Tax Extenders Likely to Get Tiny Reprieve

The provisions of the tax extenders bill just passed by Congress expire at the end of 2014.
David KatzDecember 18, 2014

When Congress passed a bill late Monday to extend bonus depreciation, the research and development credit and a plethora of other extensions of business tax breaks set to expire at year’s end, it didn’t leave much time for businesses to act on them.

The bill, which applies just to 2014 and includes 30 business-related tax provisions, “will last just two more weeks before families and businesses will be thrown back into the dark about what taxes they owe,” Ron Wyden, outgoing chairman of the Senate Finance Committee.

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The legislation, he added, “doesn’t have the shelf life of a carton of eggs.”

Sen. Ron Wyden

Sen. Ron Wyden

Indeed, the clock is still ticking. President Obama has yet to sign the bill into law, although he is almost certain to do so soon. The legislation would extend tax breaks that expired on Dec. 31, 2013. Yet while the measure, called the Tax Increase Prevention Act of 2014 wouldn’t provide CFOs with much time to approve new equipment purchases or to authorize research projects that could gain their companies more tax deductions, it would shell out some serious savings to corporations that have already taken such steps this year.

“In general, the extenders are really a gimme. You’re supposed to pass laws in the beginning of the year so people can act on [them],” Randy Schwartzman, the tax partner in charge of the Northeast region at BDO USA, said yesterday. “There’s still a two-week incentive period where people can take this provision and act on it. But basically this extender package is really a gift to businesses that didn’t really think they’d be entitled to these benefits.”

In the case of the extension of bonus depreciation, probably the most widely applicable corporate provision, the gift, which will cost the federal government about $1.5 billion in tax revenues over 2015-2024, is quite substantial. The provision, which extends a 50% bonus depreciation on purchases of fixed assets through 2014, would enable companies to hugely speed up the deductions in the first year they buy equipment or materials to buttress their businesses, thereby potentially boosting their cash flow.

Had the bill not been passed, asset purchases would have reverted to the situation under normal depreciation rules, according to Schwartzman. Under those rules, for instance, if a company had purchased a $100,000 piece of machinery and claimed it had a five-year depreciable life, it would be able to write off 20%, or $20,000, of the purchase the first year.

Under the bill, however, the company could write off the first half, or $50,000, of the purchase price in the first year. The remaining 50% would be subject to a 20% annual depreciation over the five years of depreciation — meaning the company could write off another $10,000 in that first year. In short, the bill would enable the company to write off $60,000 today for a $100,000 piece of machinery rather than the $20,000 it could deduct under the prior rules.

Much more costly to federal coffers would be the extension of the research and development tax credit included in the bill. The provision, which would extend through 2014 a 20% tax credit for qualified research expenses or a 14% alternative simplified credit, would cut federal tax revenues by $7.6 billion over 2015-2024.

That price tag was the big factor that prevented Congress from taking the widely advocated step of making the R&D credit permanent. “There was a real push to make it permanent, and … Obama has advocated making it permanent,” notes Mark Luscombe, the principal federal tax analyst at Wolters Kluwer, a tax and accounting publishing company. “But no one was willing to come up with the money for making it permanent.”

The R&D credit is widely applicable, potentially affecting “anybody doing product development, especially cutting edge product development” like biotech or high-tech companies, says John Gimigliano, head of the tax legislative group at KPMG.

But the credit applies to many more companies than that. Gimigliano, a senior tax counsel for the House Ways and Means Committee from 2005 to 2008, recalls that when he worked in Congress, “the banks used to come to talk to me about R&D all the time. They spend a lot of money doing research and experimentation on their websites for online banking.”

If the R&D credit, which has reportedly been renewed eight times, weren’t passed, companies wouldn’t be able to claim a credit for all the research they’ve done in 2014. “Most of them have done the research during the course of the year assuming Congress would restore the credit,” he said. “At some point companies are going to say that ‘we’re not going to assume that we’re going to get credit for it’ and start to cut back. That’s a big risk.”