As you may recall, Congress passed legislation very late in 2014 that reactivated provisions that were set to expire on December 31, 2013. The Tax Increase Prevention Act of 2014 extends numerous provisions through December 31, 2014.
I previously wrote about this topic, focusing on section 179 and bonus depreciation deductions. The article's tagline referred to the enactment as "some last minute gifts from Congress." It now seems that "gifts" may have been the wrong word. A thoughtful gift giver, after all, takes into consideration the wants and needs of the recipient.
There were three kinds of recipients at the end of 2014:
- Thanks, but no thanks: Those with no need or desire for the gift, who either made major purchases in 2013 or did not need capital purchases in 2013 or 2014.
- The lucky recipients: Those who made purchases in 2014 in anticipation of the provision extension.
- It's hardly a gift: Those few who managed to make major purchases (and have them in place) within the seven working days between the December 19 enactment and December 31-and that includes December 26 as a workday.
I spoke with financial planners and dental consultants about the experiences of their clients and their own thoughts going forward. The messages were all similar to the thoughts of Adam Decker, co-owner of Veros Dental:
We remind our clients that the economics and need for equipment or asset purchases should be the primary driver for making a purchase, not the tax benefit. Typically, when large purchases are at play, we would prepare projections for them letting them know their expected liability in either scenario.
The general feeling is section 179 and bonus depreciation will stay around but also that whatever the rules are, they essentially will simply adjust to them.
Going forward, we continue to advise as we did during all of 2014 except for the last few days! That is, first, let the need for the expenditure be the primary drive the purchase. Second, be aware of the situation related to the law changes and be prepared either way.
In other conversations, I learned that a small number of dentists did make last-minute purchases after the enactment but were limited in what they could buy because of the "in place by December 31" restriction.
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A few more made purchases throughout 2014 and will benefit at tax time. Not knowing how the year would turn out, however, meant resources in the form of spendable tax savings were not available until the end of the year. Those tax savings might have even given the 2014 economy some boost if they had been used for durable goods or even a vacation. Going forward, most have indicated that they are taking the same stance as they did for 2014-calculate it both ways and wait.
Better news ahead?
The issue, of course, is not the provisions themselves, but the timing. There is no opportunity for planning when the results of decisions are unknown. A retroactive tax consequence is only helpful if there is such a thing as a retroactive purchase. It also leaves us to wonder if retroactive "fixes" have become the norm.
There is, however, good (maybe great) news on the horizon. On December 10, 2014, Representative David Camp (MI-R) introduced the Tax Reform Act of 2014, which was referred to the House Ways and Means Committee the same day. In his remarks before the House on December 11, 2014, Representative Camp noted that this Act was over four years in the making. It is the most comprehensive change to the US tax system since the Tax Reform Act of 1986. Over 50 provisions are being changed or eliminated. He also noted the reform's guiding principles are strengthening the economy and making the tax code simpler and fairer for all Americans.
The proposal provides that the maximum amount a taxpayer may expense is $250,000 of the cost of qualifying property placed in service for the taxable year. The $250,000 amount is reduced dollar for dollar by the amount by which aggregate purchase amount exceeds $800,000. The $250,000 and $800,000 amounts are indexed for inflation for taxable years beginning after 2014. In addition, the proposal makes permanent the treatment of off-the-shelf computer software, air conditioning and heating units, and qualified real property (e.g., leasehold improvements) that are eligible for section 179 treatment.
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Many more changes are planned for business provisions, including elimination of the alternative minimum tax and a reduction in the corporate tax rate. The proposed legislation also includes an overhaul to foreign tax matters intended to make the United States a more attractive business environment. For individuals, many deductions and tax credits are slated to be reduced or completely eliminated.
What remains to be seen is if the Act will pass-and if it does, when. The political climate seems to be the worst it has ever been. If members of Congress cannot find common agreement, we are doomed to a system of "patches and fixes" that make planning impossible. It may be that in December of 2015 we will be going through the same exercise but with much more at stake. On the other hand, if the Act is passed, even though it is not perfect, planning opportunities may again be available and time will resume moving forward. Stay tuned-Apex360 will cover future developments.
Editor's note: Consult a tax expert or accountant to advise your personal tax situation.