Tax increase prevention

By Mark E. Battersby| February 3, 2015

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Find out which tax extenders aggregate producers will be afforded in preparation for filing 2014 taxes.

Congress has passed and the president has signed into law the Tax Increase Prevention Act of 2014, the so-called “tax extenders” that retroactively extended 54 expired tax breaks for one year that effectively allow business owners such as aggregate producers to claim a number of popular but temporary tax incentives on their 2014 tax returns. Many people would have been denied tax breaks without these one-year extensions, including businesses big and small, commuters who use public transportation, teachers who spend their own money on classroom supplies, individuals who claim the state and local sales tax deduction, people who pay for higher education tuition and people who live in states without state income taxes.

Without the new law, pit and quarry operators would have been unable to claim business and energy incentives such as bonus depreciation, Section 179 first-year expensing and the research tax credit. The election to expense mine safety equipment and the underused rescue team training credit would remain in limbo.

Unfortunately, the Tax Increase Prevention Act does not make any extenders permanent, nor does it extend any of them for the usual two-year period that has been customary. Instead, under the new law, these extenders are only for the 2014 tax year.

The business tax extenders

The Tax Increase Prevention Act extends many previously expired business tax incentives for one year, including:

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, an aggregates producer can deduct half the cost of new capital purchases in the first year.

Under Section 179 of the tax code, businesses are allowed to deduct the cost of investments in business assets such as equipment, property and software at the time of purchase, rather than over many years, creating a more immediate tax windfall. Section 179 of the tax law allows a business to deduct the entire cost of up to $500,000 of new or used computer equipment, heavy vehicles, fixtures, furniture – in fact, most depreciable assets with less than a 20-year life.

Because the Section 179-expensing deduction is limited to the taxable income of the aggregates producer with any excess carried forward, bonus depreciation may be more valuable.

After all, those actively involved in running a business cannot only claim losses generated by 50 percent bonus depreciation against other income, but they can also carry any still-unused losses back for two years and get a refund check from Uncle Sam.

And don’t forget, an aggregates producer may be able to use Section 179 expensing on qualified improvements to leased property that was placed in service by Dec. 31, 2014. Of course, there’s a limit of $250,000 on 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 that was placed in service in 2014 into the 15-year Modified Accelerated Cost Recovery System (MACRS) class for depreciation purposes – that is, it can be depreciated in 15 years under MACRS.

Work opportunity tax credit. Under the tax extender bill, a crushed stone, sand or gravel business can again apply for the Work Opportunity Tax Credit if it hires military veterans and active reservists. An even larger credit is available to small businesses that hire individuals who receive supplemental security income or long-term family assistance. Credits are also available for long-unemployed or service-disabled veterans.

Other hiring-related provisions that were restored for the 2014 tax year are credits for businesses that hire qualified ex-felons or qualified summer youth employees.

Small business financing. The 100 percent exclusion from capital gain allowed on the sale or exchange of qualified small business stock held for more than five years by non-corporate investors has been extended. Stock acquired by investors in an aggregates business after 2014 will be entitled to only the regular 50 percent exclusion if not changed by lawmakers.

Recognizing S corporation 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.

That built-in gain is usually gain that arose prior to the sand, gravel or crushed stone operation’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 built-in gains tax is five years rather than 10 years.

Energy-related tax savings. The extension of the energy-efficient commercial buildings deduction allows an above-the-line deduction for energy-efficient commercial buildings. Last year, business owners 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 would qualify for the deduction, as well.

More extended deductions

There are, of course, many far-narrower provisions included in the Tax Increase Prevention Act, including tax breaks for film and theater producers, NASCAR racetrack owners, racehorse owners, and rum producers in Puerto Rico and the Virgin Islands.

Among the other provisions applying to businesses that have been extended are the already mentioned:
■ Extension of mine rescue team training credit
■ Extension of election to expense mine safety equipment
■ The often-overlooked research tax credit
■ 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
■ Low-income tax credits for new buildings (not federally subsidized)
■ Indian employment credit and accelerated depreciation on Indian reservations
■ S corporation charitable donation of property
■ Production tax credit
■ Biodiesel and renewable diesel tax credit
■ Other energy tax credits and deductions

Changing your mind about taxes

Under the new law, these extenders are for the 2014 tax year only. Obviously, coming this late in 2014 leaves little time for planning and may, in fact, require changes to already-filed 2014 tax returns.

Fortunately, once an aggregates producer’s tax returns have been filed, changes can be made on an amended tax return. Generally, an aggregates business, or its owner, can change their mind about previously reported income and missed deductions 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 proprietors and others use Form 1040X, Amended Individual Tax Return. A corporation 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 the Form 1120S or Form 1065.

Money now, returns later

Uncle Sam, in the form of the Internal Revenue Service (IRS), usually wants its money sooner rather than later, a requirement that usually means pre-paying estimated tax bills or fully paying their 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, aggregates producers and other businesses can delay filing their 2014 tax return with little worry about the IRS’ strict pre-payment rules.

Using Form 4868, “Automatic Extension of Time to File a U.S. Individual Tax Return,” an individual can obtain an automatic, six-month extension of time to file tax returns. Incorporated aggregates producers may obtain the automatic six-month extension of time 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 of time to file also applies to the returns of pass-through entities such as partnerships, S corporations and limited liability companies.

While the Form 7004 does not extend the time for payment of tax, the Tax Increase Prevention Act of 2014 is all about reducing a sand, gravel or crushed-stone operation’s tax bill.

Tomorrow

While lawmakers touted the tax credit for research and development expenditures and an exemption that allows financial companies such as banks and investment firms to shield foreign profits from U.S. taxes as among the biggest tax breaks, several provisions allow aggregates producers and other businesses to write off capital investments more quickly.

For 2014, 50 percent bonus depreciation is back and the dollar limits for Section 179 expensing are way back up at $500,000, with a $2.5 million investment ceiling. However, on Jan. 1, 2015, bonus depreciation disappeared again, and Section 179 became way less powerful, reverting to a $25,000 limit with a $200,000 investment ceiling.

Of course, renewing the extenders only through the 2014 tax year means Congress will have to deal with them again, perpetuating a long-standing routine of annual reconsideration of the package. Until then, will your aggregates business reap the reward of a lower tax bill thanks to the Tax Increase Prevention Act of 2014?