Just before Christmas of 2014, our Congress decided to get in on the act and leave you a present under the tree. Waiting until the third week of December, Congress finally passed—and the President signed into a law—a bill that retroactively extended many beneficial tax provisions affecting individual taxpayers and business owners.
With mid-term elections behind them our representatives in Congress no longer had to be concerned about which side of the fence they appear to favor, paving the way for the passage of a long outstanding bill H. R. 5771 or the Tax Increase Prevention Act of 2014. A few of our representatives in Congress finally understood that sending a check for 40 percent of profits to the government does play a significant role in business owners’ ability to run their businesses efficiently, hire employees and invest (in the true sense) in capital assets.
The passing of this latest Tax Act considers many of the expired credits and deductions but of particular importance to many small business owners are as follows:
- Research and Development Expenditure Deduction and Credit—Remember you don’t have to have a laboratory to utilize this credit. If you are incurring costs associated with improving a method or process in your business you may qualify for this credit.
- Bonus Depreciation—Advancing the first year deduction on capital improvements. In 2012 and 2013 you were entitled to take 50 percent bonus depreciation for assets placed in service during those years. TIPA extends the 50 percent bonus depreciation provision for qualifying property purchased and placed in service before January 1, 2015.
Section 179 Depreciation—For the 2014 tax year, you can now expense up to $500,000 of qualified property placed into service during the year. Had the tax break not been extended, the maximum amount you could expense for 2014 would have been $25,000. Note that the total amount of property you can place into service before having to reduce your section 179 deduction is $2 million. The amounts that may be expensed also apply to certain qualified leasehold improvements.
One Hundred Percent Exclusion of the Gain from the Sale of Small Business Stock—In order to stimulate investment in small businesses, the 1993 tax law introduced IRC section 1202 which allows for the exclusion of up to 50 percent of the realized gain on the sale of qualified small business stock (60 percent for certain empowerment zone businesses) that were acquired before 2009. The exclusion was increased to 75 percent by the American Recovery and Reinvestment Act and applies to stock acquired after February 17, 2009 and before September 27, 2010. The Small Business Jobs Act of 2010 increased the exclusion to 100 percent. The provision was extended an additional year with the passage of The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. In essence a business owner who sells the shares of his C Corporation can effectively exclude up to 100 percent of the gain on the sale provided that the shares were acquired during the original issue, gross assets could not have exceeded $50 million for any period of time between issue and sale and the corporation may not have been an S Corporation. The gain is limited to the greater of $10 million or 10 times the taxpayer’s basis in stock issued by the corporation. This provision was extended in 2014 under the TIPA.
Built-In Gain Tax Reduction of Recognition Period of S Corporations—The Tax Reform Act of 1986 introduced IRC Section 1374(c) which implemented a tax on the appreciated value “captured” within the C Corporation at the time of the S election. The basic premise of this ruling dictates that a C Corporation whose value has increased since inception and, therefore, creates goodwill, the appreciated or “built-in” value of that corporation should not escape the tax rates that are attributable to C Corporations in lieu of the more favorable personal tax rates. The corporation could be subjected to a 35 percent tax on that appreciated value called a Built-In Gains Tax. The potential for this tax to be imposed was for a period of 10 years after the S corporation election was made and is triggered by the sale of any of the appreciated property or unrecognized accounts receivables originally held within the C Corporation. The 10-year holding period was temporarily reduced to seven years during the passing of the American Recovery and Reinvestment Act and further reduced to five years with the passing of The Small Business Jobs Act of 2010. TIPA currently extended the reduced five year holding period through 2014.
The Clock is Ticking
While this is great news to many, understand that unlike your visiting holiday guests, these provisions won’t hang around for very long. In fact, as many of you are reading this the provisions have already run their course. The extension for many of these provisions only lasted until midnight of December 31, 2014.
Furthermore, the Internal Revenue Service announced that even though the bill was passed in late in December it does not anticipate any delays for the 2015 filing season. The IRS began accepting returns on January 20.
“We have reviewed the late tax law changes and determined there was nothing preventing us from continuing our updating and testing of our systems,” says IRS Commissioner John Koskinen. “Our employees will continue an aggressive schedule of testing and preparation of our systems during the next month to complete the final stages needed for the 2015 tax season.”
It’s no secret that small businesses drive the economy, but new regulations and continued uncertainty about the future tax environment are a drag on our forecasting and decision making process—and 2014 was no exception. As we close out 2014 and begin 2015 with some added momentum many of you ask, “What’s in store for us on the tax front during the new year?”
Having taken control of both the House and Senate by the Republicans, expect some significant activity towards a long-term tax bill that may provide some stability to our tax structure and environment. With a little luck and some bipartisan efforts maybe our next gift will get to us in time to do some meaningful planning. I’m eager to see what the Easter bunny will bring.
U.S. Treasury Circular 230 requires that this firm advise you that any tax advice provided was not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that the IRS could impose upon you.