There are two very generous tax breaks business owners have relied upon: bonus depreciation and Section 179 expensing. For those unfamiliar with what these are, bonus depreciation currently allows business owners to write off 50 percent of the cost of new capital assets in the year of purchase as long as such assets meet certain criteria.
Section 179 expensing allows business owners to expense up to $500,000 of the cost of qualified capital assets in the year of purchase, but this limit starts to decrease if total capital assets exceed $2 million for the year and is totally eliminated if total capital purchases exceed $2.5 million.
Here’s a brief history. At the end of 2013, business owners and tax professionals started speculating regarding the fate of these tax breaks. Bonus depreciation just expired, and Section 179 expensing was going to decrease the maximum amount that can be expensed to $25,000 with a phase-out limit starting at $200,000.
There was a real fear that bonus depreciation would go away and a less-generous Section 179 expensing would take over. With this uncertainty, business owners were reluctant in making significant capital purchases unless they had to, and some opted to lease assets rather than purchase them. (Leasing versus purchasing is a whole new subject, and we’ll save that for another day.)
That was the rule for most of 2014 until, late in December, Congress and President Obama finally decided to extend these tax breaks retroactive to the beginning of 2014. There was a mad dash of capital purchases during the last couple of weeks in 2014 to take advantage of the extended tax breaks.
Fast-forward to 2015, and it’s déjà vu. The government again waited until the end of the year to renew these tax breaks, but this time there was a twist. The government removed the uncertainty and extended the bonus depreciation until 2019.
Business owners can claim the 50 percent bonus depreciation for qualified capital purchases made in 2016 and 2017, 40 percent bonus depreciation in 2018 and 30 percent bonus depreciation in 2019.
Let’s put a question mark on what the government will do for 2020. In addition, the government has made the limits of Section 179 expensing up to $500,000 permanent. With the uncertainty gone, tax professionals like myself can properly advise their clients in what could result in a signification tax savings without waiting until the last minute.
Please be cautious, because these tax breaks are allowed on your federal tax return only. Some states conform to these rules, some don’t – and some with a slight variation. Make sure to check with your tax adviser to avoid any surprises.
Aside from bonus depreciation and Section 179 expenses, there are a few more tax-related issues that we need to be mindful of, including especially the new deadline for filing tax returns. Due dates for partnership returns, including limited liability companies (most LLCs are taxed as partnerships), are now due March 15 instead of April 15.
Calendar-year corporate returns (C-corporations) will be due April 15 instead of March 15. Due dates for most other types of tax returns remained unchanged.
You have to send your financial information to your tax preparer much sooner this year than previous years if you want your business return filed timely by the due date. If you can’t, you are still allowed to request an automatic six-month extension. Remember, the extension is to request additional time to file but not an extension to pay.
There is also a new deadline to file informational returns such as W-2s and most 1099s. The IRS requires businesses to provide W-2s to all of its employees and 1099-MISC to non-employees on or before Jan. 31. This rule is nothing new. However, in previous years, businesses had until February 28 or March 31 to file these informational returns to the government.
This gave businesses additional time to fix any errors. Starting with the tax year 2016, W-2s and 1099-MISC with an amount noted in Box 7 as non-employee compensation, the filing deadline is Jan. 31, 2017. You can request for an extension, but the IRS has already indicated they will approve extensions on a very limited basis, so no guarantees.
Meeting this earlier filing deadline for informational returns might be a challenge for business owners but can be easily mitigated if they are prepared. Meeting the deadline for filing a W-2 shouldn’t be a problem, since business owners already have their employees’ personal information to properly complete the form.
The issue might be on 1099s. The general rule is that businesses issue a 1099 to any person or entity (sole proprietorships, partnerships and limited liability companies but not necessarily for corporations) whom they have paid over $600 in services.
The problem I have seen regarding 1099s is that business owners do not have the appropriate information to properly issue the 1099. To avoid scrambling to get the information right before the deadline, I would suggest business owners review their records now and have potential 1099 recipients fill out IRS Form W-9.
This form will contain the recipient’s name, address and Social Security number or EIN. This form can be easily downloaded from the IRS website. I would also suggest that if you haven’t already paid these people or entities, obtain a completed W-9 before making the payment. They will be more willing to complete the form knowing that they won’t get paid if they don’t.
There are revisions to the IRS tax code every single year. Your local and state taxing authorities will also have changes of their own. Some revisions will apply to you but a lot more probably won’t.
- CPA, Partner
- Frazer LLP
- Email Ralph Lizardo