Congress Defers Action on Key Tax Bills

September 22, 2014|Donald Kossow

Tax bills to retroactively extend many expired federal tax incentives for manufacturers are languishing in Congress. Of these many tax provisions, our manufacturing clients have most frequently applied the following incentives:

  • Research & Development Tax Credit
  • Section 179 Expense Allowance
  • Bonus Depreciation
  • Alternative Fuel Tax Credit

These incentives expired at the end of 2013. Since then, the House has passed various tax bills to extend them and sent those bills to the Senate. The Senate has not acted on them and is apparently waiting until after the November elections. This will push any developments to the very end of the calendar year, making 2014 tax planning very challenging. 

Brief descriptions of these popular incentives follow, including their likelihood of re-enactment.

Research and Development Credit

The R&D credit was originally enacted in 1981 to “stimulate a higher rate of capital formation and to increase productivity.” But the credit has never been adopted into law on a permanent basis. Instead, Congress has been renewing the credit for 1 to 2 year periods since then – often retroactively – except for a 1-year period from 1995-1996. 

The credit is essentially based on a percentage applied to qualifying wages and materials incurred as part of qualifying R&D activities. The tax law and IRS regulations defining qualifying activities are quite extensive, but examples include new product development, software development, and new production floor processes. Activities must be technological in nature and include aspects of discovery and experimentation. 

Based on the history of how Congress has been extending the R&D credit, we expect the credit will be retroactively extended to January 1, 2014 and continue through December 31, 2015 or 2016. We are planning with our clients on this basis. Our R&D credit specialists have vast experience identifying qualifying activities and guiding clients through the process, including documenting the qualifying expenses.

Section 179 Expense Allowance

Section 179 was first enacted in 1958 as an incentive to small businesses to better match taxable income to cash flow. As one tool to stimulate the economy during the Great Recession, Congress temporarily increased the annual expense allowance for qualifying purchases to $500,000 if total capital expenditures were less than $2.5 million. However, this temporary $500,000 allowance expired for tax years beginning after 2013. 

The Section 179 expense allowance is still in effect for tax years after 2013, but the current limit is only $25,000. We expect Congress will retroactively increase the expense limit, but the amount of the increase is uncertain. If Congress determines the economy needs further stimulation, it may reinstate the $500,000 limit. However, if Congress decides stimulation is needed but not to the extent of the full $500,000, we could see a limit in the range of $150,000, which would be the $25,000 limit adjusted for inflation.

Bonus Depreciation

We first saw bonus depreciation in 2001 as another strategy by Congress to stimulate capital expenditures and modernize U.S. manufacturing facilities. From 2001 to 2004, bonus depreciation was 30% of the cost of qualified new equipment, but Congress increased the bonus rate to a whopping 100% of the cost for the period of September 2009 through 2011. The bonus rate was 50% when it expired at the end of 2013.

This incentive was very beneficial for manufacturers because it reduced income taxes and thereby made more cash flow available to invest in the business. Although a few tax bills currently pending in the Senate would retroactively extend bonus depreciation and one bill would actually make it permanent, we feel the chances of bonus depreciation coming back for a command performance are probably slim. We are planning with our clients accordingly.

Alternative Fuel Tax Credit

The alternative fuel tax credit is most commonly applied to manufacturers who use propane or other compressed gas to fuel the forklifts in their manufacturing plants. Depending on the amount of alternative fuel consumed, the annual credit for our clients ranges from $2,000 to $8,000 per year. This credit expired after 2013. Based on prior actions by Congress, it is likely this credit will be retroactively extended.

Other tax incentives

There are many other tax incentives that expired after 2013 that may also apply to manufacturers, including the Work Opportunity Tax Credit and a 5-year S Corporation Built-In Gain period replacing the current 10-year period. 

Manufacturers watch as Congress considers expired tax benefits

Tax benefit First enacted History   Will Congress extend?  
R&D Credit 1981 Extended 1-2 years at a time since inception (except for 1 year)  Very likely
Sec. 179 Expense Allowance 1958 $25,000 limit increased to $500,000 in 2008 Likely, but the limit is uncertain
Bonus Depreciation 2001 • 30% / 2001-2004
• 100% / Sept. 2009-2011
• 50% / 2012-2013
Alternative Fuel Tax Credit     Very likely 

This article is intended to give an update and likely outcome of a few of these expired provisions. Of course, we do not have a “tax legislation crystal ball,” and politics have a major influence on the outcome of any tax legislation. We are closely monitoring these and other tax legislative concerns, and we will continue to communicate any developments to our clients. Please contact us to discuss the tax benefits that will work for you. 

Don Kossow, CPA, shareholder, has extensive experience advising clients on a wide range of tax strategies and planning, including business succession planning, mergers and acquisitions, tax incentives, multi-state taxation, and flow-through entities. He is a member of our International Tax team and a leader of our Manufacturing team.