Insights

Congress is getting pretty good at playing the PAYGO game. PAYGO is the legal provision that requires legislation to balance spending increases and revenue reductions with spending cuts and revenue increases elsewhere in the bill. Unfortunately for taxpayers, the game usually results in popular taxpayer-friendly provisions early on, later offset by sunset provisions or expiring credits (often coupled with tax-rate hikes, or additional revenue generators). In addition, and not coincidently, legislation typically stretches as far as a decade, leaving a new administration to extend popular credits or consider allowing those provisions to expire. As a result, tax planning becomes “nightmarish,” as credit extender packages are often passed in November or December retroactive to the beginning of the calendar year, leaving taxpayers unable to establish behaviors that would allow them to take advantage of available incentives.

Good news has just surfaced regarding some tax provisions that expired at the end of 2014. On July 21, the Senate Finance Committee voted 23-3 to move an extenders bill to the full Senate for consideration. Even better news, the package under consideration would extend these credits two years, through December 31, 2016, affording taxpayers a rare opportunity to operate throughout an entire tax year knowing which incentives will be available. While it is still early in the process, the January 21 vote is certainly a step in the right direction. Here is a sampling of some of the credit extension proposals currently making their way to the Senate floor:

Changes impacting individuals:

• The deduction for state and local sales taxes. This allowance would be especially helpful for residents of states that do not levy a state income tax, as it affords those taxpayers utilizing itemized deductions an equitable benefit.
• Availability of an above-the-line deduction for certain expenses of teachers. Primary and secondary school teachers would be allowed to deduct expenses of books and supplies used in the classroom, up to $250.
• Deduction for qualified tuition and related expenses. This provision would allow, with certain income and dependency restrictions, up to $4,000 of above-the-line deductions.
• Ability to utilize, for charitable purposes, tax-free distributions from individual retirement accounts (IRAs) of taxpayers age 70 ½ or older. The extender package would allow a taxpayer to receive a deduction for distributions of less than $100,000 from their IRA to a charitable organization.
• An exclusion of up to $2 million ($1 million if married but filing separately) of discharged principal residence indebtedness from gross income. Taxpayers going through foreclosure would have the opportunity to settle their debt for something less than what is owed, and not pick up the differential in income.

Changes impacting businesses:

• Research and experimentation credit. This popular tax credit would allow taxpayers electing the alternative simplified credit to receive 14% of qualifying research and development expenses to the extent that amount exceeds 50% of the average qualified research expenses over the prior three years.
• Work opportunity tax credit. Employers who have hired certain workers (including veterans) would be eligible to receive a tax credit of up to $6,000 per employee, calculated as a percentage of qualifying wages (credit could be higher in the case of certain veteran employees).
• Employer wage credit for activated military reservists. Small businesses with fewer than 50 employees would be eligible to claim a credit equal to 20% of differential wages paid to qualified workers called up for active military duty.
• Expanded expensing under §179. Taxpayers would be eligible to expense up to $500,000 with an increased investment-based phase-out amount of $2,000,000 (subject to taxable income limitations). The extenders would also retain the expanded definition of Section 179 property.
• 50% bonus depreciation. This provision would extend the opportunity to expense 50% of the adjusted basis of qualified property placed in service before January 1, 2017, or January 1, 2018, for assets with a longer production period.
• 15-year straight line cost recovery for qualified leasehold property, qualified restaurant property, and qualified retail improvements. Not only would this measure shorten the recovery period for qualifying property, but it also would allow the taxpayer to utilize bonus depreciation on qualifying assets.
• Election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation. This provision would allow taxpayers to utilize AMT credits up to 20% of the amount of the foregone bonus depreciation.
• Special expensing rules for film and television production. If at least 75% of compensation is for services performed in the U.S., the taxpayer can expense up to $15 million ($20 million if the costs are incurred in a low-income or distressed community) in lieu of depreciation.
• Reduction in S corporation recognition period for built-in gains tax. The extender package would reduce the built-in gain recognition period from 10 years to 5 years.
• Basis adjustment to stock of S corporations making charitable contributions of property. The decrease in the stock basis would be an amount equal to the shareholder’s pro rata share of the adjusted basis of the contributed property.
• Empowerment zone tax incentives. The proposed legislation would extend a wide assortment of tax incentives for taxpayers in empowerment zone census tracts.

Credits benefiting energy conservation efforts:

• Credit for construction of energy-efficient new homes. An eligible contractor would be able to claim a business credit for constructing qualified, new energy-efficient homes that are directly purchased by persons for residential use.
• Energy-efficient commercial building deduction. Costs of energy-efficient commercial building property placed in service during the year would be deductible up to $1.80 per square foot.
• Credit for nonbusiness energy property. Taxpayers would be eligible to receive a tax credit equal to 10% of the amount paid or incurred for energy efficiency improvements and residential energy property expenditures during the year.
• Credit for alternative fuel vehicle refueling property. Taxpayers would be eligible to receive a tax credit for 30% of the cost of alternative fuel vehicle refueling property, up to $30,000 if the property is subject to depreciation, or $1,000 in any other case.
• Credit for fuel cell vehicles. Taxpayers would be eligible to receive a tax credit against tax imposed for the sum of qualified fuel cell motor vehicles, lean-burn technology motor vehicles, hybrid motor vehicles, alternative fuel motor vehicles, and plug-in conversions.
• Incentives for biodiesel and renewable diesel. Taxpayers would receive a tax credit for biodiesel fuel created during the year equal to the sum of the biodiesel mixture credit, biodiesel credit, and small agri-biodiesel producer credit.
• Credit for facilities producing energy from certain renewable resources. Taxpayers would be eligible to receive a tax credit equal to 1.5 cents per kilowatt hour of electricity.

While the above extenders would be seen as welcome news by most taxpayers, the PAYGO game continues as evidenced in the temporary nature of the legislation being considered. These extenders would be scheduled to expire again at the end of 2016. Since that date so closely aligns with the arrival of the next executive administration, our next President will decide the long-term fate of these incentives through either a permanent extenders package or perhaps the first comprehensive tax reform legislation in a generation. Either way, tax planning initiatives will continue to be compromised by the temporary nature of these components of our current tax code.

There is a silver lining. PYA is here to help. If you have any questions about these incentives or other tax planning concerns, contact the experts listed below at PYA (800) 270-9629.