phaseout amount is scheduled to drop to $200,000.
50% bonus depreciation
The cost of property with a useful life longer than one year generally can’t be deducted in the year of acquisition. Instead, the cost is depreciated over a number of years. The depreciable life is prescribed by Congress and depends on the kind of property purchased, and on the type of business it’s used in.
Bonus depreciation allows the taxpayer to deduct a percentage of the cost in the year the property is placed in service. In 2014, the percentage allowed is now 50% (increased from 0%). The remaining 50% of cost is then depreciated over the life of the asset.
Click here to learn more about the bonus depreciation rules.
Luxury auto depreciation
Under the luxury auto limits, depreciation deductions that can be claimed for passenger autos are subject to dollar limits that are annually adjusted for inflation. For passenger automobiles placed in service in 2014, the adjusted first-year limit is $3,160. For light trucks or vans, the adjusted first-year limit is $3,460.
A “luxury auto” is a four-wheeled vehicle which is manufactured primarily for use on public roads and is rated at an unloaded gross vehicle weight rating (GVWR) of 6,000 pounds or less. For a truck or van, the 6,000 pound weight test is applied to the truck’s gross (loaded) vehicle weight rather than its unloaded gross vehicle weight. The GVWR of a vehicle can be found at the manufacturer’s website, or at sites like edmunds.com. Ambulances, hearses, taxis, limousines, and certain other vehicles which typically aren’t used for personal purposes are exempt from this definition.
The new law increases these first-year limits by $8,000. The increase applies whether you depreciate the vehicle or use Section 179 expensing. So, first year depreciation or expensing of a luxury auto is limited to $11,160, and light trucks or vans are limited to $11,460.
15-year life for qualified real property
Leasehold improvements used in a trade or business are generally depreciated over 39 years. In 2014, taxpayers could depreciate certain qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property over 15 years instead. This more than doubled the annual deduction for those improvements. The act extends the 15-year life for qualified property placed in service in 2014.
Research credit
The research & development credit has been extended for 2014. The provision allows taxpayers with qualified research expenses to claim a credit for a portion of those expenses. Many states (including Pennsylvania) also offer a credit.
S corporation 5-year built-in gains recognition period
When a corporation that was formed as a C corporation elects to become an S corporation (or where an S corporation receives property from a C corporation in a nontaxable carryover basis transfer), the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a recognition period.
In 2012 and 2013, the recognition period was reduced to five years. This made it easier for S corporations to sell some or all of their assets without paying tax at the corporate level.
The five year period now also applies to 2014.
Nontaxable IRA Transfers to Eligible Charities
Taxpayers who are age 70 1/2 or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year. These distributions aren’t subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer’s return.
This provision had expired. The act extends it to charitable IRA transfers made in tax years beginning before Jan. 1, 2015.
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