Tax legislation passed late in December 2015 (the Protecting Americans from Tax Hikes Act) extended a number of favorable business provisions and made some others permanent. The provisions can have a significant impact on a business’s taxes for 2016. Here is a rundown of important tax changes for small businesses that need to be considered when preparing your 2016 and 2017 returns.
Section 179 Expensing – The Internal Revenue Code, Sec. 179, allows businesses to expense, rather than depreciate, personal tangible property other than buildings or their structural components used in a trade or business in the year the property is placed into business service. The annual limit is inflation-adjusted, and for 2017, that limit is $510,000, up from $500,000 in 2016. The limit is reduced by one dollar for each dollar when the total cost of the qualifying property placed in service in any given year exceeds the investment limit, which is $2,030,000 for 2017, a $20,000 increase from the 2016 amount.
In addition to personal tangible property, the following are included in the definition of qualifying property for the purposes of Sec. 179 expensing:
- Off-the-Shelf Computer Software
- Qualified Real Property – The term “qualified real property” means property acquired by purchase for use in the active conduct of a trade or business, which is normally depreciated and is generally not property used for lodging except for hotels or motels. Qualified retail property includes:
- qualified leasehold improvement property,
- qualified restaurant property, and
- qualified retail improvement property.
Bonus Depreciation – Bonus depreciation is extended through 2019 and allows first-year depreciation of 50% of the cost of qualifying business assets placed in service through 2017. After 2017, the bonus depreciation will be phased out, with the bonus rate 40% in 2018 and 30% in 2019. After 2019, the bonus depreciation will no longer apply. Qualifying business assets generally include personal tangible property other than real property with a depreciable life of 20 years or fewer, although there are some special exceptions that include qualified leasehold property. Generally, qualified leasehold improvements include interior improvements to non-residential property made after the building was originally placed in service, but expenditures attributable to the enlargement of the building, any elevator or escalator, and the internal structural framework of the building do not qualify.
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.
Vehicle Depreciation – The first-year depreciation for cars and light trucks used in business is limited by the so-called luxury-auto rules that apply to highway vehicles with an unloaded gross weight of 6,000 pounds or less. The first-year depreciation amounts for cars and small trucks change slightly from time to time; they are currently set at $3,160 for cars and $3,560 for light trucks. However, a taxpayer can elect to apply the bonus depreciation amounts to these amounts. The bonus-depreciation addition to the luxury-auto limits is $8,000 through 2017, after which it will be phased out by dropping it to $6,400 in 2018 and $4,800 in 2019. After 2019, the bonus depreciation will no longer apply.
New Filing Due Dates – There are some big changes with regard to filing due dates for a variety of returns. Many of these changes have been made to combat tax-filing fraud. The new due dates are effective for tax years beginning after December 31, 2015. That means the returns coming due in 2017.
- Calendar Year: The due date for 1065 returns for the 2016 calendar year will be March 15, 2017 (the previous due date was April 15).
Fiscal Year: Due the 15th day of the 3rd month after the close of the year.
- Extension: 6 months (September 15 for calendar-year partnerships).
- Calendar Year: 2016 calendar year 1120-S returns will be due March 15, 2017 (unchanged).
- Fiscal Year: Due the 15th day of the 3rd month after the close of the year.
- Extension: 6 months (September 15 for calendar-year S Corps).
- Calendar Year: The due date for Form 1120 returns for the 2016 calendar year will be April 18, 2017 (the previous due date was March 15). Normally, calendar-year returns will be due on April 15, but because of the Emancipation Day holiday that is observed in Washington, D.C., the 2017 due date is the 18th.
- Fiscal Year: Due the 15th day of the 4th month after the close of the year, a month later than in the past (exception: if fiscal year-end is June 30, the change in due date does not apply until returns for tax years beginning after December 31, 2025).
- Extension: 6 months. (Exceptions:  5 months for any calendar-year C corporation beginning before January 1, 2026, and  7 months for June 30 year-end C corps through 2025.) Thus, the extended due date for a 2016 Form 1120 for a calendar-year C Corp will be September 15, 2017.
W-2s, W-3s and 1099-MISC reporting non-employee compensation
- Due Date: For 2016 W-2s, W-3s, and Forms 1099-MISC reporting non-employee compensation, the due date for filing the government’s copy is January 31, 2017 (the previous due date was February 28 or March 31 if filed electronically). The due date for providing a copy to the employee or independent contractor remains January 31.
- Extension: The 30-day automatic extension to file W-2s is no longer automatic. The IRS anticipates that it will grant the non-automatic extension of time to file only in limited cases in which the filer or transmitter’s explanation demonstrates that an extension of time to file is needed as a result of extraordinary circumstances
Work Opportunity Tax Credit (WOTC) – 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.
This credit originally sunset in 2014, but the PATH Act retroactively extended the credit for five years 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 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.
What is in the future?
With the election of a Republican president and with a Republican majority in both the House and Senate, we can expect to see significant tax changes in the near future. President-elect Trump has indicated that he would like to see the Sec. 179 limit significantly increased and the top corporate rate dropped to 15%. Watch for future legislation once President-elect Trump takes office.
If you have questions related to the business write-offs or filing due dates, please give this office a call.