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Closely Held Businesses

Closely Held Business Year-End Planning

By November 22, 2016No Comments

As 2016 comes to a close, make sure to consider year end planning for your business and know what to expect for 2017.

Tax Return Due Date Changes:

Due to the passage of the “Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015,” filing due dates for 2016 tax returns may have changed depending on the entity filing the tax return.

March 15, 2017:

Partnership tax returns (calendar year Form 1065) will now be due earlier than in prior years, moving up the due date of the return from April 15th to March 15th

S-Corporation tax returns (calendar year Form 1120-S) will not be affected by the new act and the return will remain due on March 15th

April 15, 2017:

C-Corporation tax returns (calendar year Form 1120) will now be due a month later than in previous years. The due date will now be April 15th instead of the prior year due date of March 15th.

3.8% Medicare Contribution Tax:

Once again, the Medicare surtax will be placed on taxpayers with Net Investment Income (NII) above certain thresholds. The Medicare surtax does not apply to income derived from an active trade or business or from the sale of property used in an active trade or business. The Medicare surtax is based on the lesser of the taxpayer’s NII or the amount of “modified” adjusted gross income (MAGI) above a specified threshold.

The MAGI thresholds for 2016 are:

  • $250,000 for married taxpayers filing jointly or for a surviving spouse;
  • $125,000 for married taxpayers filing separately;
  • $200,000 for single and head of household taxpayers; and
  • $12,400 in 2016 for estates and trusts (adjusted for inflation).

NII includes:

  • Gross income from interest, dividends, annuities, royalties, and rents provided this income is not derived in the ordinary course of an active trade or business;
  • Gross income from a trade or business that is a passive activity;
  • Gross income from a trade or business of trading in financial instruments or commodities; and
  • Net gain from the disposition of property, other than property held in an active trade or business.

Additional 0.9% Medicare Tax on Earned Income:

The 0.9% will still be in effect for wages and self-employment income received in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately) for a total Medicare tax of 2.35% for those individuals.

An employer is required to collect additional Medicare tax on any employee who is in excess of $200,000 for the calendar year, regardless of employee’s filing status or other wages and compensation.

De Minimis Expensing Rule (repairs vs. cap regulations):

Purchases of multiple inexpensive, tangible items are not required to be capitalized.  The aggregate amount of these items can be expensed. “Inexpensive” varies from client to client and should be defined in a written policy.  The amount that can be expensed is subject to certain limitations. Larger companies with Applicable Financial Statements may deduct up to $5,000 per invoice. For smaller companies without Applicable Financial Statements there is a $2,500 safe harbor.

Year-end considerations:

Year-end considerations regarding income and expenses not mentioned above have remained relatively the same. Consider accelerating or deferring income into years in which you will have higher expenses or be in a lower tax bracket. Additional suggestions are as follows:

Zero-out income

C-Corp – Calculate wages and/or bonuses by zero-ing out income to avoid double taxation

Reasonable Compensation

S-Corp income is not subject to employment taxes or self-employment income

S-Corp owners must take reasonable compensation (subject to employment taxes) for services performed for the S-Corp

Withholding & Estimated tax payments

Consider whether sufficient withholding has been made throughout the year

If not, consider making an estimated tax payment or, if possible, a year-end bonus with extra withholding.

Home Office Safe-Harbor Deduction

Allowed a deduction of $5 per square foot up to 300 square feet

Deduction is limited to the gross income derived from the business

Depreciation:

Bonus Depreciation was extended through 2019 due to the passage of the PATH Act of 2015

Section 179 expense deduction limits for 2016 is $500,000, with the spending cap on equipment purchases at $2,000,000 causing a reduction of the expense dollar for dollar

Research Tax Credit

After being a temporary tax law for 34 years, the Research Tax credit was made permanent at the end of 2015. This ensures going forward that the credit will be available for all business

Along with being made permanent, the research tax credit may also be available to offset AMT taxes or payroll taxes for certain small businesses

Potential Tax Impact of 2016 Election:

The Trump Tax Plan will lower the business tax rate from 35% to 15%

Will eliminate the corporate alternative minimum tax

Will eliminate most corporate tax expenditures except the Research Tax Credit

Will allow firms engaged in manufacturing in the US to elect to expense capital investment and lose the deductibility of corporate interest expense

For more details on the potential Trump Tax Plan please visit: https://www.donaldjtrump.com/policies/tax-plan

If you have any questions on the above, please contact your L&B Professional.

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