Kevin J. McPherson, The Daily Record Newswire
Every year a significant number of tax incentives are due to expire on Dec. 31. The end of 2013 was no different as many popular corporate and individual tax credits and deductions were due to come to an end. Lawmakers can still extend some, if not all of these tax breaks retroactively, but for now, these are no longer as of Jan. 1.
Bonus depreciation
This election allowed businesses to expense up to 50 percent of the cost of many qualifying capital purchases. There was no limit to the amount that could be expensed through this depreciation election. As a result, businesses could, in theory, generate taxable losses in years with large capital investments and use these losses to offset future income or carryback and reduce taxable income from prior years.
Section 179 expensing
While not eliminated in 2014, the benefit was significantly reduced. Similar to bonus depreciation, this depreciation election allowed small businesses the option to expense up to $500,000 of qualifying capital expenditures in 2013. Beginning in 2014, the amount has been reduced to $25,000. This $475,000 reduction, together with the elimination of “bonus” depreciation, will result in higher tax bills for many businesses across the country.
Research & development tax credit
Those businesses that conducted qualifying research and development activities were able to take a tax credit based on a complex formula that included wages paid to those involved in the activity, material and supplies used in such activity, and certain R&D contract expenses. This credit has been extended retroactively to the beginning of the year numerous times since its introduction back in the 1980s, but has yet to be extended beyond 2013.
Wind power production tax credit
Wind farms have received a tax credit of 2.3 cents for every kilowatt hour of electricity generated in 2013. This credit was extended last year with a provision allowing for any wind farm to claim the credit on projects that broke ground in 2013, but placed in service after 2013. No credit is available for projects that begin construction in 2014 or later. Many believe the industry would not have seen such rapid growth without this incentive.
IRA charitable rollover
Also known as a Qualified Charitable Distribution, this provision allowed donors over 70.5 years of age to transfer up to $100,000 from a traditional IRA directly to a qualifying charity in 2013. The QCD would not increase the donor’s taxable income, but nor would it result in a tax deduction. Without this provision, various federal and some state tax laws would prevent the deduction from fully offsetting the increase to taxable income. An additional benefit was that the QCD would count towards the required minimum distribution.
The Mortgage Forgiveness Debt Relief Act
This act was signed into law in 2007 and offered an exception to the rule that debt forgiven would be treated as taxable income. Under this law, qualifying homeowners were able to exclude forgiven debt that was a result of a renegotiated mortgage or foreclosure. This law helped many taxpayers through the financial crisis of a few years ago. Beginning in 2014, taxpayers will be required to include such debt forgiveness as taxable income.
Mass transit commuter incentive
For the past few years, employers could subsidize their employees parking costs up to $250 per month, and if their employees took mass transit, up to $245 per month, tax-free. With the beginning of 2014, the tax code now favors cars over mass transit as the tax-free reimbursement for parking remains at $250, but drops to $130 for mass transit.
State and local sales/use tax deduction
Gone is the provision that allowed residents to claim a deduction for state and local sales and use tax on Schedule A of their tax return. This benefited those that lived in states with low or no state income taxes.
Tuition & fees deduction
Students and parents will no longer be able to claim a maximum “above-the-line” deduction of $4,000 for college tuition and fees. While this deduction is no longer available in 2014, the American Opportunity and Lifetime Learning Credits are still available.
This is just a brief summary of some of the provisions that expired at the end of 2013. There is always the chance that some of these incentives will be extended retroactively once Congress returns from break.
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Kevin J. McPherson, CPA, is a principal with Mengel, Metzger, Barr & Co. LLP. He can be reached at (585) 423-1860 or Kmcpherson@mmb-co.com.
