Wednesday, November 19, 2014

Year- End indecision caused by expiring tax benefits

Year-end uncertainty highlights need for reform

Once again we find ourselves in an a all too common position! Many popular tax planning opportunities, such as the R&D credit and bonus depreciation, expired at the end of 2013. As of the publish date for this article, the Expiring Provisions Improvement Reform and Efficiency Act has been drafted but not yet voted on. As rumor has it, it won’t be voted on until after the November elections. This act addresses 62 business and individual provisions that have already expired.
As a tax practitioner for the past 20-plus years, the best advice I can offer to my clients and to other practitioners for 2014 year-end planning is to assume the Act will pass and plan accordingly. The Act seeks to extend the following most  commonly used provisions:
  • 50% bonus depreciation
  • Section 179 expense at the $500,000 level with phase-outs starting at $2 million of additions
  • 15-year life for qualified leasehold improvements
  • R&D credit
  • 1202 stock
  • Work Opportunity Tax Credit
  • Renewable Energy tax credits
  • New Markets Tax Credit
  • Reduction in S Corporation built-in gain period
  • Above-the-line $250 deduction for teachers
  • Deducting sales tax in lieu of income tax
  • Above-the-line deduction for higher education expenses
  • Tax-free distributions from IRAs for charitable purposes
  • PMI deductions
But the real issue is how do we plan to move forward beyond 2014? Over the last decade, the tax rules have consisted of many short-lived opportunities that, while beneficial to many taxpayers, have passed very late in the year. If you recall, the last time we went through this cycle was at the end of 2012 when we were on a crash course with the fiscal cliff, but, at the very last minute, the American Taxpayer Relief Act was passed. Even though that tax act did give us certainty as it related to the individual tax rates, AMT exemption, and gift and estate tax rates, it offered many commonly used provisions for business and individuals that were only extended for another two years.
I find it very interesting how our tax policy has evolved into two-year extensions of popular tax provisions. Then every other year we wait with baited breath to see if an extender package is passed. This cycle creates uncertainty and makes it difficult for practitioners to plan. Our current situation makes it clear that we need tax reform now, yet it begs the question: is that even possible in the current political environment?
Maybe and maybe not. The Senate does, however, set broad expectations for reform in its introduction to the provisions of the EXPIRE Act, saying that “reform efforts should eliminate temporary provisions from the tax code, boost the economy through the tax code, broaden the tax base by lowering tax rates and ensure an appropriate baseline is used.” The Act also states that “comprehensive tax reform will begin in the next Congress and conclude prior to the expiration of tax extenders.”
So, in an optimistic moment, we can start to envision what a reform package might look like. In Congress’ initial iterations, reform for C Corporations could include reducing the corporate tax rate to 25%, but eliminating benefits such as the production deduction, like-kind exchanges and LIFO inventory. Bonus depreciation could become a thing of the past, and net operating loss utilization could be altered. For individuals, tax reform could include a simplified rate structure with only 10% and 25% brackets (taking us from seven to two brackets); the elimination of AMT, as well as most deductions; and the elimination of personal exemptions in lieu of a generous standard deduction.
Regardless of the path the final reform package may take, getting there will be a long and challenging road and will take strong bi-partisan support to overhaul a tax code that hasn’t seen major reform in 30 years. However, considering the global perspective that our corporate tax rate is not competitive and the insanely complicated rules individuals must navigate to comply with their tax obligations, it is becoming clearer with each passing day that reform is not only necessary, but critical to a stable tax and business environment.

For much of this well written article, I would like to thank Tracy Monroe, CPA, MT, who is a partner with Cohen & Company.