Don’t Tax Yourself Post-Busy Season

April 18th has passed, and now it’s time to sit back and relax until the next tax deadline, right? Wrong.

A majority of businesses and individuals put preparing for next year’s deadline at the bottom of their priorities. Did you find yourself scrambling prior to the recent deadline? Did you complete all of the proper forms for tax breaks and incentives? You’re not alone, and there are incentives to get a head start on now, to consider for the next fiscal year.

While you were preparing for your deadline, SC&H Group has been keeping a close eye on tax updates to help you stay ahead of the incentive curve. The following is a roundup of important tax developments that may affect individuals and business owners.

How can small businesses leverage the R&D tax credit to offset payroll tax?

Businesses that increase certain R&D expenses have the opportunity to utilize a tax credit to reduce their income liability. For tax years that begin after December 31, 2015 – eligible small businesses can take advantage of a new option enabling them to apply part or all of their R&D credit against their payroll tax liability, instead of their income tax liability. The option to elect the new payroll tax credit may be especially helpful for eligible startup businesses that have little or no income tax liability. To qualify, a business must have gross receipts of less than $5 million in the current taxable year, and no gross receipts for any taxable year prior to 2012. Under the new rules, an eligible small business with qualifying R&D expenses can apply up to $250,000 of its R&D credit against its payroll tax liability.

The following are the steps an eligible small business needs to consider if choosing to pursue the route of obtaining this R&D credit:

  • Must complete a Form 6765, Credit for Increasing Research Activities, attach it to a timely-filed business income tax return. By completing this step the business claims the payroll tax credit on its employment tax return for the first quarter that begins after it files the return reflecting the election.
    • For example – if a business files an income tax return on April 10, 2017, with a Form 6765 attached reflecting the payroll tax credit election, it would claim the payroll tax credit on its Form 941, Employer’s Quarterly Federal Tax Return, for the third quarter of 2017.
  • If your business files annual employment tax returns, they will need to claim the payroll tax credit on its annual employment tax return that includes the first quarter beginning after the date on which the business files the return reflecting the election.
  • You also must file a Form 8947, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, and attach it to the employment tax return.

Under a special rule for tax year 2016, a small business that failed to choose the payroll tax option, but still wishes to do so, can still make the election by filing an amended return by Dec. 31, 2017.

Fast track settlement program established for small businesses and self-employed tax payers

The IRS announced it has made a permanent program allowing small business and self-employed taxpayers to resolve tax disputes with the IRS more efficiently. The Fast Track Settlement (FTS) program, is designed to help small businesses and self-employed individuals under examination by the Small Business/Self Employed (SB/SE) Division of the IRS. This new program is a customer driven model, created to resolve tax disputes in the early stages; and as a result, audit issues can usually be resolved within 60 days, rather than months or years. Tax payers who choose this option maintain their rights, for example – they still have the right to appeal even if the FTS process is unsuccessful.

2017 luxury automobile depreciation dollar limits and lease income add-backs released.

The annual depreciation and expensing deductions for so-called luxury autos are limited to specific dollar amounts (inflation-adjusted each year). The following is a breakdown of what the IRS has announced for autos and light trucks or vans placed in service during 2017:

  • For autos (not trucks or vans) the dollar limit for:
    • The first year an auto is in service is $3,160 ($11,160 if the bonus first-year depreciation allowance applies);
    • The second tax year, $5,100;
    • The third tax year, $3,050;
    • Each succeeding year, $1,875.

These dollar limits are the same as those that applied for autos first placed in service in 2016

  • For light trucks or vans (passenger autos built on a truck chassis, including minivan and sport-utility vehicles (SUVs) built on a truck chassis) the dollar limit for:
    • The first year the vehicle is in service is $3,560 ($11,560 if the bonus first-year depreciation allowance applies);
    • The second tax year, $5,700;
    • The third tax year, $3,450;
    • Each succeeding year, $2,075.

For a light truck or van placed in service in 2017, the dollar figures are the same as for such vehicles first placed in service in 2016, except that the third-year amount is $100 higher.

A taxpayer that leases a business auto may deduct the part of the lease payment representing its business/investment use. If business/investment use is 100%, the full lease cost is deductible. With this in mind auto lessees cannot avoid the effect of the luxury auto limits, however, taxpayers must include a certain amount in income during each year of the lease to partially offset the lease deduction. The amount varies with the initial fair market value of the leased auto and the year of the lease, and is adjusted for inflation each year. The IRS has released a new inclusion amount table for autos first leased during 2017.

IRS delays employer deadline to provide small employer HRA notice to employees.

Generally effective for years beginning after December 31, 2016, an eligible employer— an employer with fewer than 50 full-time employees (including full-time equivalent employees), that does not offer a group health plan to any of its employees—may provide a qualified small employer health reimbursement arrangement (HRA) to its eligible employees, and such an HRA won’t be treated as a group health plan.

Thus, a qualified small employer HRA isn’t subject to the tax law’s group health plan requirements, including the portability, access, and renewability requirements of the Affordable Care Act (ACA, also known as Obamacare). HRAs are arrangements under which an employer agrees to reimburse medical expenses including health insurance premiums up to a certain amount per year, with unused amounts available to reimburse medical expenses in future years. The reimbursement is excludable from the employee’s income.

The qualified small employer HRA rules generally require an eligible employer to furnish a written notice to its eligible employees at least 90 days before the beginning of a year for which the HRA is provided (or, in the case of an employee who is not eligible to participate in the arrangement as of the beginning of such year, the date on which the employee is first so eligible).

However, under interim guidance from the IRS, an eligible employer that provides a qualified small employer HRA to its eligible employees for a year beginning in 2017 isn’t required to furnish the initial written notice to those employees until after further guidance has been issued by the IRS. That further guidance will specify a deadline for providing the initial written notice that is no earlier than 90 days following the issuance of that guidance.

Tax Reform

In closing, comprehensive tax reform is being discussed in Congress, with evolving strategies, goals and hurdles for Congress to consider. Ideas such as corporate tax rate reduction, immediate expensing of fixed asset acquisitions, border adjustment taxes, consumption taxes, reducing or eliminating the payroll tax, stripping many individual and business deductions from the Internal Revenue Code and being proffered, but there is no definitive path forward at this time.

SC&H Group is monitoring the discussions, and we’d love to hear from you with questions or if you need any help navigating these changes – you can reach out to us here. We look forward to talking!