Legal Speak: Federal Income Tax Incentives for Alaska Businesses
Stoel Rives LLP
Spring is a hopeful time of year. As the snow begins to melt, the days begin to get longer, and evidence of living plants begins to emerge, one’s thoughts naturally turn toward summer and the possibilities it will bring. That is perhaps more true in Alaska, where the duration and darkness of the winters is legendary, than anywhere else. Unfortunately, spring also brings with it the inevitable and often painful task of preparing yet another year’s federal income tax returns. It is only fitting in this season of hope—and pain—to look to the future and think about what a business might do in the coming months to reduce its income tax liability for 2014.
Congress allowed to expire at the end of 2013 a significant number of popular federal income tax incentives that were available in recent years. These include the general bonus depreciation deduction, the research and development tax credit, tax credits for certain renewable energy projects, tax credits for certain biofuels, the work opportunity tax credit, mine safety-related credits, the expanded deduction for business startup expenditures, the credit for energy-efficient buildings, the special deduction for films produced primarily in the United States, and many others.
Certain members of Congress have said that they intend to take up a number of these expired provisions in the near future and may extend some or all of them. This, of course, remains to be seen, and Beltway insiders differ on whether some or all of these provisions are likely to be extended. In the meantime, however, there are a few remaining federal income tax incentives that, with careful planning, could help ease next spring’s pain.
This article will touch on just a few of these incentives. This article does not address all incentives that may be available to a particular person. In addition, the rules governing each of these incentives are complex and we urge readers to consult with their individual tax advisors to help determine whether they qualify for and can utilize these or other incentives.
The very popular allowance for bonus depreciation, which Congress had previously extended and modified a number of times, generally expired at the end of 2013. There remains, however, a 50 percent bonus depreciation allowance for certain qualifying aircraft placed in service before the end of 2014.
To qualify for this allowance, an aircraft must meet the placed-in-service date requirement and must be used in a business that does not involve transporting persons or property (except for agricultural or firefighting purposes). In addition, the taxpayer seeking the bonus depreciation deduction must be the original user of the aircraft, and the aircraft must cost at least $200,000 and have an estimated production period of more than four months. If these and certain other requirements are satisfied, the taxpayer may deduct half the cost of the aircraft in 2014.
The remaining one-half of the cost of the aircraft can be deducted over its depreciable useful life using the normal accelerated depreciation schedule. If an aircraft qualifies for bonus depreciation, it can provide a significant benefit that can help offset the cost of a new aircraft.
Renewable Energy Credits
The federal income tax credits available for many types of renewable energy equipment also expired at the end of 2013. Certain credits remain, however, that could be beneficial to businesses in 2014. For example, the investment tax credit for solar energy property that is placed in service during the year remains in effect for 2014.
The credit generally is equal to 30 percent of the cost of the qualifying equipment. To qualify for the credit, the equipment must use solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, to provide solar process heat, or to light the inside of a structure using fiber-optic distributed sunlight.
A similar 10 percent credit exists for qualified fuel cell property, combined heat and power system property, and equipment used to produce, distribute, or use energy derived from a geothermal deposit.
These credits are direct credits against federal income tax owed, rather than deductions or other reductions in taxable income. Although the credits are not refundable, if a taxpayer does not have sufficient taxable income to fully utilize the credits in 2014, they can be carried back to previous tax years and forward to subsequent tax years in certain circumstances.
Some of the other federal income tax incentives that currently remain in place for 2014 include an excise tax credit for liquefied hydrogen and liquefied hydrogen fuel mixtures, the alternative motor vehicle credit for qualified fuel cell motor vehicles, and the alternative fuel vehicle refueling credit for hydrogen refueling property. Any business involved in the renewable fuel industry or operating renewable fuel vehicles should consider these remaining incentives.
Many taxpayers are hopeful that Congress will extend some of the business tax incentive programs in the near future. In the meantime, business owners may want to think about whether they can take advantage of any of the remaining unexpired incentives and what impact those incentives might have on business decisions.
Kevin Pearson is a tax partner at the law firm of Stoel Rives LLP. You can contact him at firstname.lastname@example.org.
Posted: March 31, 2014