Taxes, a subject both universally applicable and boring, are always changing and shifting. It’s the duty of all small business owners to stay on top of these changes and understand how they may impact your business.
There are a number of changes to business taxes for 2016. Prepare for your New Year by understanding what’s changed.
This is a notoriously dry topic, so extra care has been taken to spice it up a bit. I’ll focus on actionable information that may be directly applicable to how you do business. This topic is also complex and I’m not a CPA – so my goal is to prepare you to speak to your CPA.
Let’s get into it.
Important Business Tax Changes for 2016
Some of the key changes for business tax in 2016 revolve around the extension of existing policies, including changes to them. On top of that, some policies have been permanent, meaning that they’ll impact your business its entire existence. That’s pretty intense.
So, what policies have changed?
Bonus Depreciation Phase Out. The concept of bonus depreciation is that you, as the business owner, can deduct the cost of an asset that was purchased in one year over a longer period of time. I’ll illustrate what that means by placing you in charge of a cupcake shop.
Your shop is successful, but you’re looking to expand – because you’re an entrepreneur and that urge never goes away. You hear about a new ‘cupcake vending machine’ that’s taking another city by storm. Eager to stay ahead of the trend, you decide to buy five of them, slap on your logo and install them at key locations throughout the city. You stay ahead of the trend and make money. Good job!
Now, the total cost of those cupcake vending machines (those really exist, by the way) was $20,000. You plan on keeping them for several years, they will be operating more than 50% of the time and you bought them new – so they qualify for bonus depreciation. You can deduct 50% of the purchase amount the first year, and defer the rest of the deduction to upcoming years.
The purpose of this system is to help strategically balance large tax deductions over time. This program is changing, however. The percentage that may be deducted for the first year is scheduled to change up until 2019, when the program will end:
- 50% in 2015 through 2017
- 40% in 2018
- 30% in 2019
Actionable Information: If you want to take advantage of this program, you need to:
- Track purchase invoices for all assets
- Be ready to prove that they operate for more than 50% of the time that your business is open
- They were purchased new and from someone you don’t know personally
Check with your CPA about any specific information that may be important to your industry.
$500,000 Section 179 Expensing Limit: This deductible allows a business owner to deduct in a single year the cost of any asset used within a business more than 50% of the time. This deduction applies to both new and used items.
The limit that can be deducted using Section 179 has changed over the years, reaching a low of $25,000 in 2015. Now, Congress has permanently set the expense limit at $500,000. That’s a lot of cupcake vending machines.
In addition to the new set limit, business owners may purchase an additional $2,000,000 in business property per year.
Actionable Information: Keep all of your purchase receipts and be prepared to prove that anything claimed under this deduction is used more than 50% of the time.
Qualified Small Business Stocks: This provision empowers founders and investors in regular C-Corporations to sell or exchange tax-free after five years. This provision has been on the books, and has now been made permanent.
Actionable Information: If your business is a C-Corp, inform all co-founders and investors that this has been made permanent. Consult with your CPA to see if there are any necessary changes to your bookkeeping.
The Affordable Care Act and You
It’s impossible to think about 2016 taxes without considering the Affordable Care Act, especially as a small business owner. The implementation of this new act will impact a large percentage of small businesses.
Do you presently have employees and offer them health insurance?
Yes? You probably don’t have anything to worry about, although your CPA will need to track and report your health insurance coverage.
No? You may face penalties for not offering health insurance. (Unless you have less than 50 employees. In which case, read on, but no need to worry.)
In 2016, the Affordable Care Act now applies to businesses that have 51 to 99 employees. The fines for not offering health insurance to at least 70% of their full-time employees are $2,000 per employee. When dealing with somewhere between 51-99 employees, these fines can add up quickly.
Actionable Information: Health insurance will start impacting many small businesses’ bottom line in new ways. Either be prepared to pay the fines, or start offering health insurance. You should definitely ask your CPA what information they’ll need about your health insurance programs if you are now impacted by The Affordable Care Act.
Tips for Small Business Owners in 2016 – Lightning Round
It’s time for some rapid fire tips for small business owners who are freshly facing 2016. Let’s go:
- Think about your taxes throughout the year. Your CPA can help you understand how to shift your mindset into one that focuses on taxes all year. Making this shift will prevent your cash flow from killing your dreams.
- Hire a pro. Seriously, don’t try to do everything yourself. This advice is applicable to every aspect of your business, especially taxes. Work with a CPA, even if it’s only on a consultation.
- Don’t assume. There are no guarantees when it comes to the future of taxes, largely when talking about tax breaks. It’s common for tax breaks to be extended, but don’t assume that’ll happen.
Ready to rock your taxes in 2016? At the very least, you’re more aware of how these changes may impact your business. Some business owners won’t have to make any changes, while others will have to examine their entire annual budget. Which one are you?
How have you had to change your business to accommodate the new tax policies? How is The Affordable Care Act impacting your cash flow? Let us know in the comments!