The 2015 Small Business Year-end Tax Guide
The following guide will cover:
Wouldn't it be nice if the tax system remained the same every year? This would make it easier to understand your situation, what to expect in the year to come, and how to reduce your tax liability.
Unfortunately, the IRS does not share your enthusiasm for keeping things the same. There are annual changes that deserve your attention and 2016 is no different.
Tip: small business owners can improve their situation by consulting with a certified public accountant or payroll service. This allows you to remove yourself from the day-to-day activity associated with taxes, while also ensuring that you are current with all recent changes.
2016 Tax Changes To Review
- Tax Rates and Brackets
Don't become too comfortable with the tax rates and brackets for 2015, as these are set to change in 2016.
Several adjustments were made, such as the top tax rate of 39.6 percent now applying to single taxpayers who earn more than $415,050. This rate also applies to married taxpayers filing jointly who earn more than $466,950. In 2015, the earnings thresholds were $413,200 (single) and $464,850 (married filing jointly).
- Increase in the Standard Deduction for Heads of Household
The standard deduction for heads of household will increase from $9,250 to $9,300.
- Increase in Maximum Earned Income Credit
This applies to taxpayers filing jointly who have three or more qualifying children. In this case, the maximum Earned Income Credit will increase from $6,242 in 2015 to $6,269 in 2016.
- Increase in Foreign Earned Income Exclusion
The exclusion was $100,800 in 2015, but will increase to $101,300 in 2016.
- Personal Exemptions Increase
Personal exemptions have increased from $4,000 in 2015 to $4,050 in 2016. Along with this, the Alternative Minimum Tax exemption is on the rise, reaching $53,900 for singles and $83,800 for married couples filing a joint return. This is an increase of $300 (single) and $400 (married filing jointly) when compared to 2015.
Are you Making these Year-end Small Business Tax Errors?
There are approximately 28 million small businesses in the United States, all of which are responsible for paying taxes.
With 2015 coming to a close, now is the time for every business to review their tax situation and prepare for the new year.
Some companies have a system in place for avoiding tax errors. Others continue to make the same mistakes every year, never realizing that they could improve their situation by adjusting their approach.
Here are several of the most common mistakes:
- Underpaying estimated taxes. This may not sound like a big deal, but once you file your return you will realize that trouble is on the horizon.
Take for example a self-employed professional who earns less than $150,000 per year. In this case, you are required to make quarterly payments that equal 100 percent of your tax bill from last year or 90 percent of your final tax bill. If you don't meet this requirement, the IRS will charge you a penalty.
- Putting off purchases until the new year. You don't want to spend just to spend, but now may be the time to purchase items, such as office equipment, that you will require in the near future. If you make this purchase in 2015, it will give you another tax deduction.
- DIY tax filing. There is nothing simple about filing a tax return. Even if you have software on your side, there will be questions that confuse you and scenarios that require professional attention.
Filing your own return may sound like a good way to save money, but you are likely to pay for this in the end. For example, you may miss out on deductions and credits that could lower your tax liability.
Rather than add this stress to your plate, consider the benefits of hiring a payroll company and accountant to provide service.
- Forgetting to get organized before the calendar changes. You can avoid this concern by staying organized through the year. If you neglected to do so, you will spend many hours organizing tax documents, such as invoices and receipts.
If you don't get organized in 2015, things won't get any easier when it comes time to file your return in 2016.
- Failing to understand all your tax obligations. You will pay the most money to the IRS, but your tax obligation doesn't stop there. Are you on the same page with your state and local tax authorities? Established companies don't often run into this trouble, but first-year businesses could find themselves overlooking the many types of tax that they owe.
2016 Retirement Plan Contribution Limits
With 2015 coming to an end, you may find you have fallen short regarding your retirement contributions.
For 2016, these contribution limits remain the same:
- The 401(k) contributed for employees remains unchanged at $18,000. This also holds true for most Thrift Savings Plans, 457 plans, and 403(b) plans.
- The catch-up contribution also remains unchanged for 2016. Employees aged 50 or older can make a catch-up contribution up to $6,000.
While the above contribution limits remain unchanged for 2016, here are some changes that could impact your situation:
- For IRA contributors not covered by a workplace retirement plan but who are married to a covered individual, the deduction phase-out has increased $1,000 to between $184,000 and $194,000.
- The AGI phase-out range for contributions to a Roth IRA has increased $1,000 to $184,000 to $194,000 for married couples filing jointly. For single individuals and heads of household, the phase-out has also increased $1,000, reaching $117,000 and $132,000, respectively.
If you still have questions or concerns regarding the 2016 retirement plan contribution limits, the IRS published an official announcement on October 21, 2015. The announcement covers what has changed and what will remain the same for the upcoming tax year.
Tax-Deductible Expenses for the Self-Employed
When you work as a self-employed professional, you will take on a variety of expenses. Your goal is to understand which ones are tax deductible, and then take advantage of these as a means of saving money.
Reducing your taxable income through expenses is one of the best strategies you can employ. It doesn't matter if you are new to the ranks of self-employment or have been working in this capacity for many years, there are a variety of deductible expenses that deserve your attention. These include:
- Self-employment tax deduction.
- Home office.
- Health insurance premiums.
- Phone and internet expenses.
- Use of your vehicle for business purposes.
- Interest paid on business loans.
- Costs associated with client meetings.
- Web fees, such as those for domains and hosting.
It can be confusing to keep track of tax-deductible business expenses throughout the year. By implementing a system for doing so, you can avoid the possibility of overlooking expenses that could greatly reduce your tax liability.
Tip: work with a CPA who can help you search for and take advantage of every possible deduction.
As long as you play by the rules, there are many tax-deductible expenses that self-employed professionals can use to reduce their tax bill and save money.
2016 Tax Benefit Adjustments
Just the same as every year, the Internal Revenue Service has announced a variety of adjustments for the coming year. In all, these adjustments touch on more than 50 tax provisions. Those that will have the biggest impact on taxpayers are listed below:
- The 39.6 percent tax rate on single taxpayers will increase from $413,200 to $415,050.
- The standard deduction for heads of household will increase from $9,250 to $9,300.
- The adjusted gross income amount used by joint filers to calculate the reduction in the Lifetime Learning Credit will increase from $110,000 to $111,000.
- The foreign earned income exclusion will increase from $100,800 to $101,300.
- Estates of decedents who pass on in 2016 will have a basic exemption of $5,450,000, which is an increase from $5,430,000 last year.
For more information on these tax benefit adjustments, among others, review this 27-page document published by the IRS.
2016 Tax Brackets
While not always the case, tax brackets typically change from year to year. The upcoming year is no different, with a few slight changes taking place. For example, the threshold for the top tax rate of 39.6 percent has increased for both single and joint filers. The same holds true with the thresholds for some of the other individual tax rates.
(Source: The Motley Fool)
With this chart, you can get a better idea of which tax bracket you might fit into for the upcoming year.