Year End Tax Planning for 2016|
On December 18, 2015 President Obama signed the Protecting Americans From Tax Hikes Act of 2015 ("PATH Act"). This Act extended many of the more than 50 tax provisions that expired at the end of 2014 for at least two years, 20 key tax provisions were extended permanently. The PATH Act also modified and expanded several important tax provisions including expanding the assets qualifying for the Section 179 depreciation deduction and the 50% Section 168(k) bonus depreciation deduction. Below is a list of some changes in the tax law for 2016 that could impact you and your business:
Extended Through 2016
- Energy Efficient New Homes - tax credit for builders of energy efficient new homes that achieve a 30% ($1000 credit) or 50% ($2000 credit) reduction in heating and cooling energy consumption relative to comparable dwelling
- Energy Efficient Improvement - Upfront deduction for energy efficient improvements to commercial buildings of up to $1.80 per square foot for the cost of qualifying energy efficient property installed in a commercial building
- Deduction of mortgage insurance premiums as qualified interest
- Above-the-line deduction for qualified higher education tuition and related expenses (up to $4000)
- Income exclusion for discharge of up to $2,000,000 of Qualified Principal Residence Indebtedness
Extended Through 2017
- Bonus Depreciation - Section 168(K) - where a 50% depreciation deduction was allowed for qualifying property acquired and placed in service after December 31, 2014 and before 2018. In addition, the $8,000 increase in first year depreciation limit for qualifying vehicles subject to the 280F passenger auto depreciation limitations (6000lbs or less)
- Bonus Depreciation - Section 168(K) - Substitution of "Qualified Improvement Property" ("QIP") for "Qualified Leasehold Improvement Property" as property qualifying for the Section 168(k) depreciation deduction, for property placed in service after 2015. QIP is defined as any improvement to the interior portion of a non-residential building where the improvement is (1) placed in service after the date the building was first placed in service, and (2) not attributable to the (a) enlargement of the building, (b) any elevator or escalator, or (c) the internal structural framework of the building. This could mean that items such as new HVAC system, electrical or plumbing systems, lighting fixtures, ceilings, floors, stairs, non-load bearing walls qualify.
- Bonus Depreciation - Section 168(k) - new property purchased for personal use and later converted to business use by the same owner is still new property and may qualify for Section 168 (k) property.
- Work opportunity credit - a maximum tax credit of $2,400 per eligible employee, for hiring members of targeted groups such as qualified veterans and the long term unemployed.
- Solar Tax Credits for Businesses at 30% in 2016, declining to 22% in 2021
- Solar Tax Credits for Individuals at 30% in 2016, declining to 22% in 2021
- Enhanced Section 179 - expensing allowances which allowed businesses to expense $500,000 for investment in qualified property, with a phase out starting at $2,000,000. Enhanced to include "Qualified Real Property" such as Qualified Leasehold Improvement Property, Qualified Restaurant Property, Qualified Retail Improvement Property. The deduction is limited to the aggregate taxable income, any amount that cannot be deducted as a Section 179 expense because of the income limitation can be carried forward until it can be deducted.
- Research and experimentation credit - equal to 20% of R&D expenses over the base period amount. For tax years beginning after 2015, a qualified small business (Gross Receipts < $5M) may elect to claim a certain amount of its R&E credits as a payroll tax credit against its employer OASDI (Old-Age Survivor and Disability Insurance i.e. social security) rather than its income tax liability!
- Qualified Small Business Stock - 100% gain exclusion on sale of qualified small business stock for both regular tax and AMT purposes. A Qualified Small Business is a C-corporation with gross assets <$50M in certain industries.
- Improvements - Extension of 15-year straight line depreciation for qualified leasehold, restaurant, and retail improvements
- American Opportunity Credit -tax credit is increased from a maximum of $1800 to $2500, and allowed for up to 4 years of college instead of 2 years of college. Allows for 40% of credit to be refundable. Phase out range increases from AGI of $96,000 to 116,000 to $160,000 to $180,000. Qualifying expenses include: tuition, fees and course materials.
- The election to take deduction for state and local general sales taxes instead of state and local income taxes
New in 2016
- Due date for W-2 and 1099 filings with the IRS has been pulled in to January 31 to align with the due date by which they are filed with the recipient.
Changed in 2016
- The De Minimus safe harbor business expense deduction for businesses without applicable (i.e. audited) financial statements increases from $500 in 2015 to $2,500 in 2016 with accounting procedures and tax return election.
- The maximum contribution to Health Savings Account increased from $3,350 self only and $6,650 family coverage in 2015 to $3,350 and $6,750, respectively in 2016
- Excise Tax for individuals failing to carry qualified health care coverage increased from $325 per uninsured adult, $162.50 uninsured minor not to exceed $975 to $695 per uninsured adult, $347.50 per uninsured minor not to exceed $2,085.
- Standard Deduction - Although the standard deduction remained at $6300 ($12,600 MFJ) in 2016. Itemized deductions for individuals are generally reduced by 3% of AGI in excess of the threshold which increased from $258,250 in 2015 to $259,400 in 2016.
- Personal exemption - amount for individuals increased from $4,000 in 2015 (with a phase out beginning at $258,250 of AGI) to $4,050 (with a phase out beginning at $259,400 of AGI) in 2016
- Standard Mileage Rates - The standard mileage rates for all business miles driven in a car decreased from 57.5 cents per mile in 2015 to 54 cents per mile in 2016
- Electric Vehicle Tax Credit for purchase of qualified plug in electric vehicles range from $3700 to $7500 depending on the vehicle make and model.
Unchanged in 2016
- Affordable Care Act Large Employer reporting requirements - effective in 2016, employers with 50 or more full time employees including part time equivalents (with all related businesses treated as single employer) during the prior year are required to file form 1095-C, to report health insurance coverage offered to employees for the 2015 calendar year. Penalties for failure to file with IRS can be up to $250/return and failure to file with employee up to an additional $250/return.
- FICA Wage base for wages and self-employment income subject to the 15.3% tax remained at $118,500 in 2016
- The maximum IRA contribution remained at $5,500 for 2016 and the maximum 401K contribution remained at $18,000 for 2016
- The maximum SEP contribution remained at $53,000 for 2016
- The Annual exclusion for gifts remained unchanged at $14,000 for 2016
- Student loan interest deduction remains at $2500 for 2016, AGI phase out begins at $65,000 for single taxpayer, $130,000 MFJ
- The child tax credit for qualified children under the age of 17 remained at $1000
- Additional .9% Medicare Surtax on earned income of higher income Individuals, If w-2 wages exceed $250,000 married filing jointly, $125,000 married filing separately, $200,000 for other individuals
- Additional 3.8% Medicare Surtax on net Investment Income of higher Income individuals, it is 3.8% of the lesser of 1) net investment income or 2) Modified AGI exceeding $250,000 married filing jointly, $125,000 married filing separately, $200,000 for other individuals
- Capital Gains and Dividend will be taxed at 0%, 15%, 20% depending on individual income tax bracket
In addition to being aware of the tax law changes listed above, cash based business owners should consider purchasing in 2016, those Items needed for the New Year. Accrual based business owners
should consider ratably accruing certain prepaid service contracts as there is a tax code provision that provides these taxpayers with a safe harbor to treat economic performance as occurring on a ratable basis for certain 12-month service contracts that require upfront payment (up to 3 months of service) allowing them to recognize expenses in the prior year. This will allow you to realize the tax savings from the purchase in 2016 versus 12 months from now.
These deductions can really add up, especially if you take advantage of the IRS Section 179 mentioned above. Provided the listed property is used 50% or more of the time for business. This produces an immediate write-off of capital assets. Some typical assets that qualify for Section 179 include: manufacturing and R&D equipment, some vehicles, cell phones, computers, off-the shelf software. For example, if you buy a $1,000 computer and use it for your business, you could deduct the full cost from your taxes. If you were in the 28% federal income tax bracket, this would save you $280 in income tax. At a 12% cost of capital, this translates into a 4% discount on your computer purchase!
Many business owners fail to take advantage of all the tax deductions available to their business. Here are a few of the more commonly overlooked tax deductions you should be aware of:
* Business travel expense
* Inventory shrinkage
* Accounting fees for tax preparation services
* Bank service charges
* Bad debt expense
* Business related books, magazines, seminars, association dues
* 50% of self-employment tax
* Appreciation on property donated to charity
* Trade or business tools with life of one year or less
The Protecting Americans From Tax Hikes Act of 2015 ("PATH Act") extended many of the more than 50 tax provisions that expired at the end of 2014 for at least two years, 20 key tax provisions were extended permanently. It is in your best interest to take advantage of these tax law changes. It could really impact your bottom line!
Please let us know if you have questions concerning the 2016 federal tax law changes or any other tax compliance or planning issues.
Paul J. Beckert MBA, CPA
Pinnacle Business Solutions
Note: The information contained in this material represents a general overview of tax regulations and should not be relied upon without an independent, professional analysis of how any of these provisions apply to a specific situation.
Key Points of Interest
You can now take the Section 168(k) bonus depreciation, deduction on Qualified Improvement Property
The research and experimentation credit can now be applied to your payroll taxes to reduce employer social security taxes
The De Minimus safe harbor business election enables you to write off capital purchases of $2,500 or less which allows you to use your bonus depreciation and Section 179 deductions for other purchases
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