Déjà vu? Maybe, maybe not … well probably

by The City Wire staff ([email protected]) 154 views 

Each year December brings Christmas and uncertainty in the permanency of the Internal Revenue Code. While Christmas brings a frenzy of consumer spending, exhausted parents, overeating, and renewed family feuds under the banner of peace and goodwill, it also brings that annual guessing game as to whether a polarized Congress and White House will extend retroactively the income tax provisions that expired the previous year.

Last Wednesday, (Dec. 3) the Republican-controlled U.S. House of Representatives passed a bill to extend expired provisions of the Internal Revenue Code after work on making many of these provisions permanent broke down. As of today, the Senate hasn’t passed the “tax extenders” and the President will still need to sign any bill into law.

The most common question I have been asked by my clients this year is, “are the incentives for buying equipment going to be extended to 2014?” They are referring to two popular provisions of the Internal Revenue Code that expired on Dec. 31, 2013: The election for businesses to expense tangible personal property, aka the Section 179 deduction, and 50% bonus depreciation.

Section 179 of the Internal Revenue Code allows a business to expense certain assets in the year they are purchased rather than to depreciate the cost of these assets over several years. This election is significant to small businesses in that it can significantly accelerate their cash flow by reducing the business’s current year's income taxes. This provision has historically given small businesses incentive to invest in assets for their business which can result in its growth and allow it to expand its workforce.

50% bonus depreciation is similar to the Section 179 election to expense assets in that it allows a more generous depreciation deduction in the year the asset is purchased, but there are differences. Section 179 is available for both new and used equipment whereas the 50% bonus depreciation is only available for new equipment. The Section 179 deduction is limited each year to a business’s taxable income, bonus depreciation isn’t. There are other differences, but you get the point. It was designed to provide businesses an incentive to invest in their business by buying additional equipment.

Here in lies the problem with Congress and the White House. Waiting until 2015 to pass tax incentives that expired Dec. 31, 2013 so that they are available in 2014 doesn’t provide businesses much incentive to invest in equipment during the 2014 tax year. Uncertainty in the Internal Revenue Code doesn’t provide any incentive for businesses or anybody to buy equipment or invest in renewable energy or provide jobs for disadvantaged or targeted groups or make contributions from a retirement plan to charitable organizations. (For a full list of expired and expiring tax provisions, see the List of Expiring Federal Tax Provisions 2013-2024 prepared by the Staff of the Joint Committee on Taxation.)

So where does a business trying to make a decision as to when to invest in equipment for their business stand in relation to the ever fluid Internal Revenue Code and the inadequate tax policies of our government? Disclaimer: This is not a prediction. It is not even a guess. I’m just passing along what somebody else said.

Bloomberg reported on Dec. 4 that U.S. Senate Finance Committee Chairman Ron Wyden expected the Senate to discuss the House Bill extending the expired tax provisions this week. However, because of the Christmas Holidays he expected the vote for the Senate to approve the extensions would not happen until the Senate reconvened after the holidays, in 2015. Bloomberg also reported that President Obama said he was open to a short-term extension, not that he would sign the bill.

If you are an optimist, go shopping for equipment. If you a pessimist, increase your 4th estimated income tax payment due Jan. 15. If you are somewhere in between, you have three weeks to get with your CPA to plot your final tax planning transactions. Good luck.