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.
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.
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 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.
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.