President Obama is expected to sign bill extending tax provisions that expired at end of 2013

It's been called "a terrible way to make tax policy" and "not that great a deal for families, individuals, and businesses"--and that's just by its supporters. Still, even though far from ideal, the "Tax Increase Prevention Act of 2014" is an early Christmas present for taxpayers.

The bill seamlessly extends 50 tax provisions that expired earlier this year through the end of 2014. A couple of expiring provisions get a prospective extension: certain multiemployer defined benefit pension plan provisons that expire at the end of 2014 would be extended through the end of 2015. The bill also includes the popular Achieving a Better Life Experience Act (or "ABLE" Act) which permits the creation of special tax-exempt accounts for individuals with disabilities.

For a chart listing which expired and expiring tax provisions are extended by the bill (and which are not), along with all of the other tax provisions in the bill, see below.

What the Extender Package Means in the Short Term

It may not be feasible to undertake a year's worth of R&D between now and the end of the year to take advantage of the extended research credit, but there is still a small window of time to take advantage of certain extended provisions.

  • If you are considering the purchase of business equipment, you may want to do so before the end of the month to take advantage of the increased section 179 expensing (if you are a small business) or "bonus depreciation" (if you are a larger business).
  • If you are a US multinational and have been deferring a dividend payment from a controlled foreign corporation (or "CFC") to another CFC while you waited to see whether the CFC look-through rule of section 954(c)(6) would be extended, now is the time to pay that dividend.
  • If you were considering a charitable contribution and were waiting to see if any of the expired charitable contribution extenders would be extended, you can act now.
  • If you have been holding off on making qualified energy improvements to see if section 25C has been extended, your reason for proscratination is over.

Of course, because the extensions are retroactive, actions taken earlier this year qualify for the extended provisions as well. So, those who bet that their provision would be extended retroactively will be rewarded--unless they relate to electric scooters (section 30C(g)(2)), certain health insurance costs (section 30D(g)), qualified refinery property (section 179C(c)), or New York Liberty Zone bonds, provisions that were not extended by the bill. Still, retroactive extension provides little practical value to those who rely on those extenders, such as the wind energy production tax credit, where it is not commercially feasible to take significant actions prior to extension.

What the Extender Package Means in the Long Term

For many taxpayers, the new year will begin just as the old year did, with their not knowing whether or when the tax provisions that expired at midnight on New Year's Eve will be extended. However, the one-year extension in the Tax Increase Prevention Act necessarily means that Congress will take up the expired tax provisions in 2015. Indeed, the fact that Congress extended the provisions for just one year clearly indicates that Congress intends to spend next year scrutinizing the provisions. That heightened scrutiny may be good news for proponents of provisions that came close to being made permanent in the negotiations earlier this month, since another concerted try for permanence is likely next year. On the other hand, the heightened scrutiny may be bad news for those provisions that have generated opposition and controversy. Despite the recent history of retroactive extensions, tax writers in Congress could warn affected taxpayers early in 2015 not to count on a provision being extended again. Such a warning would particularly impact those provisions which require significant lead-time before a qualifying investment can be made and with respect to which taxpayers are reluctant to act without the certainty of extension.

The biggest question is how this expected scrutiny of extenders fits into the likely debate next year over tax reform. The extenders' position is an uneasy one. Traditionally, the debate on extenders has been how they fit into the current Internal Revenue Code: in other words, does a particular provision deserve to be part of permanent tax law or should it be allowed to lapse as merely a temporary departure from permanent tax law? Any conclusion to that inquiry inherently reflects the goals and policy of current tax law. Tax reform, on the other hand, is a debate about whether and how the Internal Revenue Code should be changed to reflect different tax policies and goals. Thus, temporary provisions like extenders effectively have to pass muster under both current tax policy and future tax policy. So, even if an extender met the first test, i.e., Congress concluded that a particular extender deserved to be made permanent in light of current tax policy, that newly-minted permanence would not protect that provision if all similar tax expenditures are being eliminated in the course of tax reform. For example, several extenders relate to depreciation and cost recovery. If Congress were to make a high-level decision about lengthening depreciation schedules as part of tax reform--a common element to many tax reform plans--that change in underlying "permanent" law would make certain extenders obsolete and change the analysis of those that were still relevant.

So, why fight over permanence if permanence means little if everything is on the table in tax reform? The answer lies in the fact that extenders have historically been extended, at least in recent years, without revenue offsets. If Congress seeks to do revenue-neutral tax reform, then extension of temporary provisions have to be "paid for" if they are included in new tax system. That constraint makes revenue-neutral tax reform harder to achieve because taxpayers will naturally evaluate the new, reformed tax system by comparing it to today's tax code (with its temporary provisions) rather than comparing it to the hypothetical tax code that would exist in the future with all the expiring tax provisions having lapsed. Such an apples-to-oranges comparison makes the proposed tax reform appear to have "eliminated" even more existing incentives and benefits than it really did to achieve lower rates. Thus, on a fundamental level, the fight over whether an extender is made permanent or not is really a fight over the baseline for tax reform. It is no indication that an extender will survive tax reform (if it happens) unscathed.

It's a confusing situation with no obvious answer. No wonder Congress puts it off as long as it can each year.

"Extenders" and other tax provisions in H.R. 5771, the Tax Increase Prevention Act of 2014

Expired provisions

Click here to view table.

Expiring provisions

Click here to view table.

Other tax provisions

Click here to view table.