The legislative environment in 2015 saw many tax law changes affecting small businesses, including two that particularly affect S corporations. If you’re the owner of an S corporation, here’s what you should do to get your business taxes in order for Uncle Sam.
Once you’re done reading, you can download our tax filing infographic, which includes important filing dates for your required forms specifically for S corporations.
Don’t Put Off Filing Taxes
First, file on time, which for S corporations means March 15. You’ll file Form 1120S and give each shareholder a copy of Schedule K-1 (Form 1120S). Don’t confuse this with Schedule K-1 (Form 1065), which is for partnerships. Your shareholders should also be prepared to use their Schedule K-1 to account for their share of the business’ taxes.
If you can’t file on time, request an automatic six-month extension by March 15 using Form 7004, and pay what you estimate you will owe.
Second, keep good records. Because of the tax advantages they enjoy, S corporations are more likely to be audited than many other business entities, so it’s especially important to maintain backup documentation for any business deductions you take.
To stay on the right side of the law, remember that S corporations cannot deduct the cost of health insurance premiums for shareholder-employees who own more than 2% of the company. It’s also critical to pay yourself a reasonable salary and to abide by IRS guidelines regarding the number and type of shareholders an S corp is allowed.
The PATH Act Changes
It’s critically important to understand how tax law changes affect your business. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended and made permanent a number of tax changes, including two specific to S corporations:
Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property
When an S corporation makes a contribution to charity, that contribution “flows through” to the S corporation’s shareholders, who have to adjust their stock basis accordingly. For tax years beginning after December 31, 2014, a shareholder’s basis in the stock of an S corporation is reduced by the shareholder’s pro-rata share of the adjusted basis of the property contributed.
Permanent Reduction in Built-in Gains (BIG) Tax
If a C corporation converts to S corporation status, it will owe a built-in gains tax on any assets of the C corporation that it sells within five years (this previously was 10 years). The new law is retroactive to the start of 2015.
In addition to the specific updates mentioned above, the PATH Act changes affect small businesses in the following ways:
If your business purchases a long-term asset, you can deduct a large part of its cost in the year of purchase. The bonus depreciation has been retroactively extended from January 1, 2015, through 2019, although it will be phased out as follows:
- 2015 through 2017: 50%
- 2018: 40%
- 2019: 30%
Section 179 Expensing Limit
Section 179 of the Tax Code allows businesses to deduct the cost of new or used tangible personal business property, up to an annual limit, in a single year. Retroactive to January 1, 2015, the Section 179 annual limit is now $500,000. Business owners can purchase up to $2 million worth of qualifying business property each year.
First-Year Depreciation of Business Vehicles
If you claim 50% bonus depreciation for business vehicles placed into service in 2015, the annual limit on first-year depreciation is increased by $8,000.
Work Opportunity Tax Credit
Tax credits for hiring members of targeted groups, including military veterans, people who receive welfare and food stamps, people with disabilities, low-income ex-felons and high-risk young people, are extended through 2019. A wage credit for hiring active-duty members of the military has been made permanent.
Improvements to Qualified Real Property
For 2015, up to $250,000 worth of improvements to qualified lease, retail and restaurant property can be deducted under Section 179; the remaining cost is deductible over 15 years. In 2016, the maximum Section 179 deduction for this type of property increases to $500,000.
There may also be tax law changes in your state, which you should discuss with your tax advisor.
Healthcare and Retirement
How will the Affordable Care Act (ACA) affect your taxes this year? You can take the small employer health insurance credit (though the definition of small employer has changed in recent years) if you pay at least half the cost of healthcare coverage for your staff.
Employer reporting rules have also changed. If you are considered a “large employer,” meaning you have 50 or more full-time employees, including full-time equivalent employees, you have to file informational returns with the IRS reporting health insurance coverage and issue Form 1095-C to employees. If you have multiple locations, or even multiple businesses, you must aggregate all of your employees to arrive at your reporting total.
Finally, consider setting up a Simplified Employee Pension (SEP) plan to cut your taxes. You can do this whether you’re incorporated, unincorporated or self-employed if you don’t have a retirement plan in place. You’ll have to make contributions toward employees’ plans, but you’ll get a nifty tax deduction when you file.