Last month the 2015 tax season came to a close, so it's a good time to start thinking about 2016 taxes and how to maximize tax opportunities in the months ahead. A number of business tax breaks that came and went over the years are now permanent—or at least extended for few years — thanks to the budget deal hammered out in Congress in December.
Here are four key IRS tax changes for 2016 of which you should be aware:
1. More Tax Breaks for Businesses
Consider the following tax breaks that you may be able to take advantage of for 2016.
Businesses each year will be able to expense up to $500,000 in purchased equipment. Congress had been approving the limit on a year-by-year basis; it is now permanent.
This incentive for businesses to buy new equipment is now extended until 2019. The bonus depreciation percentage is 50 percent for property placed in service during 2015, 2016 and 2017, phasing down to 40 percent in 2018 and 30 percent in 2019.
R&D Tax Credit
This tax credit for research and development expenses is also permanent going forward. Better yet, young companies still ramping up sales (less than five years old and less than $5 million in annual revenue) can now take advantage of the credit by using up to $250,000 in R&D expenses to offset employer payroll taxes. Also, eligible small businesses ($50 million or less in gross receipts) are able to claim the credit against alternative minimum tax (AMT) liability.
2. Stricter ACA Requirements
The net widens this year when it comes to Affordable Care Act penalties for not offering affordable health insurance. Such tax-based fines now apply to all employers with at least 50 full-time equivalent employees (including full-time equivalents); it was applied to those with 100 last year (and those with at least 50 that did not qualify for transition relief). Penalties could end up being tens of thousands of dollars and could kick in if, for example, there is no adequate and affordable health plan offered and/or at least one of your workers receives a premium tax credit for coverage obtained through the health insurance marketplace. You could also trigger a penalty if one of your workers is paying more than 9.66% of his or her household income on the company health plan. (The Kaiser Family Foundation further breaks down employer responsibility under the ACA.)
The Protecting Americans from Tax Hikes Act, though, did give businesses some relief under the new health care rules through a suspension of the "Cadillac Tax" until 2020 on pricey employer-sponsored health plans.
3. Tax Relief for Employees Who Take the Bus
Through the PATH Act, it no longer matters what form of transportation workers use to get to work when it comes to pre-tax dollars spent on commuting costs. Mass transit users get to have up to $255 a month excluded from taxes — the same amount of money that car parkers can have excluded. The amount will permanently stay the same for each type of commuting, and will be adjusted for inflation in coming years.
4. Mileage Rates Down Slightly
Every year, the IRS adjusts the optional standard mileage rates that can be used to calculate deductions related to driving a vehicle for work, or for other purposes such as medical or moving. This year, the mileage rates are down slightly.
- 54 cents/mile (2016), 57.5 cents/mile (2015)
Medical or moving miles:
- 19 cents/mile (2016), 23 cents/mile (2015)
In service of charitable organizations:
- 14 cents/mile (2016), 14 cents/mile (2015)