For many businesses, January means preparing the previous year's documents, invoices and receipts for tax filing. But before you meet with your accountant, it's important to understand any tax changes that may impact your business this year.
As a new administration transitions into the White House, the potential for volatility in the realm of tax policy is high. Business News Daily talked to small business tax experts to find out more about the changes, extensions, and expectations entrepreneurs should be aware of as 2017 gets underway.
First and foremost, there are some changes to filing deadlines that business owners need to be aware of. C-Corp filing dates will be pushed back, while Partnerships', LLCs' and S-Corps' filing deadlines are moving up.
"Small business owners, prepare yourselves for some due date changes this tax season," Richard Lavina, co-founder and CEO of Taxfyle, said. "The due dates for C-Corporations (Form 1120) were pushed back a month from March 15 to April 15. Likewise, the due dates for Partnerships (Form 1120) and S-Corporations (Form 1120-S) were pushed forward from April 15 to March 15."
Make sure you're aware of your filing deadlines and whether or not they've changed. Small business owners who miss their deadlines will have to request an extension from the IRS and make any estimated payments if they expect they owe money. Any money owed to the IRS is still due on tax day even if an extension is granted.
Tax break extensions
Now for some good news: there are a few tax breaks that will be extended through 2017. Here's some of the key deductions and credits that your business should look to take advantage of in the coming year. Some of these changes have been known about for some time, but it's still important to be aware of them moving forward.
Brian Ashcraft, director at Liberty Tax Service, said the passage of the PATH Act made a $500,000 deduction regarding equipment purchases less than $2 million permanent.
"The PATH Act made Section 179 expensing permanent and added items like off-the-shelf computer software to the list of qualifying property," Ashcraft said. "Instead of using regular deprecitation, which would allow small deductions over a period of five years, your business can take the full [cost of qualifying equipment] in the first year, as long as it is placed into serevice in the same tax year and is used more than 50 percent of the time for business."
The extension applies to both used and new equipment, he added.
Bonus depreciation, a tax break that allows businesses to deduct 50 percent of the costs for new capital equipment when its purchased, will surive through 2019. However, the percentage that can be deducted will decrease each year until bonus depreciation finally sunsets under the PATH Act.
"Bonus depreciation is always a hot button item when it comes up in Congress," Lavina said. "However, this will gradually diminish each year until it expires."
The 50 percent deduction will remain in 2017, but will decrease to 40 percent in 2018. A subsequent 10 percent decrease will reduce the deduction to just 30 percent in 2019, and bonus depreciation will expire without any additional Congressional action by 2020.
Work Opportunity Tax Credit
Another important extension is the Work Opportunity Tax Credit, Thompson said, which incentivizes employers to hire certain long-term unemployed indiviudals, including military veterans. According to Thompson, the credit was extended by the PATH Act through 2019 and added a 40 percent credit up to the first $6,000 in wages for employers who hire workers that have been out of work for at least 27 weeks.
Research and Development Tax Credit
Finally, a change in the R&D Tax Credit means that businesses that make less than $50 million annually and invest heavily in research can now apply the credit to the Alternative Minimum Tax (AMT) or possibly even to offset payroll taxes, Lavina said.
Social Security taxes
The Social Security Administration announced this year that it would raise the cap on taxable income subject to the combined 7.65 percent tax rate for Social Security and Medicare from $118,500 to $127,200. For those who are self-employed, the employer match requirement means they will ultimately pay a tax of 15.3 percent on the first $127,200 of income they earn.
"The maximum amount of Social Security tax a taxpayer could pay will therefore increase from $7,347 in 2016 to $7,886.40 in 2017," Brian J. Thompson, attorney and CPA at Brian Thompson Law, said. "Note that self-employed persons pay both the taxpayer amount and an equal amount in the form of the employer match."
Possible corporate tax rate changes
Thompson also noted the likelihood that the corporate tax rate will decrease with an incoming Trump Administration and Republican controlled Congress. Currently, the federal corporate tax rate stands at 35 percent, but Thompson anticipates a decrease to a rate somewhere between 15 and 25 percent.
"It is important to note that this corporate rate only applies to C-Corporations," Thompson said. "Most small businesses will not benefit from such a change to the corporate tax rate because most small businesses are LLCs or S-Corporations, [which are] pass-through entitites and not subject to federal income tax at the entity level."
Instead, Thompson added, LLCs and S-Corps are taxed on the indvidual owners' or shareholders' personal income tax return.
"We think that C-Corporations may come back into fashion for small business if the new administration does lower tax rates," Steven J. Weil, president of RMS Accounting, said.
There are other potential income tax changes on the horizon, according to Nate Byers, CPA for JBC Wealth Advisors.
"We are expecting to go from having seven tax brackets to three tax brackets, as well as the elimination of the Alternative Minimum Tax (AMT) and the Net Investment Income Tax," Byers said. "Because of what we expect to be a lower tax environment in 2017, the default suggestion to taxpayers is to accelerate expenses into 2016. If you were going to make a large purchase in early 2017, the tax environment suggests that making that purchase in 2016 will maximize your tax savings."
Byers suggested that entrepreneurs sit and discuss strategy with their tax advisors before the end of the year. Bernie Kent, chairman of Schecter Investment Advisors, echoed that sentiment, stating that some businesses might even want to consider restructuring depending on how tax policy changes.
"Small business owners will need to revisit their structure when the new law is passed," Kent said. "S corporations and LLCs maybe better off with the corporate tax. Small corporations may want to be taxed as flow-through entities. Thus, all small businesses will need to consider which taxing regime makes the most sense under their particular circumstances."
Possible changes to the Affordable Care Act
Finally, possible changes to the Affordable Care Act (ACA), including President-elect Trump's promise to "repeal and replace" the law, could have significant tax implications for small businesses.
"First and foremost, it’s expected that business regulations may change, and depending on what those regulation changes are, you may find some significant alterations," Roger Harris, president of Padgett Business Services, said. "It appears Republicans may prioritize the repeal and replacement of Obamacare."
Since it is unclear what the new administration will end up doing to the ACA, it's prudent to follow the existing regulations for this tax filing season. This includes preparing and submitting 1095-C forms for your full-time employees who need them, no later than March 2.
Arthur Tacchino, chief innovation officer at SyncStream, an ACA compliance and reporting company, noted that ACA full-time employees include anyone who works 30 or more hours per week (or 130 or more hours in a calendar month).
"Employers should have applied either the Monthly Measurement Method or the Look-Back Measurement Method to determine which employees are ACA full-time in accordance with these regulations," he said. "For employers that offer self-insured coverage, they also must provide a 1095-C Form to non-employees (COBRA beneficiaries or retirees) and part-time employees that are enrolled in the self-funded coverage. Employers will likely need the assistance of an adviser ... to make these types of critical determinations [and ensure that] they are providing the correct employees and individuals with the required tax form."
Tacchino reminded employers that it is their responsibility – not the IRS's – to explain to employees why they're receiving a 1095-C form and what to do with it. More information about this form can be found on the IRS website.
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 income 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. Never make business decisions assuming that particular tax breaks will pass, or that certain policies will be enacted.
"The best course of action [is to] go about your business as normal," Harris said. "Plan for today’s tax law and don’t get hung up on something that isn’t here yet. We’ll have plenty of time to figure the changes out when and if they come next year."
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. Note that changes to the ACA may be on the horizon.
- The IRS also maintains its own information center on self-employed and small business taxes. You can find the guide here.
Additional reporting by Ashley Smith.