2014 Last-Minute Tax Changes

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2014 Last-Minute Tax Changes

 

 

Nearing the end of 2014, Congress, once again, has extended the “expiring” tax benefits. This means that certain benefits that had expired on Jan. 1, 2014, were retroactively reinstated back to the state of the year. And, like last year, they again expire on Dec. 31.

 

With great fanfare we will be told that the deduction for mortgage-insurance premiums, state and local sales tax, $250 educator expenses and for up to $4,000 of higher-education costs have been reinstated.

 

People who transferred their home on a short sale may once again exclude the canceled debt from income; those age 70 ½ may transfer money from their IRA to a charity without increasing their adjusted gross income; and both contractors and homeowners might be able to get a credit for energy-efficient construction.

 

Business owners may once again expense as much as $500,000 of purchased property, and bonus depreciation is also back. Owners of S corporations that once were corporations can avoid a corporate-level tax if they sell corporate assets more than five years, instead of 10 years, after the conversion to S status.

 

New House Ways and Means Committee Chairman Paul Ryan promises, or threatens, depending on your position on this issue, to use “dynamic” scoring of tax-law changes. The Congressional Budget Office already uses dynamic scoring on steroids.

 

We have always been told that business tax breaks such as rapid write-offs for equipment purchases stimulates economic growth. Congress tells us this. The law change causes behavioral change (it’s dynamic, not static).

 

Congress creates a very generous write-off for business equipment, lets it lapse at the end of every year, and then reinstates it very late in the next year. So when business really needs to make a decision about equipment purchases, it has no idea whether there will be a generous or meager tax benefit available.

 

Similarly, a business organized as a C corporation may have two levels of tax (corporate and shareholder) when it sells assets and distributes sale proceeds to the owners. A business organized as an S corporation generally has only one level of tax (shareholder).

 

So a business that starts as a C corporation and later changes to an S corporation may be changing to avoid taxes. Congress limited such a scheme by saying that any corporate asset sales within 10 years of the change will bear a corporate level or tax.

 

The requirement to sit in the penalty box for 10 years could cause a business owner to defer selling corporate assets just to save taxes. To help business sales during the economic decline, Congress shortened the penalty period to five years.

 

These tax provisions are intended to induce behavioral change – leading to possible dynamic scoring.  But they undermine their goals with fits and starts of one-year extender periods.

 

Our firm had a client who could have sold corporate assets this summer but didn’t because summer tax law would have caused a corporate penalty tax from a C-to-S conversion he had done eight years earlier.

 

Well, now he could avoid the penalty. But his buyer is long gone. An analysis of the TIPA said business owners should sell in the last two weeks of 2014 before the law again reverts to 10 years.

 

Reread that last sentence. The business person is supposed to find a buyer and close the deal in two weeks.

 

Every year they tell us the tax legislation is good but it just never looks right on the plate.