What you need to know about the Tax Increase Prevention Act
Congress has passed and the President signed into law the Tax Increase Prevention Act of 2014, which retroactively extended for one year 54 expired tax breaks. These “tax extenders” effectively allow chiropractors and their practices to claim a number of popular but temporary tax incentives on their 2014 tax returns when they are filed in 2015.
For the record, the extenders bill was combined with the Achieving a Better Life Experience Act, also known as the ABLE Act, to help those with disabilities and their caregivers to save and provide for education, housing, and medical expenses in the future.
The Tax Increase Prevention Act doesn’t make any extenders permanent—nor extend any of them for the usual two-year period that has been customary. Instead, under the new law, these extenders are for the 2014 tax year only. As these were announced late in 2014, little time is left for planning and they may require changes to any already-filed 2014 tax returns.
Professional practices, businesses big and small, sole practitioners, commuters who use public transportation, teachers who spend their own money on classroom supplies, individuals who claim the state and local sales tax deduction, higher education tuition, and people who live in states without state income taxes would have been denied these tax breaks without the one-year extension.
The business tax extenders
As mentioned, the Tax Increase Prevention Act extends many previously expired business tax incentives for one year, including a number of provisions most likely to impact on your practice:
Business property write-offs
Bonus depreciation has been extended, allowing an additional first-year deduction of 50 percent of the cost of equipment acquired during the 2014 tax year. With 50 percent bonus depreciation, a practice can deduct half the cost of new capital purchases in the first year.
Under Section 179 of the tax code, practices are allowed to deduct the cost of investments in practice assets such as equipment, property, and software at the time of purchase, rather than over many years, thus creating a more immediate tax windfall. In other words, Section 179 of the tax law allows you to deduct the entire cost of up to $500,000 of new or used equipment, computers, vehicles, fixtures, furniture—in fact, most depreciable assets with less than a 20-year life.
To some, the bonus depreciation break may be more valuable than the Section 179 break because the Section 179 expensing deduction is limited to the taxable income of the practice with any excess carried forward. Those actively involved in running a practice or business can not only claim losses generated by 50 percent bonus depreciation against other income but can also carry any still-unused losses back for two years and get a refund check from Uncle Sam.
And don’t forget, your practice may be able to use Section 179 expensing on qualified leasehold or retail improvement property that was placed in service by December 31, 2014. Of course, there’s a limit of $250,000 on this type of qualifying property.
New life for leasehold improvements
In addition to the Section 179 first-year expensing allowance, the new law extends the inclusion of qualifying leasehold improvement property and qualified retail improvement property placed in service in 2014 into the 15-year Modified Asset Cost Recovery System (MACRS) class for depreciation purposes—that is, it can be depreciated over 15 years under MACRS.
The often-overlooked research and development (R&D) credit expired completely at the end of 2013. Open to businesses of any size (and a darling of many large corporations), the provision offers a tax credit covering as much as 20 percent of the cost of R&D related to creating new products or improving existing processes. And, as some chiropractors have discovered, the broad definition of “research” can apply to their activities. The extension applies to both the 20 percent and 14 percent alternative credit. The credit has not been made permanent.
Work opportunity tax credit
Under the tax extender bill, your practice can again apply for the Work Opportunity Tax Credit if you hire military veterans and active reservists. An even larger credit is available to small practices that hire individuals who receive supplemental security income or long-term family assistance, and long-unemployed or service-disabled veterans. Other hiring-related provisions that were restored for the 2014 tax year include credits for practices and businesses that hire qualified ex-felons or qualified summer youth employees.
Corporate built-in gains
A corporate-level tax at the highest marginal rate (currently 35 percent) is imposed on an S corporation’s net recognized “built-in gain.” A built-in gain is usually one that arose prior to the practice’s conversion from a regular C corporation to an S corporation, and arises when assets are sold. Under the new law, an S corporation’s recognition period for the built-in gains tax is five years rather than 10.
Energy-related tax savings
The extension of the energy-efficient commercial building deduction allows an above-the-line deduction for energy-efficient commercial buildings. Last year, chiropractors who built or renovated property featuring renewable energy technology—such as solar panels or “green” lighting equipment—could take advantage of a special tax deduction. Until this bill became law, the deduction could only be claimed on property placed in service before the end of 2013. Now, any such property opened in 2014 qualifies for the deduction as well.
More extended deductions
There are, of course, narrower provisions including tax breaks for film and theater producers, NASCAR racetrack owners, racehorse owners, and rum producers in Puerto Rico and the Virgin Islands included in the Tax Increase Prevention Act. Among the other practice-related provisions that have been extended are:
- The New Markets Tax Credit,
- Tax incentives for empowerment zones,
- An employer wage credit for activated military reservists,
- The extension of basis adjustment to stock of S corporations making charitable contributions of property,
- Indian employment credit and accelerated depreciation on Indian reservations,
- S corporation charitable donation of property
- The biodiesel and renewable diesel tax credit, and
- Other energy credits and deductions.
Changing your mind about taxes
Under the new law, these extenders are for the 2014 tax year only. Fortunately, once a practice’s tax returns have been filed, changes can be made using an amended tax return. Generally, a practice—or its principal—can change its mind about missed deductions or unreported income within three years from the time the return was filed, or within two years from the time the tax was fully paid, whichever is later.
Individuals, sole practitioners, etc., use Form 1040X, Amended Individual Tax Return. An incorporated practice that filed Form 1120 uses Form 1120X, Amended U.S. Corporation Income Tax Return, to file an amended return, while S corporations and partnerships check a box on Form 1120S or Form 1065.
Money now, returns later
Uncle Sam, in the form of the IRS, usually wants its money sooner rather than later, a requirement that usually means pre-paying estimated tax bills or fully paying the expected tax bill on or before the deadline (either March 15 or April 15 for those businesses and individuals using a calendar year). Today, however, chiropractors can delay filing their 2014 tax returns with little worry about the IRS’s strict pre-payment rules.
Using Form 4868, “Automatic Extension of Time to File a U.S. Individual Tax Return,” a chiropractor can obtain an automatic six-month extension of time in which to file. Incorporated practices may obtain the automatic six-month extension to file income tax returns by submitting Form 7004, “Application for Automatic 6-Month Extension of Time to File Certain Business, Income Tax, Information, and other Returns.” The automatic six-month extension also applies to the returns of pass-through entities such as partnerships, S corporations, and limited liability companies (LLCs).
Deduct while you can
While Form 7004 does not extend the time for payment of tax, the Tax Increase Prevention Act of 2014 is all about reducing a chiropractic practice’s tax bill.
While lawmakers touted the tax credit for R&D expenditures and an exemption that allows financial companies to shield foreign profits from U.S. taxes as among the biggest tax breaks, several provisions allow chiropractors, their practices, and businesses to write off capital investments more quickly.
So for 2014, 50 percent bonus depreciation is back and the dollar limits for Section 179 expensing are back up to $500,000, with a $2.5 million investment ceiling. However, as of Jan. 1, 2015, bonus depreciation disappeared again, and Section 179 becomes less powerful, reverting to a $25,000 limit with a $200,000 investment ceiling.
Will your practice reap the reward of a lower tax bill thanks to the Tax Increase Prevention Act of 2014?
Mark E. Battersby is a tax and financial adviser, freelance writer, lecturer, and author located in suburban Philadelphia. He can be reached at 610-789-2480.
DISCLAIMER: The author is not engaged in rendering tax, legal, or accounting advice. Please consult your professional adviser about issues related to your practice.