Although recent action has been taken in the form of the recent Budget compromise passed last week that contains no increases in tax rates, certain inaction by Congress may raise the overall tax burden in 2014 for both individuals and businesses.
Items expiring in 2013 include the tax break on the cancelation of debt of certain mortgages. Even though foreclosures and defaults are on the decline, large banks such as JP Morgan, Bank of America, and other institutions continue to modify loans that would qualify for this income exclusion. Energy efficiency credits, tuition deductions, and an itemized deduction for sales taxes are all set to expire at the end of 2013.
Perhaps the largest tax impact for most businesses in 2014 would come from the expiration of the 50% bonus depreciation provision, which allowed half of the cost of purchases to be deducted in the year of purchase. This provision has no limitation and applies to businesses of all sizes.
A more targeted deduction has been under some consideration lately to be extended. Primarily aimed at smaller businesses and sometimes known as the “Section 179” deduction, this allows a business to deduct the entire cost of certain types of property in the year of purchase. If no action is taken by Congress the maximum amount that can be deducted annually goes to $25,000 in 2014 from $500,000 in 2013.
Other more industry-specific credits like biodiesel production are slated to expire, as are benefits for railroad-track maintenance, motorsports complexes, and racehorse owners. These narrowly defined provisions are often relatively small in dollar terms, but they can have a big impact on those who are in the businesses that they affect.
House GOP leaders are unlikely to make a decision on whether to retroactively pass a group of expiring individual and business tax incentives until next spring, If Camp decides that passing tax reform is impossible during an election year, then a retroactive tax extenders bill will probably get a vote in the House, according to Neal. The economy is struggling and job creation is sluggish, in part, because U.S. businesses will not make investments while tax incentives like the research and development (R&D) credit are on hold, Neal explained. Moreover, as long as passage of comprehensive tax reform is on hold, businesses will be reticent about where to invest roughly $2 trillion in cash, which is sitting on the sidelines. (1)
As of mid-December, lawmakers hadn’t taken much action to push these provisions forward. That doesn’t mean it won’t happen, though, as many individuals and businesses rely on the provisions. In particular, targeted business tax breaks often make or break a certain industry’s business model, and players in those industries use all their political clout to try to get them extended. Nevertheless, given the lack of attention the situation has gotten so far, it’s entirely possible that expiring provisions will in fact results in new taxes for 2014 and beyond. This, of course, will mean later tax filings and additional compliance chaos for the taxpayer and their tax advisors.
(1) CCH Federal Tax Day: a senior member of the House Ways and Means Committee said on December 12. Rep. Richard E. Neal, D-Mass., speaking at the annual convention of the New Markets Tax Credit Coalition in Washington, D.C., said that Ways and Means Chairman Dave Camp, R-Mich., will probably decide on whether to pursue comprehensive tax reform by February or March of 2014.