This blog post covers 2016 year-end update for businesses. With the start of 2017 quickly approaching, a slew of changes is upon us. The new year often brings tax changes, and with a new president in 2017 there is already talk of overhaul of the tax code. While we will briefly discuss some speculative changes for 2017, most of the changes discussed below have already been approved by Congress and will be in effect for 2017.
An important change that affects many businesses is the change in due dates for various forms and returns. Forms 1099-MISC and W-2 are due to both employees and the IRS (or Social Security Administration, in the case of W-2s) on Tuesday, January 31st. This deadline is applicable for forms filed both by paper and online. Some states require separate filing of Forms 1099-MISC and W-2, and the state deadlines may or may not follow the federal timeline. Please consult us regarding state filing requirements. As a reminder, if you pay a contractor $600 or more during 2016 for services, rent, or any other non-employee compensation, you are required to file Form 1099-MISC for that contractor. In addition, payments to attorneys of $600 or more must be reported. Payments made to C-corporations, S-corporations, or paid by credit card are not required to be reported. If you are unsure whether a 1099 is required, we will work with you to ensure that you are compliant and avoid any penalties (which, as we will discuss later, have unfortunately increased for 2017). Forms 1099-DIV and 1099-INT follow the same timeline as in prior years: they are due February 28th if paper filed or March 31st if electronically filed.
Due dates for income tax returns have changed for many entities. Partnership returns (Form 1065) are now due on the 15th day of the third month following the taxpayer’s year-end. For partnerships (or LLCs taxed as partnerships), this means that the 2016 tax return is now due one month earlier than in previous years. For calendar-year taxpayers, Form 1065 is due March 15th, 2017.
C-corporation returns (Form 1120) are now due on the 15th day of the fourth month following the taxpayer’s year-end. For calendar-year taxpayers, the 2016 tax return will be due on April 15th, 2017 (instead of March 15th, as in prior years). An important caveat: C-corporations with a fiscal year end of June 30th will not be subject to the changed due date until the 2027 filing season. No, that’s not a typo! For some unclear reason, the legislation specifies that 6/30 year-end C-corporations will continue to file their returns on the 15th day of the third month following their year-end, which means that the 1120 is due September 30th.
The due date for S-corporation returns (Form 1120S) have not changed: Form 1120S is due on the 15th day of the third month following the taxpayer’s year-end (for calendar-year taxpayers, the due date remains March 15th). The following table summarizes the changes to due dates for various business returns:
|If you are a…||Your return used to be due on…||Your return is now due on…|
|Partnership (12/31 year-end)||April 15th||March 15th|
|Partnership (Fiscal year-end)||15th day of fourth month||15th day of third month|
|C-corp (12/31 year-end)||March 15th||April 15th|
|C-corp (Fiscal year, except 6/30 year-end)||15th day of third month||15th day of fourth month|
|C-corp (6/30 year-end)||September 15th||September 15th (until 2027 filing season)|
|S-corp (12/31 year-end)||March 15th||March 15th (unchanged)|
|S-corp (Fiscal year-end)||15th day of third month||15th day of third month (unchanged)|
Many extensions for returns have changed as well. Six-month extensions are allowed for partnerships (an additional month over prior years), five-month extensions are allowed for S-corporations (unchanged), and five-month extensions are allowed for C-corporations with a non-6/30 year-end (one month less than in prior years). C-corporations with a 6/30 year-end will continue to have a six-month extension until the 2027 filing season, at which point the extension will decrease to five months.
Some states follow the federal due date for returns, but others do not. As a result, it is possible for a state return to be due before the federal return. It is important to be aware of the specific filing requirements of each state.
Another important due date change applies to the foreign bank account reporting requirements. The FBAR (FinCen Report 114) is now due April 15th, instead of June 30th. If you’ve been on auto-pilot for these reporting requirements it is essential that you are prepared to report the information earlier this year! One positive change in this area, however, is that an extension for FinCen 114 now exists. At this point it is unclear whether the extension will be granted automatically, so it’s best to plan to report any foreign bank accounts by April 15th.
An unfortunate change for 2017 is the increase in penalties for late filing or other errors. Penalties relating to late filing of many forms, including Forms 1099, W-2, 1098, K-1, and 1095 (Health Care Reporting) have increased to anywhere from $50 per late filing (if fixed within 30 days) up to $530 (if intentionally disregarded). The late filing penalty for pass-through entities (Form 1065 or 1120S) did not change from 2015, but it will increase for the 2017 tax year. Even though it did not change, the late filing penalties add up quickly, as they are based on a “per shareholder, per month” basis. The current penalty is $195 per month (or any portion of a month) per shareholder.
Stop! Maybe you’re thinking about skipping over this section because your company doesn’t take the research and development credit because your company is always in AMT, or maybe your company is in a loss and can’t take the credit anyway. If that’s the case, we’ve got good news for you and you should keep reading! The R&D credit has changed significantly for tax years starting in 2016 or later. First, the R&D credit is permanent, which means that you can now plan your R&D expenditures with the knowledge that the credit will be available for the year. In the past, the R&D credit only offset regular tax, so if your company (or shareholders/partners/members of a pass-through entity) was subject to AMT, you didn’t receive any benefit from the credit. For tax years starting in or after 2016, the R&D credit can be used to offset alternative minimum tax. It gets even better: if you are a qualifying small business, you can use the R&D credit to offset up to $250,000 of your payroll taxes. If you’d like to assess whether the R&D credit can benefit your business, we’d be happy to review your research and development activities to determine the best tax-savings approach.
If your company develops software internally, you may be eligible to take the R&D credit as well. The IRS finally released regulations in October of 2016 relating to internal-use software, and the resulting changes are taxpayer-favorable. We can assist in determining whether your internal development R&D costs qualify for the credit.
Depreciation and Fixed Assets
Although the PATH Act was passed in 2015, there are numerous provisions that apply to tax years beginning in 2016. If your company has done (or is planning to do) substantial updates, renovations, or additions of property we can analyze the changes to determine whether they qualify for beneficial treatment. Some areas that may qualify for significant tax savings are HVAC systems and qualified improvement property. “Qualified improvement property” is new to 2016 and is specifically defined in the legislation, and we can determine whether your improvements fall under this category.
Another beneficial change to tax years starting in or after 2016 is the increased safe harbor for expensing fixed assets. While regulations previously allowed businesses to expense up to $500 (per invoice) of fixed assets (or up to $5,000 per invoice if financial statement requirements are met), the regulations now allow expensing of up to $2,500 per invoice, even if the company does not have applicable financial statements. It is important to note that this safe harbor only applies if a proper de minimis policy is in place. If you do not have a policy in place, Freyman CPA can provide you with the information required to do so.
Partnership Audit Rules
While we could write a series of blog posts on this topic, we will only briefly discuss the changes to audit partnership rules here. If your business is a partnership (or you are a partner in a partnership) we highly recommend reading this section and getting in touch with us to ensure that the partnership and its partners are protected.
The short version is that beginning in 2018 the IRS will be allowed to audit partnerships at the partnership level (rather than at the individual partner level, which is the current method) and assess tax to the partnership itself. The partnership can elect out of this, in which case the audit and any subsequent tax assessment would be done at the partner level. While this rule will not be in effect until 2018, the consequences are so serious that we recommend all partners and partnerships begin planning during the next year. If a partnership does not elect out of the new audit method, this can have a significant impact on partners entering and exiting the partnership. In addition, the new rules require the designation of a “partnership representative,” who acts on behalf of the partnership. This is a very important designation, as this person will have the sole authority to bind the partnership and all of the partners. We recommend that all partners and partnerships review their partnership (or operating) agreements with both a CPA and an attorney.
President-elect Trump has discussed a number of tax changes that he would like to make. While there is a Republican Congress, there is not a current filibuster-proof super majority. Consequently, it is unclear which tax changes would pass. Some of the changes that have been proposed include:
- A reduction in the corporate tax rate to a single rate of 15%.
- An end to deferral of taxes on overseas earnings.
- A repeal of all business incentives, except for the R&D credit.
- The repeal of the Affordable Care Act (and the accompanying taxes, penalties, and reporting requirements).
While we do not know what the tax code will look like at the end of 2017, we should ensure that the current laws are followed so that penalties, interest, and other fines are not assessed. Please contact us if you would like to discuss tax planning strategies, compliance matters, or other tax-related matters.