We spoke with Mike Kelley, a CPA/ABV, and CVA with Wheeler Fairman & Kelley Certified Public Accountants in Austin, Texas. Kelley specializes in tax consulting and compliance for individuals, corporations, partnerships and trusts, and is a member of the Institute of CPAs, the Texas Society of CPAS, and the National Association of Certified Valuation Analysts.
A tax extender (read our December 22, 2015 update on tax extenders here) is an extension of a temporary tax break that Congress can choose to – or choose not to – renew annually. Each year, tax extenders can have a big impact on the taxes small businesses owe. The problem is that they fluctuate each year, and Congress doesn’t always release details about how much a business can deduct for the tax year until the last minute.
There are a wide variety of tax breaks that Congress can extend each year, from tuition deductions to mortgage debt relief. Two tax breaks that Kelley says small businesses should be aware of are the bonus depreciation and Section 179.
Bonus depreciation got started after the dot-com bust as a way to prompt businesses to buy new assets and stimulate the economy. When you buy new business-related items like computers, desks, or other equipment, you can write off half of that in the year you placed the new item in service.
Sec. 179 also applies to business purchases, and includes both new and used items. For 2014, the dollar limits for Sec. 179 were $500,000. That meant small business owners could “deduct the full costs of up to $500,000 on most depreciable assets that have less than a 20-year life, such as a new or used computer, equipment, vehicles, furniture, and more,” according to Entrepreneur.
Without Congress taking action, however, the Sec. 179 deduction will not be $500,000, as it was for 2014 taxes – it will revert to $25,000. Bonus depreciation amounts can also fluctuate, Kelley says. Some years the bonus is 50 percent, and in some years it’s been 100 percent.
“That’s a huge difference,” Kelley says of the depreciation amounts. “I have some clients that are small businesses and are hoping they will be able to write off computers they bought because that investment went over $25,000. But we don’t have guidance from the government yet, so I don’t know if they will pass the extenders.”
Affordable Care Act
The ACA added a significant amount to the tax code, and with its implementation, many employers can now face tax penalties for not providing health insurance to employees or for not reporting to the IRS about what kind of coverage they are providing.
As of Jan. 1, 2015, businesses with more than 100 employees must provide health insurance to at least 70 percent of their full time workers, or they will face a tax penalty of up to $2,000 per employee, reports Business News Daily. For some states, businesses with between 59 and 99 employees will have to provide health insurance to full time employees beginning Jan. 1, 2016. Click here for more on what defines large and small groups and how the insurance requirements differ between the two.
“2014 was the first penalty year for the ACA,” Kelley says. “This year the penalty will go up even more….the biggest takeaway for clients is that we as CPAs cannot know the tax code and the ACA at the same time. Businesses should work with insurance brokers as well as a
CPA. I’d say to a small business owner ‘let’s get this conversation started, and I’ll point you toward the right people to talk to when it comes to insurance requirements and questions’.”
While Kelley says he’s frustrated that Congress has not yet decided whether or not to keep the tax extenders as they were last year, he said there are some best practices that cash basis business taxpayers should be aware of.
“In general, you want to accelerate expenses, and defer income,” Kelley says. “If you know you’re going to need new equipment, buy it before the end of the year and place it in service in order to get a deduction for depreciation. And if you wait to send out invoices toward the end of the year, you may receive income in the early part of the following year instead of at the end of the current year.”
Beyond that, it makes sense for every business owner to work with a CPA.
“I don’t ever tell anyone the same thing – it depends on each situation, client by client,” Kelley says. “I work with each client around their needs and goals.”