For many businesses, January means preparing the previous year’s documents, invoices and receipts for tax filing.
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.
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.
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 1065) 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.
The PATH Act made Section 179 expensing permanent and added items like off-the-shelf computer software to the list of qualifying property. Instead of using regular depreciation, 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 service 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.
Bonus depreciation, a tax break that allows businesses to deduct 50 percent of the costs for new capital equipment when it’s purchased, will survive through 2019. However, the percentage that can be deducted will decrease each year until bonus depreciation finally phases out under the PATH Act. 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.
In addition, the bonus depreciation will apply to certain trees; vines and plants bearing fruits and nuts that are planted or grafted before January 1, 2020.
Work Opportunity Tax Credit
Another important extension is the Work Opportunity Tax Credit. Employers may elect to claim a WOTC for a percentage of first-year wages, generally up to $6,000 of wages per employee, for hiring workers from a targeted group. First-year wages are wages paid during the tax year for work performed during the one-year period beginning on the date the target-group member begins work for the employer.
Which incentivizes employers to hire certain long-term unemployed individuals, including military veterans. The credit was extended by the PATH Act through 2019.
- Generally, the credit is 40% of first-year wages (not exceeding $6,000), for a maximum credit of $2,400 (0.4 x $6,000).
- The credit is reduced to 25% for employees who have completed at least 120 hours but fewer than 400 hours of service for the employer. No credit is allowed for an employee who has worked fewer than 120 hours.
- The legislation also added qualified long-term unemployment recipients to the list of targeted groups, effective for employees beginning work after December 31, 2015.
Research and Development Tax Credit
After 21 consecutive years of extending the research credit year by year, the PATH Act made it permanent and made the following modifications to the research credit:
- For years after December 31, 2015, small businesses (average of $50 million or less in gross receipts in the prior three years) can claim the credit against the alternative minimum tax.
- For years after December 31, 2015, small businesses (less than $5 million in gross receipts for the year the credit is being claimed and no gross receipts in the prior five years) can claim up to $250,000 per year of the credit against their employer FICA tax liability. Effectively, this provision is for start-ups.
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. Note that self-employed persons pay both the taxpayer amount and an equal amount in the form of the employer match.