The Tax Increase Prevention Act of 2014

On Dec. 19, 2014, the President signed into law the long-awaited year-end tax package, the Tax Increase Prevention Act of 2014 (TIPA). This law extended to the end of 2014 many but not all of the individual, business, and energy provisions that expired at the end of 2013. In addition, the law provides for a new tax-advantaged savings program to aide in meeting the financial needs of disabled individuals, called the ” Achieving a Better Life Experience” (ABLE) program, as well as several other miscellaneous provisions.

Business Provisions Advantages of 2014

2014 remains a good year for law firms and their business clients to have made large fixed asset purchases or capital improvements. The additional first-year depreciation deduction (also known as bonus depreciation) is 50% of the adjusted basis of qualified property acquired and placed in service after Dec. 31, 2011 and before Jan. 1, 2015 (Jan. 1, 2016 for certain longer-lived and transportation property). The boosted expensing amounts under IRC Section 179 also remain through the 2014 tax year, which allow the firm/client to expense up to $500,000 for tangible personal property placed in service. This begins to become phased out once $2 million of qualifying property is placed in service, and becomes completely phased out when the cost of expensing eligible property exceeds $2,500,000. In addition, qualified leasehold improvement property can still be depreciated over 15 years for qualified leasehold improvements that were placed in service before Jan. 1, 2015.

Research Credit

For law firm clients that incur qualified research expenses, a research credit is available and has been extended through the end of 2014. Because the extension of the research credit is retroactive to include amounts paid or incurred after Dec. 31, 2013, clients that are fiscal year taxpayers that have already filed a return for a year that includes part of 2014 should consider filing an amended return to claim a refund for amounts now eligible for the credit.

Work Opportunity Tax Credit

Law firms that hired members of certain targeted groups before Jan. 1, 2015 can receive the Work Opportunity Tax Credit (WOTC) against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). Generally, the percentage of qualifying wages is 40% of first-year wages (25% for employees who have completed at least 120 hours, but less than 400 hours of service for the law firm). For long-term family assistance recipients, the WOTC can be as high as $10,000 per employee, and as high as $24,000 for qualifying veterans. Similarly, law firms that are eligible small business employers and pay differential wages (to employees for periods that they are called to active duty with the U.S. uniformed services for more than 30 days) can claim the Differential Wage Payment Credit up to $4,000 per employee for wages paid before Jan. 1, 2015. Employers must submit WOTC applications to state workforce agencies (SWAs) within 28 calendar days after the new hire's start date. However, the U.S. Department of Labor (DOL) issued Training and Employment Guidance last year when the WOTC had similarly expired, which instructed SWAs to continue to accept employer certification requests. Hopefully, the IRS will implement these Special Transition rules again.

Food Inventory

For law firm clients that maintain food inventory, an enhanced deduction for contributions of food inventory was extended for contributions made before 2015. A C corporation may deduct the lesser of the basis plus half of the property's appreciation, or twice the property's basis for contributions of food considered wholesome food (i.e., meant for human consumption and meeting certain standards). For entities other than C corporations, the aggregate contributions of wholesome food cannot exceed 10% of the taxpayer's aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year.

S Corporations

Where a law firm or their client that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a recognition period. The reduction in the recognition period from 10 years to five years has been extended for determining the net recognized built-in gain for S elections made in 2014.

'Green' Law Firms

In the case of a “green-minded” law firm, a deduction is allowed in an amount equal to the cost of an “energy efficient commercial building property” placed in service during 2014. The maximum deduction for any building is $1.80 per square footage of the building, over the aggregate amount of all Energy Efficient Commercial Buildings Deductions previously taken.

Individual Provisions

The exclusion for income from discharged home mortgage debt was extended for one year. This means that attorneys and their clients who acquired debt to buy, build, or improve their principal residence may exclude up to $2 million ($1 million for married individuals filing separately) of discharged debt from gross income. TIPA also extended the provision for mortgage insurance premiums paid or accrued by an attorney or client in connection with acquisition indebtedness with respect to their qualified residence. These premiums paid or accrued before Jan. 1, 2015 can be deducted as qualified residence interest, subject to a phase-out of 10% for each $1,000 by which the attorney or client's adjusted gross income (AGI) exceeds $100,000 (no deduction is allowed if the taxpayer's AGI exceeds $110,000).

To soften the blow of ever-increasing transit costs, the Act extended the provision allowing law firm employees and employees of their clients to exclude from gross income up to $250 per month for qualified parking, and $250 a month for transit passes and commuter transportation in a commuter highway vehicle. This provision was extended through 2014, and is scheduled to return to $250 per month for qualified parking and $130 a month for transit passes and commuting thereafter if it does not get extended beyond December, 2014. In order to reduce administrative burden, the IRS is providing a special administrative procedure for employers that treated the excess transit benefits (amounts in excess of $130 but not more than $250 per month) as wages and that have not yet filed their fourth quarter Form 941 for 2014. Employers that desire to use this special administrative procedure must repay or reimburse their employees for the over-collected FICA tax (including any Additional Medicare Tax) on the excess transit benefits for all four quarters of 2014 on or before filing the fourth quarter Form 941, due Feb. 2, 2015.

This procedure can only be used to the extent that employers have repaid or reimbursed their employees for the employee share of FICA tax attributable to the excess transit benefits. Employers that have already filed their 4th-quarter 941 or 2014 Forms W2 will need to follow normal correction procedures using Form 941-X for each quarter in 2014 for which FICA tax was over-collected, and Forms W2-c to take into account the increased exclusion for transit benefits.

Attorneys who itemize deductions may continue to elect to deduct state and local general sales and use taxes instead of state and local income taxes. This provision was retroactively extended so that itemizers that reside in states without state income taxes or whose sales taxes are higher than income taxes for the 2014 tax year can choose to deduct sales taxes paid as an itemized deduction.

Higher education expenses ' i.e., “qualified tuition and related expenses” of the attorney, their spouse, or dependents, can be deducted as an adjustment to gross income for tax years beginning before Jan. 1, 2015. The maximum deduction is $4,000 for an individual whose AGI for the tax year does not exceed $65,000 ($130,000 in the case of a jointly filed tax return), or $2,000 for individuals who do not meet the above AGI limit, but whose AGI does not exceed $80,000 ($160,000 in the case of a joint return). For attorneys with AGI in excess of $250,000 ($300,000 for joint returns) who are receiving limited or no benefit from dependency exemptions, it may be beneficial to forgo the dependency exemption which would allow their college-enrolled dependents to claim an education credit on their own personal tax returns in order to receive the greatest (family-wide) tax benefit.

Attorneys who are age 70' or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year for charitable IRA transfers made in tax years beginning before Jan. 1, 2015. These charitable contributions are neither included in gross income nor claimed as an itemized deduction on the attorney's return, and therefore are not subject to the charitable contribution limits. For charitably-minded attorneys or their clients who own appreciated real property, a charitable contribution is allowed for aggregate qualified conservation contributions up to the excess of 50% of the attorney or client's contribution base over the amount of all other allowable charitable contributions, with a 15-year carryover of such contributions in excess of the applicable limitation.

For qualified energy property placed in service before 2015, an attorney can claim a credit up to a $500 lifetime limit (with no more than $200 from windows and skylights) over the aggregate of the credits allowed to the attorney for all earlier tax years ending after 2005. The credit equals the sum of 10% of the amount paid or incurred by the attorney for qualified energy efficiency improvements installed during 2014 plus the amount of the residential energy property expenses paid or incurred by the attorney during the year. For clients who are in the construction business, a credit can be claimed in the amount of $2,000 or $1,000 (depending on the projected level of fuel consumption) for each qualified new energy efficient home that is constructed by the contractor and acquired by a person from the contractor for use as a residence during the year.

'ABLE' Accounts for The Disabled

Under existing law, a qualified disability trust described in IRC Section 1917 of the Social Security Act (beneficiaries of which are determined to be disabled) may be used to provide financial aid to a disabled person without disqualifying the beneficiary for other government benefits. Distributions from these trusts to a child are treated as earned income for purposes of the “kiddie” tax and therefore are taxed at the minor's tax rate, as opposed to the parents'. Special needs trust taxation is a complex subject that requires that the attorney drafting the trust document has the requisite expertise, and is familiar with the benefits systems, the proper creation of the Trust, and ultimately the defense of the Trust in the event that it should be challenged in court by a third party, the Social Security Administration, or Medicaid.

Alternatively, under TIPA, “Achieving a Better Life Experience” (ABLE) accounts can be set up for tax years beginning after Dec. 31, 2014 to help persons with disabilities build a tax-exempt account to pay for qualified disability expenses without the need for trust documents. These accounts are presumed to operate similarly to a 529 plan utilized for education expenses. While there is no deduction allowed for a contribution to an ABLE account, amounts in an ABLE account generally get to accumulate on a tax-exempt basis. Contributions to these accounts must be made in cash, and cannot exceed the annual contribution limit (the amount of the annual gift tax exclusion for that year). Distributions from ABLE accounts are excludible from gross income as long as they do not exceed the designated beneficiary's qualified disability expenses, including such expenses as: education; financial management and administrative services; housing; legal fees; transportation; employment training and support; expenses for oversight and monitoring; assistive technology and personal support services; funeral and burial expenses; health, prevention, and wellness; other expenses to be promulgated by the IRS.

Conclusion

While this legislation immediately resolves the uncertainty of whether the extender tax breaks will be available for 2014, their future will once again become uncertain, as they expired at the end of that year. The reason for extending these tax breaks just one year was apparently to provide additional time for the extenders to be more closely examined and decided upon in a less time-constrained environment as part of greater tax reform. This may ultimately result in some of these provisions either being made permanent or allowed to expire.

Richard H. Stieglitz, CPA, a member of the Board of Editors of our sister newsletter, Law Firm Partnership & Benefits Report, is a Tax Partner in the New York accounting firm of Anchin, Block & Anchin LLP. Nichol Chiarella, CPA, is a Tax Manager with the firm. The authors can be reached at 212-840-3456 or via e-mail at [email protected] and [email protected], respectively.

On Dec. 19, 2014, the President signed into law the long-awaited year-end tax package, the Tax Increase Prevention Act of 2014 (TIPA). This law extended to the end of 2014 many but not all of the individual, business, and energy provisions that expired at the end of 2013. In addition, the law provides for a new tax-advantaged savings program to aide in meeting the financial needs of disabled individuals, called the ” Achieving a Better Life Experience” (ABLE) program, as well as several other miscellaneous provisions.

Business Provisions Advantages of 2014

2014 remains a good year for law firms and their business clients to have made large fixed asset purchases or capital improvements. The additional first-year depreciation deduction (also known as bonus depreciation) is 50% of the adjusted basis of qualified property acquired and placed in service after Dec. 31, 2011 and before Jan. 1, 2015 (Jan. 1, 2016 for certain longer-lived and transportation property). The boosted expensing amounts under IRC Section 179 also remain through the 2014 tax year, which allow the firm/client to expense up to $500,000 for tangible personal property placed in service. This begins to become phased out once $2 million of qualifying property is placed in service, and becomes completely phased out when the cost of expensing eligible property exceeds $2,500,000. In addition, qualified leasehold improvement property can still be depreciated over 15 years for qualified leasehold improvements that were placed in service before Jan. 1, 2015.

Research Credit

For law firm clients that incur qualified research expenses, a research credit is available and has been extended through the end of 2014. Because the extension of the research credit is retroactive to include amounts paid or incurred after Dec. 31, 2013, clients that are fiscal year taxpayers that have already filed a return for a year that includes part of 2014 should consider filing an amended return to claim a refund for amounts now eligible for the credit.

Work Opportunity Tax Credit

Law firms that hired members of certain targeted groups before Jan. 1, 2015 can receive the Work Opportunity Tax Credit (WOTC) against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). Generally, the percentage of qualifying wages is 40% of first-year wages (25% for employees who have completed at least 120 hours, but less than 400 hours of service for the law firm). For long-term family assistance recipients, the WOTC can be as high as $10,000 per employee, and as high as $24,000 for qualifying veterans. Similarly, law firms that are eligible small business employers and pay differential wages (to employees for periods that they are called to active duty with the U.S. uniformed services for more than 30 days) can claim the Differential Wage Payment Credit up to $4,000 per employee for wages paid before Jan. 1, 2015. Employers must submit WOTC applications to state workforce agencies (SWAs) within 28 calendar days after the new hire's start date. However, the U.S. Department of Labor (DOL) issued Training and Employment Guidance last year when the WOTC had similarly expired, which instructed SWAs to continue to accept employer certification requests. Hopefully, the IRS will implement these Special Transition rules again.

Food Inventory

For law firm clients that maintain food inventory, an enhanced deduction for contributions of food inventory was extended for contributions made before 2015. A C corporation may deduct the lesser of the basis plus half of the property's appreciation, or twice the property's basis for contributions of food considered wholesome food (i.e., meant for human consumption and meeting certain standards). For entities other than C corporations, the aggregate contributions of wholesome food cannot exceed 10% of the taxpayer's aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year.

S Corporations

Where a law firm or their client that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election if the gain is recognized during a recognition period. The reduction in the recognition period from 10 years to five years has been extended for determining the net recognized built-in gain for S elections made in 2014.

'Green' Law Firms

In the case of a “green-minded” law firm, a deduction is allowed in an amount equal to the cost of an “energy efficient commercial building property” placed in service during 2014. The maximum deduction for any building is $1.80 per square footage of the building, over the aggregate amount of all Energy Efficient Commercial Buildings Deductions previously taken.

Individual Provisions

The exclusion for income from discharged home mortgage debt was extended for one year. This means that attorneys and their clients who acquired debt to buy, build, or improve their principal residence may exclude up to $2 million ($1 million for married individuals filing separately) of discharged debt from gross income. TIPA also extended the provision for mortgage insurance premiums paid or accrued by an attorney or client in connection with acquisition indebtedness with respect to their qualified residence. These premiums paid or accrued before Jan. 1, 2015 can be deducted as qualified residence interest, subject to a phase-out of 10% for each $1,000 by which the attorney or client's adjusted gross income (AGI) exceeds $100,000 (no deduction is allowed if the taxpayer's AGI exceeds $110,000).

To soften the blow of ever-increasing transit costs, the Act extended the provision allowing law firm employees and employees of their clients to exclude from gross income up to $250 per month for qualified parking, and $250 a month for transit passes and commuter transportation in a commuter highway vehicle. This provision was extended through 2014, and is scheduled to return to $250 per month for qualified parking and $130 a month for transit passes and commuting thereafter if it does not get extended beyond December, 2014. In order to reduce administrative burden, the IRS is providing a special administrative procedure for employers that treated the excess transit benefits (amounts in excess of $130 but not more than $250 per month) as wages and that have not yet filed their fourth quarter Form 941 for 2014. Employers that desire to use this special administrative procedure must repay or reimburse their employees for the over-collected FICA tax (including any Additional Medicare Tax) on the excess transit benefits for all four quarters of 2014 on or before filing the fourth quarter Form 941, due Feb. 2, 2015.

This procedure can only be used to the extent that employers have repaid or reimbursed their employees for the employee share of FICA tax attributable to the excess transit benefits. Employers that have already filed their 4th-quarter 941 or 2014 Forms W2 will need to follow normal correction procedures using Form 941-X for each quarter in 2014 for which FICA tax was over-collected, and Forms W2-c to take into account the increased exclusion for transit benefits.

Attorneys who itemize deductions may continue to elect to deduct state and local general sales and use taxes instead of state and local income taxes. This provision was retroactively extended so that itemizers that reside in states without state income taxes or whose sales taxes are higher than income taxes for the 2014 tax year can choose to deduct sales taxes paid as an itemized deduction.

Higher education expenses ' i.e., “qualified tuition and related expenses” of the attorney, their spouse, or dependents, can be deducted as an adjustment to gross income for tax years beginning before Jan. 1, 2015. The maximum deduction is $4,000 for an individual whose AGI for the tax year does not exceed $65,000 ($130,000 in the case of a jointly filed tax return), or $2,000 for individuals who do not meet the above AGI limit, but whose AGI does not exceed $80,000 ($160,000 in the case of a joint return). For attorneys with AGI in excess of $250,000 ($300,000 for joint returns) who are receiving limited or no benefit from dependency exemptions, it may be beneficial to forgo the dependency exemption which would allow their college-enrolled dependents to claim an education credit on their own personal tax returns in order to receive the greatest (family-wide) tax benefit.

Attorneys who are age 70' or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000 per year for charitable IRA transfers made in tax years beginning before Jan. 1, 2015. These charitable contributions are neither included in gross income nor claimed as an itemized deduction on the attorney's return, and therefore are not subject to the charitable contribution limits. For charitably-minded attorneys or their clients who own appreciated real property, a charitable contribution is allowed for aggregate qualified conservation contributions up to the excess of 50% of the attorney or client's contribution base over the amount of all other allowable charitable contributions, with a 15-year carryover of such contributions in excess of the applicable limitation.

For qualified energy property placed in service before 2015, an attorney can claim a credit up to a $500 lifetime limit (with no more than $200 from windows and skylights) over the aggregate of the credits allowed to the attorney for all earlier tax years ending after 2005. The credit equals the sum of 10% of the amount paid or incurred by the attorney for qualified energy efficiency improvements installed during 2014 plus the amount of the residential energy property expenses paid or incurred by the attorney during the year. For clients who are in the construction business, a credit can be claimed in the amount of $2,000 or $1,000 (depending on the projected level of fuel consumption) for each qualified new energy efficient home that is constructed by the contractor and acquired by a person from the contractor for use as a residence during the year.

'ABLE' Accounts for The Disabled

Under existing law, a qualified disability trust described in IRC Section 1917 of the Social Security Act (beneficiaries of which are determined to be disabled) may be used to provide financial aid to a disabled person without disqualifying the beneficiary for other government benefits. Distributions from these trusts to a child are treated as earned income for purposes of the “kiddie” tax and therefore are taxed at the minor's tax rate, as opposed to the parents'. Special needs trust taxation is a complex subject that requires that the attorney drafting the trust document has the requisite expertise, and is familiar with the benefits systems, the proper creation of the Trust, and ultimately the defense of the Trust in the event that it should be challenged in court by a third party, the Social Security Administration, or Medicaid.

Alternatively, under TIPA, “Achieving a Better Life Experience” (ABLE) accounts can be set up for tax years beginning after Dec. 31, 2014 to help persons with disabilities build a tax-exempt account to pay for qualified disability expenses without the need for trust documents. These accounts are presumed to operate similarly to a 529 plan utilized for education expenses. While there is no deduction allowed for a contribution to an ABLE account, amounts in an ABLE account generally get to accumulate on a tax-exempt basis. Contributions to these accounts must be made in cash, and cannot exceed the annual contribution limit (the amount of the annual gift tax exclusion for that year). Distributions from ABLE accounts are excludible from gross income as long as they do not exceed the designated beneficiary's qualified disability expenses, including such expenses as: education; financial management and administrative services; housing; legal fees; transportation; employment training and support; expenses for oversight and monitoring; assistive technology and personal support services; funeral and burial expenses; health, prevention, and wellness; other expenses to be promulgated by the IRS.

Conclusion

While this legislation immediately resolves the uncertainty of whether the extender tax breaks will be available for 2014, their future will once again become uncertain, as they expired at the end of that year. The reason for extending these tax breaks just one year was apparently to provide additional time for the extenders to be more closely examined and decided upon in a less time-constrained environment as part of greater tax reform. This may ultimately result in some of these provisions either being made permanent or allowed to expire.

Richard H. Stieglitz, CPA, a member of the Board of Editors of our sister newsletter, Law Firm Partnership & Benefits Report, is a Tax Partner in the New York accounting firm of Anchin, Block & Anchin LLP. Nichol Chiarella, CPA, is a Tax Manager with the firm. The authors can be reached at 212-840-3456 or via e-mail at [email protected] and [email protected], respectively.