Tax planning for small business owners in 2017

Tax laws change every year, often providing new opportunities for business and personal planning that can save money and improve our overall financial results. This year is no exception. While there are no major changes to tax law affecting small business owners this year, there are a number of more subtle developments in tax procedure that open new financial possibilities for businesses that approach the topic with proper planning.

There were fewer but more significant changes to small business tax law for 2017. This article does not attempt to summarize or even list every change but rather highlights a few of those issues that are most likely to have a substantial impact on small business owners. The intent is to stimulate some initial thoughts about the potential benefits of tax planning and trigger a discussion between the business owner and tax adviser.

Cost of living adjustments

The most noticeable change for 2017 involves the indexing of a broad range of tax limits ant thresholds. This is noteworthy because we had no cost of living adjustments for 2010 or 2011. In effect, we will feel the impact of three years’ worth of price increases all at once.

After two years of relatively stable pricing, some economists expect to see more inflation in 2017. Increasing tax limits and thresholds would seem to contribute to this inflationary thinking. Most of the changes serve to decrease taxes while others ultimately serve to increase taxes due. Business managers may wish to pay extra attention to the overall net impact of changing dollar amount transactions on their bottom line in early 2017.

The changes will be immediately noticed in wage tax withholding and employee benefit plans including 401(k) retirement savings and Health Savings Accounts.

Change of filing dates

The due dates for various types of tax returns are changed. Check the new due date for each type before making assumptions.

Health benefits

IRS gives businesses until March 31, 2017 to take action to restore some types of health benefits that ere outlawed by the Affordable Care Act. Properly used, these can save more than $1,000 per employee per year in taxes. It makes sense for most small business owners to take a fresh look at their health plan and consider all of the old and new options.

Tax shelters

President Donald Trump raised interest in strategies that reduce or eliminate federal income taxes. These strategies are available to all small business taxpayers. The only question is how much effort and expense do small business owners want to put into a tax reducing strategy. This should be considered in relation to your overall financial plan and circumstances.

Independent contractors and employment tax liabilities

The IRS has known for more than a decade that a third of small businesses mis-classify employees as subcontractors to avoid collection of wage taxes. The percentage is even higher in certain industries. The cost to the Treasury in lost tax revenues is enormous, possibly topping $3 billion dollars per year. In order to boost tax revenues, enforcement of independent contractor mis-classification is a high priority item.

The cost of defending a wage tax audit and the potential tax adjustments (plus interest and penalties) represent a major financial risk to small businesses that use independent contractors. Some small business owners that considered themselves safe from this type of audit

Affected businesses may want to consider a voluntary compliance review and action plan. Back  the IRS announced details of the Voluntary Classification Settlement Program. In short, the program allows taxpayers to settle the issue with a payment of 10% of the wage taxes and completely avoid interest and penalties.

The Treasury Department has gained focus and momentum over the past decade on closing this area of non-compliance to generate more wage tax revenue. The noose is getting tighter for businesses that use contractors in the place of employees. If you choose to avoid voluntary settlement then at least consider the financial effects on the business of an increasingly likely audit in the next few years.

Get a fresh start

The IRS recognizes that some well-intentioned and honest business owners ran into trouble paying their taxes during the recession. When money is tight the tax bill is often the last item to be paid.

Self-employed taxpayers with gross receipts less than $500,000 and net income less than $100,000 are eligible for a streamlined offer in compromise program to settle tax bills under $50,000 when the entire amount of tax cannot be paid. The IRS looks at the taxpayer’s assets and income to determine whether all or part of the tax can be paid as a lump sum or in installments. Settlement of an outstanding tax debt through a compromise offer allows a business owner to move forward with a new start without the financial and emotional burdens of a looming tax problem.

The threshold for filing tax liens against taxpayers is now higher; in most cases a business owner is now safe from liens if the unpaid tax balance is less than $10,000. Previously the threshold was $5,000 tax due. This change in procedure is important because a significant portion of small business tax delinquencies fall in the $5,000 to $10,000 range.

If a lien has been placed, the taxpayer now stands a better chance of having the lien removed to help restore business credit. Paid liens will be withdrawn at the taxpayer’s written request under an expedited program. Unpaid liens can still be withdrawn if the taxpayer agrees to a direct debit payment plan.

Small businesses with tax debts should now consider the tangible benefits possible from the ability to obtain additional business and personal credit in comparison to the manageable cost of a tax installment payment plan.

Business travel

Business travel expenses have become a highly audited item, especially for self-employed individuals. Businesses may elect to use a standardized daily expense allowance rather than record each travel expense transaction. Besides simplifying record keeping requirements, adoption of this method provides workers with an incentive to economize and save money during business travel.

Financial and estate planning

The conventional advice is that estate tax strategies are no longer necessary part of financial planning for most small business owners. The smarter approach may be to ‘go slow’ and not abandon trusts and estate planning tools already in place. In other words, there may not be any need to hire an estate planning attorney this year but expect the issue to resurface in the future. Money spent in the past to preserve family wealth may still prove valuable in the future.

More information

The IRS.gov Web site provides more information on all of the topics mentioned. In particular the news page and the small business page may be useful. The IRS also has a separate page to address the small business contractor vs. employee issue.

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20 Rules for Operating a Health Reimbursement Arrangement (HRA)

Update January 30, 2017: No fee Health Reimbursement Arrangements for small businesses are available to qualifying businesses. See Freedom Benefits for business qualification information. A regular fee applies to other businesses. Setup time is 24 to 48 hours once I have the employer information required. Claim administration is typically about $100 per employee per year but varies depending on the accounting and payroll system used by the employer. In some cases where the employer uses QuickBooks Online accounting and a compatible payroll system then the claim administration may also be free.

Updated December 30, 2016 – If your small business reimburses employee health care costs, you need to be aware that tax laws have changed effective July 2015 and again in December 2016 and there may be actions necessary right now to amend your reimbursement arrangement and avoid potentially severe tax liabilities as a result of the Affordable Care Act (ACA). The IRS issued a series of rules and notices from 2013 to 2016 that detail the new tax rules.

HRAs must properly incorporate primary health insurance or risk substantial tax penalty. This following expanded list of 20 items may help small business employers and their tax advisers gain a better understanding of the new excise tax rules and how to avoid them.

Please note that if you are operating a company with one participant in the health plan or where husband and wife are the only health plan participants, many of these 20 items do not apply. Please read the note at the end of the article first.

Affordable Care Act prescription bottle on blue with sethescope and pills.

The Affordable Care Act dramatically changes the tax rules for employers who reimburse employee medical expenses.

 

1. The federal government considers your informal employee health care payment arrangement to be subject to the extensive legal requirements of a “group health plan” (even if you did not intend it so or think of it that way). The legal requirements include exposure under the requirements of the Employee Retirement Income Security Act of 1974 for employee welfare benefit plans.

2. To avoid taxes and legal liabilities, the HRA must either be integrated with an employer-provided ACA-compliant group health insurance plan or must comply with the provisions of  Section 18001 of the 21st Century Cures Act.

3. The HRA must be in writing unless you are reimbursing insurance costs only.

4. Employers who do not offer group health insurance may now reimburse the cost of individual health insurance or out-of-pocket medical expenses.

5. Where an employee is covered by their spouse’s plan, employers may not reimburse the cost of the spousal coverage.

6. The HRA may cover employees who are not covered by the employer’s group insurance plan, including the spouse or dependents who are not on the group health insurance.

7. For purposes of determining whether a violation of ACA market reforms has occurred, it does not matter whether the reimbursements were made on a pre-tax or after tax basis.

8. Taxation of health benefits to the employee is a separate issue from the applicability of excise taxes on the employer. The normal treatment is to exclude the benefit from employee income but the benefit would be taxable compensation in some cases where the employee does not maintain minimum essential coverage. This article does not cover taxation of benefits under an HRA.

9. Employers who give taxable compensation bonuses may make reference to employee health care costs if that is the purpose of the bonus arrangement.

10. The minimum statutory tax penalty for unintentional violation of ACA market reform law not modified by the 21st Century Cures Act is 10% of the amount the employer paid. The maximum amount of penalty is $100 per employee per day of violation, plus (if applicable) wage taxes plus (if applicable) interest and penalties.

11. Stand-alone HRAs may reimburse up to $4,950 for an eligible employee and $10,000 for an employee with family coverage.

12. If an employees is not covered for the entire year, the limitations are prorated.

13. A HRA must be communicated to employees separately from the insurance plan.

14. Employees may not contribute to a HRA. All contributions must be employer paid.

15. HRAs are effective in expanding coverage at a higher overall cost. HRAs are not effective in reducing the overall cost of employee health benefits. In fact HRAs may someday trigger the “Cadillac tax” provisions for rich health benefits in the future because they increase the total health benefits for employees (unless this tax s repealed as expected).

16. Improper reimbursements trigger severe excise penalties under section 4980D of the Internal Revenue Code. This penalty is $100/day excise tax per applicable employee (which is $36,500 per year, per employee). Smaller penalties may apply if the violation was not due to willful neglect. The penalties must be self-reported beginning in 2014 yet many employers may not even realize that they are in violation so the likelihood of interest and late payment penalties further compounds the problem.

17. If the employer is subject to the smaller 10% excise penalty for one year and then still does not correct the HRA plan for 2016, there would likely be a greater likelihood that the higher severe penalty would be assessed for the same repeat violation in the second year.

18. Employers that had a medical reimbursement plan prior to July 1, 2015 and have not updated their plan this year may unknowingly be subject to the excise tax. Apparently there are many small firms that don’t even know about this problem).

19. Employers affected penalties in #16 above should act as quickly as possible to terminate or amend their HRA plan and make appropriate payroll tax adjustments if necessary to avoid additional lateness tax penalties.

20. Excise tax penalties under IRC 4980D are self-reported on IRS Form 8928. The first small business penalty taxes were payable March 16, 2016 by corporate filers on violations occurring from July to December 2015.


 

The good news: For most small businesses, it is easy and inexpensive to get experienced professional help with the setup and documentation of a self-administered HRA. I’ve acted as adviser to help set up or amend these benefits for dozens of small businesses and nonprofit organizations across the U.S. since the 1980s. In many cases the work can be accomplished as a flat fee concierge advisory service. I can provide sample HRA plan documents to qualifying businesses but you may wish to have an attorney review them; I cannot provide legal services.


 

Disclosure and clarification

The advice in this article is simplified for the purpose of clear communication regarding most small businesses. As with most aspects of tax and benefit law, there are special circumstances that may not be addressed in this general information. This article ignores the possibility of uninsured ACA-compliant health plans or grandfathered health plans simply because these are not common.

*Many of these points do not apply to one participant health plans or small C corporations. A husband and wife C corporation might be operated as a two employee company for other purposes but the HRA could be designed as a one person health benefit plan with dependent (the other employee/spouse) coverage. Then, as a one person health plan the HRA would be exempt from classification as an employer-provided health plan as discussed in IRS Notice 2015-17 that clarifies Code § 9831(a)(2) provides that the market reforms do not apply to a group health plan that has fewer than two participants who are current employees on the first day of the plan year. Accordingly, an arrangement covering only a single employee (whether or not a shareholder-employee) generally is not subject to the market reforms whether or not such a reimbursement arrangement otherwise constitutes a group health plan. In the case, the “old rules” apply and the HRA could be operated in the same manner as before ACA. It is still important that the plan documents support the fact pattern presumed in this discussion.

The term “health insurance” in this discussion refers to primary ACA-compliant major medical insurance also known as “minimal essential coverage”.

 

References

26 U.S.C. 4980D Failure to meet certain group health plan requirements

29 CFR 2510.3-1(j) http://www.gpo.gov/fdsys/pkg/CFR-2010-title29-vol9/pdf/CFR-2010-title29-vol9-sec2510-3-1.pdf

IRS Notice 2013-54 http://www.irs.gov/pub/irs-drop/n-13-54.pdf

IRS Notice 2015-87 https://www.irs.gov/pub/irs-drop/n-15-87.pdf

IRS Notice 2016-4 https://www.irs.gov/pub/irs-drop/n-16-04.pdf

Application of Affordable Care Act Provisions to Certain Healthcare Arrangements https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-2013.pdf

US Department of Labor, FAQs about Affordable Care Act Implementation (Part XXII) http://www.dol.gov/ebsa/faqs/faq-aca22.html

Why ACA Employer Mandate Rules Need More Guidance” by Alden Bianchi in Employee Benefit News, 12/25/2014.

TD 9705: Minimum Essential Coverage and Other Rules Regarding the Shared Responsibility Payment for Individuals, 11/26/2014  (How employer contributions to HRAs affect calculation of affordability and exemption from individual mandate penalty) https://s3.amazonaws.com/public-inspection.federalregister.gov/2014-27998.pdf

 

Related topics:

The changing role of small business HRAs

Small business health plan compliance checklist

Taxation of health insurance in 2014

21st Century Cures Act

Bad tax advice and gobblygook

It has always been tough for small business owners to get basic straightforward information they need to avoid tax problems. But this year I notice the problem is magnified many times by a flood of misinformation and gobblygook published on blogs and promoted in social media, This is especially true for issues surrounding the Affordable Care Act. I hate to say it but if a firm is promoting their product or service then the information published is inherently conflicted and should be suspect to bias in presentation. The moral is “don’t believe everything you read on the internet” – that includes tax advice on flashy corporate web sites.

I’ve lost count of the number of bad tax advice articles I’ve seen this year on this online topic alone. Many of the errors are noted in earlier posts in this blog. Some were honest errors. I have no problem with a writer who makes a mistake especially in this topic that is new and uncertain. God knows I’ve make my share of mistakes in the hundreds of tax advice columns I’ve published. But the majority of bad tax advice this year comes from those who knowingly distort the truth to sell their product and services.

Today I saw an article that falls into a third category, a logical failure to connect the article title with the tax laws cited. It was an article about apples and and the tax laws pertaining to oranges with confusing and inappropriate attempts to link the two.

If you own a small business that is helping employees through today’s health care challenges, it would be tax foolish to not review your arrangement for tax reporting requirements and possible additional taxes.

Historic employee benefit plan documents

I am aware that there is a demand for historic benefit plan documents – those that compiled with the laws of a period in the past – and I maintain a range of prototype documents used by my small business practice. At the same time, we know that it is not legal to use these documents to retroactively date any employee benefit plan.

Recently I’ve noticed an increase in requests for historic documents especially with regard to changes triggered by the 2010 health reform law. I can’t get involved if the intent seems to be improper and so I tend to simply ignore these inquiries to avoid any uncomfortable situation.

But I’ve recently decided that when I am hired for a consultation on a legitimate purpose and the topic of historic documents comes up, I can point to locations online where this information is already published. I would do this with a repeat of the stipulation that retroactive dating of employee benefit plans is not permitted.