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Key Expired Tax Breaks for Businesses

March 13, 2014

Many of these federal income tax breaks were available (at varying levels) for several years before expiring on 12/31/2013.

This is a continuation of our previous blog: Scorecard of the Key Expired Tax Breaks for Individuals but for businesses.

Research and Development Credit- Business are no longer eligible for a long-standing tax break for increasing qualifying R&D expenditures (QREs), including wages, supplies, and certain consulting and contract research fees related to qualified research activities. In 2013, this credit generally equaled 20 percent of the amount by which current-year QREs exceeded a base-period amount (subject to a 6.5 percent maximum).

50 Percent First-Year Bonus Depreciation Deduction- For qualifying new (not used) assets that were placed in service (hooked up and ready for use) in calendar year 2013, taxpayers could write off 50 percent of the cost in the asset’s first year of service. Qualifying assets included most software, certain “heavy” passenger vehicles, non-passenger vehicles, and equipment.

Expanded Section 179 Deductions- For tax years that began in 2013, eligible small and medium-sized businesses could immediately write off up to $500,000 of qualifying new and used assets, including most software, certain “heavy” passenger vehicles, non-passenger vehicles, equipment, and up to $250,000 of qualifying real estate improvements. Assets had to be placed in service (hooked up and ready for business use) by the end of the tax year that began in 2013 to be eligible.

The maximum Section 179 deduction for tax years beginning in 2014 will be only $25,000. And no Section 179 deductions will be permitted for real estate improvements.

15-Year Depreciation for Leasehold Improvements, Restaurant Property, and Retail Space Improvements- Generally, taxpayers must depreciate non-residential real property straight-line over 39 years for federal tax purposes. But 15-year straight-line depreciation was allowed for the cost of qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail space improvements that were placed in service in 2013 (but not expensed under Section 179 or eligible for the 50 percent first-year bonus depreciation deal in 2013).

New Markets Credit- In 2013, individuals and corporate taxpayers could receive a federal tax credit for qualified equity investments in certain community development entities. Examples of projects that might qualify for the credit include small business financing and daycare centers improvements in low-income communities. In 2013, the credit generally equaled 39 percent of the qualified equity investment and could be claimed during a seven-year credit period.

Credit for Building Energy- Efficient Homes- In 2013, homebuilders were eligible for a $2,000 tax credit for each new energy-efficient home they built in the United States, including manufactured homes. Firms could also claim this credit for substantially reconstructing and rehabilitating an existing home and making it more energy efficient. Homes that did not fully meet the energy-efficiency standards could qualify for a reduced $1,000 credit. A home had to be sold by December 31, 2013 for use as a residence to qualify for the credit.

Credit for Manufacturing Energy- Efficient Appliances- The credit for manufacturing energy-efficient dishwashers, clothes washers, and refrigerators in the U.S. expired at the end of 2013. The credit amounts per unit were $75 for qualifying dishwashers, $200 for qualifying refrigerators and $225 for qualifying clothes washers.

Business Credit for Alternative Fuel Vehicle Refueling Property- In 2013, businesses could claim a federal tax credit for up to 30 percent of the cost of installing non-hydrogen alternative fuel vehicle refueling property. This credit could be claimed for expenditures such as a gas station’s costs to install ethanol, compressed natural gas, or hydrogen refueling pumps or equipment to recharge electric-powered car batteries. For businesses, the annual cap for each location for this credit was $30,000. A credit for hydrogen refueling property is allowed through 2014.

S Corporation Built-In Gains Tax Exemption- If you operate a corporation that recently converted from C to S status, a corporate-level built-in gains tax (also known as the BIG tax) may apply when certain S corporation assets—including receivables and inventories—are converted to cash or sold within the “recognition period.” The recognition period is normally the 10-year period that begins on the date when the corporation converted from C to S status.

For eligible built-in gains that were recognized in tax years beginning in 2013, however, there was an exemption from the BIG tax. The exemption applied if the fifth year of the S corporation’s recognition period had gone by before the start of the tax year that began in 2013.

Enhanced Charitable Deduction for Food Donations- Businesses that were not operated as C corporations were entitled to an enhanced charitable contribution if they donated food to qualified charities in 2013. This provision was intended for non-C corporation businesses that have food inventories, such as restaurants and grocery stores. These deductions are normally limited to the taxpayer’s basis in the food or its fair market value, whichever is lower. But in 2013 the temporarily enhanced deduction equaled the lesser of:

  • The taxpayer’s basis in the food plus one-half the value in excess of basis or
  • Two times the taxpayer’s basis in the food

The same enhanced deduction rule has been available to C corporations for years – and still is. The taxpayer’s total charitable contribution deduction for food donations under this provision generally could not exceed 10 percent of net income for the tax year from sole proprietorships, S corporations, or partnerships (or other non-C corporation entities) from which the food donations are made.

Favorable Rules for C Corporation Farm and Ranch Qualified Conservation Contributions- Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. For qualified C corporation farming and ranching operations, the maximum write-off for qualified conservation contributions was increased from the normal 10 percent of adjusted taxable income to 100 percent of adjusted taxable income in 2013. Qualified conservation contributions in excess of what could be written off in 2013 could be carried forward for 15 years.

Favorable Rule for S Corporation Donations of Appreciated Assets- For tax years beginning in 2013, a favorable shareholder basis rule applied for stock in S corporations that made charitable donations of appreciated assets. For such donations, each shareholder’s tax basis in the S corporation’s stock was only reduced by the shareholder’s pro-rata percentage of the company’s tax basis in the donated assets.

Without this provision, a shareholder’s basis reduction would have equaled the passed-through write-off for the donation (a larger amount than the shareholder’s pro-rata percentage of the company’s tax basis in the donated asset). This provision was taxpayer-friendly because it left shareholders with higher tax basis in their S corporation shares, which is almost always beneficial to shareholders.

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