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.
S Corporation Tax Penalties
Like any other business entity, S corporations can be hit with penalties if their returns aren’t filed timely or properly. In fact, if you miss the tax filing deadline, you may be hit with one or more of five penalties:
- Interest: Even if you file for an extension, interest will accrue from the original due date. In addition to interest on your principal tax payment, interest will also accrue on any penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax and reportable transaction understatements from the due date (including extensions) to the date of payment.
- Late Filing of Return: Unless you have a valid reason for it, any return that is filed late or is missing information can incur a penalty. If no tax is due, the penalty is $195 for each month, including partial months, for up to 12 months, multiplied by the number of shareholders in the S corporation. If a tax was due, that monthly penalty will include 5% of the unpaid tax for each month for up to 25% of the unpaid tax.
- Late Payment: If the payment itself is late, a penalty of 0.5% to 1% per month can accrue, with a maximum of 25%. This may be waived if the S corporation can prove reasonable cause.
- Failure to Furnish Timely Information: This penalty may be incurred if you either fail to furnish a Schedule K-1 to a shareholder, or if the Schedule K-1 you furnish has inaccurate information. The penalty for failing to issue a Schedule K-1 is $260. If you have been found to intentionally disregard the requirement for correct information, each $260 penalty is increased to $520 or, if greater, 10% of the aggregate amount of items required to be reported.
- Trust Fund Penalty: If your S corporation didn’t pay its anticipated tax bill, then a penalty amount equal to the bill will be applied.
If you forget to pay an estimated tax payment by the quarterly due date, you’ll be required to fill out Form 7004, which will calculate a small penalty for late payments. The same penalty rules applied to the tax-filing deadline may also apply to late quarterly tax payments.
When possible, make any and all income tax or estimated tax payments as soon as you can, since waiting will only add further penalty and interest charges.
Feeling overwhelmed? Don’t try to do it yourself. Spend the money on a qualified tax advisor who is familiar with small business issues, and make it easier for them to help you by using solid bookkeeping software. The tax breaks you’ll enjoy should more than pay for themselves. And you can deduct the cost of tax preparation on next year’s return.
Be sure to check out all of our tax preparation tips as part of our all-inclusive tax guides for small businesses, so you can file early and breathe easy. And use the infographic below as a handy reference to ensure you don’t miss any tax deadlines.