Leo Parmegiani, Tax Partner, PKF O’Connor Davies, New York
On December 19, 2014, President Obama signed into law the “ Tax Increase Prevention Act of 2014 ” (TIPA) to extend most of the tax provisions that expired in 2013 retroactively for one year, through 2014. These popular tax incentives include the research credit, bonus depreciation, and the ability to use required IRA distributions to make charitable contributions.
Unfortunately, TIPA does not make permanent any of the extenders – nor extends any of them for the usual two-year period customary for most recent extenders legislation. Instead, the new law delays the ultimate fate of the extenders for the 2015 tax year and beyond to the 114th Congress.
The following are some of the key provisions of the newly enacted law.
Bonus Deprecation – Allows taxpayers to claim an additional first-year deprecation deduction for 50% of the qualifying property’s cost. The property must be new and placed in service before January 1, 2015 to qualify for bonus depreciation.
Code Section 179 Expensing – IRC Section 179 allows a taxpayer to immediately deduct, rather than gradually depreciate, the cost of qualified assets, subject to certain limitations. The extenders legislation set the first year deduction amount at $500,000 for 2014, with a $2 million overall investment limit. Absent this extension, the expensing limitation was $25,000 with a $200,000 overall investment limit.
Qualified Leasehold/Retail Improvements, Restaurant Property – The legislation extends the 15-year class life designation for this type of property thus qualifying it for the 50% bonus depreciation and the Section 179 first year expensing deduction, but with a lower $250,000 dollar limit.
Research Tax Credit – Once again, the research credit, which allows taxpayers a 20% credit for qualified research expenses incurred over a base amount or a 14% alternative simplified credit, has been extended through 2014. The extenders package contains no provision for making the credit permanent.
100% Exclusion for Gain on Qualified Small Business Stock – the provision provides for a 100% exclusion allowed for gain on the sale or exchange of qualified small business stock held for more than five years by non-corporate taxpayers for stock acquired before January 1, 2015.
Subpart F Exceptions for Active Financing – The U.S. parent of a foreign subsidiary engaged in a banking, financing, or similar business is eligible for deferral of tax on such subsidiary’s earnings if the subsidiary is predominantly engaged in such business and conducts substantial activity with respect to such business. The subsidiary must pass an entity level income test to demonstrate that the income is active income and not passive income.
Look-through Rule for Related Controlled Foreign Corporations – Look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations under the foreign personal holding company rules has been extended through 2014. The bill allows tax deferral for such payments made between commonly controlled foreign corporations (CFC). This provision allows U.S. taxpayers to deploy capital from one CFC to another without triggering U.S. tax.