2017 Year-End Tax Guide for Businesses

2017 Year-End Tax Guide for Businesses by Nadine Riley*Due to the weekly changes and updates to the proposed tax law, some of this article’s content may have changed. Once the law is passed, we will update you.

{7:06 minutes to read} Now that each chamber of Congress has met, i.e. the House and the Senate, we now await the final verdict regarding how they will reconcile their differences and decide what will be the new tax law.

Overall, based on the proposed changes, the tax rate for businesses is likely to be lowered. Below I recap three (3) proposed areas of change that may impact you and your business:

  1. The proposed tax rate for most corporations is to be 21% from both sides, but each chamber has a timing difference regarding the effective date.
  2. Some pass-thru entities (such as partnership/LLC, S-Corp, etc.), the income from the company passes through to the owner and is taxed on the individual’s tax return. We may see a change in the manner in which income will be taxed. The proposal has a 2-tier tax on the pass thru income; you will be able to deduct your first 20 percent of income tax-free, then the remainder will be taxed at the regular tax rate (i.e. the individual’s tax rate). Do pass-thru entities still offer great tax advantages when compared to corporations? Under the proposed law, generally speaking, maybe not?
  3. Some types of assets may be expensed on the date they are put into use, while others will be capitalized (expensed over a period of time, usually years).

Please keep in mind that the above is not yet law. There is still time to plan for 2017 under the current law.

It is crucial for us as business owners to take a step back and review the year-to-date financials of our businesses. This is helpful to plan for the future and also effectively incorporate tax planning. There continue to be changes from one year to the next. The general rule is, when the tax rate is low we defer expenses to boost (increase) income; on the other hand, when tax rates are high we defer income and boost expenses. Change is inevitable but with preparation, we can embrace it.

Here are seven (7) areas to consider as a business owner that may impact your tax expense (from a business and a personal viewpoint):

  1. Basis: Keep track of your basis. Though your company is a separate legal entity, the financial outcome of the company may affect your tax obligation at the personal level. Generally, the owners (partner) may need enough basis to deduct a loss. For example, due to basis limitation, some pass-thru entities with losses may not be deductible on the owners’ (partners’) tax returns.
  2. S-Corporation (S-Corp): Per the IRS, shareholders are generally required to take a salary (via payroll) from the company. It is recommended that at year-end you review your salary, distribution and the business profit, since this will impact your overall tax liability.
  3. Home Office Deduction: Many businesses are operated within our homes. If you use your home for business, you may be eligible to take a portion of your home that is used exclusively for business as a deduction. The deduction is limited to the current year’s business income.
  4. Prepay some expenses in 2017 if you believe your income has increased greatly. This will help to reduce the 2017 tax impact for cash basis taxpayers.
  5. Research and Development Credits: Under the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), qualified small businesses may elect to claim a portion of their research credit as a payroll tax credit against their employer Federal Insurance Contributions Act (FICA) tax liability, rather than against their income tax liability. The credit is available for certain research activities and with qualified research expense. The credit can generally be claimed whether the business has a net income or net loss.
    • While this is a lucrative credit, the rules are quite stringent on what is considered eligible activity and expenses. It is best to work with a specialist in this area. If you don’t already have one, I have a few I can introduce you to.
  6. Depreciation: Making the right election for depreciation expense as it relates to those assets placed into service in 2017 is still a great way to reduce your taxable income.
  7. Payment Made to Non-Employees: If you paid an individual or a company for service provided (amounting to $600 or more), please obtain a completed W-9 form. If you are filing any Forms 1099-MISC and reporting an amount in Box 7, Nonemployee Compensation, the deadline for filing these forms has been moved up to January 31, 2018.

Lastly, please keep in mind that having a business loss does not mean there is no tax obligation. Many states impose a franchise tax on companies that incorporate or do business in the state. The term doing business in the state can be interpreted differently per state. Doing business in the state could result from just having a staff, a partner, a vendor business, etc. located or residing in that state.

It is true that tax reporting does vary from one business to the next, so it would be unlikely that all reporting affecting your business will be covered in this article. However, I do hope you find a strategy that you believe may apply to you and/or your business. When in doubt, simply send me an email or call. Please keep in mind that some questions may warrant a tax planning consultation, for which there is a cost.

Thank you for reading and I look forward to seeing or hearing from you over the next few weeks.

Nadine Riley, CPA
Founder, Masterpiece Accounting Group
Phone: (212) 966-9301
Email: info@mpagroupllc.com