Tax changes veterinarians should watch for in 2014

The new year could be ringing in significant tax changes. Many provisions of the American Taxpayer Relief Act of 2012 are scheduled to expire after 2013, unless there is further action from Congress. In addition, various parts of the Affordable Care Act take effect in 2014, and the Supreme Court handed down a major decision that affects the entire federal tax system. Here is a look at the changes that could most significantly affect the veterinary community, with the caveat that, as always, tax laws are subject to change at a moment’s notice.

Section 179

The maximum Section 179 deduction for new equipment placed in service in tax years after 2013 will be reduced to $25,000, compared to the previous $500,000 limit in effect for the 2012 and 2013 tax years. Likewise, the purchase phase-out limit decreases to $200,000 from $2,000,000. The expansion of Section 179 to allow “Qualified Real Property” (i.e., certain leasehold improvements) will expire after 2013. It’s likely that legislation will be enacted to increase the maximum deduction beyond $25,000 but the timing of the legislation and the ultimate maximum amount that will be allowed is anyone’s guess.

Bonus depreciation

Absent further legislation, bonus depreciation will expire after 2013. Born out of recessionary times, bonus depreciation has been available in various amounts over the last handful of years. A bonus depreciation of 50 percent has been allowable in 2012 and 2013. Along with the expiration of bonus depreciation, the additional $8,000 first-year allowable depreciation on passenger automobiles will expire.

15-year recovery period for qualified leasehold improvements

This special provision, which has allowed for shorter depreciation periods and potential bonus depreciation or section 179 expensing, is scheduled to expire for property placed in service after 2013.

Work opportunity tax credit

Eligibility for the credit ends on December 31, 2013. In order to qualify, members of certain targeted groups must be hired and begin working prior to January 1, 2014, among other requirements. The credit is generally equal to 40 percent of the qualified worker’s first-year wages up to $6,000. Higher amounts are available if certain qualified veterans are hired.

Small employer health insurance credit

From 2010 through 2013, the available credit each year was a maximum of 35 percent of the health insurance premiums paid by the employer on behalf of its employees. Beginning in 2014, the credit may only be claimed for two consecutive tax years, beginning with the first tax year in or after 2014 that the credit is claimed. The maximum available credit amount increases to 50 percent of the premiums. Also beginning in 2014, the credit is only available if the insurance plan is purchased through the Small Business Health Options Program (SHOP) Marketplace. The credit has various phase-outs and limitations on the types of arrangements that are allowable, so be sure to discuss with your tax advisor whether you might qualify.

Individual health insurance mandate

While the mandate for larger employers to provide health insurance to its full-time employees (or face potential penalties) has been delayed to 2015, the individual health insurance mandate remains in effect. Beginning January 1, 2014, individuals are generally required to either carry health insurance that provides certain minimum essential coverage for themselves and their dependents, qualify for an exemption, or face a payment when filing their income tax return. The potential required payment in 2014 is the greater of $95 per uninsured adult and $47.50 per uninsured person under 18 years old with a maximum of $285, or a flat fee of 1 percent of taxable income. To help offset the cost of insurance obtained through the Marketplace, premium assistance tax credits are available to those whose household income for the year is between 100 percent and 400 percent of the federal poverty line based on their family size.

Same-sex marriage

On June 26, 2013, the U.S. Supreme Court struck down as unconstitutional Section 3 of the Defense of Marriage Act (DOMA), which held that for federal purposes marriage was defined as the union between one man and one woman. Subsequently, the IRS ruled that for federal tax purposes, all legally married same-sex couples will be treated as married regardless of whether the couple resides in a jurisdiction that recognizes same-sex marriage. This means that for tax year 2013 and beyond, same-sex spouses must either file as married filing jointly or married filing separately for their federal individual income tax return. For 2012 and prior tax years, if the original tax return is filed on or after September 16, 2013, the couple must file as married. If the original return was filed before this date, the couple has the option (but is not required) to file an amended tax return as long as the statute of limitations has not expired. The Supreme Court did not strike down Section 2 of DOMA, which holds that states do not have to recognize a same-sex marriage that is recognized in another state. This leaves a system where some states recognize same-sex marriage and some do not, and each state will have its own treatment for tax purposes.

Many other tax provisions are scheduled to expire at the end of 2013. Some of the more significant include:

> The itemized deduction for state and local sales tax in lieu of state and local income taxes.

> The above-the-line deduction for qualified higher education expenses.

> The ability to treat mortgage insurance premiums as qualified residence interest.

> The income exclusion for discharge of up to $2,000,000 of qualified principal residence debt.

> The ability to make tax-free IRA distributions to charities of up to $100,000 for those age 70½.

> The above-the-line deduction of up to $250 for unreimbursed teachers’ classroom expenses.

> The $500 maximum lifetime credit for making energy efficient improvements to principal residences.

> The 5-year waiting period for S Corporations to avoid the Built-In-Gains Tax reverts to a 10-year waiting period.

As always, consult your tax advisor to determine how these changes will affect your personal tax situation and how you can best take advantage of the provisions to minimize taxes.