On December 16, 2014, Congress passed H.R. 5771, which includes the Tax Increase Prevention Act of 2014 (Extender Act) and the Achieving a Better Life Experience Act of 2014 (ABLE Act). President Obama signed H.R. 5771 into law on December 19, 2014.
Highlights of the Extender Act include:
Business Tax Extenders. The Extender Act extends for one year through 2014 certain tax provisions, including:
- Extension of the research and development tax credit, which allows a 20 percent credit for qualified research expenses;
- Extension of the low-income housing tax credit rate for newly constructed non-federally subsidized buildings;
- Extension of the exemption of the basic military housing allowance from the income test for purposes of low-income housing tax credit buildings;
- Extension of the new markets tax credit;
- Extension of the tax credit for wage payments to employees who are active duty members of the uniformed services;
- Extension of the work opportunity tax credit;
- Extension of qualified zone academy bonds;
- Extension of accelerated depreciation of qualified leasehold improvement, restaurant, and retail improvement property, and certain other property;
- Extension of 50 percent bonus depreciation for certain qualified business property placed in service during 2014 (2015 for property with longer production periods) and extension of the ability to use AMT tax credits in lieu of bonus depreciation;
- Extension of the increased expensing allowance for business assets, computer software and qualified real property;
- Extension of certain tax rules relating to dividends of regulated investment companies (RICs) to non-resident aliens;
- Extension of the treatment of RICs as qualified investment entities for purposes of the Foreign Investment in Real Property Tax Act (FIRPTA) and thus not subject to withholding under FIRPTA;
- Extension of the subpart F income exemption for certain active financing income;
- Extension of the subpart F look-through rule for certain controlled foreign corporations;
- Extension of the exclusion on gain from the sale of certain small business stock;
- Extension of the basis adjustment rule for S corporation stock on charitable contributions of property;
- Extension of the rule for S corporations reducing the recognition period for the built-in gains tax from 10 years to 5 years; and
- Extension of certain tax incentives for investment in empowerment zones.
Individual Tax Extenders. The Extender Act extends for one year through 2014 certain tax provisions, including:
- Extension of the deduction for elementary/secondary school teacher expenses;
- Extension of the exclusion from gross income from the discharge of qualified principal residence indebtedness;
- Extension of the equalization of the exclusion for employer-provided mass transit and parking benefits;
- Extension of the deduction for mortgage insurance premiums, which will continue to be treated as qualified residence interest for purposes of the mortgage interest deduction;
- Extension of the itemized deduction of state and local general sales taxes (in lieu of an itemized deduction for state and local income taxes);
- Extension of the deduction of contributions of capital gain real property made for conservation purposes;
- Extension of the above-the-line deduction for qualified and related higher-education expenses; and
- Extension of the rule allowing for tax-free distributions from Individual Retirement Accounts (IRAs) for charitable purposes for taxpayers over 70 1/2 years old.
Energy Tax Extenders. The Extender Act extends for one year through 2014 certain tax provisions, including:
- Extension of the residential energy efficiency improvement tax credit;
- Extension of the second generation biofuel producer credit;
- Extension of the income and excise tax credits for biodiesel and renewable diesel;
- Extension of the tax credit for producing electricity using certain renewable resources;
- Extension of the energy efficient new homes tax credit;
- Extension of the depreciation allowance for second generation biofuel plant property;
- Extension of the energy efficient commercial buildings deduction;
- Extension of special tax deferral rules for sales or dispositions of qualified electric utilities; and
- Extension of the excise tax credit for certain alternative fuels.
Increase of JCT Threshold. The Extender Act increases the threshold for review of refunds or credits for C corporation returns by the Joint Committee on Taxation (JCT) to $5 million (from $2 million). This means that the IRS may now issue refunds or credits up to $5 million to C corporations without a review by the JCT. This provision does not apply to any pending refund or credit reports that were made prior to the date of enactment.
Highlights of the ABLE Act include:
Qualified ABLE Programs. The ABLE Act allows for the establishment of a “qualified ABLE program,” which is a tax-exempt savings program maintained by a state or agency for the purposes of supporting a designated beneficiary with disabilities. In summary, the ABLE Act provides that:
- Total annual contributions to any one ABLE account are set at the gift tax exclusion amount as provided under Section 2503(b) of the Code ($14,000 in 2015).
- Distributions of qualified disability expenses are generally not includible in gross income. Qualified disability expenses include education, housing, transportation, employment training and support, health and legal fees. Distributions used for non-qualified expenses are subject to tax and an additional 10 percent tax.
- An eligible individual is an individual who is entitled to benefits based on blindness or disability under the Social Security Act, with such disability occuring prior to age 26.
- ABLE accounts may be rolled over into other ABLE accounts for the same designated beneficiary or for new beneficiaries who are eligible members of the family of the designated beneficiary.
Certified Professional Employer Organizations. The ABLE Act provides that certified professional employer organizations (PEOs) (i.e., organizations that administer payroll functions) will be treated as the employer of any worksite employee performing services for a customer organization. Thus, under the ABLE Act, the PEO will be solely responsible for the customer’s employment taxes and withholding obligations, which is in contrast to current law. To be certified, a PEO must satisfy certain requirements, including posting a bond, complying with reporting obligations and submitting audited financial statements. These provisions will be effective for wages for services performed on or after January 1, 2016.
Controlled Foreign Corporation Dividends Exclusion. The ABLE Act would exclude from personal holding company income dividends received by U.S. shareholders from a controlled foreign corporation.