Written By: Guy Schmitz, J.D., LL.M.
Is there anything worse than the Congressional ritual of letting temporary provisions expire and then resuscitating them, nominally retroactively? While the members of Congress undoubtedly trumpet their extender legislation as an accomplishment to save these important tax benefits, the fact was that the taxes that affect decisions on hiring and capital investment were uncertain for 11-plus months of the year, making the resurrection less of a boon to taxpayers than, say, if the tax situation had been clarified earlier in the year; many transactions simply cannot be completed in such a short time frame. This procedure left planners with little they could say to clients seeking their advice without hedging, fearful that just maybe this time a provision would not be extended. Practitioners became all too familiar with this recurrence, reminiscent of the movie Groundhog Day.
Escaping Eternal Recurrence
Things seemingly took another turn back in March, when Senate Finance chair decided that the ritual of letting temporary provisions expire only to resuscitate them retroactively was grating on taxpayers and their advisors, and that action should be taken early in the year. Unfortunately, the preliminary Extender bill was deferred by the Senate majority leader until after the November election. Just like every other year.
Following the election, the tax writers convened and reached a preliminary agreement that would have made 10 of the provisions permanent while reviving some 50 or so temporary provisions, giving them yet another lease on life. But then the Administration issued an executive order that deferred deportation proceedings on illegal and undocumented aliens. Republicans feared that such individuals would file for refundable child credits and earned income tax credits, the latter being an area identified as rampant with fraud; they withdrew their support for extension, expansion, or permanency of these provisions. With that came another event suggesting that this time the scenario would not be repeated: the threat of a presidential veto of any legislation that did not include these middle-class (and lower-class) tax benefits. And with that, the Congressional leaders called off the deal and planned to regroup before tackling the issue in December.
There is a greater chance than there has been over the past decade that some or all of these provisions will find their eternal rest. The Service had already indicated that the tax climate would most likely adversely affect the start of tax season, and the continuing delay in addressing extenders only further pushes the finalization of returns and the return processing software further into the future.
I Got You Babe
Insiders in Washington, however, believed that the Congress members would see their shadows and proclaim two more years of the cycle of expiration, political grandstanding, and the retroactive resurrection of the provisions with an extension through the end of 2015, but no change in status from temporary to permanent for any of the provisions (which, except for the education credit, have technically expired):
- The research credit, simplified to make the credit permanent but also giving start-up businesses the ability to claim the credit against payroll taxes;
- he enhanced §179 expensing;
- The state and local sales tax deduction;
- The American Opportunity Tax Credit, indexed to inflation after its renewal in 2018;
- The employer-provided mass transit and parking benefits exclusion;
- The reduced recognition period for built-in gains of S corporations;
- The rules regarding basis adjustments to the stock of S corporations making charitable contributions of property;
- The rule allowing some tax-free distributions from IRAs for charitable purposes;
- The deduction for charitable contributions by individuals and corporations of real property interests for conservation purposes; and
- The deduction for charitable contributions of food inventory.
However, the legislation proposed on December 1, the Tax Increase Prevention Act of 2014, would only extend the provisions through the end of 2014 (rather than 2015, as in the Senate Finance initial markup). This means that the expired provisions will re-expire less than a month after being given new life (if enacted and not vetoed).
The new Congress claims it will take up tax reform in 2015. We’ll see about that. The indications are that this will be a donnybrook.