Welcome Tax Relief Provided to Individuals and Businesses Extended through Calendar Year 2014

The Tax Increase Prevention Act of 2014 retroactively extends, through Dec. 31, various individual and business tax relief provisions that previously expired during calendar year 2013 or 2014. The full text of the Act, passed by Congress last week, may be accessed here.

Significant features of the Act impacting individual taxpayers include:

1.  State and Local Sales Tax Deduction. The Act retroactively extends the ability of an individual taxpayer that itemizes deductions to elect to deduct state and local general sales and use taxes instead of state and local income taxes. Prior to the passage of the Act, this election was not available for tax years beginning after Dec. 31, 2013.

2.  IRA Distributions to Eligible Charities. Subject to certain limitations, taxpayers aged 70 1/2 or older may make tax-free distributions from their Individual Retirement Accounts to charities. Such charitable IRA distributions are not subject to the charitable contribution limits that otherwise apply to charitable contributions made by individuals.

3.  Discharged Home Mortgage Debt. The exclusion from gross income of income derived from the discharge of “qualified principal residence indebtedness” is extended, and applies to home mortgage debt discharged before Jan. 1, 2015. This exclusion previously only applied to qualifying debt that was discharged before Jan. 1, 2014.

These retroactive extensions provide a welcome relief for individual taxpayers who elect to itemize their deductions, instead of taking the standard deduction, as well as for certain individuals who desire to make charitable contributions from their retirement accounts.

On the business side, the highlights of the Act include, but are not limited to:

1.  Extension of Certain Tax Credits. The Act retroactively extends the Research Credit, the Work Opportunity Tax Credit, the Indian Employment Credit, the New Markets Tax Credit and the Differential Wage Payment Credit for employers.

2.  S Corporation Five Year Recognition Period for Built-in-Gain Tax. The five-year recognition period provided for an S corporation with built-in-gains at the time of converting from a C corporation is extended and applies for tax years beginning in 2014. This extension provides much needed clarity to tax attorneys, tax advisors and accountants advising clients contemplating making an election to treat their corporations as an S corporation.

3.  Exclusion of 100 percent of Gain on Certain Small Business Stock. The Act extends the 100 percent exclusion from income on all gain recognized on the disposition of qualified “small business stock.”

4.  Lower Shareholder Basis Adjustments for Charitable Contributions by an S Corporation. Prior to the Act, for charitable contributions in tax years beginning before Dec. 31, 2013, a shareholder in an S corporation who makes a contribution of property to a charitable organization reduces his or her basis in the S corporation stock by an amount equal to the shareholder’s pro-rata share of the adjusted basis of the contributed property. The Act extends this provision for contributions in tax years beginning before Jan. 1, 2015.

5.  Bonus First Year Depreciation Extended. Subject to certain conditions, an additional first year depreciation deduction was permitted equal to 50 percent of the adjusted basis of certain property acquired and placed into service after Dec. 31, 2011 and before Jan. 1, 2014. The Act extends this bonus first-year depreciation for one year so that it applies to certain property acquired and placed into service before the end of calendar year 2014.

The impact of the Act on your tax filing position and business may be complex.