In recent years, taxpayers have been faced with great uncertainty determining whether they can depend on tax incentives to help them lower their taxes. Shortly after the year began in 2013, Congress resolved the budget impasse that had threatened to shut down the government by passing the American Taxpayer Relief Act of 2012, P.L. 112-240. That legislation extended 51 provisions for two years retroactively through the beginning of 2012 and through 2013.
Last year, in December, Congress extended most of these provisions for one year retroactively to the beginning of 2014, but not going forward, so they expired again at the end of 2014 (Tax Increase Prevention Act of 2014, P.L. 113-295).
Unlike many previous years, Congress did not spend much time or effort this summer working to fix the extenders situation, and, unlike last year, there was little discussion of making any of the perennial extenders permanent. So, as we enter the last quarter of 2015, with most tax incentives expired, it’s a good time to review which provisions might get a last minute reprieve and see what legislation is pending in Congress.
The tax incentives examined in this article are separated into incentives for individuals and businesses, followed by energy-related provisions.
Expired individual tax incentives
Tax incentives for individuals that expired at the end of 2014 include:
- Sec. 62(a)(2)(D) deduction for certain expenses of elementary and secondary school teachers, which allows teachers to deduct up to $250 they spend to buy books, supplies, computer equipment, and other materials for use in their classrooms.
- Sec. 108(a)(1)(E), which excludes from gross income discharge of qualified principal residence indebtedness income.
- Sec. 132(f), which proves parity between the exclusion for employer-provided mass transit and parking benefits by making the limit for the monthly tax exclusion for employer-provided transit passes and vanpools the same as the limit for employer-provided parking benefits.
- Sec. 163(h)(3) treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer’s principal residence.
- Sec. 164(b)(5) deduction for state and local general sales taxes in lieu of a deduction for state and local income taxes;
- Sec. 170(b) special rule for contributions of capital gain real property made for conservation purposes, which permits qualified conservation contributions to be deducted up to 50% of a taxpayer’s contribution base (100% for qualified farmers and ranchers).
- Sec. 222, which provides an above-the-line deduction for qualified tuition and related expenses.
- Sec. 408(d)(8), which allows taxpayers to distribute up to $100,000 in qualified charitable distributions from individual retirement plans without including the distributions in income.
Tax incentives for businesses
Business tax incentives expired at the end of 2014 include:
- Sec. 41 research and development credit, which provides a credit of 20% of qualified research expenses over a base amount.
- Sec. 42(b)(2) temporary minimum low-income housing tax credit rate for nonfederally subsidized buildings, which allows a 9% minimum low-income housing credit rate for those buildings.
- Sec. 142(d)(2)(B)(ii), under which the military basic pay allowance for housing exclusion is disregarded with respect to a qualified building for purposes of the low-income housing credit.
- Sec. 45A Indian employment tax credit for employers of enrolled members of Indian tribes (or their spouses) who work on and live on or near an Indian reservation.
- Sec. 45D new markets tax credit (although it has not been extended for 2015, carryovers of the unused limitation for years through 2014 were extended through 2019), which provides tax credits for investments in businesses or real estate in low-income communities.
- Sec. 45G, the railroad track maintenance credit, equal to 50% of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer.
- Sec. 45N mine rescue team training credit, which provides a credit for a portion of training costs for qualified mine rescue team employees.
- Sec. 45P employer wage credit for employees who are active duty members of the uniformed services, which provides a credit for small business employers for up to 20% of the eligible differential wage payments paid while an eligible employee is serving on active duty.
- Sec. 51 work opportunity tax credit equal to 40% of the qualified first-year wages of employees who are members of a targeted group.
- Sec. 54E qualified zone academy bonds, which allows qualified schools to issue bonds for renovations (but not new construction), equipment purchases, teacher training, or developing course materials when they partner with private businesses.
- Sec. 168(e)(3)(A), which allows racehorses that are 2 years old or younger to be depreciated as three-year property instead of seven-year property.
- Sec. 168, which allows 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
- Secs. 168(i)(15) and (e)(3)(C)(ii) allowing a seven-year recovery period for motorsports entertainment complexes.
- Sec. 168(j), which allows owners accelerated depreciation for qualifying property used predominantly in the active conduct of a trade or business within an Indian reservation.
- Sec. 168(k), which provides a depreciation deduction equal to 50% of the adjusted basis of qualifying property in the first year it is placed in service (also known as bonus depreciation).
- Sec. 168(k)(4), which permits corporations to elect to accelerate their alternative minimum tax credit in lieu of bonus depreciation.
- Sec. 170(e)(3)(C), which allows businesses to make contributions of “apparently wholesome food” to charities that will use it for the care of the ill, the needy, or infants and to take an above-basis deduction for these contributions of food inventory.
- Sec. 179 increased $500,000 expensing limit and $2 million phaseout threshold and an expanded definition of Sec. 179 property to include qualified real property.
- Sec. 179E election to expense mine safety equipment, which permits taxpayers to elect to treat 50% of the cost of any qualified advanced mine safety equipment as a deduction in the year the property is placed in service.
- The Sec. 181 special expensing rules for certain film and television productions, which allows taxpayers to treat costs of any qualified film or television production as a deductible expense.
- Sec. 199(d)(8), which permits a deduction for income attributable to domestic production activities in Puerto Rico.
- Sec. 512(b)(13)(E), which modifies the tax treatment of certain payments to controlling exempt organizations so that they are not treated as unrelated business income.
- Secs. 871(k)(1) and (2), which exempts interest-related dividends and short-term capital gain dividends from a regulated investment company (RIC) from tax.
- Sec. 897(h)(4), which treats RICs as qualified investment entities under the Foreign Investment in Real Property Tax Act, P.L. 96-499.
- The subpart F exception under Secs. 953(e)(10) and 954(h)(9) for active financing income.
- Sec. 954(c)(6), which provides for lookthrough treatment of payments of dividends, interest, rents, and royalties received or accrued from related controlled foreign corporations under the foreign personal holding company rules.
- Sec. 1202, which provides an exclusion of 100% of gain on certain small business stock; it has reverted to 50%.
- Sec. 1367(a)(2), which allows S corporation shareholders to adjust their basis in their stock when the S corporation makes charitable contributions of property using their basis in the property instead of its fair market value.
- Sec. 1374(d)(7), which reduced the S corporation recognition period for built-in gains tax to five years.
- Sec. 1391 empowerment zone tax incentives.
- Sec. 7652(f) temporary increase in the limit on cover over of rum excise taxes from $10.50 to $13.25 per proof gallon to Puerto Rico and the Virgin Islands.
- The American Samoa economic development credit.
Energy tax incentives
Various energy tax provisions expired at the end of 2014 include:
- Sec. 25C, which provides a 10% credit for qualified nonbusiness energy property.
- Sec. 30B, which provides a credit for qualified fuel cell motor vehicles.
- Sec. 30C, which provides a 30% credit for the cost of alternative (non-hydrogen) fuel vehicle refueling property.
- Sec. 40(b)(6), which provides a credit for each gallon of qualified second-generation biofuel produced.
- Sec. 40A credit for biodiesel and renewable diesel, which includes the biodiesel mixture credit, the biodiesel credit, and the small agri-biodiesel producer credit.
- Sec. 45(e)(10)(A)(i), a production credit for Indian coal facilities placed in service before 2009.
- Sec. 45 credits for facilities producing energy from certain renewable resources.
- Sec. 45L, which provides a credit for each qualified new energy-efficient home constructed by an eligible contractor and acquired by a person from the eligible contractor for use as a residence during the tax year.
- Sec. 168(l), which provides a depreciation allowance equal to 50% of the adjusted basis of qualified second-generation biofuel plant property.
- Sec. 179D deduction for energy-efficient commercial buildings.
- Sec. 451(i) special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities.
- Secs. 6426(c) and 6427(e) excise tax credits for alternative fuels.
At this writing, there are two different efforts to extend the expiring tax credits. The Senate bill introduced this summer, the Tax Relief Extension Act of 2015, S. 1946, generally provides for a two-year extension. The provisions would be reinstated to the beginning of this year and for 2016. The House of Representatives’ bill, Tax Cuts for America Act of 2015, H.R. 1808, has a much smaller list of seven tax provisions, and the bill would extend those benefits for only this year retroactively.
If history is any guide, if Congress finally acts, it will be at the last minute, which makes planning nearly impossible. With the election nearing, the situation this year may be even worse than usual.
AICPA asks Congress to act
On Oct. 1, Troy Lewis, CPA, Chair of the AICPA Tax Executive Committee, sent a letter to Congress urging action on tax extender legislation to address the uncertainty taxpayers face in tax planning and compliance.
Sally P. Schreiber is a Tax Insider senior editor.