One of the hottest topics for the New Year is comprehensive tax reform. The new administration, with the support of Congress, is likely to make dramatic changes in federal tax law. The big questions are what will the changes be and when will they take effect. Depending on when legislation is finalized, changes likely will not go into effect until late in the year or in 2018, and some changes may be phased in over several years. While comprehensive tax reform is still uncertain, what is known is the fact that there are numerous new tax rules that have already been set for 2017; these will continue to apply until there are legislative changes. Here are 10 key business tax rules that differ from 2016:
1. Wage Base for Social Security Tax
The amount of earnings on which the Social Security tax is based increases in 2017 to $127,200, which is a dramatic increase from the $118,500 limit in 2016. The tax rate remains at 6.2% for employers and employees, and 12.4% for self-employed individuals. Applying the rate to the new wage base means more than $500 paid by an employer for each employee with earnings over last year's wage base and up to this year's ceiling. Self-employed individuals can continue to deduct one-half of self-employment tax, which encompasses both the Social Security and Medicare taxes.
2. Section 179 Deduction
Businesses that buy machinery and equipment can elect to deduct the cost upfront rather than depreciating it over a number of years by using the Section 179 (first-year expensing) deduction. The basic rules are unchanged, which means that only profitable businesses can benefit from this write-off. However, the dollar limit on the Section 179 deduction for 2017 is $510,000, or $10,000 more than in 2016.
The dollar limit phases out when total purchases for the year exceed a threshold amount. For 2017, the threshold is $2,030,000, or $20,000 more than in 2016.
3. Retirement Plan Contributions
The amount of contributions and benefits for qualified retirement plans in 2017 are slightly higher than in 2016. Contributions to profit-sharing and other defined contribution plans are limited to $54,000 (up from $53,000 last year). Similarly, the amount of annual benefits from defined benefit plans is up to $215,000; the limit had been $210,000 in 2016. The amount of compensation that can be taken into account in figuring these contributions and benefits is raised to $270,000, up from $265,000.
Caution: What have not been changed are the limits on elective salary contributions by employees to 401(k) plans and SIMPLE IRAs. These remain at $18,000 to 401(k) plans, with a catch-up contribution by those ages 50 and older of $6,000. For SIMPLE IRAs, the limit is $12,500, with a catch-up contribution of $3,000.
4. Medical FSAs
Employees can contribute compensation on a pre-tax basis to special accounts restricted for the payment of out-of-pocket medical costs. The dollar limit on these contributions for 2017 is $2,600, up from $2,550 in 2016.
5. Qualified Small Business Health Reimbursement Arrangements
The 21st Century Cures Act, which was enacted in December 2016, allows small businesses to reimburse employees for premiums on their individual policies as long as the arrangement conforms to certain requirements. There is a dollar limit on permissible reimbursements ($4,950 for self-only coverage and $10,000 or family coverage, as adjusted for inflation), notice requirements, and a restriction on employees to prevent double-dipping (receiving a reimbursement while claiming the premium tax credit for coverage purchased through a Marketplace). A taxpayer's monthly premium tax credit would generally be reduced by 1/12 of the annual permissible reimbursement under the arrangement.
6. Health Savings Accounts
Having a high-deductible health plan (HDHP) allows for tax-deductible contributions to special savings accounts. The definition of an HDHP for 2017 is unchanged from 2016. However, the amount of the contribution for self-only coverage is slightly higher in 2017 than it was in 2016; $3,400 up from $3,350. The limit for family coverage is unchanged and remains at $6,750.
7. Small Employer Health Insurance Credit
Small businesses that pay at least half of the cost of coverage for their staff may claim a tax credit for 50% of the premiums they paid. Eligibility for the credit is based on the number of employees and average annual payroll. For 2017, average annual payroll for the maximum credit is up to $26,200; it had been $25,900 in 2016. As the size of payroll increases, the credit phases out; no credit can be claimed when the average annual payroll increases to $52,400 in 2017 (up from $51,800 in 2016).
Other rules for the credit are unchanged. Thus, it can only be claimed if coverage is purchased through a government SHOP. Also, even if all other credit conditions are met, no credit can be taken if the credit has been claimed in two consecutive years.
8. Affordable Minimum Essential Health Coverage
In general, applicable large employers, which are companies with 50 or more full-time, including full-time equivalent employees, must offer affordable minimum essential health coverage that provides minimum value (covering at least 60% of the total allowed cost of benefits) to their full-time employees and their dependents or potentially pay a penalty. The definition of "affordable" is based on a percentage of household income. For 2017, that percentage is 9.69%, which is up slightly from the 9.66% that applied in 2016. Employers are unlikely to know household income, and as such can use of the three safe harbors as defined in the IRS regulation.
9. Adoption Assistance Programs
Businesses can help employees with their adoption costs using a program for this purpose. The dollar limit on the amount that can be covered on a tax-free basis for employees in 2017 is $13,570 (up from $13,460 in 2016).
10. Failure to File Partnership and S Corporation Returns
Businesses that are delinquent in filing their tax returns face late filing penalties. For partnerships and S corporations, the penalty is figured per owner per month. The penalty amount for 2017 is $200. While this is only a $5 increase from 2016, this limit amount can add up for a partnership or S corporation with a number of owners and a lengthy delinquency.
A Greek philosopher said, "The only thing that is constant is change." This surely applies to tax rules. There are modest changes that are already certain for 2017. There are likely to be major changes coming later on.