BY KEVIN M. HEDLEY, MS, CPA, PFS
“The farther backward you can look, the
farther forward you are likely to see.” Winston
Churchill once said.
We do not need to look to far back in history
to see what was going to transpire in
December 2014 with regard to the tax law.
But not looking too far back does not allow
us to see too far forward either. Starting in
early December and finally being resolved
in mid December, the House, the Senate and
the President came together and enacted
the Tax Increase Prevention Act of 2014.
This law in many ways makes 2014 a tax
based rehash of 2013 but unfortunately the
law only lasted until Dec. 31.
The Tax Increase Prevention Act of 2014
has extended a series of expired or expiring
individual, business, and energy provisions
known as “extenders.” The extenders are a
varied assortment of more than 50 individual
and business tax deductions, tax credits,
and other tax-saving laws that have been on
the books in one way or another for years,
but are technically temporary because they
have a specific end date.
Congress many times has temporarily
extended the tax breaks for periods of one or two years, colloquially referred to as
“extenders.”
The law, as eventually passed and signed
in December, retroactively reinstated these
tax breaks. Unfortunately, the law was
passed too late in the year to fully plan for
it and allow businesses to fully utilize the benefits provided. Despite it being around
for only two weeks in 2014, your business is
likely eligible to benefit from the tax provisions
of the law.
The extended business credits and
special depreciation and expensing rules
include:
The research credit, the temporary minimum
low-income housing tax credit rate for
nonfederally subsidized new buildings; the
military housing allowance exclusion for
determining whether a tenant in certain
counties is low-income; the employer wage
credit for activated military reservists; the
work opportunity tax credit; three-year
depreciation for racehorses.
The 15-year straight line cost recovery for
qualified leasehold improvements, qualified
restaurant buildings and improvements, and
qualified retail improvements; special expensing
rules for certain film and television
productions; the deduction allowable with
respect to income attributable to domestic
production activities in Puerto Rico; the
exclusion of 100 percent of gain on certain
small business stock; the basis adjustment
to stock of S corporations making charitable
contributions of property; and the reduction
in S corporation recognition period for
built-in gains tax.
A few of the provisions which will benefit
most businesses are enhancements to the
depreciation rules.
At the start of 2014 the rules for bonus
depreciation had completely expired but
with the new law the 50 percent bonus
depreciation has been reinstated. Bonus
depreciation allows for an additional deduction
when the asset is first purchased. For
example, a 50 percent bonus depreciation
allowance would mean that businesses immediately
deduct 50 cents of every dollar
spent on qualifying purchases.
This provision is automatic and allows for
immediate tax savings if properly utilized.
The remaining 50 cents would be deducted
according to regular depreciation schedules.
Bonus depreciation may result in substantial
present value tax savings for businesses
that purchased or constructed qualified
property. Qualified purchases for the bonus
rules include most business equipment and
software. Unlike Section 179 expensing, you
do not need net income to take bonus depreciation
deductions. Further, bonus is not
limited to smaller businesses or capped at a certain dollar level, but it is not available for
used property. Also, many states, including
New York opt out of this provision for state
income tax purposes.
Another popular provision of the new law
is Sec. 179. Essentially, Sec. 179 of the IRS
tax code allows businesses to deduct the full
purchase price of qualifying equipment and/
or software purchased or financed during
the tax year. That means that if you buy or
lease a piece of qualifying equipment, you
can deduct the full purchase price from your
gross income.
Sec. 179 can only be used when a business
has net income and can only be used within
certain limits. The limits are certain caps to
the total amount written off ($500,000 for
2014), and limits to the total amount of the
equipment purchased ($2,000,000 in 2014).
The deduction begins to phase out dollarfor-
dollar after $2,000,000 is spent by a given
business, so this makes it a true small and
medium-sized business deduction.
If your business acquired more than
$2,000,000 of equipment in 2014, your ability
to use Sec. 179 is phased out.
So what are the differences between bonus
and Sec. 179? Bonus can only be used
for new equipment; Sec 179 may be used for
new or used equipment. Bonus can be used
even if your company has incurred a loss in
2014 but Sec. 179 may only be used if there
is a net profit in your business.
Bonus can be used by large and small
businesses alike, whereas a business spending
over $2,000,000 on equipment will have
its ability to use Sec. 179 be limited or even
eliminated. Sec. 179 allows a business to
write off the entire purchase price of an
asset, yet bonus only allows a portion of the
assets (albeit a large portion).
Also, it must be remembered that New
York state does not allow bonus depreciation
but does allow Sec. 179.
As with any law, even those as seemingly
simple as depreciation, careful planning is
needed to ensure your business saves as
much tax not just in the current year but
also going forward. Most of the provisions
in the law expired at Dec. 31 when we were
all watching the ball drop. Careful planning
is needed to effectively utilize these provisions
in the new yet already expired law.
Hedley is a partner with Hedley & Co.,
PLLC, certified public accountants in Clifton
Park.
Photo Courtesy Hedley & Co. PLLC