President Signs Extender Tax Breaks at Year End
There is a group of approximately 50 tax provisions that are enacted as temporary measures, but which Congress routinely reenacts. These are popularly referred to as the “extenders.” The extenders expired at the end of 2013. After much deliberation, both the House of Representatives and the Senate this month passed most (but not all) of the provisions that were on the list of extenders. President Obama signed the legislation on December 19, 2014.
The extenders are a varied group of provisions. Some of them are relief provisions (for example, the extension of exclusion from gross income of discharge of qualified principal residence indebtedness). Other extenders are specific to certain businesses (for example, the extension of the seven-year recovery period for motorsports entertainment complexes). The legislation also contains energy tax extenders that were originally enacted as incentives. The legislation that was passed also contains technical corrections to the tax code and elimination of certain “deadwood” provisions.
In addition to the provisions mentioned above, the following constitutes a non exhaustive list of highlight provisions in the extenders:
1. Extends the election to deduct state and local sales taxes in lieu of state and local income taxes.
2. Extends the allowance for taxpayers to deduct qualified tuition and fees for post secondary education.
3. Extends the ability of teachers to deduct certain classroom expenses.
4. Extends the ability to deduct mortgage insurance premiums as interest.
5. Contributions of capital gain real property for conservation purposes will be deductible as charitable contributions.
6. Extends 50% bonus depreciation through 2014 and through 2015 for certain property with a longer production period and certain aircraft.
7. Extends immediate deductibility of certain assets.
8. Extends the work opportunity credit with respect to qualified employees who begin work for employers before January 1, 2015.
9. Extends the 100% exclusion for the gain on sale or exchange of qualified small business stock.
10. Continues the five year recognition period for asset sales by S corporations after conversion from C corporation status (instead of ten years).
11. Extends the nonbusiness energy credit for qualified energy-efficiency improvements to residential property.
12. Extends production credits for electricity generated by qualified energy resources and for biodiesel and diesel from biomass.
The extenders legislation will have a very short life. It retroactively renews these provisions for 2014, but generally they sunset again at the end of December 2014. Some legislators proposed making the extension effective for two years, but this did not happen. Congress will need to revisit the extenders after the new Congress convenes in 2015. In the meantime, uncertainty about which of the extender provisions will be reenacted for 2015 creates tax planning difficulties until reenactment actually occurs.
It remains to be seen what effect the late passage of the extenders will have on the upcoming tax-filing season. The Internal Revenue Service expressed concerns that passage of the legislation so late in 2014 will put pressure on the Service in its preparation of tax forms and instructions for the tax-filing season that generally begins in late January. However, more recently the Service expressed optimism that the tax-filing season will not be delayed.
There will be renewed controversy when the extenders come up again in 2015. Certain legislators have proposed that at least some of the extenders should be enacted as permanent provisions. Some of the extenders have a significant revenue impact (for example, the research and development credit) such that making them permanent would affect revenue scoring. Certain legislators have expressed their wish to eliminate some of the extenders (for example, certain alternative energy provisions). The White House threatened to veto the legislation unless it included relief provisions aimed at low- and moderate-income individuals (for example, the childcare credit and the earned income credit). Congress did not include these provisions. These same considerations will likely surface again in 2015.
There have been calls for comprehensive tax reform from many quarters. However, the difficulties that the narrow extenders faced in getting enacted indicate how difficult it may be to enact broad-based tax reform in the next Congress.
The extenders bill also included a much less controversial provision referred to as the ABLE Act (Achieving a Better Life Experience Act of 2014). Under the ABLE Act, states can establish and operate programs under which severely disabled persons under 26 years old could open tax-favored savings accounts and make annual contributions up to the gift tax exclusion limit (currently $14,000 but adjusted annually for inflation).