Year end tax planning for 2014 is particularly challenging because Congress has yet to act on a host of tax breaks that expired at the end of 2013. It is uncertain at this time whether the expired provisions will be extended by Congress on a permanent or temporary basis -- and whether any such extension would be made retroactive. These extender provisions may be dealt with as part of a broader tax reform effort, examined on an individual basis as opposed to their being part of the traditionally passed "extenders package," or simply allowed to remain expired.

Expired Tax Breaks for Individuals

Business owners aren't the only ones facing uncertainty about expired tax breaks. Here are the most popular tax breaks for individual taxpayers that expired at the end of 2013:

Higher Education Tuition Deduction. In 2013, you could deduct up to $4,000 (or up to $2,000 for higher income folks) for qualifying higher education tuition and related fees paid for you, your spouse or your dependents.

Option to Deduct State and Local Sales Taxes. In 2013, individuals had the option of claiming an itemized deduction for general state and local sales taxes instead of claiming an itemized deduction for state and local income taxes. This option was beneficial for taxpayers who live in states with no personal income taxes and taxpayers who pay only minimal state income taxes.

Charitable Donations from IRAs. IRA owners who had reached age 70 1/2 by Dec. 31, 2013, were allowed to make charitable donations of up to $100,000 directly out of their IRAs in 2013. The donations counted as IRA required minimum distributions.

So, charitably inclined seniors who had more IRA funds than needed could reduce taxes by arranging for tax-free IRA donations to take the place of taxable required minimum distributions in 2013.

Tax-Free Treatment for Forgiven Principal Residence Mortgage Debt. For federal income tax purposes, canceled debts generally count as taxable cancellation of debt (COD) income. However, a temporary exception applied to COD income from canceled mortgage debt that was used to acquire a principal residence. Under the temporary provision, up to $2 million of COD income from principal residence acquisition debt that was canceled between 2007 and 2013 was treated as a tax-free item for federal income tax purposes.

Energy-Efficient Home Improvement Credit. For 2013, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. The $500 cap must be reduced by any credits claimed in earlier years.

Salary Reduction for Transit Passes. Your employer may allow you to sign up to reduce your taxable salary to pay for mass transit passes to commute to and from work. In 2013, the maximum monthly amount you could set aside on a tax-free basis was $245. The maximum monthly amount for 2014 will be only $130 unless Congress decides to allow a larger amount. (If that happens, the larger amount would likely be $250.)

Deduction for Teachers' School Expenses. For 2013, teachers and other personnel at K-12 schools could deduct up to $250 of school-related expenses they paid out of their own pockets, regardless of whether they itemized or not.

As the dust settles from the November elections, Congress is expected to finally decide on the fates of these tax breaks -- but legislators could possibly drag out a decision until early next year, which could delay the start of next year's tax season. Here's an overview of some major tax breaks that may be on the chopping block for businesses, unless Congress decides otherwise:

Expanded Section 179 Deductions

For tax years that began in 2013, eligible small and medium-size businesses could immediately write off a whopping $500,000 of qualifying new and used assets, including most software, certain "heavy" passenger vehicles, nonpassenger vehicles, equipment, and up to $250,000 of qualifying real estate improvements, such as:

  • Interiors of leased nonresidential buildings,
  • Restaurant buildings, and
  • Interiors of retail buildings.

As the tax law reads now, 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. However, if Congress restores the $500,000 maximum Section 179 deduction or the Section 179 deduction for qualifying real estate improvements for tax years beginning in 2014, business owners might need to act fast to acquire qualifying assets in a timely manner. Assets must be placed in service (hooked up and ready for business use) by the end of the tax year to be eligible for Section 179.

Bonus Depreciation Deductions

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, nonpassenger vehicles and equipment.

As the tax law now reads, the first-year bonus depreciation deduction generally doesn't apply to assets placed in service in 2014. If Congress restores the bonus depreciation program, there will likely be a placed-in-service deadline of Dec. 31.

15-Year Depreciation Period for Qualifying Nonresidential Real Property

Generally, taxpayers must depreciate nonresidential real property straightline over 39 years for federal tax purposes. But 15-year straightline 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).

Under current tax law, the depreciation period for nonresidential real property reverts to 39 years for federal tax purposes, unless Congress decides to reinstate the 15-year depreciation period for qualifying real property placed in service in 2014.

S Corporation Built-In Gains Tax Exemption

If you operate a corporation that recently converted from C corporation to S corporation 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. If this break is restored for tax years beginning in 2014, eligible S corporations might consider making some asset sales that trigger build-in gains in this tax year -- while the BIG tax exemption is available -- instead of waiting to sell in future years when the BIG tax might apply.

Gains from Selling Qualified Small Business Corporation Stock

Qualified small business corporation (QSBC) stock that was issued in calendar year 2013 may be exempt from federal capital gains tax when the stock is eventually sold. This exemption equates to a zero percent federal income tax rate on future profits from selling eligible QSBC shares down the road.

However, you must hold the shares for more than five years to qualify. QSBC shareholders that are C corporations are ineligible for this tax break. Also, many companies won't meet the definition of a QSBC in the first place (consult your tax adviser). Under existing tax law, the gain limitation for QSBC shares issued in 2014 is only 50 percent, unless Congress restores the 100 percent gain exclusion.

Research and Development (R&D) Credit

Businesses are no longer eligible for a longstanding tax break for increasing qualifying research and development 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).

Of the dozens of expired tax provisions Congress is poised to revive in 2014, few are as popular among lawmakers as the credit for research and development. In the short term, a temporary R&D credit that mimics the expired version appears likely to be extended for 2014. Over the long run, however, tax analysts believe the R&D tax credit needs updating to make it available to more companies and to be competitive with similar tax incentives in Canada and other countries.

Be Prepared to Act Fast

Some or all of these expired federal tax provisions may be retroactively reinstated in the lame duck congressional session after the election, thereby opening up some truly last-minute year end planning opportunities. But there's no way of knowing when (or if) that will take place. Your tax advisers are closely monitoring any tax law changes and will let you know as soon as Congress decides on the fates of these federal tax breaks. Stay tuned.