2017 New Tax Laws for Small Business Owners

It's my job as an accountant to help small businesses thrive and plan for their financial future.  Taxes are a big part of the picture, especially if there's a big liability at the end of the year.   There are strategies that can be put into place to avoid this, deductions you may not know about and proactive steps you may take to decrease the impact of the annual tax bill on your small business finances.  Doing it online, especially if you have questions or are unsure of what liberties you can and cannot take when filing, may end up costing you more.  Call a professional to save you time, money and stress!

New Tax Laws That Impacts Small Business Owners in 2017

Published February 3, 2017 Entrepreneur.com

Since it’s always best to be well-prepared when it comes to taxes, here are some of the new changes that you should be aware-of. As with anything to do with the government or taxes -- if you really want to stay-top of this information, meet with your tax advisor and frequently check for updates on IRS.gov.

Keep in mind, this isn’t legal advice as I’m not in that space … but more a few new tax laws for 2017 that I’ve noticed that business owners should pay attention too.

Section 179 expensing/bonus depreciation
Under Section 179 of the tax code, explains Brian McCuller, JD, CPA, “the expensing provision allows capital investments of up to $500,000 for certain property to be taken as an expense deduction -- rather than being depreciated break -- which was made permanent under the PATH Act passed at the end of 2015 -- phases out for asset purchases above $2 million.”

Additionally, HVAC units are now eligible as an expense deduction instead of depreciation in tax years beginning after Dec. 31, 2015.

“The bonus depreciation provision allows businesses to claim additional depreciation for certain property in the first year of the recovery period if placed in service from 2015 to 2019 (with an additional year for certain property with a longer production period),” adds McCuller. “For property placed in service in 2015, 2016 and 2017, the bonus depreciation is 50 percent. For 2018, it drops to 40 percent; for 2019 it goes to 30 percent.”

In other words, if you purchased or leased new hardware or software for your business, for example, you can depreciate half the cost as part of “bonus depreciation.” For 2017, it may be in your best interest to invest in the most up-to-date equipment possible.

Tighter filing deadlines
Filing deadlines have been changed so that flow-through entity return deadlines are due prior investor return deadlines. This means that partnerships and S-corporations operating on a calendar year will have a new deadline of March 15. The deadline for calendar year based C-Corporations will be pushed from March 15 to April 15.

Below is a the complete list of changes to deadlines for each state.

Furthermore, if your business provides health benefits then please note that the deadline for Form 1095, which is the proof of insurance coverage, will be on January 31. Also take note that hard filing deadlines have been imposed for Forms 1094-B and 1095-A, B and C. These are due by February 28 by mail or by e-file on March 31.

New partnership audit rules
Effective in 2018, partnerships could be liable at the entity, as opposed to partner level for audit related tax collections. This change will have a significant impact on how partnership interests are valued and transferred. Because they’re also so complex, it’s best to speak to your tax advisor for additional information.

Expanded eligibility for R&D tax credit
Until the PATH Act, the development of internal use software was not eligible for the research and development tax credit.

Organizations, particularly in construction, software, manufacturing, wine, aerospace subcontracting, boat building and biotech, can qualify for this credit if they have engineers, scientists or product development personnel on staff.

Other qualifications include software that is innovative and can be commercially sold.

Tom Sanger, a partner with accounting and advisory firm Moss Adams, says that, “small businesses, now defined as having an average of less than $50 million in gross revenue over the prior three years, will be able to offset (the alternative minimum tax ) AMT with R&D credits generated after Jan. 1, 2016.”

“This provision opens up the credit to small corporations subject to the AMT, as well as pass-through entities (where the credits flow through to shareholders),” Sanger adds. “In the past, these credits were suspended and carried forward for up to 20 years until they were no longer subject to the AMT.”

Pending estate planning changes
“The IRS has proposed changes in the rules for how minority stakes in family-owned businesses are valued when owners transfer interests to the next generation during their lifetimes,” explains McCuller. “The changes have not been finalized, and business owners who have been considering passing along part of their ownership interests may want to consult with their tax advisors about accelerating those plans to take advantage of current rules.”

Possible tax laws under President Trump
In addition to the changes listed above, business owners should also pay attention to the tax laws that may take effect under President-elect Donald Trump.

For starters, “The Trump plan would reduce the corporate tax rate from a maximum rate of 35 percent to a rate of 15 percent (the GOP Blueprint calls for a U.S. corporate rate of 20 percent),” says accounting, tax and consulting firm Elliott Davis Decosimo. Also, “U.S. manufacturers would be able to fully expense new plant and equipment investments, though by doing so would forego any deduction for net interest expense.

“Most tax credits, other than the research credit would be eliminated. For U.S. taxpayers with foreign subsidiaries, there would be a one-time deemed repatriation tax of 10 percent on foreign earnings of those subsidiaries.”

This could have major tax consequences for small businesses. In fact, Trump’s tax reform will most likely benefit the wealthy and large corporations as opposed to SMBs.

(By John Rampton)

Tax Planning for Small Business

It’s fairly common knowledge that when you plan ahead, things generally cost you less money.  You have more time to shop around for the best deal and you aren’t paying exorbitant fees for last minute convenience.  While it comes to mind that this rule is especially true for travel expenses, it is also very true when it comes to tax planning for your small business.  The more you plan ahead, the more likely you are to find a strategy or that new tax law, that saves you hundreds.

Cash flow is incredibly important for small businesses, and minimizing your tax liability means more money for growth and investment.  Money saving strategies like making contributions at end of year are also beneficial to your bottom line.  Further, knowing your bottom line months in advance can give you more time to plan on making that payment.  Would you rather learn about a $10,000 bill a week in advance or 4 months in advance? Exactly.

Tax Planning for Different Business Forms

SOLE PROPRIETORSHIPS AND PARTNERSHIPS Tax planning for sole proprietorships and partnerships is in many ways similar to tax planning for individuals. This is because the owners of businesses organized as sole proprietors and partnerships pay personal income tax rather than business income tax. These small business owners file an informational return for their business with the IRS, and then report any income taken from the business for personal use on their own personal tax return. No special taxes are imposed except for the self-employment tax (SECA), which requires all self-employed persons to pay both the employer and employee portions of the FICA tax, for a total of 15.3 percent.

Since they do not receive an ordinary salary, the owners of sole proprietorships and partnerships are not required to withhold income taxes for themselves. Instead, they are required to estimate their total tax liability and remit it to the IRS in quarterly installments, using Form 1040 ES. It is important that the amount of tax paid in quarterly installments equal either the total amount owed during the previous year or 90 percent of their total current tax liability. Otherwise, the IRS may charge interest and impose a stiff penalty for underpayment of estimated taxes.

Since the IRS calculates the amount owed quarterly, a large lump-sum payment in the fourth quarter will not enable a taxpayer to escape penalties. On the other hand, a significant increase in withholding in the fourth quarter may help, because tax that is withheld by an employer is considered to be paid evenly throughout the year no matter when it was withheld. This leads to a possible tax planning strategy for a self-employed person who falls behind in his or her estimated tax payments. By having an employed spouse increase his or her withholding, the self-employed person can make up for the deficiency and avoid a penalty. The IRS has also been known to waive underpayment penalties for people in special circumstances. For example, they might waive the penalty for newly self-employed taxpayers who underpay their income taxes because they are making estimated tax payments for the first time.

Another possible tax planning strategy applies to partnerships that anticipate a loss. At the end of each tax year, partnerships file the informational Form 1065 (Partnership Statement of Income) with the IRS, and then report the amount of income that accrued to each partner on Schedule K1. This income can be divided in any number of ways, depending on the nature of the partnership agreement. In this way, it is possible to pass all of a partnership's early losses to one partner in order to maximize his or her tax advantages.

C CORPORATIONS Tax planning for C corporations is very different than that for sole proprietorships and partnerships. This is because profits earned by C corporations accrue to the corporation rather than to the individual owners, or shareholders. A corporation is a separate, taxable entity under the law, and different corporate tax rates apply based on the amount of net income received. As of 1997, the corporate tax rates were 15 percent on income up to $50,000, 25 percent on income between $50,000 and $75,000, 34 percent on income between $75,000 and $100,000, 39 percent on income between $100,000 and $335,000, and 34 percent on income between $335,000 and $10 million. Personal service corporations, like medical and law practices, pay a flat rate of 35 percent. In addition to the basic corporate tax, corporations may be subject to several special taxes.

Corporations must prepare an annual corporate tax return on either a calendar-year basis (the tax year ends December 31, and taxes must be filed by March 15) or a fiscal-year basis (the tax year ends whenever the officers determine). Most Subchapter S corporations, as well as C corporations that derive most of their income from the personal services of shareholders, are required to use the calendar-year basis for tax purposes. Most other corporations can choose whichever basis provides them with the most tax benefits. Using a fiscal-year basis to stagger the corporate tax year and the personal one can provide several advantages. For example, many corporations choose to end their fiscal year on January 31 and give their shareholder/employees bonuses at that time. The bonuses are still tax deductible for the corporation, while the individual shareholders enjoy use of that money without owing taxes on it until April 15 of the following year.

Both the owners and employees of C corporations receive salaries for their work, and the corporation must withhold taxes on the wages paid. All such salaries are tax deductible for the corporations, as are fringe benefits supplied to employees. Many smaller corporations can arrange to pay out all corporate income in salaries and benefits, leaving no income subject to the corporate income tax. Of course, the individual shareholder/employees are required to pay personal income taxes. Still, corporations can use tax planning strategies to defer or accrue income between the corporation and individuals in order to pay taxes in the lowest possible tax bracket. The one major disadvantage to corporate taxation is that corporate income is subject to corporate taxes, and then income distributions to shareholders in the form of dividends are also taxable for the shareholders. This situation is known as "double taxation."

S CORPORATIONS Subchapter S corporations avoid the problem of double taxation by passing their earnings (or losses) through directly to shareholders, without having to pay dividends. Experts note that it is often preferable for tax planning purposes to begin a new business as an S corporation rather than a C corporation. Many businesses show a loss for a year or more when they first begin operations. At the same time, individual owners often cash out investments and sell assets in order to accumulate the funds needed to start the business. The owners would have to pay tax on this income unless the corporate losses were passed through to offset it.

Another tax planning strategy available to shareholder/employees of S corporations involves keeping FICA taxes low by setting modest salaries for themselves, below the Social Security base. S corporation shareholder/employees are only required to pay FICA taxes on the income that they receive as salaries, not on income that they receive as dividends or on earnings that are retained in the corporation. It is important to note, however, that unreasonably low salaries may be challenged by the IRS.

This article originally appeared on ReferenceforBusiness.com and includes some other great resources as well!