As we approach year-end, it is important to step back and ensure your company performs strategic planning to minimize taxes, reduce your burn rate, understand your tax reporting obligations, and reduce your due diligence and business risk exposure.
In December of 2015, the Protecting Americans from Tax Hikes (PATH) Act was enacted, which has many important items for technology companies. The PATH Act made permanent the 100% gain exclusion on the sale of qualified small business stock, the deductibility of equipment purchases up front under Code Section 179, and reduced the S corporation built-in gains period to five years. The law also made permanent the research and development tax credit and for certain startup companies, allows the credit to offset the alternative minimum tax or be refundable against payroll taxes.
As in past years, planning is an ongoing process to monitor expiring and proposed changes to the tax landscape. Also added to the mix is the far-reaching Affordable Care Act (ACA) and whatever changes the new Congress and Administration may make to the tax code.
President-elect Donald J. Trump has a long list of proposed changes to the U.S. tax code including lowering individual and corporate income taxes, repealing the alternative minimum and estate taxes, and taxing carried interest for investment funds at ordinary rates. He is also proposing a one-time repatriation holiday at a reduced tax rate, significant infrastructure spending, repeal and replacement of the ACA, along with many other changes. The current lame-duck Congress should be monitored to see if any of these changes are enacted by year-end. Given the uncertainty of Mr. Trump's proposed changes becoming laws, consideration should be given to the acceleration of deductions and deferral of income to see if these strategies are worth the risk. Below are some important highlights of the current tax landscape to consider.
Research and Development Tax Credit: Beginning in 2016, eligible small businesses (less than $50 million in average annual gross receipts) may claim the research and development tax credit against alternative minimum tax liability, and the credit can be used by certain startups (less than $5 million in gross receipts and no gross receipts in any tax year preceding the five tax year period that ends with the tax year of the election receipts within the last five years) against the employer's payroll tax liability.
Work Opportunity Credit: The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. The credit gives a business an expanded opportunity to employ new workers and to be eligible for a tax credit based on the wages paid. The credit is available for first-year wages paid or incurred for employees hired who begin work during certain years the credit is available. The credit is generally 40% of the first $6,000 of qualified wages paid to each member of a targeted group during the first year of employment. Beginning January 1, 2016, a new targeted group (individuals unemployed for at least 27 weeks) has been added for long-term unemployment recipients.
Qualified Small Business Stock
Exclusion of Gain Attributable to Certain Small Business Stock: Stock acquisitions that qualify as "small business stock" under Internal Revenue Code Section (§)1202 are subject to special exclusion rules upon their sale as long as a five-year holding period is satisfied. A 100% gain exclusion applies for qualified small business stock acquired after September 27, 2010, and held for more than five years. A 75% exclusion applies for qualified small business stock acquired after February 17, 2009, and before September 28, 2010 (and held for at least five years). A 50% exclusion applies for qualified small business stock acquired before February 18, 2009 (and held for at least five years).
Equipment Purchases: If you purchase equipment, you may make a §179 election, which allows you to expense (i.e., currently deduct) otherwise depreciable business property, including computer software and qualified real property. Air conditioning and heating units placed in service during tax years beginning in or after 2016 are eligible for this deduction. You may elect to expense up to $500,000 of equipment costs (with a phase-out for purchases in excess of $2,010,000), and the deduction is subject to a business income limit. If the cost of your
§179 property placed in service during 2016 is $2,510,000 or more, you cannot take a §179 deduction.
Bonus Depreciation: For property acquired and placed in service during 2016 through 2019 (with an additional year for certain property with a longer production period), the bonus depreciation percentage is 50% for property placed in service during 2016 and 2017, 40% in 2018, and 30% in 2019.
Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses, and their dependents as an above-the-line deduction, without regard to the general 10%-of-AGI floor. Self-employed Health Insurance includes eligible long-term healthcare premiums.
Vehicles Weighing Over 6,000 Pounds: A popular strategy in recent years is for the company to purchase a heavy vehicle for business purposes (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limits for depreciation. For SUVs rated between 6,000 and 14,000 pounds gross vehicle weight, the expensing amount is limited to $25,000.
Capitalization of Tangible Property: Starting in 2016, the regulations covering the purchase of supplies, repairs, and tangible property such as computers, increased the de minimis safe harbor amount that taxpayers can elect to annually expense from $500 to $2,500 for taxpayers without an applicable financial statement. We recommend that each company document their capitalization policy. Note: if a company issues GAAP-based (Generally Accepted Accounting Principles) financial statements, the capitalization policy should be the same as what is used for tax, i.e. it is the company capitalization policy.
Domestic Production Activities Deduction: Businesses that engage in domestic production activities are allowed to deduct a certain percentage of their qualified production activities income. The domestic production activities deduction is available to corporations and individuals, as well as to owners of partnerships and S corporations. Whether you qualify for the deduction depends on the nature of your business, but technology companies that use developers in the U.S. often qualify. Note: if the 50% of W-2 wages limitation applies to your company, consider ways to increase your 2016 W-2 income, such as through bonuses.
NOL Carryback Period: If your business suffers net operating losses for 2016, you generally apply those losses against taxable income going back two tax years (and in certain situations go back three years). A corporation may file Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, to recover any overpayment of estimated tax for the tax year over the final income tax liability expected for the tax year.
Healthcare and Other Employee Benefit Planning
SHOP Exchanges: In 2016, the Small Business Health Options Program (SHOP) is generally available for employers with 50 or fewer full-time equivalent employees. Coverage must be offered to all full-time employees working 30 or more hours per week. Each exchange will offer its own SHOP marketplace. Self-employed persons with no employees cannot use the SHOP Exchange.
Credit for Employee Health Insurance Expenses of Small Employers: Eligible small employers are allowed a credit for certain expenditures to provide health insurance coverage for their employees. Generally, employers with ten or fewer full-time equivalent employees (FTEs) and an average annual per-employee wage of $25,900 or less are eligible for the full credit. In 2016, the credit amount begins to phase out for employers with either 11 FTEs or an average annual per-employee wage of more than $25,900. The credit is phased out completely for employers with 25 or more FTEs or an average annual per-employee wage of $51,800 or more. The credit is available on a sliding scale for up to 50% of the employer's contribution toward employee health insurance premiums, and is only allowable if the health insurance is purchased through a SHOP Exchange. The credit is available only for two consecutive taxable years after 2013, so it is not available if you or a predecessor claimed it for 2014 and 2015.
Pay to Play Excise Tax: For the 2016 plan year, if you have 50 or more employees, you could be subject to an excise tax, which could be as much as $2,160 per full-time employee, for failure to offer a healthcare plan that is minimum essential coverage to at least 95% of your full-time employees if at least one employee obtains subsidized coverage through a public health insurance exchange. The first 30 workers are excluded from the penalty excise tax. If you do offer coverage but it is not adequate or is unaffordable, the excise tax could be $3,390 for each full-time employee who obtains subsidized coverage through an exchange. Larger employers should be considering their healthcare plan option in light of this potential excise tax liability.
Health Care Reporting: Filings for 2016 Form 1095-C and Form 1094-C, generally for employers with 50 or more full-time equivalent employees, and Form 1095-B and Form 1094-B, for employers with self-insured plans and other providers of minimum essential coverage, are due earlier for 2016, specifically by February 28, 2017, if you are filing on paper, or by March 31, 2017, if you are filing electronically. Statements to employees are due by January 31, 2017.
Tax Returns: For C corporations reporting on a calendar year, the 2016 corporate tax filing deadline is now April 15, 2017. Flow-through entities with a calendar year-end including partnerships and S corporations are due March 15.
FBAR: U.S. persons holding any financial interest in, or signature or other authority over, a foreign financial account exceeding $10,000 at any time in a calendar year must file a Report of Foreign Bank and Financial Accounts (FBAR) with the Treasury Department. The due date for 2016 is the same as the U.S. tax filing deadline of April 15, 2017 (unless extended by a weekend or holiday), with a maximum six-month extension to October 15.
FATCA: The Foreign Account Tax Compliance Act (FATCA) requires reporting and possible withholding on payments made to foreign entities, whether the foreign payees are financial institutions or not. Your compliance processes need to be in place in advance of making any payments to foreign entities.
Corporate income tax rate: The North Carolina corporate income tax rate was reduced in 2016 from 5% to 4% and in 2017 to 3%.
Single Sales Factor Apportionment: To attract and retain businesses, North Carolina is phasing in a single sales factor apportionment over the next three years. North Carolina (NC) uses payroll, property, and sales in NC as the factors to calculate tax. These changes will eventually eliminate NC property and NC payroll from being factors in the calculation of corporate state income and franchise tax and help NC corporations become more competitive.
The 2016 tax year offers many proactive tax planning opportunities and reporting obligations. It is important to understand your multistate income, sales tax, international income tax, and value-added tax (VAT) obligations. Look for future articles in 2017 to discuss these in more detail.
Technology Practice Leader
Brooks Malone is a CPA and partner at Hughes Pittman & Gupton, LLP (HPG) with 27 years of public accounting experience. He leads the Technology practice group at HPG, and co-leads the Firm's Life Science practice group serving bootstrapped and investor-backed technology, medical device, and life science companies. A former Council for Entrepreneurial Development (CED) board member, he is also a listed contributor to the National FastTrac Tech Curriculum that was funded by the Kauffman Foundation.