Expired Tax Provisions of 2013

Mike Burt, CPA (Jan, 2014)

With each passing tax year there are growing ranks of accountants that simply accept the fact that Congress is willing to allow certain tax provisions to expire only to be extended at the last minute prior to year end, or reinstated retroactively the following year.  The term for those temporary tax provisions often extended by Congress for one to two years at a time rather than being allowed to expire are called tax extenders.  Once again Congress did not disappoint, allowing multiple tax provisions to expire as of December 31, 2013 rather than extend before year end.  With Congress returning to session in January 2014 it is to be expected that the largest business tax breaks will incite a lobbying frenzy.

Why are certain temporary tax provisions viewed as good policy not made permanent parts of the tax code?  Some are repeatedly used as bargaining chips and fundraising tools by Congress members who serve on tax writing committees.  Sometimes temporary tax provisions are created to help with disaster relief or in an attempt to provide short-term economic stimulus.  Temporary tax provisions also allow legislators the ability to evaluate the effectiveness of whether the provisions fulfilled their conceived purpose prior to extending them or letting them expire. 

Budgetary considerations come into play as well.  Temporary tax provisions made permanent increase the deficit.  It is projected that if all expiring tax provisions scheduled to expire from 2013 to 2023 were extended it would cost $938.3 billion.  The extension of the gratuitous $500,000 Section 179 expensing allowances and partial expensing for investment property alone would cost approximately $346.1 billion.

Some tax provisions allowed to expire for individuals as of December 31, 2013 include:

  • Above-the-line deduction for teachers’ classroom expenses – eligible teachers will no longer be able to deduct above-the-line up to $250 of their unreimbursed job related classroom expenses
  • Tuition and fees deduction - taxpayers can no longer deduct above-the-line qualified tuition and related expenses
  • State and local sales tax deduction – taxpayers are no longer allowed to deduct state and local sales tax as part of their itemized deductions instead of taking a deduction for state income taxes.  This was beneficial to those taxpayers living in states having no state income tax, as well as those individuals whose state and local sales tax exceeded their state income tax.
  • Deduction for mortgage insurance premiums – taxpayers owning homes with less than 20% equity usually pay additional money called PMI (private mortgage insurance).  This is no longer allowed as a deduction on Schedule A as an itemized deduction.
  • Exclusion for cancellation of indebtedness on primary residences – forgiven debts under the Internal Revenue Code are generally treated as taxable income.  From 2007 to 2013 up to $2,000,000 of debt forgiven could be exempt from income tax from foreclosures resulting in the cancellation of mortgage debt, short sales, or mortgage restructurings.
  • Qualified charitable distributions – taxpayers over 70 ½ years old will no longer be able to take up to $100,000 of their required minimum distributions from their IRA’s and contribute them directly to charitable organizations without including the distributions in income.  This provision helped some individuals to lower their income levels enough to claim tax breaks containing phase out limits they were not able to take otherwise.
  • Credit for energy efficient home improvements – taxpayers were allowed a lifetime maximum credit of up to $500 for qualified non-business energy efficient home improvements to a principal residence such as insulation, roofing, furnaces, or windows to name a few ($200 lifetime maximum for windows).

Some tax provisions allowed to expire for businesses as of December 31, 2013 include:

  • Research and development credit – for whatever reason this popular credit allowed for qualified research expenses for manufacturers is always found on the expiring tax provisions list only to be extended at the last second or retroactively reinstated.  While this credit being retroactively reinstated is not a given, this provision could lead to the largest public outcry if not reinstated.
  • $500,000 Section 179 deduction and a $2 million phase-out – In 2014 the Section 179 deduction is set to revert back to $25,000 and a phase-out starting at $200,000 (scheduled to be adjusted for inflation).
  • 50% Bonus depreciation – businesses will no longer to be able to deduct 50% of the cost of new qualifying assets up front.
  • 15 Year straight-line depreciation for qualified leasehold improvements, qualified restaurant buildings, and qualified retail improvements – non-residential property and its structural components will change back to a 39 year depreciable life.
  • Work Opportunity Tax Credit (WOTC) – businesses that hire employees from specific targeted groups such as disabled workers, veterans, and public assistance recipients will no longer be allowed a tax credit.
  • Qualified small business stock exclusion – the 100% exclusion of gains from income when investors sell qualified small business stock is reduced to a 50% exclusion in 2014.
  • Five year built-in gains tax recognition period for S corporations – this is slated to increase to 10 years again in 2014.
  • Employer wage credit for activated military reservists.
  • Election to accelerate AMT credits instead of additional first year depreciation.
  • Basis adjustment to stock of S corporations donating property to charitable organizations.

Most of the items above have been tax extenders in the past, but there is no certainty any will be retroactively reinstated.  Only time will tell if some of these provisions viewed as vital that were allowed to expire, such as the R&D tax credit, will eventually be made a permanent part of the tax code.  It seems likely we may just continue to see extender packages and retroactive reinstatements year after year, which seems to be the accepted norm.  Please feel free to contact your Dermody, Burke & Brown tax advisor to further discuss any questions you may have.

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