The tax filing season is now well under way. While the time for proactive planning for the 2016 year may have passed, you may still be able to reduce or minimize your tax liability by being aware of some tax changes, deductions and credits that are missed by many business taxpayers.
New Due Dates
While this is not a planning opportunity, please be aware of some new due dates, so that penalties for late filing or late payment are not incurred.
Starting for tax years beginning after December 31, 2015, Partnerships and LLCs (Forms 1065 and related K-1s) the deadline has moved from April 15 to March 15 (or the 15th day of the 3rd month after end of tax year)
C Corporations get a breather, their due dates move back from March 15 to April 15 for a calendar year entity; S corporations remained unchanged.
FBAR – the reporting of foreign bank accounts- have moved from June 30 to April 15. There is an extension available; if you have signature authority over a foreign bank account, make sure you handle this one, as the penalties are egregious.
Pension & Profit Sharing Plans
If your business has a profit sharing plan in place, discretionary contributions may be made to the plan up to the extended due date of the return; so for corporate returns, if an extension is filed, the contribution may be made as late as September 15, 2017 and still be deductible on your 2016 tax return.
For smaller employers, a SEP (Simplified Employer Pension Plan) can be set up, even after the end of the tax year. Under the SEP, the company can contribute up to 25% of eligible compensation, or up to 20% of net profit for a sole proprietorship or self-employment income. These plans can often be set up quickly with your bank or investment advisor, but should be done in concert with your tax preparer, so all requirements are met and properly reported.
For the 2016 tax year, for federal purposes, acquisitions of up to $500,000 of tangible personal property used in a trade or business may be expensed in the year of acquisition. This election, made under Sec. 179, is optional, and is limited to taxable income of the entity. Also for federal purposes, bonus depreciation, 50% of cost in year one for new equipment, can be taken beyond taxable income, creating a loss for the entity, which may be carried back to recapture taxes of an earlier tax year. As it appears that tax rates may likely drop in the near future, a carryback to a year with higher rates may be more valuable than a carryover to future years. Your tax preparer can help you with this analysis.
Domestic Production Activities Deduction (DPAD)
This is a deduction that is far more accessible to business than many taxpayers realize. It’s thought of primarily for manufacturers, assemblers and the like, but actually extends to certain engineering, architectural and construction services related to construction of U.S. real property, computer software development, even certain film production. The deduction is 9% of Qualified Production Activities Income, and the business must have W-2 employees in the activity.
The Tip Credit
More formally known as the “Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips”, this is a credit geared to the restaurant and hospitality industry where tips to the employees are prevalent. To the extent the employer reports employee tips on their payroll tax returns, and pays social security and medicare on those amounts, the employer receives a credit for 7.65% of those tips. It’s actually surprising how many qualified taxpayers don’t take advantage of this credit.
Retirement Plan Startup Costs.
There is a new credit for 2016, that if you set up a SEP, SIMPLE or Qualified Retirement Plan, you may be able to take a credit of 50% of the cost to set up and administer the plan, up to $500 per year for the first three years the plan is in place.
These are just a few items to put on your radar for consideration as you undertake your tax reporting. This is by no means all inclusive, and the items are all applicable on a case by case basis. Please be sure to talk with your tax professional about these issues if you think they may apply to your business. If you don’t currently have a tax preparer, please consider one of the professionals listed in the Campbell Chamber of Commerce business directory.
Michael J. Lombardi, CPA
Treasurer of Chamber Board of Directors