It’s that time of year again: tax season.
Regardless of what state you do business in, there are a few federal updates that will no doubt affect your US-based business. For starters, you have a few more days than usual to file your federal taxes, as April 15th falls on a Saturday. Further, Washington D.C. celebrates Emancipation Day on Monday April 17th; so, federal taxes are due Tuesday April 18th this year.
Hopefully you already noticed the new January 31st deadline for getting W-2s to your employees. The new deadline came as part of the Protecting Americans from Tax Hikes Act enacted at the end of last year. Check out our 2016 tax calendar for a complete list of important deadlines.
Here are a few new tax laws for 2016 of which small businesses need to be aware.
The PATH Act
If you aren’t familiar with the Protecting Americans from Tax Hikes (PATH) Act, that’s because it was rolled into the Consolidated Appropriations Act of 2015, also referred to as “the budget,” that was passed in December 2015. Many of the regulations affect individuals, but the act also impacts small business owners in a number of ways.
For example, under the act, owners can now deduct money for improvements made to certain commercial properties. Additionally, employers can save by hiring members of particular groups, such as veterans and individuals who are receiving food stamps.
As part of the authorization, the Section 179 deduction was extended. It allows business owners to deduct up to $500,000 from the cost of property used for business purposes more than half the time. Note that, in a given year, owners can only purchase up to $2 million of commercial property qualifying for Section 179.
The authorization also extends the bonus depreciation laws that expired in 2014. Bonus depreciation allows business owners to deduct a large portion of the cost of a new long-term asset. From 2015-2017, the depreciation percentage will be 50%, but this value may drop to 40% in 2018 and 30% in 2019.
Qualified purchases under PATH include tangible personal property like equipment and machinery. Congress hopes that the bonus depreciation rules will provide a valuable stimulus for a still-struggling economy.
Along with changes under PATH, the Affordable Care Act (ACA) will affect tax filing for small business owners in 2016. Launched in 2010, the Affordable Care Act features multiple provisions designed to transform the insurance market while providing incentives for small businesses to offer employees health insurance. With that in mind, large companies employing 50 or more full-time workers are now required to offer healthcare.
Not only can businesses that fail to provide employees with healthcare be subject to penalties, but small businesses that cover 50% or more of premium costs and employ fewer than 25 workers might also qualify for help in the form of the Small Business Health Care Tax Credit.
2016 Small Business Tax Deadlines
Because of an official District of Columbia holiday on April 15, most Americans have until April 18 to file their returns. If you live in Maine or Massachusetts, you will have until April 19 to file without being subject to penalties due to the delayed observance of Patriot’s Day on April 18.
If you’re a sole proprietor or are part of a regular partnership, you will file on April 18. Electing large partnerships, S Corporations and C Corporations are generally required to file by March 15. The only exception is for corporations with fiscal years that don’t align with the normal calendar year. In this case, your corporation’s return will be due on the 15th day in the fourth month following your fiscal year’s last quarter.
Luckily, businesses that fail to prepare their taxes on time have the opportunity to file an extension. In most cases, companies can request six-month extensions without enduring severe penalties. If you do opt to file an extension, it’s important that you send the request with an estimated payment by the due date. Failing to remit payment can result in the IRS invalidating your extension.
Additionally, owners who underpay or fail to send funds can be hit with hefty fees. Visit the IRS website for more information about filing a tax return extension request this year.
State and Local Tax Law Changes
On the state level, below are some of the more significant changes that could affect your business for its 2016 tax return. Not listed below, but definitely important, 2016 was a popular year for states truing up their filing deadlines with federal deadlines. Accordingly, be sure to check for your state’s business tax filing deadlines. The below list is a high-level overview of some of the more newsworthy changes. Check with a tax professional or your state’s taxing authority for more updates and specific details.
- Created the Alabama Renewal Act which creates programs that provide two credits (i.e. Growing Alabama tax credit, and the Port tax credit) to businesses that generate growth in the state.
- Created the Apprenticeship Tax Credit which provides a one thousand dollar income tax credit for employers that employ an apprentice. Credit limited to five apprentices credit per year, and a cumulative cap of three million dollars
- Starting July 1, 2016, all returns and reports must be filed electronically. A five-year exemption is available for taxpayers who can substantiate the inability to file electronically.
- The Small Producer oil and gas production tax credit sunsets the later of 2016 or the ninth calendar year after the first year of production.
- Cut corporate income tax rate from 6% to 5.5%.
- Created a Declaration of Independent Business Status Form which permits a employing unit and contractor to create a rebuttable presumption of an independent contractor relationship.
- Increases depreciation percentage allowed pursuant to the IRC for Arizona income tax purposes from 10% to 55% in tax year 2016.
- 20% corporation business tax surcharge expected to sunset at the end of 2015 was extended through 2016 and 2017. The surcharge generally applies to companies that have more than $250 in corporation business income tax liability. Companies with less than $100 million in annual gross revenue are exempt.
- Created a combined reporting requirement, whereby businesses are considered under common ownership of the same entity or entities directly or indirectly own more than 50% of the voting control of each (i.e. a unitary business). Businesses have various election options that become binding for 10 years following such election.
- Added a $250 capital base tax for financial services companies with a nexus in the state.
- Delaware Competes Act establishes new thresholds that reduces many filing requirements for small businesses.
- Began phasing-in new, single-sales-factor apportionment scheme for corporation income tax purposes.
- Amended filing extension periods for certain business entities including corporations and partnerships.
- Cut corporate income tax rate from 7% to 6.5%.
- Increased the number of businesses that will be charged a corporate franchise tax, by amending the term “corporation” to include LLCs and certain other business entities.
- Expanded state franchise tax to corporations that own property in the state both directly and indirectly through a partnership, joint venture, or other business organization.
- Limited utilization of net operating losses to 72% of net income.
- Began phasing out the franchise tax, with a goal of repealing the tax altogether effective January 1, 2028.
- Created a gross receipts tax, the Commerce Tax, for businesses with a Nevada gross revenue exceeding $4,000,000.
- Amended the Business Profits Tax to give businesses the option of not including a stepped-up basis in assets to address the “phantom tax” issue complained of by businesses within the state.
- Approved the ability of businesses granted a Business Employment Incentive Program grant to convert the grant to a refundable tax credit against state corporate business or insurance gross premiums tax obligations. The credit may also be assigned or sold.
- Cut corporate income tax rate from 6.9% to 6.6%.
- Cut corporate income tax rate from 7.1% to 6.5%.
- Caps for New York Excelsior Jobs Program credits reduced.
- Cut corporate income tax rate from 5% to 4%, giving North Carolina the lowest tax rate of any state levying corporate income tax.
- Expanded addback provision of state corporate income tax to include net interest expense paid or accrued to a related member.
- Amended definition of “sales” in calculating the sales factor for apportionment purposes to exclude dividends and receipts from certain financial swaps and financial derivatives.
- Revised the state’s bank and trust company shares tax to amend the meaning of “conducting business” in the state, increase the tax rate, correct the goodwill deduction retroactively to January 1, 2014, among other future changes.
- Implemented a tax amnesty program for tax obligations delinquent as of December 31, 2015 potentially permitting a 100% waiver of penalties and a 50% waiver of interest. The program includes a 5% penalty for nonparticipation.
- Identified additional circumstances under which the Department of Revenue may waive penalties for delinquent franchise and excise taxes, and updated the formula for calculating quarterly franchise and excise taxes.
- Decreased the penalties for deficient/delinquent estimated franchise and excise taxes from 5% to 2%.
- Permitted certain computer and electronic manufacturing businesses to elect the use of either a) an equally weighted three factor apportionment formula including property, payroll, and sales; (b) a double-weighted sales factor apportionment formula including property, payroll, and double-weighted sales; or (c) a single sales factor that apportions business income for state corporate income tax purposes.
- Capped the total annual state bank franchise tax at $18 million per taxpayer, with the ability to increase that number in future years based on industry performance.
- Disallowed the Department of Revenue to make a nexus determination based solely on the attendance or participation of a company representative at a single trade convention in one year.
- Revised the meaning of whether a transaction has economic substance to largely resemble the meaning under federal law.