How to Minimize Your Tax Bill
An easy reference guide of tax changes and year end planning for your business.
It’s that time of the year, tax season.
A lot has changed since last year, so lets dive right in.
Changes in Due Dates
Effective beginning with 2016 tax returns, the due date for most C Corporations tax returns has been moved back one month to the 15th day of the fourth month following the corporation’s year end.
This means that the due date for a typical calendar year-end return has been moved from March 15th to April 15th . Note that this applies to C Corporations only. S Corporation returns are still due on the 15th day of the third month, or March 15th for nearly all S Corporations.
Partnership returns are now due on the 15th day of the third month. Previously, they were due on the 15th day of the fourth month, or on April 15th for the typical partnership with a calendar year end. Although very few security and systems integration companies operate as partnerships, many are multi-member LLC’s, which may be taxed as partnerships.
Automatic six-month extensions are available for corporate and partnership returns, but they must be filed by the original due date of the Return. If the Extension is not timely filed, the return is considered not timely filed.
For example if a calendar year 2015 Partnership extension is filed on April 15, and the return is filed on October 15, the return would be considered to have been filed seven months late. The extension would be rejected since it was not timely filed.
Permanent Extensions Affecting Security and Systems Integration Companies
After years of short term extensions, many coming right at year end, or in the case of 2014, coming in January of the following year, Congress finally ‘permanently’ extended many business tax breaks.
Expensing of certain capital purchases, known as Section 179 expensing, has been made permanent, as have the threshold amounts. Section 179 allows a qualified company to expense certain purchases of furniture, equipment, and even some vehicles in the year of purchase instead of depreciating them.
The limit on purchases is $500,000 for 2016 and the company cannot have more than $2,010,000 in total capital purchases during the tax year. If you are contemplating a major purchase, you may benefit by making it before year end. Remember, not all purchases qualify and certain other limitations apply.
Also remember that reducing your taxable income in one year may not be the best strategy. Talk to your tax professional to determine what is best for you.
The Section 168(k) deduction, also known as ‘bonus depreciation’, has also been permanently extended. This provision allows a taxpayer to expense 50% of the adjusted basis of qualifying property in the first year that it is in service. Again, there are limits and not all assets will qualify, so talk to your tax professional before making a major purchase.
Bonus depreciation limits will fall to 40% for property placed into service in 2017 and to 30% for 2018 purchases.
It’s That Time of Year: Preventing Kitchen Fires During the Holidays
The built-in gains period has been permanently reduced to five years. Built-in gains may occur when a C Corporation elects to be treated as an S Corporation. Since an S Corporation is substantially not a tax-paying entity, there is no Federal Income Tax for the Corporation on the sale of the assets (think alarm accounts) of an S Corporation.
The capital gain is allocated to the stockholders, and they pay the tax on their personal returns. If the sale occurs within 5 years of the S Corporation election, it will trigger built-in gains and the sale will be taxed to the Corporation as if it were still an S Corporation.
The built-in gains period was previously 10 years, so the new five year period is a welcome change.
If you are a C Corporation and are considering selling in the near future, talk to your tax professional about making the S Election effective January 1, 2017, so that you can get your clock running.
While the process is simple, there are many factors to consider, so be sure to get sound advice before rushing into the change.
The Work Opportunity Tax Credit, equal to 40% of the qualified first-year wages of employees who are members of a targeted group, was extended through 2019. The credit has been modified beginning in 2016 to make it available for employers that hire qualified ‘long-term unemployed’ workers defined as unemployed for 27 weeks or more.
I have had several clients who hired qualified employees and did not know about the credit.
Section 168(j) allows accelerated depreciation for qualified property used in an Indian reservation. This may not apply to a security company or integrator, but it could apply to a customer purchasing a large camera system for a casino.
With a new President and Congress, things are bound to change even more in 2017 and beyond. Talk to your tax professional now, don’t wait until year end.
Mitch Reitman is Managing Principal at Reitman Consulting Group, Inc., which provides tax compliance and consulting services to the security and systems integration industry. He can be reached at 817-698-9999 or at Mitch@Reitman.US.
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