What’s New in 2017 – Key Tax Updates to be Aware of
This year promises to be challenging in the tax realm as President Trump and Congressional Republications have promised to enact a significant reform in 2017. Even if there is no new law, there will be a number of changes that go into effect for the first time this year, or apply for the first time for tax returns filed this year.
Below is a roundup of key tax updates to be aware of:
ACA executive order does not change compliance
On January 20, President Trump signed an executive order titled, “Minimizing Economic Burden of the Patient Protection and Affordable Care Act (ACA) Pending Repeal.” The executive order is designed to provide instructions to the various agencies and service groups responsible for the ACA, pending repeal.
The executive order is comprised of six sections, a particular section instructs “the Secretary of Health and Human Services and the heads of all other executive departments and agencies with authorities and responsibilities under the ACA to exercise all provision or requirement of the ACA to exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the ACA that would impose a fiscal burden on any State or cost, fee, penalty or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products or medications,” to the maximum extent permitted by law.
Some may understand the provision as stating ACA compliance can be stopped, but that is not the case. The provision does not provide authority to limit compliance with the current rules and regulations under the ACA. Therefore, until further guidance is issued, it is important to continue to comply with the ACA at all levels.
2017 IRS mileage rates
R&D tax credit offers new cash benefits for small to mid-sized businesses
The Protecting Americans from Tax Hikes (PATH) Act made the research and development (R&D) tax credit permanent and included some attractive enhancements for small and mid-size businesses. Now that the law has been in effect for a year, small and mid-sized businesses filing their 2016 tax returns can take advantage of the enhancements for the first time. These enhancements serve big impacts to these businesses by escalating their ability to utilize the credit.
One enhancement included is that eligible small businesses may now claim the R&D tax credit against alternative minimum tax (AMT) liability. An eligible small business is defined as a business less than $50 million in average gross revenues for the three previous years.
Before the PATH Act, the R&D tax credit could be only used to offset regular tax, which limited many small to mid-sized businesses’ ability to use the credit if they were subject to AMT. Although this is especially true for many owners of pass-through entities, keep in mind the $50 million average gross receipts (revenues) rule for the three prior years is applied both at the entity level and the shareholder level. Because of this, all members of the same controlled group are treated as a single taxpayer.
Another enhancement benefits qualified small businesses. A qualified small business is defined as a business with less than $5 million in annual gross receipts and having gross receipts for no more than five years. These businesses are now able to use the R&D tax credit to offset the FICA employer portion of payroll tax. The cap amount to offset payroll tax is $250,000 for each eligible year. Because of this, all members of the same controlled group are treated as a single taxpayer. The annual election under this section must be made on or before the due date, including extensions, of its originally filed return. This will be available to offset the FICA employer portion of the payroll tax for the first calendar quarter beginning after the date the qualified small business files its income tax or information return for the taxable year.
Cost segregation a potential permanent tax savings
Due to recent administration changes in Washington D.C., tax reform is typically a growing topic of conversation. While the effects of proposed tax reform are unknown, the most discussed change involves the lowering of business and individual tax rates.
If tax rates are reduced, tax deductions will become even more valuable in tax years before the rates are lowered. Expediting deductions into the 2016 tax year would lower tax liabilities when rates are high and shift income into future years when rates are expected to be lower, thus permanently reducing tax liabilities.
For those who own real estate, cost segregation could be a highly beneficial tax planning tool. IRS rules allow taxpayers to apply a cost segregation at any time after the building is purchased, renovated or constructed. This provides a unique opportunity to plan out which tax year depreciation deductions are realized. Taxpayers who may have opted not to perform a cost segregation study should now reconsider, as the tax savings made permanent by the potential rate changes.
We will continue to keep our clients up to date on future tax provision developments. Please contact a specialist at BerganKDV with any questions.