As we head toward the end of another year, every small business owner’s mind inevitably turns to the anxiety of tax season. Will you owe for 2016? And, what changes are on the horizon for taxes in 2017?
Here is some good news. First, you’ll have a little more time to file 2016 returns. While tax returns in the US are normally due by April 15 each year, 2016 tax returns will not be due until April 18, 2017—since April 15 falls on a Saturday and the District of Columbia will observe Emancipation Day on April 17.
Luckily, there aren’t many surprises this year. The Protecting Americans from Tax Hikes (PATH) Act passed at the end of 2015, making several important provisions permanent. This includes the $500,000 limit for Section 179 expensing for investments in business assets and the research and experimentation credit. Also, low inflation means tax brackets have stayed relatively stable. Still, there are a few items small business owners should be aware of as we prepare to file another year’s tax returns.
Anticipating a tax refund? Sole proprietors and business owners who receive pass-through income from a partnership, LLC or S-Corp, and who claim the Earned Income Tax Credit or the Additional Child Tax Credit may have to wait a little longer for refunds.
The PATH Act mandated that no credit or refund for an overpayment will be made to a taxpayer before February 15 if the taxpayer claimed the Earned Income Tax Credit or the Additional Child Tax Credit. Both credits are refundable, meaning they can reduce your tax liability to below zero.
Identity theft has been an increasing problem over the last several years, with thieves filing fraudulent returns claiming these credits. To combat the problem, IRS and state authorities are taking more time to review returns before issuing refunds.
Health insurance is expensive and premiums keep rising. Unfortunately, penalties for those without coverage are increasing as well.
The Affordable Care Act mandates that all taxpayers be covered by health insurance unless they qualify for an exemption. If you don’t have health insurance and don’t qualify for an exemption, a penalty is calculated on your tax return. The penalty is either calculated as a percentage of total household Adjusted Gross Income (AGI) or a flat rate, whichever is greater. Penalties increase each year to keep pace with inflation and encourage those who can afford coverage to buy it.
Last year, the penalty was the higher of 2% of AGI or $325 per adult and $162.50 per child under age 18, with a maximum of $975. For the 2016 tax year, the flat rate penalty will more than double. Unless you were covered by insurance for all of 2016, the penalty would be to 2.5% of AGI, or $695 per adult and $347.50 per child, with a maximum of $2,085.
Self-employment taxes will increase for people earning more than $118,500 in 2017. That’s because of a significant increase in the maximum amount of wages that will be subject to the 6.2% Social Security tax in 2017, a limit known as the Social Security Wage Base (SSWB).
For the past two years, the SSWB remained at $118,500, meaning the maximum amount of Social Security tax an employee would pay was $7,347. In 2017, the SSWB will jump to $127,200, an increase of more than 7%. Now, employees will pay $7,886.40—an increase of $539.40.
For a little background, the Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers. One is the Social Security tax, the other the Medicare tax. The FICA tax rate for employers is 7.65%, (6.2% Social Security tax and 1.45% Medicare tax). Employees pay the same rates, plus an additional 0.9% Medicare tax on all wages in excess of $200,000.
Self-employed people pay both the employer and employee portion of their Social Security and Medicare taxes, resulting in a 12.4% Social Security tax and 2.9% Medicare tax. Plus the additional 0.9% Medicare tax on self-employment income in excess of $200,000. Self-employed workers are allowed an “above the line” deduction for half of their self-employment tax to arrive at their adjusted gross income.
There is no limit on the amount of wages subject to the other portion of the FICA tax, the 1.45% Medicare tax.
For 2016 tax returns, the standard mileage rate for business use of a car, truck or van is 54 cents per mile. That’s a decrease from the 2015 standard mileage rate of 57.5 cents per mile in 2015. That said, the IRS has not yet released the 2017 standard mileage rates.
Employers who provide transportation benefits can take advantage of a provision commonly known as “Commuter Tax Benefits.” These qualified transportation fringe benefits allow employers to save on payroll-related taxes when they provide parking and transit benefits to their employees. For 2016 and 2017, employers can provide up to $255 per month for transit expenses, vanpool expenses, qualified parking or bicycle commuting reimbursements.
Tax brackets have edged up only slightly from 2015 to 2016 and again from 2016 to 2017. There are still 7 tax brackets, with the highest rate of 39.6% at incomes over $418,401 ($470,701 for Married Filing Jointly).
From 2015 to 2016, the standard deduction for single and married couples remained constant—$6,300 for Single, $12,600 for Married Filing Jointly. In 2017, the standard deductions will increase just slightly to $6,350 for Single filers and $12,700 for married filers.
Personal exemptions will remain constant for 2017. For 2016 and 2017, the personal exemption is $4,050—an increase of $50 from 2015. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $261,500 ($313,800 for married couples filing jointly). In 2017, the personal exemption will be phased out completely at $384,000 ($436,300 for married couples filing jointly).
A few tax provisions are due to expire at the end of 2016, and it’s unknown if these provisions will be extended.
Alternative Fuel Vehicle Refueling Property Credit: Businesses and individuals who install refueling stations for electric vehicles have been able to take advantage of the credit to offset some of the cost of installing the stations. The maximum credit for individuals is $1,000 or 30% of the installation cost, whichever is lower. For businesses, the maximum credit per location is the lesser of $30,000 or 30% of the cost of installation.
Energy-Efficient New Homes Tax Credit: Home builders have been able to take the credit for the construction of new energy-efficient homes. This $2,000-per-home credit applies to those located in the US as long as construction is substantially completed before December 31, 2016 and the home meets the energy saving requirements outlined in the statute. Manufactured homes are eligible for a $1,000 credit.
A number of incentives for biodiesel and renewable diesel are also set to expire at the end of 2016. For a complete list of expiring tax provisions, check out this list from the Joint Committee on Taxation.