Every year some tax laws expire, and, as a business owner, you have to wait on congress to decide whether or not they're going to extend these tax laws. Good times for business tax preparation, right? This video will highlight and explain some of the major deduction expirations that will effect your individual and business 2014 tax returns.
Individual Tax Return Expirations
01. State & Local Sales Tax Deduction
The law that allowed individuals to write off sales tax expired in 2013. Here's what the IRS says about writing off sales tax:
You have the option of claiming either state and local income taxes or state and local sales taxes. (You can’t claim both.) If you saved your receipts throughout the year, you can add up the total amount of sales taxes you actually paid and claim that amount.
Until congress decides whether or not to extend this sales tax deduction, the law has expired. However, if congress does decide to extend this law you can amend your tax return accordingly. In that case, here's a link to the Sales Tax Deduction Calculator.
02. Teacher Deductions
Teachers were able to write off up to $250 per year for student and classroom supplies that were not covered by the school. These deductions expired in 2013, and teachers are waiting to see if congress decides to extend these tax laws.
03. Loss of Personal Home Deduction
When the economy tanked in 2008, and many people lost their homes to foreclosure, laws were passed where these people wouldn't have to pay taxes on their loss. This law expired in 2013. So, if you lost your personal residence in 2014, it's up in the air as to whether or not you'll have to pay taxes on your lost home.
Business Tax Return Expirations
Many of the expired deductions for 2014 have to do with depreciation. What's depreciation and how does it work? Here's a quick reminder:
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
Most types of tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment are depreciable. Likewise, certain intangible property, such as patents, copyrights, and computer software is depreciable.
Now, let's get on with those expired business deductions. Here's what expired, and we're all hoping get extended:
01. Equipment & Asset Deductions
For the past few years, businesses have been able to write off up to $500,000 new equipment expenses and asset purchases. However, that amount has expired, and has returned back to the $25,000 limit. That's a big difference! Let's hope they extend this one. For now, with this deduction expired, you can only write off $25,000, and the rest of it can be depreciated over the life of the asset for the next few years.
02. Bonus Depreciation
This is where businesses were able to fully expense purchases. You could write off 50% of the expense, and then depreciate it over the life of the asset. Totally expired.
03. Building Improvements
When you purchase a building, you can expense it over 27.5 or 39 years...that's a long time before you see the full benefit of this investment. So, a law was passed that said that certain improvements on a building could be expensed over 15 years--a much shorter period! Well, this one's expired too. So it's back to 27.5 or 39 years.
Still confused? Have some specific questions?
Watch More Tax Tips & Accounting In 60-Seconds
Ryan: Hi, I’m Ryan Steck. I’m the CFO and lead CPA here at Ignite Spot.
Ann: And I’m Ann Whittaker, I work in the marketing department, and I know nothing about taxes.
Ryan: Let me give you a little background here. Every year there’s tax laws that get enacted; some expire; some get changed; some new rules get made. Well, over the last number of years, probably the last ten years, these tax extenders keep coming up. What are tax extenders? They’re laws that have been put into place and then expire. So tax rules have come in, we get exemptions, we get reductions, we get some write-offs, we get to take tax write-offs on a lot of things, but some of them expire over time. What a tax extender does is where Congress and the government come in and they decide when a law has expired, whether they’re going to extend it or not. And so in 2013 a lot of tax deductions expired. And today we’re going to talk about a lot of those tax deductions that expired. And why we call them tax extenders.
Ann: So for me, I would think, should I file my taxes now? Or later? Or when should you start putting this all together if you have no idea what these are going to be.
Ryan: We’re in an impossible situation and that’s a great question. And there really isn’t a good answer, and let me tell you why. Because in 2013 a lot of the tax deductions expired. A lot of the country expects that these deductions will be retrospectively put into place beginning of January 2014. But they haven’t done it yet. And because they haven’t done it yet, we don’t know if they’re going to. And so as a business owner, you’re sitting there in January trying to plan your business. Are you a planner Ann?
Ann: I am a planner. I love spreadsheets.
Ryan: I’m a planner as well. I like to lay things out, know what I’m going to do, have a strategy in place, and move forward. Well business owners are left hanging on some of these, not knowing if they’re spending money, that they’re not even going to get a tax deduction for. And so what we’re waiting for is Congress to decide whether or not we’re going to get some of these tax deductions this year. And I want to spend some time reviewing those.
Ann: Alright. Let’s go.
Ryan: Let’s first start talking about the individual tax extenders. These are the expenses that individuals usually get to take on their tax return, that we don’t know if they’re going to in 2014 or not. So the first one is the state and local sales tax deduction. What this does is this allows you to take a write-off on your tax return for sales taxes that it’s estimated that you’ve paid throughout the year. This helps certain states. If you live in a state where you don’t pay state taxes--these are the states that are going to be effected by this. Some of the states we talk about are Washington state, Texas, Florida, Wyoming, and there’s a handful of others where they don’t have to pay state taxes. This state tax deduction allowed them to get a deduction for sale tax that they paid to the states.
Ann: So, me, as an individual, can write off those sales taxes.
Ryan: You can write of sales taxes. And there’s a formula that goes into that that expired in 2013. Some of the other ones that expired is a teacher deduction. So teachers every year are allowed to write off up to $250 in supplies and other things that they purchased to do their job--to fill the classroom and get the supplies that they need that aren’t covered by the school. But that deduction is gone.
Ryan: So in 2008, the economy took a big hit. A lot of people lost their homes, the housing market basically crashed. Because of that a lot of individuals had a lot of potential tax liabilities for losing their homes and the banks repossessing them. Congress put into place some laws that would allow individuals who owned a personal residence to not have to pay taxes on their foreclosed homes. That law expired in 2013. That’s a big one, where, if you’re losing your home, not an investment property, not a rental property, but your personal home, that law is no longer in place at the moment. We’re hoping that one gets extended and that there’s relief for people who do lose their homes.
Ann: Ok so for 2014, that’s up in the air.
Ryan: Right. For 2014, that’s up in the air. So we’re hoping that gets put back into place for January, 2015.
So, there’s a lot of other individual ones out there, but those are the big ones that I thought you should be aware of. Next let’s move over to some of the heavy hitters with the business returns. And there’s some big things that happened there. Back in early 2000, a business had the ability to expense new equipment, and asset purchases up to $25,000 a year. So if you bought a piece of equipment that cost $50,000 you could write $25,000 off of it in year one, and then depreciate the rest of it over subsequent years. Depreciation is your ability to actually deduct and asset once you buy it. Certain assets you buy, equipment, furniture, you’re actually supposed to depreciate it. That means you expense it over 2, 4, 5 years. You don’t get to write it all off in one year.
Ann: Oh, ok that makes sense.
Ryan: And so now what happens is this law over time has really gone up, it maxed out at about $500,000 a year that you could expense as a business owner in new equipment purchases.
Ann: So does it matter the size of your business?
Ryan: Not at all. There is a $2M threshold in asset purchases but you’ve got to be pretty big for those thresholds to kick in.
Ryan: So for the most part, a lot of businesses were able to write off all of their equipment and asset purchases the year they bought them up to this point. Well now in 2013, again with these expiration of laws, that $500,000 limit is back to $25,000.
Ann: That’s a big difference.
Ryan: It’s a big difference, and a big deal because now if you’re a business trying to spend money on the year, trying to invest in yourself and grow your business, you don’t know if you’re getting a $500,000 write off or a $25,000 write off, plus whatever depreciation you can take.
Ann: Yikes, ok!
Ryan: Big deal. How do you plan for that throughout the year? I don’t have an idea. You just have to do your best guess, hope that these extenders get put in place and you have the ability to take them.
Another depreciation law that they’ve had for a number of years, if you don’t want to fully expense, is they had what’s called bonus depreciation. So what bonus depreciation said, much like section 179 where you get to fully expense your purchases, you could take your purchase and full expense 50% of it and then depreciate or expense the rest of it over the life of that asset. Whether is be 3, 5, 7 years.
Ann: Ok so over the life of the asset. Ok.
Ryan: So that’s another one in play, that bonus depreciation. It expired in 2013, so there’s no more 50% at the moment.
Ryan: The last one I want to talk about is a pretty big one, and there’s a common theme here: it all seems to be around depreciation. If you get buildings, four walls, you own a building, that’s generally depreciable, meaning you can generally expense it, over 27 and a half or 39 years. That’s a long time.
Ann: Odd numbers.
Ryan: So if you purchase a building for a million dollars you’ve got to wait 39 years to recognize the full benefits of that building purchase of a million dollars.
Ann: Wow, ok.
Ryan: So the IRS a number of years ago put into place some special rules where certain improvements or things you did to the building could be expensed over 15 years instead of 27 and a half or 39 years. Well a lot of those improvement laws have expired in 2013. So now if you buy a large asset like a building, you’re kind of stuck right now at the moment with this 27 and a half year or this 39 year expensing problem.
Ann: So that’s for improvements made in 2014 where you’re going to have this expensing problem. Would you recommend that people wait to do any improvements on buildings until next year, if they had plans?
Ryan: And that’s the hard thing. I mean, it’s not a bad recommendation, but I can’t recommend anything at this time and that’s the problem. Because if Congress does act, and gets their act together and does all these things, all these expenses go back to January 1st as being eligible. If Congress decides to enable these, and we anticipate that they probably will, but if they do act and actually enable these and put the patch on, or tax extender as we commonly call them, then all of these expenses will be allowed, back dated to January 1st, 2014 as if they’d always been in place.
Ann: Now, does Congress have a deadline when they need to decide on this? Do business owners have any idea when this will happen?
Ryan: No. No one has any idea when this will happen. We always hope it will be by the end of the year, the IRS has come out and said if they don’t act soon, then it will delay the start of tax season, and if you know the IRS you never want to give them the excuse to delay on anything. So that’s one problem. The other problem comes in, as you said, there is no deadline, and so what if they wait until 2015? Back in about 2001, we had a similar problem. Where some tax extenders weren’t fixed until March.
Ann: Oh wow.
Ryan: So everyone who had filed a tax return up until March then had to go back and amend their taxes so that they could benefit from extra deductions that were then allowed.
Ann: So if you’re a planner and you like to get things done soon, you might end up having to go back and edit.
Ryan: And it really does just depend on what these guys decide to do. So we’re kind of stuck in an interesting position and not sure how to act. I do personally believe that these extenders will be put back in place for the most part, when that will happen, I don’t know. What it will look like, will it look exactly the same? I don’t know either. I don’t want businesses to be afraid but it’s hard to make decisions when you don’t know what you’re up against.