Maximize Deductions, Minimize Penalties: 3 Small Business Tax Issues You Should Know For 2016


Nothing is certain but death… and changes in the tax code.

Even if you pay a hefty sum to an accountant to handle your books and tax filings, it's important that every small business owner be aware of key changes in policy that could impact your bottom line. If you're not paying attention to relevant legislation in Washington, you could miss out on a huge deduction—or incur a huge penalty.

Below, we highlight three changes for the 2015 tax year that every small business owner should know about. Even if these issues don't affect you this year, they may well apply in the near future as your business expands.

Affordable Care Act

Small businesses have been mostly exempt from the ACA “employer mandate” requirement to provide health care coverage, but beginning this year several important provisions now apply to businesses that have 51 to 99 employees. If you operate a business with fewer than 50 full-time equivalent employees you have less to worry about—but if you're in the 51 to 99 range, you may face penalties for not offering “affordable” health insurance that provides “minimum value coverage” to full-time employees OR for failing to report to the Internal Revenue Service what type of coverage you have (or have not) provided.

In 2016, the tax penalties for not offering health insurance to at least 95% of full-time equivalent employees are $2,160per employee. These fines can obviously add up quickly.

The ACA defines a full-time employee as someone who works:

  •        A minimum of 30 hours per week, averaged over the course of a month;
  •        OR 130 hours or more per month.

There are multiple reporting requirements under the ACA.  Not only will an employer be required to report the value of the health insurance coverage offered to each employee on his or her W2 once the relevant regulations are issued, but additional and more onerous reporting requirements are already in place. This year, employers must also report—both to the IRS and to the individual employee—details regarding the health insurance offered to employees in 2015. This reporting requirement is exceedingly complex and requires providing:

  • The names and social security numbers of employee’s dependents;
  • The value of the coverage offered to employees, dependents, and spouses;
  • The portion of the premium that the employer paid or would have paid;
  • The portion of the premium that the employee paid or would have paid;
  • And a monthly accounting of whether coverage was elected by the employee and/or any dependents.  

Failing to accurately report this information could result in a fine of $250 for each return for which such failure occurs, not to exceed $3 million. For 2016, employers have until March 31 to provide this information to employees and until May 31 (June 30 if filing electronically) to the IRS.

For more information on ACA requirements, see the IRS Q&A page for employer-shared responsibility provisions.

Also worth noting that some small businesses may be eligible for ACA tax credits. For instance, businesses with fewer than 25 employees that offer employer-sponsored health plans through the Small Business Health Options Program (SHOP) marketplace may qualify for the Small Business Tax Credit, which can help with the expense of offering health coverage to employees.

Section 179

Every now and then, legislative news from Washington is warmly greeted by the small business community. The passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015 in December was one of those occasions. The bill extended many business-related tax rules, including a permanent reinstatement of the research and development tax credit (discussed further below) and the Section 179 deduction.

Section 179 is an important tax benefit that allows businesses to write off the entire expense (up to $500,000) of heavy equipment, computer software, and other depreciable assets that have less than a 20-year life—provided those assets are operated or used by the business more than 50 percent of the time. The write-off comes in the form of a deduction from gross income. Any business that has purchased, financed, or leased new or used equipment within the 2015 tax year can qualify.

Big deal, you might say. Can't equipment always be deducted? Sure, but the great thing about Section 179 is that businesses can deduct the entire expense of small capital purchases immediately, rather than having to depreciate the cost over a number of years. (Although once equipment purchases total $2 million, the allowed deduction will start to phase out dollar-for-dollar—which means no expensing for purchases of $2.5 million or more.)

This tax break could potentially save your business a lot of money. The Section 179 deduction is often used by agricultural and construction companies, but you should check with your accountant to see whether it applies to any of your business purchases. 

Research & Experimentation (R&D) Tax Credit

The PATH Act mentioned above also expanded and made permanent the R&D tax credit. The importance of this measure can't be overemphasized: making the credit permanent will remove uncertainty about future investments, and allow businesses to recoup a portion of the costs expended in pursuit of innovation. The legislation also expanded how credit benefits can be utilized by certain small businesses.

Previously, the R&D tax credit could be used only to offset regular tax, limiting its effectiveness for small to mid-sized businesses and startups subject to alternative minimum tax (AMT). But the PATH Act changes allow businesses with less than $50 million in gross receipts over the past three years to use the credit against their AMT. This "AMT turnoff" means that thousands of small businesses can finally take advantage of the tax credit benefits.

In addition, the bill allows "qualified small businesses"—those with less than $5 million in annual gross receipts and having gross receipts for no more than five years— to use the R&D tax credit (capped at $250,000) to offset the FICA employer portion of payroll taxes. This change will have a huge impact on emerging and early-stage startups, which—as "startup" suggests—are often just launching, have little or no income, and aren't paying federal income taxes.

With these barriers to benefit credit removed, small businesses and startups have an unprecedented opportunity to take advantage of this valuable credit. This is definitely something to bring up with your accountant, even if you don't think it applies to you. The R&D tax credit uses a broad definition of research and development that includes multiple industries and types of activities.

How can we help?

Hopefully the items above will make your prepared to talk shop with your accountant or tax-preparer. (Or simply to due the work yourself.) We're always curious how tax policies are impacting small businesses. Is your business taking advantage of the R&D credit? Have you had to change hiring plans because of the Affordable Care Act? We'd love to know—and figure out if we can help you.

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