Also see: An In-Depth Article: 2016 Year-End Tax Planning for Individuals.
             

In-Depth Article: 2016 Year-End Tax Planning for Businesses

(Parker Tax Publishing November 2016)

The second installment of Parker's annual two-part series on year-end tax planning recaps 2016's major changes affecting business, and strategies clients can use to minimize their business' 2016 tax bill. The online version of the article includes links to sample year-end client letters for individuals and businesses.

CLIENT LETTERS for both individuals and businesses are available online now:

Practice Aid: See CPA Client Letter: Year-End Tax Planning for 2016 for BUSINESSES. and CPA Client Letter: Year-End Tax Planning for 2016 for INDIVIDUALS.

Several significant changes took effect in 2016 that will affect a business's federal tax filings in 2017. As the year draws to a close, practitioners will want to review these filing changes with their clients, as well as get an estimate of projected taxable income or loss to see what actions can be taken to reduce a client's tax bill. It's also important to ascertain that enough estimated taxes have been paid to avoid any penalties on underpayments.

The following article on year-end planning for businesses is the second of two installments in Parker's year-end tax planning series. An in-depth look at year-end planning for individuals appeared in the October 7, 2016, issue of Parker's Federal Tax Bulletin.

I. Key Changes for 2016

Accelerated Filing Deadlines for Forms W-2, W-3, and Form 1099-MISC

Forms W-2 and W-3. New for tax year 2016, the deadline for filing both electronic and paper Forms W-2 to employees and to the Social Security Administration (SSA) is January 31, 2017. Previously, businesses had until the end of February to file paper Forms W-2 with the SSA and until the end of March to make electronic filings. In addition, the January 31 deadline also applies to Forms W-2AS, W-2GU, W-2VI, W-3 and W-3SS.

Form 1099-MISC. The deadline for filing Form 1099-MISC where a business is reporting an amount in Box 7, Nonemployee Compensation, has also been moved up to January 31, 2017. If a business is not reporting an amount in Box 7, the deadline remains February 28 for paper filings and March 31 for electronic filings.

Extensions for Filings. Extensions of time to file Form W-2 with the SSA are no longer automatic. For filings due on or after January 1, 2017, a business may request one 30-day extension to file Form W-2 by submitting a complete application on Form 8809, Application for Extension of Time to File Information Returns, including a detailed explanation of why the additional time is needed and signed under penalties of perjury. The IRS will only grant the extension in extraordinary circumstances or catastrophe. This does not affect extensions of time to furnish Forms W-2 to employees. An extension of time to furnish Forms W-2 to employees may be requested by sending a letter to the IRS, but if an extension is for more than 10 employees, the request must be filed electronically. Requests for an extension of time to furnish Forms W-2 to employees are not automatically granted. If approved, an extension will generally be for no more than 15 days from the due date, unless the need for up to a total of 30 days is clearly shown.

Form 8809 may also be used to request an extension of time to file Form 1099-MISC, as well as other Forms 1099.

Increased Penalties for Failure to Timely File Certain Information Returns

In addition to the accelerated filing deadlines for 2016 Forms W-2, Forms W-3, and Forms 1099-MISC, higher penalties apply for (1) the failure to file correct Forms W-2 by the due date; (2) the intentional disregard of filing requirements; (3) the failure to furnish Forms W-2; and (4) the intentional disregard of payee statement requirements.

In addition to applying to Forms W-2, W-3, and 1099-MISC, other common forms subject to these increased penalties include: Schedule K-1 (Forms 1041, 1065, and 1120S); Form 1098, Mortgage Interest Statement; Form 1098-E, Student Loan Interest Statement, Form 1099-C, Cancellation of Debt; Form 1099-INT, Interest Income; and Form 5498, IRA Contribution Information.

For each information return or payee statement with respect to which a failure occurs, the penalty has been increased from $100 to $250, and the maximum penalty that may be imposed has been increased from $1,500,000 to $3,000,000.

For taxpayers who intentionally disregard the filing requirements for information returns and payee statements, the per-failure penalty has been increased from $250 to $500.

Change in Return and Extension Due Dates for C Corporations and Partnerships

In general, C corporations with tax years ending in 2016 now have an extra month to file their federal income tax returns. Such returns are due by the 15th day of the fourth month following the close of the tax year, rather than the 15th day of the third month following the close of the tax year. Thus, 2016 calendar-year C corporation federal income tax returns are due April 18, 2017, due to April 15 falling on a Saturday and Monday, April 17 being Emancipation Day in the District of Columbia.

A special rule exempts C corporations with fiscal years ending on June 30 from this change until tax years beginning after December. 31, 2025. Thus, the filing deadline for such corporations will remain September 15 until 2026 (when it will change to October 15).

Along with the tax return deadlines being changed, many of the automatic extension periods have also changed. For calendar year C corporations, the new rules provide a five-month automatic extension for returns for tax years ending after 2015, and ending before 2026. The extension period is a month shorter, but results in the same September 15 extended deadline for a calendar year C corporation because of the new due date for C corporation returns (i.e., April 15).

For fiscal year C corporations with tax years ending on dates other than June 30, the length of automatic extensions remains unchanged at six months. For fiscal year C corporations with tax years ending on June 30, a special seven-month automatic extension applies for tax years beginning after 2015 and ending before 2026.

Partnerships with tax years ending in 2016 are now required to file their federal income tax returns by the 15th day of the third month following the close of the tax year, rather than the 15th day of the fourth month following the close of the tax year. Thus, 2016 calendar-year partnership federal income tax returns are due March 15, 2017.

While partnerships were previously allowed a five-month extension of time in which to file their tax returns, they are now allowed a six-month extension so that the extended due date is the same as under prior law (i.e. September 15).

Observation: The filing deadlines for S corporation returns remain unchanged, meaning that partnership and S corporation returns will now share the same due dates.

Form 990 Extensions Consolidated to Single, Six Month Extension

While the due date for Form 990, Return of Organization Exempt from Income Tax, remains the 15th day of the fifth month after the organization's year end, tax-exempt organizations can now receive a single automatic six-month extension rather than having to apply for a three-month extension and then apply for a second three-month extension.

Planning for Revised Partnership Audit Procedures

The Bipartisan Budget Act of 2015 repealed the TEFRA partnership audit procedures and replaced them with a single centralized audit system. While some partnerships may elect out of the new regime, most partnerships will be subject to the new rules for partnership tax years beginning after 2017. Under the new system, the IRS will examine a partnership's items of income, gain, loss, deduction, credit and partners' distributive shares for a particular year of the partnership (i.e., the reviewed year). Any adjustments are taken into account by the partnership, and not the individual partners, in the year that the audit or any judicial review is completed (i.e., the adjustment year). Thus, it's possible for current year partners to be liable for mistakes or errors committed in prior years when they were not partners. However, the new rules provide certain exceptions that can allow current year partners to escape such liability, including an election that must be made no later than 45 days after the date of a notice of final partnership adjustment. The bottom line is that partnership agreements should be reviewed and revised to take into account the new audit rules, and that is best done sooner rather than later.

II. Strategies to Reduce Business Clients' Taxable Income

Depending on a business client's situation, the following are some options that a practitioner may want to discuss to help the client reduce taxable income.

Code Sec. 179 Expense Deduction and Bonus Depreciation

Two of the biggest deductions available to a business are the Code Sec. 179 expense deduction and bonus depreciation. For 2016 returns, the maximum amount of qualifying property that can be expensed is $500,000. That amount is reduced one-for-one to the extent qualifying property purchased exceeds $2,020,000, up from $2,000,000 for 2015 returns.

New for 2016 tax returns, air conditioners and heating units now qualify for the Code Sec. 179 expense deduction.

The 50 percent bonus depreciation deduction combined with the Code Sec. 179 deduction can provide a business with significant reductions in taxable income. For example, if a business purchases $800,000 of qualifying equipment, the total first year deduction would be $680,000 ($800,000 - $500,000 (maximum Code Sec. 179 deduction) - $150,000 (50% depreciation x remaining basis of $300,000) - $30,000 (normal depreciation of 20% x remaining basis of $150,000).

Fiscal year taxpayers can retroactively elect to take the 50-percent bonus depreciation deduction for qualified property placed in service during the 2015 portion of fiscal years beginning in 2014. Guidance on this election, issued in Rev. Proc. 2016-48, also addresses carrying over disallowed Code Sec. 179 deductions for qualified real property and applies to taxpayers who filed their 2014 returns (or 2015 short year returns) before the enactment of last year's tax extenders bill on December 18, 2015.

Research Credit More Attractive for Smaller Businesses and Start-Ups

Beginning in 2016, businesses with $50 million or less in gross receipts may claim the Code Sec. 41 research and development (R&D) credit against alternative minimum tax (AMT) liability. Also beginning in 2016, qualified small businesses ($5 million or less in gross receipts and no gross receipts for any tax year preceding the five-tax-year period ending with such tax year) may claim the R&D credit against their payroll tax liability.

Vehicle Deductions and Substantiation

Deductions for vehicle-related expenses are an important part of most business tax returns. Whether such deductions pass scrutiny with the IRS depends on whether the business complies with the strict substantiation requirements necessary for such deductions. Practitioners should ensure that their business clients' tax records include the following information with respect to each vehicle used in their businesses: (1) the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance); (2) the amount of mileage for each business or investment use and the total miles for the tax period; (3) the date of the expenditure; and (4) the business purpose for the expenditure. The following are considered adequate for substantiating such expenses: (1) records such as an account book, diary, log, statement of expense, or trip sheets; and (2) documentary evidence such as receipts, canceled checks, bills, or similar evidence.

Records such as an account book, diary, log, statement of expense, or trip sheet are considered adequate to substantiate the element of an expense only if the records are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred.

Accountable Plans

By using an accountable plan, a business can reimburse employees for business expenses such as travel, meals, entertainment and other costs without reporting the reimbursements as taxable compensation. This can save the business employment taxes on such payments. However, in order for a plan to be considered an eligible reimbursement plan, it must satisfy (1) a business connection requirement; (2) a substantiation requirement; and (3) have a requirement to return amounts in excess of substantiated expenses.

Fringe Benefits

A business may want to consider using benefits rather than higher wages to attract employees. Certain fringe benefits paid under a qualified plan are deductible by the business and are not taxable as compensation to the employee, thus saving a business the employment taxes it would pay on the additional compensation. Retirement plans are particularly attractive to potential employees. By starting a retirement savings plan, taxpayers not only help their employees save for the future but also attract and retain quality employees. In addition to providing deductions to the business, a tax credit is available to small employers for the costs of starting a retirement plan.

S Corporation Salaries

Because some S corporations would rather distribute profits to its shareholders than pay compensation and the resulting employment taxes on such compensation, the IRS specifically targets this area when auditing an S corporation. Thus, if an S corporation is making money, reasonable compensation must be paid to owner shareholders. Failing to do so can lead not only to tax deficiencies, but penalties and interest on those deficiencies as well. The key to establishing reasonable compensation is determining what type of work the taxpayer did for the S corporation as an employee-shareholder. For clients in this situation, practitioners need documentation of the factors that support the salary the client is being paid.

Safe Harbor for Deducting Remodeling Costs Incurred by Retail and Restaurant Businesses

Late last year, the IRS issued Rev. Proc. 2015-56, which provides a safe harbor that allows a retail or restaurant business to deduct 75 percent of the qualified costs incurred in performing a "remodel-refresh" project (i.e., amounts paid for remodel, refresh, repair, maintenance, or similar activities performed on a qualified building as part of a remodel-refresh project) on a qualified building. The business must capitalize the remaining 25 percent of the costs and recover them through depreciation. Previously, the deductibility of such costs were controversial and the subject of scrutiny in an audit. There are a number of conditions that must be met in order to use this safe harbor. For example, the revenue procedure lays out the procedures for obtaining an automatic consent to change a method of accounting that must be made.

Increase in De Minimis Repair Amounts That May Be Expensed

Under a safe harbor in the repair and capitalization rules that took effect in 2014, certain amounts that a business pays for tangible property acquired or produced during the tax year may be deducted, rather than capitalized, provided certain requirements are met and the cost of the property does not exceed a de minimis amount. In Notice 2016-82, effective for 2016 and later years, the IRS increased the de minimis amount that is deductible by such businesses from $500 to $2,500.

The new $2,500 threshold applies to items substantiated by an invoice. As a result, a business may be eligible to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions. In order to take advantage of the increase in the de minimis limitation, an election must be made and the business's accounting procedures may need to be modified.

Energy Efficient Home Credit

Eligible contractors have one last chance to claim the energy efficient home credit under Code Sec. 45L. A contractor eligible for the energy efficient home credit is any person that constructs a qualifying energy efficient home. The contractor must own and have a basis in the home during its construction. A home qualifies for the energy efficient home credit only if it meets certain energy saving standards. There are two different energy saving standards and the amount of the credit depends on which standard is met. The two standards apply as follows: (1) constructed homes and manufactured homes that meet a 50 percent energy efficient standard qualify for a $2,000 credit; and (2) manufactured homes that meet a 30 percent energy efficient standard qualify for a $1,000 credit. The credit expires on December 31, 2016.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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