Several significant tax law changes took effect in 2016 that may affect your business’s federal tax filings in 2017. As the year draws to a close, you should review these changes, as well as your business’s projected taxable income or loss with a tax professional to see what actions might be appropriate before year end to reduce taxes. It’s also important to ascertain whether enough estimated taxes have been paid to avoid any underpayment of estimated tax penalties.
New January 31 Deadline for filing Government Copies of W-2s and Certain Form 1099s
Prior to 2016, businesses typically had until the end of February, if filing on paper, or the end of March, if filing electronically, to submit their government copies of W-2s and Form 1099s. However, because of a law change, employers are now required to submit copies of the W-2s with the Social Security Administration by January 31. In addition, businesses and payers must file Forms 1099-MISC with the Department of Treasury (IRS) by January 31 if they are reporting non-employee compensation in box 7. Other Form 1099s continue to have the same February 28 / March 31 deadlines.
The penalty for late filing of a W-2 or 1099 is $50 for each late form if you file within 30 days of the due date, $100 for each late form filed more than 30 days but before August 1, and $260 for each late form filed after August 1. The penalty for intentional disregard of the rules is now $530.
Social Security Wage Base Increased to $127,200 for 2017
The Social Security Administration has announced that the Social Security Wage Base will increase to $127,200 for 2017 from $118,500 in 2016. This represents a 7.34% increase. For self-employed individuals, the Social Security tax rate (OASDI tax tax) for self-employment income below or equal to the wage base remains at 12.40 percent. For 2017, a taxpayer with self-employment income equal to or exceeding the wage base will pay a maximum Social Security tax (OASDI tax) of $15,772.80, an increase of $1,078.80 from 2016’s maximum. As in the past, the Medicare tax portion of the self-employment tax is equal to 2.9% and applies to all self-employment income. For employees, the Social Security tax rate remains at 6.20 percent on earnings up to the wage base. For 2017, an employee with earnings equal to or exceeding the wage base will pay a maximum of $7,886.40 in Social Security taxes, an increase of $539.40 from last year’s maximum.
Defer Income and Accelerate Deductions
If 2016 has been a good year and you would like to minimize 2016 taxable income, consider some of the following techniques to push income to 2017 or to accelerate deductions into 2016:
- If your business is using the cash method, consider billing your clients later in December so that payments are not received until 2017.
- If you need to purchase furniture or equipment in the near future, consider purchasing and placing the asset into service prior to year-end.
- Purchase office supplies or prepay expenses prior to year-end. We can assist you in determining which expenditures will qualify to be prepaid.
Self-Employed Health Insurance Deduction – S Shareholders Report HI on W-2s
You may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents. The insurance can also cover your child who was under age 27 at the end of 2016, even if the child was not your dependent. In order to deduct your health insurance, you must satisfy one of the following tests:
- You were self-employed and had a net profit for the year reported on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040).
- You were a partner with net earnings from self-employment for the year reported on Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., box 14, code A.
- You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
- You received wages in 2016 from an S corporation in which you were a more-than-2% shareholder. Health insurance premiums must be paid or reimbursed by the S corporation and shown as wages on Form W-2, Wage and Tax Statement.
The health insurance plan must be established under your business. This is defined below for each type of business owner:
- For self-employed individuals filing a Schedule C, C-EZ, or F, the policy can be either in the name of the business or in the name of the individual.
- For partners, the policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or your partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
- For more-than-2% shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
S Corporation Salaries Must be Reasonable – Adjust at Year-End if Not
For any business operating as an S corporation, it is important to ensure that shareholders working in the business are paid an amount that is commensurate with their position and workload. The IRS targets tax returns where shareholders are distributing profits instead of paying reasonable compensation subject to employment taxes. Failing to take reasonable compensation can lead not only to tax deficiencies, but penalties and interest on those deficiencies as well.
Change in Due Dates for Partnerships, C Corporations, and Estate & Trusts
Partnerships with tax years ending in 2016 are now required to file their federal income tax returns by the 15th day of the third month following the close of the tax year, rather than the 15th day of the fourth month following the close of the tax year. Thus, 2016 calendar-year partnership federal income tax returns are due March 15, 2017. While partnerships were previously allowed a five-month extension of time in which to file their tax returns, they are now allowed a six-month extension so that the extended due date is the same as under prior law (i.e. September 15).
C corporations with tax years ending in 2016 now have an extra month to file their federal income tax returns. Such returns are due by the 15th day of the fourth month following the close of the tax year, rather than the 15th day of the third month following the close of the tax year. Thus, 2016 calendar-year C corporation federal income tax returns are due April 18, 2017, due to April 15 falling on a Saturday and Monday, April 17 being Emancipation Day in the District of Columbia.
For calendar year C corporations, the new rules provide for a five-month automatic extension. The extension period is a month shorter, but results in the same September 15 extended deadline for a calendar year C corporation because of the new due date for C corporation returns (i.e., April 15).
For fiscal year C corporations with tax years ending on dates other than June 30, the length of automatic extensions remains unchanged at six months. For fiscal year C corporations with tax years ending on June 30, a special seven-month automatic extension applies for tax years beginning after 2015 and ending before 2026.
The original due date for estates and trusts has not changed as it is the 15th day of the fourth month following the close of the tax year. However, for tax years beginning after December 31, 2015, trusts and estates can request an automatic five and one-half months extension of time to file their income tax returns. For a calendar-year trust or estate, this would generally extend the due date for filing from April 15 to September 30.
The filing deadline for S corporation returns remains unchanged, meaning that partnerships and S corporations will now share the same due dates.
Consider Establishing a Retirement Plan
If you do not currently maintain a retirement plan, you may want to consider establishing one of the following plans:
- Solo 401(k) Plan: A qualified plan for sole proprietors and small business that do not have eligible non-owner employees. A solo 401(k) must be created by December 31, but you have until April 15 (April 18th this year) of the following year to fund the plan.
- Age weighted Profit Sharing Plan. A qualified plan in which benefits are allocated more favorably to older employees. This can be an attractive plan for businesses whose owners and key employees are significantly older than other employees. As in the case of a Solo 401(k) Plan, the age weighted profit sharing plan must be created by December 31.
- SEP IRA: An IRA plan in which all contributions are made by the employer and which the employer can contribute up to 25% of a Participant’s wages or earned income into the plan. Since the plan is discretionary, there is no required contribution and the amount contributed can vary from year to year. However, since all contributions are made by the employer, this type of plan works best for businesses who have few if any non-owner employees. Unlike the two qualified plans above, a SEP IRA can be established as late as the due date of the employer’s tax return (plus any extensions).
Travel, Meals & Entertainment, and Auto Expense Substantiation
Travel expenses, meal and entertainment expenses, and certain automobile expenses are not deductible by a taxpayer unless he or she substantiates each element of the expense. Each element of such an expense must be substantiated by either: adequate records or other sufficient evidence corroborating the taxpayer’s own statements. Written evidence is accorded considerably more weight than oral evidence alone.
For travel expenses, the taxpayer must substantiate the following elements:
- The amount of each separate travel expense, such as the cost of airfare and lodging.
- The dates of departure and return for each trip away from home.
- The number of days away from home spent on business.
- The destinations or locality of travel (described by the name of the city, town, or other similar designation)
The business reason for the travel or the nature of the business benefit derived (or expected to be derived) as a result of the travel.For meals and entertainment expenses, the taxpayer must generally substantiate the following elements:
- Amount. Amount of each separate expenditure for entertainment, except that such incidental items as taxi fares or telephone calls may be aggregated on a daily basis;
- Time. Date of entertainment;
- Place. Name, if any, address or location, and destination of type of entertainment, such as dinner or theater, if such information is not apparent from the designation of the place;
- Business purpose. Business reason for the entertainment or nature of business benefit derived or expected to be derived as a result of the entertainment
- Business relationship. Occupation or other information relating to the person or persons entertained, including name, title, or other designation, sufficient to establish business relationship to the taxpayer.
With respect to deductions relating to vehicles, the taxpayer’s records must include the following information with respect to each vehicle used in the business: (1) the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance); (2) the amount of mileage for each business or investment use and the total miles for the tax period; (3) the date of the expenditure; and (4) the business purpose for the expenditure. The following are considered adequate for substantiating such expenses: (1) records such as an account book, diary, log, statement of expense, or trip sheets; and (2) documentary evidence such as receipts, canceled checks, bills, or similar evidence.
Records are considered adequate to substantiate the element of an expense only if the records are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred. When planning for year-end, it is best to make sure that your expense substantiation is sufficient before your proceed into the next fiscal year.
New Overtime Rules – Federal Court Blocks Enforcement
On November 22, a federal judge in Texas, District Court Judge Mazzant blocked the Department of Labor’s Overtime Rule Change from taking effect on the proposed date of December 1. The new rules were estimated to affect over 4.2 million workers as they doubled the salary threshold at which a white collar worker can be classified as an “exempt employee” not entitled to overtime pay.
While the Fair Labor Standard Act (FLSA) overtime rules apply to most hourly and salaried workers, they do not apply to executive, administrative, and professional (EAP) employees meeting certain criteria. The EAP exemption applies to workers who pass three tests:
- the employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (“salary basis test”);
- the amount of salary paid must meet a minimum specified amount (“salary level test”);
- the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (“duties test”).
The biggest change in the new rules was to increase the threshold for passing the salary level test. The regulations would have increased the minimum specified salary from $23,660 to $47,476 (or $455 a week to $913 a week). Under these rules, employees with annual salaries of less than $47,476 would not have been considered exempt employees, regardless of their job responsibilities. With President-Elect Trump taking office in January, it is not certain that these regulations will ever become effective.