Mid-Year Tax Proposals

William J. Killory, CPA, Partner (Jun, 2014)

In our January edition of the Focus we summarized the expired tax provisions affecting taxpayers in 2014 and beyond.  As we approach the mid-point of the year it may be helpful to review the various tax proposals being offered and risk speculating on what may happen before the end of the year.  It seems that we reach this juncture of uncertainty every two years corresponding with biannual national elections. 

There is broad based bipartisan support for the cleverly named the Expiring Provisions Improvement Reform and Efficiency Act (EXPIRE) in the Senate.  This bill addresses many of our key concerns regarding bonus depreciation and the enhanced expensing election under Section 179 bringing the levels back to last year’s $500,000 with a $2,000,000 asset phase-out amount.  The proposed law also restores the above the line deduction for tuition and fees (subject to phase-outs), the teachers classroom expense, the option for state and local sales tax deduction, mortgage insurance premium deduction, exclusion for cancellation of debt on primary residence, qualified charitable distribution to charity from your IRA along with several energy credits and employment credits.

The EXPIRE Act also reduced the built-in-gain holding period for converted S-Corporations from ten years to five years.  The perennial reauthorization of the research credit is included along with the ability to write-off qualified leasehold improvements, restaurant buildings and retail improvements over fifteen years.  These revisions would go back to the beginning of 2014 and once again expire on December 31, 2015.

The House of Representatives prefers to look at each distinct area separately and the discussion is on how to make these extenders permanent (or as permanent as Washington can get).  House Ways and Means Chairman Dave Camp, R-Michigan, had a proposal to radically alter the tax code by lowering tax rates, eliminating deductions and imposing another layer of minimum tax.  He labeled it as a tax reform and simplification bill but as he is retiring at the end of this term, it did not get significant support.  It is likely that the House of Representatives will go along with the Senate version of the extender legislation.

President Obama has proposed his version of a tax bill that emphasizes expanded earned income tax credits, extends energy and employment credits along with education credits and deductions.  His proposal brings back the enhanced $500,000 Section 179 deduction, but no mention of bonus depreciation.  The President has proposed limiting deductions to receiving only a 28% benefit, effectively increasing the Alternative Minimum tax along with the so-called Buffet rule that imposes a 30% minimum tax on adjusted gross income over $1,000,000.  The President would eliminate the ability to use the last-in first-out inventory method and limit the benefit of deferring income using a like-kind exchange.  Many of these proposal are repeats of past years’ initiatives and have not been well received in either house of Congress.

The Republicans in the Senate wanted to amend the EXPIRE Act to address the 2.3% excise tax on medical devices.  Senate Majority leader Harry Reid apparently did not think it a good idea and declared that there would be no consideration of these extenders until after the November election.  This is reminiscent of two years ago when the tax laws that had expired in 2011 were not voted on until December 31 and not signed into law until January of 2012.  The spirit of cooperation in Washington has not improved in the last two years so it is hard to predict what will happen this year.  It is safe to assume that there will be a lot of talk, but little action until the end of this year.

This puts business owners in a bit of a dilemma as the tax law, as it is right now, limits the benefits of capital investment.  While tax is always an element of the capital decision, business owners should look first to the cost, the return on investment and the impact on cash flow and the financial statements.  As we have said before – those that live by the crystal ball die by broken glass.  In this environment it is difficult to predict what will happen.  We will keep a close eye on developments in Washington and keep you updated.  In the meantime, please contact your Dermody, Burke & Brown professional for your tax and business planning needs.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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