The 2016 tax year is coming to a close. Before the end of the year there are some important tax planning issues and opportunities we want you to consider. Burdette, Smith & Bish LLC offers the following tax planning tips for 2017.
New Filing Deadlines
Beginning with 2016 returns, filing deadlines have switched for C corporations and partnerships. Partnership returns are now due by March 15th as opposed to April 15th. C corporation returns are now due by April 15th as opposed to March 15th.
Congress enacted these changes in an attempt to stagger filing deadlines so that flow-through entities such as trusts, S corporations and partnerships are all due on March 15th, while taxpaying entities are due a month later, on April 15th.
Deadlines for extended returns are a little more complicated. All returns, except for those for trusts and certain C corporations, are now eligible for six month extensions. This means that the extended deadline for partnership returns will still be September 15th. C corporations will only receive a five month extension until 2026, meaning that their extended deadline also remains September 15th. C corporations with a fiscal year ending on a date other than December 31st will have special rules. Trusts are still only permitted a five month extension.
W-2 and 1099 Filing Deadlines
The IRS will no longer allow automatic extensions for filing Form W-2. Under new temporary regulations, automatic extensions are not available for 2016 reports (due in 2017). The IRS has also indicated that it will be reluctant to grant non-automatic extensions. This change is meant to stop identity thieves who often file fraudulent electronic refund claims early in the tax filing season.
To stop the increase of identity theft, Congress is also requiring employers to file employee wage and nonemployee compensation statements to the IRS and the Social Security Administration by January 31, 2017. These include Forms W-2, W-3 and 1099-MISC.
Accelerate Deductions and Defer Income for Cash Basic Taxpayers
Sometimes it makes sense to accelerate deductions and defer income. You might want to consider deferring your consulting or self-employment income by delaying your billing. In order to deduct your state and local taxes, interest and rent payments should be paid before the end of 2016.
Make Up A Tax Shortfall with Increased Withholding
Taxes are due throughout the year. In order to fix any problems before filing in 2017, check your withholding and estimated tax payments now. If you find that you’re in danger of an underpayment penalty, try to make up the shortfall by increasing your withholding on your salary or bonuses. Keep in mind that making a larger estimated tax payment can leave you vulnerable to penalties for previous quarters, while withholding is considered to have been paid stably throughout the year.
Retirement Account Tax Savings
Today, lawmakers offer businesses a simpler way to offer themselves and their employees the tax benefits of retirement accounts. Based on how many people you employ, a simplified employee pension (SEP) or a savings incentive match plan for employees (SIMPLE) might be more cost effective than traditional plans.
SEPs do not allow employees to contribute, but have a higher limit on employer contributions. The maximum 2016 contribution is less than $53,000 or 25% of eligible compensation. With SEPs, employees are 100% vested.
SIMPLE plans allow employees to contribute up to $12,500 to their SIMPLE accounts in 2016. There is a catch-up contribution of $3,000 for employees that are 50 or older. Much like an SEP, a SIMPLE plan requires employers to contribute, while ensuring that employee contributions are 100% vested. Employers are required to contribute either matching contributions up to 3% of an employee’s compensation, or fixed contributions of 2%.
Consider Year-End Equipment Purchases
Under Section 179, businesses are allowed to expense $500,000 in new equipment. This is a permanent limit that can be reduced if all of your Section 179 property placed in service exceeds $2,010,000 in 2016.
Revised Repair Regulation Rules
In 2013, the IRS issued tangible repair regulations that affect all businesses with fixed assets. Effective 2016, the de minimis safe harbor deduction for materials and supplies was increased from $500 to $2500 for taxpayers that don’t have an applicable financial statement. If you haven’t already, you should update your written capitalization policy to comply with this updated regulation.
Business Use of Vehicles
The standard business mileage allowed for 2016 is 54 cents-per-mile. Now is the time to update your mileage log and reimburse employees using mileage deduction or actual expenses. If using the actual expense method, the maximum depreciation deduction for automobiles placed in service during 2016 is $3,160 for the first year. Vehicles that weigh more than 6,000 pounds are still exempt from luxury auto limits. This should be considered if you are purchasing a vehicle before the end of the year.
Reasonable Compensation and Year-End Bonuses
If possible, pay any yearend bonuses prior to your last payroll. Paying bonuses early or creating a separate bonus payroll will make life much easier for you and your payroll processing company.
If you own a corporation and work in the business, you will want to consider your salary carefully. S corporation owners benefit from a low salary because income that isn’t salary is not typically subject to employment tax. Unless you are a passive owner, this income won’t be subject to Net Investment Income Tax either. On the other hand, owners of C corporations generally benefit from a higher salary and lower distributions. While you will pay employment tax on the salary, the earnings paid out on the salary are only taxed once. Earnings that are distributed as dividends are taxed twice, once at the corporate level and a second time at the individual level.
Keep in mind that the IRS will challenge salary amounts if they deem them unreasonable. You can use a reasonable compensation analysis to determine whether your salary meets IRS standards. While factors the courts use to determine reasonable compensation varies, the IRS will typically look at training and experience, duties and responsibilities, time and effort devoted to the business, dividend history, employee payments and bonuses, compensation agreements, the amount paid by comparable businesses for similar services and the use of a bonus formula.
Local Filing Requirements
You will need to review your records to ensure that you are in compliance with state and local tax filing requirements. Virginia locals have gross receipts tax (BPOL) as well as a business personal property tax. Additionally, there is an annual registration fee with the State Corporation Commission. Maryland and Washington DC have business personal property tax filing requirements and annual registration fees. DC also has a ballpark tax.
Annual Housekeeping for Corporate Clients
Corporate stock ledgers must reflect all issued and outstanding stock. Ledgers should be updated whenever new stock is issued. You will want to check that stock is properly issued to shareholders before the close of the 2016 tax year.
It’s important to hold at least one Board meeting every year. The minutes of this meeting should be recorded in your corporate minute book. The minutes should reflect who was in attendance as well as all of the matters discussed and approved.
Health Insurance – S Corporations
Health insurance premiums paid for employees who own more than 2% of the corporate stock must be reported as taxable wages on the shareholder’s Form W-2. These premiums are not subject to Social Security or Medicare Tax. The annual amount of health insurance for affected employees should be reported to your payroll company prior to your last payroll.
To ensure the timely filing of your returns, please review and update your accounting records before the end of 2016. If you need assistance, we can help! Please contact us today for help with your 2017 business tax filings or give us a call at 703-591-5200.