In preparation for the April 15 tax deadline, Business News Daily consulted small business tax experts to find out what things business owners should pay attention to now as the 2016 tax season approaches. Some of these issues involve recent tax changes, while others are issues small businesses should watch for in the future.
Two important tax breaks for small business have been extended: Section 179 and bonus depreciation. Section 179 allows businesses to deduct the full price of any qualifying equipment or software purchased or leased during the year. The tax-extension bill makes permanent the $500,000 maximum deduction for new and used equipment that was purchased or leased in 2015. Bonus depreciation, which was extended through 2017, allows business owners to depreciate 50 percent of the cost of new equipment purchased in 2015. The two tax incentives can be used together.
"Now that small businesses know they can write off … eligible equipment, we may see a lot more spending by small businesses," Priyanka Prakash, finance specialist at FitBiz Loans, told Business News Daily. "The nice thing is that Section 179 applies to almost any kind of equipment, from office furniture to software to vehicles."
Other notable tax extenders include the research and development credit, work opportunity tax credit, energy production tax credits, and a deduction for local and state sales tax. Grafton "Cap" Willey, a managing director at CBIZ MHM, said the extensions — even the temporary ones — are an important step in helping small businesses plan ahead.
"[The extensions] will help with some tax planning over the next few years," Willey said. "Small businesses have been crying out for some consistency in the tax code, so that they know what the rules are when they make their decisions."
However, he added, the 2016 elections could change the political landscape in such a way that more changes and inconsistencies might be on the horizon.
The Affordable Care Act
The implementation of the Affordable Care Act (ACA) will affect some small businesses at tax time. The most notable issue for many businesses is that they could face tax penalties for failing to provide health insurance to employees or for failing to report to the Internal Revenue Service what type of coverage they have provided for employees.
"[The ACA] in 2016 now applies to businesses that have 51 to 99 employees," Ravi Ramnarain, CEO and founder of Ravi Ramnarain, CPA, LLC, said. "Businesses that are not in compliance with the necessary requirements are subject to heavy fines."
Janemarie Mulvey, former chief economist for the U.S. Small Business Administration's Office of Advocacy, said that since the start of 2016, businesses with 51 to 99 employees are required to offer health insurance to at least 70 percent of their full-time–equivalent employees or face a tax penalty of $2,000 per employee. Mulvey has published a reference guide for small businesses called "Health Reform: What Small Businesses Need to Know Now!"
Business owners should understand the reporting requirements that come along with the ACA, in order to avoid tax penalties, she added. The act requires employers to report, on each employee's W-2 form, the cost of the health coverage the employer provided. A breakdown of what the employer and the employee each paid is required in Box 12 of the form. Failing to report this information could lead to fines of $200 per employee, Mulvey said. The IRS recently extended the reporting deadline to May 31, 2016, for paper filings and June 30, 2016, for electronic filings.
"Because the IRS is now the gatekeeper for insurance coverage, they are going to start collecting info from employers about what kind of insurance they provided," she said.
Miguel Farra, chairman of the tax and accounting department at public accounting firm Morrison, Brown, Argiz & Farra LLC, agreed that the ACA insurance and reporting requirements could be burdensome to small businesses. He recommended consulting an accountant or insurance expert to make sure the coverage you provide meets the minimal essential coverage. In many cases, he said, a skilled insurance agent can also help businesses determine whether it is a better financial decision to provide insurance to employees or just pay the tax penalty.
Taxation of online sales
The Marketplace Fairness Act, which stalled in the 2014 session of Congress, is still churning its way through the legislature. The bill seeks to level the playing field between online merchants and brick-and-mortar stores by allowing states to require online sellers that gross more than $1 million per year to collect and pay the state sales tax. Unsurprisingly, brick-and-mortar stores support the move, but it faces major opposition from online retailers. The last action taken on the bill was on March 10, 2015, when it was referred to the Senate Finance Committee.
"By changing definitions of who is a local taxpayer to include even those who do not reside locally, local governments can increase the number of taxpayers, and by that action increase their tax revenue without increasing taxes," Jonathan Barsade, CEO of Exactor, said.
Tax tips for small businesses
Just because tax law can be complicated doesn't mean you have to get overwhelmed. Here are some tips on how to manage your taxes year-round.
Think about taxes all year long. Small business owners should not treat taxes as a once-a-year event. Rather, tax planning should be a year-round activity. Waiting until the last minute makes tax preparation more complicated, and it limits your money-saving options.
Hire a pro. A knowledgeable tax attorney or accountant is well worth the expense, experts say. Tax laws are complex, and they're difficult for many busy small business owners to weed through. A professional can identify tax breaks and deductions you might otherwise miss.
Be aware. Even with the help of a skilled professional, a small business owner must keep up with news related to laws. Read the business papers and keep up with Congress' work on tax laws.
- Don't make assumptions. Tax planning, to some extent, is a gamble, Farra said. Although, historically, Congress has always passed the tax-extender bill at the last minute, there are no guarantees. Never make business decisions assuming that tax breaks will pass.
Links and resources
For additional help with your small business taxes, here are some resources:
The U.S. Small Business Administration maintains a guide on navigating the tax code and staying up to date on your tax responsibilities as a business owner. Click here for more information.
The IRS website has more information about how the ACA affects small business owners' taxes here.
- The IRS also maintains its own information center on self-employed and small business taxes. You can find the guide here.
Ashley Smith also contributed to the reporting in this article.