The news many business owners have been waiting for has finally arrived, but now the benefits may be short-lived.
President Barack Obama signed the Tax Increase Prevention Act of 2014 (H.R. 5771) into law Dec. 19, followed by the U.S. Senate's 76-16 approval of the bill late Tuesday. The law retroactively extends an array of individual and business tax deductions through the end of tax year 2014.
High on the priority list for small businesses is the extension of certain equipment expensing deductions in Section 179 of the tax code. The extension allows small companies to deduct the full cost of large purchases such as vehicles, farm and office equipment, and software during the tax year of purchase rather than as a depreciation over several years. In 2013, such companies could deduct up to $500,000 in qualifying purchases of equipment placed in service during that year. When that law expired Dec. 31, 2013, the deduction limit dropped to $25,000.
Many businesses hoping the $500,000 cap would be reinstated - a move the most recent legislation does make - have been awaiting the legal go-ahead before making major purchases.
Here's the catch: a previously-proposed bill to make the $500,000 cap permanent failed, so the deductions will be valid only for purchases made through midnight Dec. 31.
"Now they've got 12 days to go out and buy this equipment," said Harold Krieger, of Krieger & Krieger Accountants & Tax Consultants in Jefferson City. "If they have not purchased equipment before this bill was enacted and held back, it gives them very little time. It is a tremendous burden on the American business community, and it is absolutely a shame that Congress should wait this long to enact such an important measure."
While businesses have bought necessary equipment through the course of the year regardless, some have put purchases on hold.
"It's kind of held us back this year," said Gary Oberkrom, vice president of Dick Otke Construction Company. "We made some purchases already this year. We bought new Bobcats, and we've already bought one new truck this year. That doesn't mean that we wouldn't still buy a new truck this year.
"We do need another truck. Our trucks are aged. It may tempt us to go do that."
He said he expects others in the construction industry to capitalize on the opportunity to spend money on equipment rather than taxes despite the short notice.
"It's going to be a huge economic impact in the last two weeks of the year," Oberkrom said. "People are going to spend some money on new equipment just because it will help save us some tax money at the end of the day."
Other notable tax deductions extended by the law include a college tuition credit up to $4,000, a home energy credit for qualified energy windows and doors up to $500, a deduction for teachers' classroom expenses up to $250 and a direct rollover from an IRA to a charitable contribution.
There is speculation that the incoming Republican-led Congress will again approach extending the tax deductions more permanently next year, and small businesses' focus will be on keeping the cap high enough.
"Twenty-five thousand dollars doesn't do much; you can't even buy a pickup for that," said Pam Neugebauer, accountant at GBH Builders. "Five hundred thousand dollars seems like a huge amount to me for a small business, but you've got to be able to buy a truck or a tractor, so it's got to be more than $25,000. It really does help boost small businesses to have some incentive, some write-off."
The deduction applies mainly to smaller businesses, as the deduction cap is reduced dollar for dollar by the amount a business' qualifying purchases exceed $2 million for the year (or by the amount that it exceeds $200,000, if the president does not sign the bill).
While GBH Builders did not need to use the tax deduction as heavily as in previous years, Neugebauer said it's important to their future.
"Normally it would be a huge thing for us, but this year we didn't have to have it," she said. "Normally that's something we pray for."
Krieger noted the late change could also put accountants and, subsequently, tax refunds behind schedule for the coming tax-preparation season.
"Everything must be changed. All our tax law systems we have in place now will have to wait until software has been changed and added before we begin doing the first tax returns for 2014," Krieger said. "Every tax-preparing company that has software will have to change it."
How long that will take depends on the software companies, but also on the Internal Revenue Service. Accountants like Krieger typically begin preparing forms around mid-January, but the IRS's software must be ready to accept them.
"If our software companies that prepare our tax software have it to us, we can prepare the returns; but we can't e-file them," Krieger said. "So we can have them done; but if the IRS is not ready to accept them, we're held up, and that means the returns are held up.
"I can almost assure you that will be a problem."