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Income Tax

10 Tax Breaks Could Be Made Permanent: Sec. 179, Bonus Depreciation, Tuition and More

There is a plan to push a package of these tax extenders earlier than usual this year and to make them permanent, once and for all. This will enable taxpayers, including both individuals and businesses, to plan accordingly.

Jun. 23, 2015

Could This Be the Year for Real Tax Planning?

It’s become almost an annual ritual around the winter holidays: Congress extends dozens of expired or soon-to-expire tax provisions on a temporary basis. But if Paul Ryan (Rep.-WI), chairman of the tax-writing House Ways & Means Committee, has his way, this rite of passage will end this year.

While attending the Wall Street Journal CFO Network meeting on June 16, Ryan confirmed that he is planning to push a package of these extenders earlier than usual this year and to make them permanent, once and for all. This will enable taxpayers, including both individuals and businesses, to plan accordingly instead of waiting to see if and when the other shoe drops.

“We want to do this as early as possible in the fall,” said Ryan. “Look what happened last year: You had to wait until December 11 to find out if these provisions were being extended.”

The tax legislation finally enacted late last year was especially problematic. Under the Tax Increase Prevention Act (TIPA) of 2014, more than 50 tax breaks were restored retroactive to January 1, 2014, only to expire again on December 31, 2014. In other words, you only had a matter of days to take action based on the extensions. The president didn’t officially sign TIPA until December 19, 2014.

Although some of the tax extenders are esoteric or specific to certain industries — such as special tax breaks for NASCAR tracks and horse racing – many are mainstream provisions affecting a multitude of individuals and small businesses. Here are ten noteworthy extenders that could be revived again.

  1. Section 179 deductions: Currently a business may deduct a maximum of just $25,000 under Section 179, with a $200,000 phaseout threshold. Previously, the maximum allowance was $500,000, phased out above a threshold of $2 million.
  2. Bonus depreciation: A separate provision allowed a business to claim 50% “bonus depreciation” for qualified property placed in service prior to 2015. In some cases, bonus depreciation could be combined with the Section 179 deduction.
  3. Building depreciation: The tax law permitted a faster 15-year depreciation period for qualified leasehold improvements, qualified restaurant buildings and qualified improvements placed in service during the year. Without an extension, the usual 39-year period applies for 2015 and thereafter.
  4. State and local tax deductions: In lieu of deducting state and local income taxes, a taxpayer could elect to deduct states sales taxes. Deductions were based on actual receipts or a state-by-state table (plus sales tax paid for certain big-ticket items).
  5. Charitable IRA rollover: Previously, a taxpayer over age 70½ was able to roll over up to $100,000 of IRA proceeds to a charity without paying tax on the distribution. This technique would satisfy the rules for required minimum distributions (RMDs).
  6. Research credits: This popular tax credit, which has been extended numerous times, provided a tax credit equal to 20% of qualified expenses exceeding a base amount. Alternatively, a business could elect a simplified 14% credit.
  7. Tuition deduction: Although taxpayers can still claim a credit for qualified higher education expenses, prior to 2015 they had the option of deducting the post-secondary school tuition up to a certain limit. The tuition deduction was phased out based on modified adjusted gross income (MAGI).
  8. Hiring credits: The Work Opportunity Tax Credit (WOTC) was available to certain businesses hiring workers from one of several disadvantaged groups. Along with a similar credit for hiring military vets, this temporary tax break is on hiatus again. 
  9. Mortgage loan forgiveness: The tax law previously authorized an exclusion for mortgage loan forgiveness on debts up to $2 million. The exclusion was available only on debt forgiveness for a principal residence.
  10. Residential energy credits: The credit for installing energy-saving items in the home has existed in various forms over the years. Prior to 2015, a maximum $500 credit could be claimed for 10% of qualified energy-saving expenditures like new heating and air conditioning systems.

The best advice you can give to your clients: Don’t do anything just yet. You can wait to see how Ryan’s proposals play out over the summer. If it looks like legislation will be approved that authorizes these tax breaks earlier in the year, you should have more time to benefit from the extensions. If not, you’ll probably find yourself in the usual tax-planning quandary.