Several provisions in particular can produce significant tax savings for businesses and individuals on their 2014 income tax returns—but quick action (before Jan. 1, 2015) may be needed to take advantage of some of them.
Provisions affecting businesses
TIPA provisions most relevant to businesses include:
50% bonus depreciation. This additional first-year depreciation allows businesses to recover the costs of depreciable property more quickly for qualified assets. Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold improvement property.
The provision also allows corporations to claim unused alternative minimum tax credits in lieu of bonus depreciation. The bonus depreciation extension generally applies only to property placed in service in 2014, so if you anticipate making major asset purchases in the next year or two, you might want to act quickly to make them before year end to take advantage of these benefits. But bear in mind that, if you qualify for Section 179 expensing, it could provide a greater tax benefit.
Sec. 179 expensing election. TIPA extends higher limits under Sec. 179 of the Internal Revenue Code, which permits businesses to immediately deduct (or “expense”) the cost of qualified assets (such as tangible personal property and off-the-shelf computer software) that are purchased for use in a trade or business in the year they’re placed in service, instead of recovering the costs more slowly through depreciation deductions.
Because of the extension, a business can deduct up to $500,000 in qualified new or used assets. The deduction is subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeds $2 million, meaning smaller businesses generally reap the greatest benefit. The expensing election can be claimed only to offset net income, not to reduce net income below zero.
Without the extension, the limit for 2014 would have dropped to $25,000, with a $200,000 phaseout threshold. Now it’s scheduled to do so on Jan. 1, 2015.
If your business is eligible for full Sec. 179 expensing, you might obtain a greater benefit from it than from bonus depreciation, because the expensing provision can enable you to deduct 100% of an asset acquisition’s cost. Moreover, Sec. 179 expensing is available for both new and used property. Bonus depreciation, however, could benefit more taxpayers than Sec. 179 expensing, because it isn’t subject to any asset purchase limit or net income requirement. You’ll also want to consider state tax consequences.
Depreciation-related breaks for qualified leasehold improvement, restaurant and retail-improvement property. TIPA extends the ability to:
- Apply up to $250,000 of the $500,000 Sec. 179 expensing limit to such property, and
- Apply a shortened recovery period of 15 years (rather than 39 years) to such property.
Work Opportunity credit. This credit is available for hiring from certain disadvantaged groups, such as food stamp recipients, ex-felons and veterans who’ve been unemployed for four weeks or more. The maximum credit ranges from $2,400 for most groups to $9,600 for disabled veterans who’ve been unemployed for six months or more.
Transit benefit parity. TIPA extends the provision that established equal limits for the amounts that can be excluded from an employee’s wages for income and payroll tax purposes for parking fringe benefits and van-pooling / mass transit benefits. The limits for both types of benefits are now $250 per month for 2014. Without the extension of parity, the limit for van-pooling / mass transit would be only $130.
Review your tax planning now
Although there’s been a lot of talk about Congress passing comprehensive tax reform legislation, it’s quite possible that we could reach the end of 2015 before knowing whether the provisions discussed above will apply for the 2015 tax year. That’s why your tax planning needs to be a year-round activity. For more information on how we can help you keep on top of how new legislation, as well as changes in your circumstances, affect your planning, reach out to David Sordello, Corporate Tax Partner (David.Sordello@armaninoLLP.com or 408.200.6403).