Seasoned business owners are well aware of tax filings each year, and new business owners are learning fast. However, whether you're an experienced business owner or just getting started, things are continually changing. Here are some new developments that may help reduce your taxes this year as well as some actions you can explore to help have a favorable outcome during this tax season. As a reminder before taking any action, speak to your CPA, tax professional, and/or legal advisor to determine the best course of action for your business.
Check Out What's New
There may be new opportunities on the 2016 return that you don't want to overlook. Examples:
- Research credit. If you're a new company involved in R&D without any revenue as yet, you can still reap tax savings. The research credit can be used to offset the employer's share of Social Security tax (part of FICA) up to $250,000.
- Health reimbursement arrangements. If you are not an applicable large employer (ALE with 50 or more full-time/full-time equivalent employees) and you reimbursed your workers for their individual health coverage, you won't be penalized. Relief for this arrangement has ended on June 30, 2015, but a last-minute measure in mid-December of 2016 extended the relief through the end of 2016.
- Work opportunity credit. If you hired someone in 2016 who was unemployed for at least 26 weeks and collecting government benefits, you may be eligible for a tax credit based on first-year wages.
Get Your Paper Trail
When it comes to tax deductions, they're only as good as the documentation behind them. Examples:
- Books and records. Ensure that your record for income and expenses is up-to-date and properly reflects all of your business activities. This includes entering your transactions and reconciling your bank and credit card statements with your entries. You can't prepare your tax return, or have your professional do it for you, until this has been completed.
- Receipts. You always need receipts, invoices, and other proof to support the positions you take on your return. For certain expenses, such as travel, entertainment, business gifts, and car usage, no deduction is allowed without required substantiation. Creating a tax file—on paper, on your computer, or in the cloud—comprised of receipts, expense accounts, acknowledgments for charitable donations, car mileage logs, etc. is a great way to keep track of expenditures throughout the year.
Consider Tax Elections
For certain expenses, you may have choices on how to handle write-offs. Examples:
- Equipment purchases. Depending on your situation, you may be able to expense the cost up to $500,000, and/or claim 50% depreciation, and regular depreciation. There's also a de minimis rule up to $2,500 per item of invoice for businesses without applicable financial statements (e.g., audited statements or SEC filings).
- Vehicle usage. The cost for driving a personal car, light truck, or van for business may be deducted using either the actual expense method (your out-of-pocket costs allocated to business use) or the IRS standard mileage rate, which on 2016 returns is 54 cents per mile.
- Home office. If you work from home and meet certain tests (e.g., this is your principal place of business), you may deduct personal expenses of the home allocated to the business space or use the IRS optional method of $3 per square foot of business space, up to a maximum of 500 square feet.
Where there are elections, it goes without saying to use the one best suited for your situation. This determination may require the advice of a tax professional.
Make Sure You've Filed Required Information Returns
Income taxes aren't the only obligation on business owners this tax season; information returns also need to be filed to report payments made in 2016. For example, did you utilize independent contractors for whom you must issue Form 1099-MISC? Did you maintain a health reimbursement arrangement for which you must issue Form 1095-B, or are you an ALE required to issue Form 1095-C? A number of the deadlines for furnishing information returns and for transmitting copies of them to the IRS are different this tax season.
If you missed the deadline, correct the delinquency as quickly as possible. The sooner you do, the smaller the late-filing penalty will be. For example, if you're a small business (gross receipts of $5 million or less) and are late by not more than 30 days, the penalty per form is $50. It doubles to $100 per form if more than 30 days late but filed by August 1. The penalty jumps to $260 per form if filed after August 1. The IRS has a chart for large and small businesses.
Seeing to it that tax filings are completed, done correctly, and on time is ultimately your responsibility as the business owner. However, working with a good team—employees managing the books, Paychex, outside CPAs or other tax professionals—can help make things run smoothly with the best outcome possible.