Calm before the storm?

After relatively few tax law changes for businesses in 2016, accountants can only say something will change in 2017. What, and how much, is anyone’s guess.

From the pages of In Business magazine.

For all the political hubbub that took place last year, 2016 was actually a pretty quiet year for changes to tax laws, according to local accountants. With Congress now working its will on President Trump’s tax proposal, however, it’s anyone’s guess of what to expect in the 2017 tax year.

“Maybe a tax reform magic eight ball would help,” quips Mike Kollath, CPA and partner at Kollath & Associates CPA in Middleton. “Based on what we’ve seen from the Trump presidency, I don’t know that anyone can predict what will happen. I know he has put forth proposals with very little detail behind them, and that tax reform is a high priority — but so was health care.”

When IB first considered the topic of business taxes for this issue, we thought we’d be able to look back at the 2016 tax year to highlight some of the major changes that took place and might have caught business owners by surprise. Sort of a “What did we learn last year that can give us a clue what to expect for this year?” kind of thing.

What we didn’t expect to learn was that 2016 was just a very dull year. Of course, that’s just fine as far as accountants are concerned.

“One thing I would love is for Congress to be required to approve all tax law changes six months before year-end/implementation, as that would allow companies to better plan, add employees, change spending, and update their quarterly tax estimate payments,” notes Vicki Buening, a tax principal at Reilly, Penner & Benton LLP in Madison.

Sound planning in Congress doesn’t often happen, and it was the biggest complaint of the accountants we spoke with about the way Congress and the Internal Revenue Service approach changes to tax laws.

“We strive to deliver no surprises for our clients,” says Jacob Peters, a principal at SVA Certified Public Accountants in Madison. “I’d say we achieved that for 2016, but for 2017 my main concern is how and when we’ll have some certainty on tax rates, if nothing else. In particular, the proposed reductions for business taxation will have a far-reaching impact on a lot of planning decisions that would need to be made before the end of the year.”

Small shake-ups, but mostly status quo

So, what exactly did change on the 2016 business tax law landscape?

“The 2016 tax year did have some minor or obscure changes, and tax laws that were extended, but overall it was pretty benign from a tax standpoint,” comments Kollath. “The big change for the 2016 tax season was in the filing deadline for partnership and S corporation returns from April 17 to March 15, and C corporation returns from March 15 to April 17.

“Another change which impacted accounting firms was new security requirements from the IRS which, in turn, resulted in increased security requirements from the software providers,” Kollath adds.

According to Kollath, bonus depreciation also impacted a significant number of his clients, although it was based on the same rules in effect for the 2015 tax year, so while it technically was a change, it was enacted so early that tax planning was possible. “The ability to get a credit on your payroll taxes also impacted many of our startup companies, but the credit wasn’t available until 2017 when the tax return was filed,” he notes.

Gordy Meicher, a partner at Meicher CPAs LLP in Middleton, says 2016 did see some significant changes to tax laws that affect business owners, particularly in the area of tax credits and alternative minimum taxes (AMT). “We were able to save many business clients 10 years of our fees by simply taking advantage of the changes in these areas,” he notes. “It was a great year for accountants to prove their real worth to their business clients. It helped us, too — our business increased 13% over the 2016 tax season [2015 taxes].”

Peters (SVA) typically works with closely/privately held businesses headquartered in southern Wisconsin, serving both the business and its owners’ tax planning, tax compliance, and business advisory needs. He explains that a number of his clients operate in multiple states, and that’s probably the area where he saw the most pain when working on 2016 taxes.

“States are getting more and more aggressive in their pursuit of revenues, and in some cases a business may find that out-of-state activities that used to cause no problem now, in fact, subject them to another state’s tax system,” Peters notes.

Like Meicher, Peters also touched on the effect of changes to the alternative minimum tax. “Something that always surprises people is the impact of the alternative minimum tax, in particular when they have an abnormally high income and then get stuck with the AMT either in that year or in the following year when they pay their state income tax, which isn’t deductible for AMT purposes. I call that the AMT whiplash, and it ensnares people for whom the AMT was never intended to apply to when the original laws were written.”

For all the impact those tax law changes did have on business owners, however, Kim Anderson, a tax principal at the Middleton office of CliftonLarsonAllen LLP, says 2016 was relatively calm. “We weren’t running around in December trying to understand a new tax law, or guessing what was going to be passed in January (2017) but retroactive to 2016.”

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Paying the price for poor (tax) preparation

Big tax law changes or not, local accountants say mistakes and oversights can still happen when small and mid-sized businesses file their taxes. Their advice — it pays to have an experienced outside accountant who’s keeping abreast of any changes in the tax laws that might affect your business or industry sector.

“Not to be self-promoting, but you can be caught unaware if you are not working with an accounting professional whose responsibility it is to monitor tax law changes,” states Kollath. “We know which clients tax changes will impact and which they won’t, and notify them all accordingly. Small to mid-sized businesses typically don’t have staff monitoring tax laws. The consequences of not knowing not only can cause taxes to be filed incorrectly, but you could miss tax planning opportunities and cost yourself money in the long run.”

That’s something Meicher has seen firsthand, and he says missed opportunities are actually a greater risk than potential penalties for making a filing error.

“Usually the reverse problem occurs where a small business does not take advantage of a law change and it costs them,” Meicher explains. “For example, in 2016 the Internal Revenue Service adopted a policy that allows a small business to deduct, rather than capitalize, items costing less than $2,500. We recently reviewed a return where the accountant erroneously capitalized many items, costing the business over $12,000 in additional taxes, to say nothing of the cost of paying that same accountant to account for these assets over a seven-year period.”

Regarding penalties, “I look at it from a risk-management perspective,” notes Peters. “A lot of the penalties are computed in a similar fashion as interest — they’re calculated as some percentage of the understated tax. Those don’t worry me too much because usually people working with a CPA will have accurate numbers, so any minor inaccuracies will have minor amounts of penalty tied to them.

“What does concern me is certain penalties that are flat amounts, and large — specifically, there are certain foreign-controlled entity and foreign bank account reporting requirements that can carry with them a $10,000 minimum penalty for non-filing,” Peters continues. “So, simply by not filing the form — even if there was $0 understated income tax — the taxpayer could be subject to a huge penalty.”

If a business is working with an accounting firm, they most likely will not miss tax law changes, says Anderson. Unfortunately, tax law changes can be subject to interpretation and it may take years for the IRS to give its interpretation of what Congress just passed.

“If a taxpayer files his or her own return, it is very likely they will miss changes because they are not focused on tax law changes on a regular basis,” Anderson notes. “Some changes are widely publicized, others are not. The interpretation of the tax law is subject to the knowledge of the reader.”

One change the IRS attempted to publicize widely but still may have caught newer small business owners unaware was that change in the filing deadline for partnerships and S-corps versus C-corps. In general, C corporations are businesses where the company pays the tax, whereas S corporations and partnerships pass the income to the individuals and the tax is paid on the individual return, with some state return exceptions.

C corporations are subject to interest and penalties on underpaid income tax of 4% of the balance due, notes Kollath. Late payment of tax would result in a penalty of 0.5% of the unpaid tax per month up to a maximum of 25%.

The late filing penalty has existed in partnerships for some time; however, the change of the due date was new for 2016 tax return filings, notes Buening.

“An important thing that new business owners should always keep in mind is to get advice from a professional — at a minimum for the first tax year filing. Startup businesses not only need to address legal things, like business documents, but they also need to consider choice of entity, what state they should be registered in as a business, first-year elections on tax return, depreciation, and many other things.”

As it relates to penalties for not filing, or late filing, there are a variety of payments — not just federal but also from Wisconsin, Buening says. There are sometimes exceptions to penalties, which is why it’s important to have a tax advisor who knows the tax codes and any updates that recently have been made. “For example, for a first-year partnership that didn’t know the tax return was due March 15, where normally April 15 would be the date to consider (or this year April 17), there is an exception that the business could submit a letter to the IRS stating the exceptions and requesting relief from the penalties.”

Peters agrees. He recommends any business owner that gets hit with a penalty try appealing it to the IRS, and points to more information available at www.irs.gov/businesses/small-businesses-self-employed/penalty-relief-due-to-first-time-penalty-
abatement-or-other-administrative-waiver. “It’s basically a one-time-free pass for certain situations.”

Throwing darts at 2017 changes

Of the accountants we spoke with, Meicher offers the most resoundingly optimistic prediction of what tax law changes for the 2017 tax year could hold. President Trump has proposed a tax overhaul that would represent one of the largest tax cuts in history, simplify the tax code by reducing the number of tax brackets from seven to three — 10%, 25%, and 35% — eliminating most of the tax breaks that mainly benefit high-income earners, repealing both the AMT and the estate tax, and doubling the standard deduction so that married couples won’t pay any taxes on the first $24,000 of income they earn.

The ball is now in the court of Congress, and the projected fiscal and deficit impacts of the plan will be watched very closely, but some believe it is very beneficial to business interests. “President Trump will get something done and it will be very beneficial for small business as it is presently proposed,” Meicher recalls. “No one is certain when or what the final outcome will be, but we already have many ideas as to what actions we will want our clients to take.”

That said, Meicher acknowledges that to date there are presently no new changes that will require significant effort for the 2017 tax year.

Other predictions were a little more reserved.

“It is very difficult to predict, with some attention still being on passage of new health care regulations,” explains Anderson. “The closer we get to 2018 for passage of any tax bill, the more likely the changes will not be retroactive to 2017 as the IRS will not have enough time to change forms and update its systems. The expected major change to business, if Trump’s tax proposals pass, will be a new fixed 15% tax rate for business. This would include flow-through income from partnerships, limited liability companies, and S corporations.”

Kollath notes that in some years tax legislation is passed in December, which has a significant impact on the tax software providers and therefore on the tax advisors, and that really delays the start of tax season.

One thing is certain, agrees Buening — tax law changes can come even after the period for filing returns begins. “This year will likely be the same, as Congress continues to work through tax law ideas and changes,” she says. “It would really be great if we could have those changes by mid year, but likely the changes will not be known until year end, or even into next year.

“As we move deeper into 2017, I believe there will be some kind of major tax law changes — I just don’t know what yet,” Buening continues. “As I tell the clients I work with, my crystal ball continues to get cloudier by the day. The best suggestion I have for business owners is to plan your year right now based on no change, and hope that any changes that do happen have either no affect for your company, or maybe make things better. Then meet again at the end of third quarter to do final planning for the last three months of the year.”

“I’ve stopped trying to predict anything,” jokes Peters. “I was gung-ho on a lot of the reform and simplification ideas earlier in the year, but it appears that a lot of those will become political casualties. I believe we will end up with some level of tax rate reduction, along with something to encourage repatriation of foreign profits.

“That said, the last year of politics has been one of unending trend-bucking,” Peters continues. “As soon as it looks like one thing, it turns out it’s the other. One thing we do know is that [any 2017 tax law changes] will be ‘tremendous.’”

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Wisconsin’s hot tax topics

It’s not all about federal taxes. There are a variety of state tax issues that affect local businesses, as well.

Wisconsin manufacturing companies can take advantage of a state sales tax credit but only for products manufactured in Wisconsin.

According to Vicki Buening, a tax principal at Reilly, Penner & Benton LLP in Madison, the state manufacturing credit has become a hot topic not only in the manufacturing industry, but also in agriculture.

“The Wisconsin manufacturing sales tax credit was removed from tax returns in 2006,” Buening notes. “Then in 2012 a different form of credit was implemented for manufacturing and agriculture.”

There are various requirements businesses must meet in order to qualify for these credits. For example, products must be manufactured in Wisconsin and only what is manufactured qualifies for the credit.

“Most business clients understand what is considered manufactured and what is not,” Buening explains. “What non-manufacturers don’t understand is there are other things the manufacturing companies do that do not qualify for the credit, so therefore those companies do pay tax to Wisconsin. Also, I like to point out that the manufacturing companies do employ Wisconsin residents and pay payroll taxes. Manufacturers put money into employees’ pockets and the employees continue to support our economy.”

Another area Buening says she has seen receive renewed attention statewide relates to state sales taxes. She’s experienced clients needing to be trained to understand what is subject to sales tax and how to deal with the purchases of items that will be re-sold.

“Businesses not only need to know their product, but also where it could be going,” Buening notes. “For example, repairing a light in a residential property versus a commercial property has different sales tax treatments. Now let’s look at food. Pizza and candy are two areas that get interesting when it comes to sales tax. Take a look at your grocery receipt and think about all the training, thought process, accounting staff, and the technology/programmers involved just to ensure businesses are operating effectively and within the requirements. Sales tax is good — it does help in Wisconsin — but it is complex. Business owners don’t only have to be concerned about income taxes, but also payroll taxes and sales taxes.”

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