As we settle into 2017, we look ahead to the future of our businesses — but one thing we can’t wave goodbye to is our 2016 taxes. The good news? We can take advantage of new small business tax breaks. Here are a few things you can’t ignore when filing this year.
Small business tax breaks for tax year 2016
The PATH Act made Section 179 permanent, which means small businesses can elect to deduct equipment expenses instead of using regular depreciation. PATH also made property like off-the-shelf computer software available for deduction, so make sure you have a list all the equipment you purchased in 2016 when filing.
This year, you’ll still get to keep your 50-percent deduction for the costs on new capital equipment when it’s purchased. However, each year after 2017, the percentage will decrease by 10 percent until 2020, when the tax break will expire altogether and be replaced by the PATH Act.
Research and development
The IRS states that research and development (R&D) expenditures are normally capital expenses. However, businesses can now choose to deduct R&D expenditures as current business expenses. This is fantastic news for small businesses who invest heavily in research.
Work opportunity tax credit
You get this tax break for being a good samaritan, more or less. It provides incentives for employers to hire veterans and other individuals who might encounter high barriers to gaining employment. The incentive is worth about $1 billion in tax credits each year.
If you’re in your first year of business, you can deduct the costs you incurred starting your business. These costs include anything you might have spent while exploring opportunities before actually opening shop.
Normally, the maximum deduction amount for startup costs is $5,000. If the costs exceed that amount, they can be amortized ratably over a 15-year period.
If your startup costs exceed $50,000, there are limitations that apply to the deduction.
The home-office deduction
Chances are that some of you might work from home. The good news is that the IRS has a special place in tax deduction heaven for you — with a simple way of receiving said deduction. Before 2013, receiving a home-office deduction meant doing some calculations, allocating and substantiation. Now, all you have to do is multiply a prescribed rate by the allowable square footage of the office.
Normally, inventory items are not deductible. Instead, most small businesses use the accrual method and count the cost of inventory as part of the cost of goods sold, which reduces the overall net revenue from sales.
However, certain small businesses in certain scenarios can count inventory as materials and supplies, which are indeed deductible.
If you’d like to switch to this method of accounting, you can do so by filing an IRS Form 3115. To simplify matters, there is also an automatic IRS consent procedure that will accomplish the same thing. To find out if you’re eligible for this accounting method and to apply, check out Rev. Proc. 2002-28.
As a small business, you might not have the financial means yet to hire full-time employees, but you might still need the extra labor. To solve this dilemma, you can hire independent contractors. With independent contractors, as opposed to full-time employees, you do not have to pay benefits or payroll taxes. Furthermore, the cost of independent labor is deductible.
With tax regulations and small business tax breaks changing every year, it can be difficult to keep up with the times and make sure your business is compliant. Use these tips to stay ahead of the game and make sure that you’re getting the most out of your filing for tax year 2016.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.