It’s almost that time again… time to break out the shoeboxes of receipts and sit down for a good old fashioned heart-to-heart with your trusty accountant.
As always, the new year brings a few significant changes to the tax code that will affect business owners, some for this tax year (2016) and some that impact how you’ll do business in the year ahead.
Here are five of the most significant changes to taxes and insurance for small business owners that have recently been introduced by the federal government.
Lower Mileage Rates
We love it when prices drop at the pump, but decreased gas prices come with one noteworthy downside for entrepreneurs—a lower mileage rate for those who use a car to conduct business.
The rates issued by the IRS for 2017 mark a continuation of a downward trend in mileage rates, and are as follows:
- Business use: 53.5 cents per mile (versus 54 cents per mile last year)
- Medical use: 17 cents per mile (versus 19 cents per mile last year)
- Moving use: 17 cents per mile (versus 19 cents per mile last year)
Business owners and employees who regularly drive for work purposes have an alternate option for claiming tax deductions, which is to track actual expenses rather than taking the standard mileage rate deduction.
This can sometimes result in a larger deduction, but requires much more stringent record-keeping; you’ll need to track not only fuel expenses, but oil changes, repairs and other maintenance, insurance, depreciation of vehicles, state and local fees and any other expenses related to owning and maintaining your vehicle.
Developed Software? You May Get a Tax Credit
Prior to this year, most software developed for internal use—say, accounting or HR purposes—didn’t help you out much tax-wise. On your 2016 return though, it may make you eligible for the research and development (or R&D) tax credit.
According to the IRS, to qualify for the credit, a piece of software developed by a company must pass a three-part test.
First, is it highly innovative? This means the software must perform a function or serve a purpose that isn’t met by an existing piece of commercial software.
Second, did its development involve significant economic risk? If your company went out on a limb financially to create the software, it’s probably a safe bet.
Finally, is its use limited to members of your company? If the software is being sold commercially, it does not qualify for the R&D credit.
Filing Deadline for Proof of Insurance
The introduction of the Affordable Care Act brought a host of new responsibilities for business owners—namely, the requirement that companies with more than 50 full-time employees provide health insurance to at least 95% of said employees.
In previous years, the deadline for submitting Form 1095, which proves insurance coverage, was at the end of March. This year its due date has been moved up significantly to January 31. If you employ more than 50 people, you’ll want to plan to prove coverage by this date or risk paying a fine.
Expense Deduction vs. Depreciation
Under Section 179 of the PATH Act, business that make certain capital investments of up to $500,000 can take them as an expense deduction rather than yearly depreciation. This now includes expenses like off-the-shelf software purchases.
Previously, the deduction would need to be taken in small installments over a period of several years. Now, entrepreneurs can take the deduction for the purchase price of the investment all at once to get a bigger tax bang up front, rather than drawing it out in smaller increments.
Social Security Tax Liability Jumps
If you’re self-employed, you already face the burden of paying both your personal Social Security tax liability and the employer match portion. This year, that liability may be going up for you.
In 2016, the Social Security Administration announced an increase on the cap on taxable income subject to the combined 7.65 percent tax rate for Social Security and Medicare, from the previous $118,500 to $127,200.
Do the math—if you’re self-employed, this means you’ll ultimately pay a tax of 15.3 percent on the first $127,200 of your income.
Time to Evaluate
Whether or not you’re affected by any of the above changes, the end of the tax year is always a good time to sit down with your accountant for a financial state-of-the-union.
Take stock of what’s changed in your business since this time last year, and ask your accountant to weigh in on how it may affect your taxes. Also, be sure to ask what you could be doing differently that could be more beneficial to you on next year’s taxes.
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