2016 Business Tax Planning: 10 Moves Before Closing Your Year!
1. DOL New Overtime Rule: Understand It Fully!
Effective 12/1/16, the annual salary threshold increases from $23,660 to $ 47,476 for “white collar” exemptions. Be sure to evaluate your employment policies thoroughly to comply.
Details here: https://www.dol.gov/WHD/overtime/final2016/
2. Employer ACA Information Reporting: Confirm Responsibility!
The IRS has announced extended due dates and penalty relief for 2016 information reporting mandated by the Affordable Care Act (ACA). The ACA requires detailed information reporting for insurers, self-insured employers, certain other providers of minimum essential coverage under IRC Sec. 6055, as well as employers with 50 or more full-time employees. Employers will now have until 3/2/17, rather than 1/31/17, to issue the 2016 forms to individuals for reporting about the health coverage on Form 1095-B (Health Coverage) and 1095-C (Employer-Provided Health Insurance Offer and Coverage). Good-faith transition relief from penalties under IRC Secs. 6721 and 6722 for 2016 information reporting under IRS Secs. 6055 and 6056 is also extended. Coordinate with your Benefits Advisor ASAP to plan ahead.
3. Vehicle, Equipment, & Technology Purchases: Buy Now?
Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2016, the expensing limit is $500,000 and the investment ceiling limit is $2,010,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, and qualified real property-qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50% first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2016.
Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500.
4. Optimize Business Taxable Income: Look Back? Look Forward?
Whether C or S Corporation, Partnership or LLC, it is important to evaluate potential taxable income for 2016 and 2017, to consider the potential to shift income or deductions if tax brackets (at the entity or individual level) can be taken advantage of. This analysis includes the potential to carry back net operating losses up to 2 years to trigger tax refunds.
A business should consider accelerating income from 2017 to 2016 if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2017 if it will be in a higher bracket this year.
A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation AMT exemption for 2016. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2016 (and substantial net income in 2017) may find it worthwhile to accelerate just enough of its 2017 income (or to defer just enough of its 2016 deductions) to create a small amount of net income for 2016. This will permit the corporation to base its 2017 estimated tax installments on the relatively small amount of income shown on its 2016 return, rather than having to pay estimated taxes based on 100% of its much larger 2017 taxable income.
5. Domestic Production Activity Deduction: A Quiet Tax Benefit?
If your business qualifies for the domestic production activities deduction (DPAD) for its 2016 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2016 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2016, even if the business has a fiscal year.
6. Passive Activity Planning: Evaluate Options!
To reduce 2016 taxable income, consider disposing of a passive activity in 2016 if doing so will allow you to deduct suspended passive activity losses.
7. Owner Basis in Pass-Through Entities: Know Your Numbers!
If you own an interest in a partnership, LLC, or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year. Conversely, plan ahead for potential basis distributions to fund tax liabilities due in early 2017.
8. Business Tax Return Due Date Changes: Mark Your Calendar!
Early 2017 brings some very important changes regarding business tax return due dates. Beginning with 2016 tax returns, the due dates for the following returns have changed:
- C corporation returns are now due the 15th day of the fourth month following the close of the corporation’s year (April 17, 2017 for calendar year C corporations). A six-month extension is allowed.
- Partnership returns are now due the 15th day of the third month following the close of the partnership’s tax year (March 15, 2017 for calendar year partnerships), with a six-month extension allowed.
- The due date for S corporation calendar year returns remains March 15, 2017.
- Beginning with the 2016 tax year, due dates for filing Forms W-3 (Transmittal) and W-2 (Wage Statements), and Forms 1099-MISC (For Non-Employee Compensation paid to Contractors) have IRS filing due dates of January 31, 2017, to meet the long-required release dates to recipients, now accelerated from the former February 28th due date. Other Forms 1099 remain due February 28 (paper), or March 31 (E-File).
9. QSB Stock Sale: An Exit Strategy Option?
Exclusion of 100% of the gain on the sale or exchange of qualified small business (QSB) stock acquired and held for more than five years has been extended for 2016 and beyond. Assess this potential benefit with a comprehensive legal and tax analysis.
10. State and Local Tax (SALT) Compliance: Are You Current?
A comprehensive state and local tax strategy helps minimize your company’s compliance risk and its tax burden. SALT planning is more than just income tax planning, it is operational planning. In the past decade, all state and local jurisdictions have built-out data management systems to identify “nexus” and matching processes to tax economic activity that crosses borders. Sales and Use Tax, Unemployment Tax, Property Tax, and other tax bases need to be considered for registration and filings.