As we near the end of 2015 we wanted to update you on new matters we face this filing year, let you know of hot button issues with the IRS, as well as remind you of normal year end planning ideas.
First, and all too common, Congress has failed to pass any significant long-term budget and tax legislation so once again we are down to the wire on what has become known as Extender legislation. There are 55 tax provisions that expired when the Bush Era tax cuts expired December 31, 2010. They were first extended for two years on December 17, 2010 which created what became known as the Fiscal Cliff, December 31, 2012. On January 2, 2013 a new tax act was signed that extended them for 2013. For almost all of 2014 we were left in a state of tax uncertainty as the one-year extension was not signed into law until December 19, 2014 (that’s right, 13 days including weekends and holidays to plan your year). It should be no surprise that although all parties have said they want to extend the taxpayer friendly tax provisions, as we write this, no agreement has been reached. So stay tuned.
Although many of the expired provisions are very industry specific, such as depreciating the Las Vegas Motor Speedway over 7 years, some of them are very important to most of us:
- 50% bonus depreciation (the ability to expense ½ of the cost of NEW equipment placed in service in 2015
- IRC 179 expensing limits (the ability to directly expense up to 100% of the cost of NEW or USED equipment placed in service in 2015) – this limit was up to $500,000 with phase out beginning at $2,000,000 of total purchases. Without the extension, the limit is up to $25,000 with phase out beginning at $200,000 of total purchases.
New this year is reporting required under the Affordable Care Act (ACA), commonly referred to as Obama Care.
For employers with more than 50 full-time equivalent employees in 2014, you are now known as an Applicable Large Employer (ALE) and fall under the ACA requiring you to provide affordable health insurance to your employees or face a penalty. Affordable is defined as no more than 9.5% of their wages. A one year extension was granted for employers with 50 to 99 employees.
In addition to providing affordable health insurance to your employees, you also have a new reporting requirement, Form 1095-C and 1094-C. Even though employers with 50-99 employees were given an extra year to offer insurance, it DID NOT alleviate them from the reporting requirements.
If you have less than 50 full-time equivalent employees you do not have any new reporting requirement, even if you provide insurance to them.
Speaking of 1099 type forms, the IRS has significantly increased the penalties for failing to file information returns (Forms W-2, 1099s and the new 1095).
The penalty for erroneous or non-filed returns is $250 per form (was $100). If you make corrections by March 2 the penalty is reduced to $50 per form (was $30). If you make corrections by August 1 the penalty is reduced to $100 per form (was 60).
If you have intentional disregard of the filing requirements the penalty is $500 per form (was $250).
These increases also apply to both the copy filed with the Internal Revenue Service and the copy filed with the payee so in reality the penalties are doubled that listed above.
1099s need to be issued to any service provider you pay more than $600 to during the year except for material suppliers and corporations (except attorney corporations who get a 1099 regardless of the type of entity). You should always get a Form W-9 completed by the vendor before making any payments to assure you have the information necessary for fulfilling your filing obligation. Also, payments by credit card or PayPal are not included in the 1099s prepared by you.
New in Nevada this year is the Commerce Tax. Although voted down by the voters it was enacted into law by the legislature. There is an effort afoot to have it repealed but we have no idea how much traction it will make.
This is a gross revenue tax on each business with Nevada gross revenue that exceeds $4,000,000 during the fiscal year ending June 30, 2016 (July 1, 2015 – June 30, 2016). There is a deduction for cost of goods sold and every industry has its own tax rate. The first payment of tax is due August 15, 2016. A tax return is due regardless of tax liability so every business will be required to file a return.
The forms and regulations are still in the works so we will keep you posted.
New for 2016, the IRS just announced they are increasing the De Minimis Safe Harbor limit for taxpayers without an Applicable Financial Statement (audited financials) from $500 to $2,500.
You should recall from last year we informed you of the new Tangible Property Regulations that substantially changed the definition of what has to be capitalized and depreciated and what is a repair and is expensed immediately. The regulations also established a de minimis safe harbor for expensing without regard to the capitalization criteria. This provision allows for the expensing of any item of $500 or less so long is the item is detailed on the invoice or $500 per invoice it not.
An example is the purchase of 10 new computer monitors for $395 each. If the invoice says 10 new monitors, $3,950, you have to capitalize the purchase and depreciate the 10 monitors over 5 years. If the invoice says 10 monitors at $395 each, total of $3,950 you can expense the purchase in the year of acquisition.
You must apply this safe harbor consistently, therefore, you cannot pick and choose what to capitalize and what to expense. Also, please note, the allowable expensing for tax purposes might not follow generally accepted accounting principles depending on the materiality of the expenditure.
Beginning January 1, 2016 this limit is increased to $2,500. Although small businesses are not required to have this policy in writing, we strongly suggest a written accounting policy and have an example on our website.
Also new for 2016, the IRS has changed the filing deadline for business returns in an effort to pass-through information to the shareholders / partners in a timely manner so they can prepare their own returns.
Beginning with the 2016 tax returns filed in early 2017:
- Partnerships, Form 1065 will be due March 15th (instead of the normal April 15th),
- S corporations, Form 1120S will be due March 15th (unchanged),
- C corporations, Form 1120 will be due April 15th (instead of the normal March 15th).
IRS Hot topics:
Vehicle expense substantiation, i.e. automobile logs. The IRS has continued to assert without substantiation you get NO deduction. This means maintaining a log which can be an Outlook calendar or an Excel spreadsheet so long as you have the date, where traveled, business purpose, number of miles traveled and the relationship of the person meeting with.
An example for us would be: March 10, 2016, XYZ client, delivered tax returns, 28 miles.
If your business use of the automobile is consistent throughout the year, the IRS says you can keep detailed records for the same week each month and use that to substantiate the business use percentage.
Meals and entertainment substantiation. Meals and entertainment are only 50% deductible and have substantiation requirements similar to vehicles. Your receipt is not sufficient. You need to list on the receipt, or in a log or calendar, who you dined with or entertained with, what their business relationship is to you and the business purpose of the get together. The date and the name of the establishment should already be on the receipt.
An example for us would be: December 7, 2015, Grape Street Café, Joe Smith, owner, XYZ client, year-end tax planning meeting.
You must retain your receipts; credit card statements are not acceptable as substantiation of an expense.
Reasonable compensation. The IRS is still looking at too low of wages being paid to S corporation owners and too high of distributions. They look at this issue two ways. First, they look at salaries paid to non-owners in similar positions. They also look at the business owner as a CEO and not just a tradesmen. Secondly, they look at distributions using a reasonable rate of return on the investment in the business. If your capitalization is low they deem the distributions should also be low.
Medical Reimbursement Accounts. Under the Affordable Care Act you are no longer allowed to reimburse an employee for an individual health insurance policy. You can increase their wages to compensate them for the expense they are incurring but the wages cannot be predicated on them spending the extra income on health insurance. And of course, both you and the employee pay income taxes, Social Security and Medicare tax on the increase in wages. There is a $100 per employee per day penalty for continuing this type of reimbursement plan. That is right, $36,500 per year.
You can continue to reimburse the health insurance premiums for the 2% or more stockholders of an S corporation through the end of this year at which point the IRS is supposed to provide us with additional guidance. You are still required to include the amount of health insurance premiums paid on behalf of the 2% or more stockholders on their W-2s in order for the corporation and stockholder to obtain the deduction.
Don’t overlook normal year-end planning techniques:
If you expect to be in a higher tax bracket this year, accelerate deductions into 2015 and push income into 2016 if possible.
Increase your contributions to your retirement contributions or look at a new retirement plan that allows you to contribute more money. Limits for 2015 are:
- Simple contributions are $12,500 with an extra $3,000 for those over 50 years old
- 401(k) and 403(b) contributions are $18,000 with an extra $6,000 for those over 50 years old
- Keogh plans (defined benefit and contribution and SEPs) are $53,000 plus and extra $6,000 for those over 50 years old
Please give us a call to go over your specific tax planning options and have a wonderful holiday season.