Analysis of The Tax Increase Prevention Act of 2014

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On December 3, 2014, the House of Representatives made the latest move in this year’s epic congressional tax extenders showdown with the Senate, passing a bill entitled the “Tax Increase Prevention Act of 2014” (hereinafter “TIPA“)that would extend dozens of expired tax provisions through December 31, 2014.

TIPA would retroactively extend for one year, through the end of 2014, virtually all of the tax extenders that had previously been temporarily extended by the American Taxpayer Relief Act of 2012 (hereinafter “ATRA”). In addition to the tax extenders, TIPA corrects several technical and clerical errors in the Internal Revenue Code, as well as eliminating many superfluous provisions. However, as a caveat, TIPA still needs to be reviewed and passed by the Senate and a unified bill presented before President Obama for his signature before any legislation actually becomes law.

The subsequent synopsis captures TIPA’s primary provisions including, but not limited to:

Business Entity Based Tax Extenders

• The extension of the Research and Experimentation Tax Credit program, which was originally introduced in the Economic Recovery Tax Act of 1981 sponsored by U.S. Representative Jack Kemp and U.S. Senator William Roth, to encourage significant investment within the United States through research and development jobs;

• The extension of the New Markets Tax Credit program which assists in the revitalization efforts of low-income and impoverished communities across the United States and its Territories;

• The extension of the Work Opportunity Tax Credit program that provides an advantageous tax credit to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment;

• 50% Bonus Depreciation for property acquired and placed into service during 2014. This provision would continue to allow taxpayers to elect to accelerate the use of AMT credits in lieu of Bonus Depreciation under special rules for property placed in service during 2014. The provision would also continue a special accounting rule involving long-term contracts and a special rule for regulated utilities;

• 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;

• Increased small business expensing limitations and phase-out amounts (e.g., $500,000 and $2 million respectively; without the extension the amounts would be $25,000 and $200,000, respectively). The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property also would be extended through 2014;

• Enhanced charitable deduction for contributions of food inventory;

• Look-through treatment of payments between related controlled foreign corporations under foreign personal holding company rules;

• Temporary exclusion of 100% of gain on certain small business stock; and

• Reduction in S-corporation recognition period for built-in gains.

Family Office Based Tax Extenders

• Extend the exclusion from gross income of qualified charitable distributions from IRAs of individuals at least 70 1/2 years of age. The exclusion is for up to $100,000 per taxpayer per year;

• Extend the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction. This deduction phases out ratably for taxpayers with adjusted gross income between $100,000 and $110,000 (i.e., half those amounts for married taxpayers filing separately);

• Extend the exclusion from gross income from the discharge of qualified principal residence indebtedness;

• Above-the-line deduction for higher education expenses;

• Deduction for expenses of elementary and secondary school teachers;

• Increased exclusion from income for employer-provided mass transit and parking benefits;

• Deduction for state and local general sales taxes; and

• Special rules for contributions of capital gain real property made for conservation purposes.

Green Energy Based Tax Extenders

• Extend multiple green energy tax incentives for alternative and renewable energy sources, including (1) credits for nonbusiness energy property, (2) an extension of the second generation biofuel producer credit, (3) credits for facilities producing energy from certain renewable resources including wind power, (4) credits for energy-efficient new homes, and (5) deductions for energy efficient commercial buildings;

• Extend the credit for purchases of nonbusiness energy property (i.e., residential energy credits). The provision allows a credit of 10 percent of the amount paid or incurred by the taxpayer for qualified energy improvements, up to $500; and

• Extend the tax credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria.

TIPA’s Technical Corrections

TIPA contains several corrections to various technical and clerical errors. These technical and clerical errors create confusion for taxpayers and consequently complicate the administration of the tax laws by the Service. TIPA would make technical and clerical corrections to recently enacted tax legislation, including the American Taxpayer Relief Act of 2012, the Creating Small Business Jobs Act of 2010, and the Economic Stimulus Act of 2008. Notably absent from the list of technical corrections is the Affordable Care Act of 2010. In general, the amendments made by these technical and clerical corrections would take effect as if included in the original legislation to which each amendment relates.

Epic Congressional Tax Extenders Showdown

While The House of Representatives passed TIPA with overwhelming bipartisan support, TIPA received an acrimonious response on the Senate floor during the week of December 8th as TIPA was under review which is an ominous sign to say the least with Tax Season 2015 just weeks away from commencing and approximately 60 tax extenders with an uncertain future hanging in the balance.

It should be duly recalled that a number of Congressional bills have been passed throughout 2014 dealing with the tax extenders by either the House of Representatives or the Senate, but unfortunately none of these Congressional bills could be unified and sent to the President for his signature into law including, but not limited to, The Expiring Provisions Improvement Reform and Efficiency Act of 2014 (EXPIRE); the American Research & Competitiveness Act of 2014; The Competitiveness and Opportunity by Modernizing and Permanently Extending the Tax Credit for Experimentation Act (COMPETE); and The Jobs for America Act of 2014 (JAA).

In a best case scenario, should the Senate eventually agree with the House and pass this one-year bill and the President signs it into law, Congress will have set itself up to revisit the tax extenders package once again during 2015.

For legislative updates from Capitol Hill and complete coverage of the latest statutory, administrative, and judicial interpretations please connect with Peter J. Scalise on TaxConnections.

Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, LLC a member of The Prager Metis International Group. Peter is a highly distinguished BIG 4 Alumni Tax Practice Leader and has approximately twenty years of progressive public accounting experience developing, managing and leading multi-million dollar tax advisory practices on both a regional and national level.

Peter is a highly acclaimed thought leader in the fields of accounting and taxation with deep subject matter expertise in connection to designing, implementing and defending sustainable methodologies for specialty tax incentives including, but not limited to, research tax incentives; orphan drug credits; therapeutic discovery credits; accounting methods and periods; energy tax incentives in connection to green building envelope efficiency and benchmarking, solar energy, bio energies, fuel cells, wind turbines, micro turbines, and geothermal systems; and comprehensive fixed asset analysis incorporating principles of construction tax planning, cost segregation analysis and the final treasury regulations governing tangible property.

Peter is a renowned keynote speaker and an extensively published author on specialty tax incentives, tax controversy matters, and legislative updates from Capitol Hill for NAREIT, AGRION, USGBC, AICPA, ASTP, NATP, ABA, AIA, and TEI. Peter serves as a member of the Tax Faculty for CPAacademy, iShade and TaxConnections University (“TCU”). Peter serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (“ASTP”) and is the Founding President and Chairman of The Northeastern Region Tax Roundtable.

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