- The farmer wanted to ensure the children inherited equitably.
- All parties wanted to limit the liability exposure posed to the farmer as an individual owner and operator.
- The father and his children wanted to limit taxable income and estate taxexposure for the older generation.
- The operation needed to be positioned for future growth.
- Limiting tax impact on contributing operations to new S Corp and Limited Partnerships
- Considering the benefits and burdens of an IC-DISC entity
- Determining how and through which entity owners should be compensated
- Cash-basis methods available for farm activities
- Important factors for tax planning:
- Farm income averaging and qualifying types of income
- Net investment income tax
- Active versus passive investor treatment
- Maximizing the domestic production activity deduction
- Optimizing income for IC-DISC commission purpose
The Protecting Americans from Tax Hikes Act of 2015, signed into law by the President on December 18, 2015, extends a number of important tax breaks, and makes many of them permanent. To see the Wolters Kluwer tax briefing, click here.
The law makes the following deductions, credits and other tax provisions permanent:
- The Research & Development credit
- Sec. 179 expensing limitation of $500,000 and $2 million phase-out amounts retroactively extended and made permanent. Also includes qualified real property. After 12/31/15, HVAC units will now be eligible for Sec. 179 expensing
- The exclusion of 100% of gain on certain small business stock
- Reduction in S corporation recognition period for built-in gains tax to 5 years
- The charitable deduction for contributions of food inventory
- The tax treatment of certain payments to controlling exempt organizations
- Basis adjustment to stock of S corporations making charitable contributions of property
- The employer wage credit for employees who are active duty members of the uniformed services
- 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
- The enhanced Child Tax Credit - $1,000 tax credit for each qualifying child under age 17
- The enhanced American Opportunity Tax Credit - $2,500 tax credit for four years of post-secondary education
- The enhanced Earned Income Tax Credit
- The deduction for certain expenses of elementary and secondary school teachers – above the line deduction for up to $250 per year
- Parity for exclusion from income for employer-provided mass transit and parking benefits
- The deduction of state and local general sales taxes
- The special rule for contributions of capital gain real property made for conservation purposes
- Tax-free distributions from IRA plans for charitable purposes – up to $100,000 per year
Summary of Changes and Reminders for 2016
- Bonus depreciation, at 50% for 2015-2017 and phased down to 40% in 2018 and 30% in 2019
- The Work Opportunity Tax Credit (WOTC), modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) to 40% of the first $6,000 of wages
- Most energy property credits (for example: Energy efficient property, Alternative Fuels, Renewable Electricity Production) extended through 2016
Additional FUTA Tax Payable
- California didn’t qualify for credit reduction since it still owed the Federal Government for borrowed unemployment funds. California employers must pay an additional FUTA tax of 1.5% per employee for a total of $147.00 per employee on their Form 940 report for 2015. Please be aware that some software programs may not automatically calculate the increase (Quickbooks will). Please contact our Core Accounting Services Department for assistance.
Sales Tax Increase
- Sales tax remains the same. For rates, please go to State Board of Equalization for more information.
Summary of Changes and Reminders for 2016
- Social Security: The limit remains the same at $118,500. The rate remains at 6.2% for both employee and employer.
- Medicare: The rate remains 1.45% with no limit. Employees who earn more than $200,000 will continue to pay an extra 0.9% Medicare tax in 2016. (Employers don’t pay a matching portion for this amount).
- State Disability Insurance (SDI): The rate remains at 0.90% and the limit is raised to $106,742 for a total tax of $960.68 for 2016. (These changes should be installed with your payroll software update).
- SUI: Verify and change your rate as necessary based on your notification received from EDD. You should have received your new “EDD State of California Notice of Contribution Rates and Statement of UI Reserve Account for the Year 2016” notice in the mail or you can find your new rate on the following website: UI Rate Search.
If your SUI rate has changed from the rate used in 2015, you need to manually change it in your computer payroll module. Tax table updates do not include your new SUI and ETT rate. Make this change before you process a 2016 payroll.
- EDD Report of Independent Contractors (Form DE542) needs to be filed for the new year.
- Minimum wage increases on January 1, 2016 to $10.00 per hour. As a reminder, per California Labor Code section 2810.5, all employers must provide nonexempt employees with a wage notice upon hire and again within seven days after a change is made to either the employee’s rate of pay or pay allowances (such as in the case of a minimum wage change).
- The 2016 mileage rates are as follows:
- 54 cents per mile for business miles driven, down from 57.5 cents for 2015
- 19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015
- 14 cents per mile driven in service of charitable organizations
W-2 Reporting of Health Insurance Premiums
- The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable. The value of the employer’s excludable contribution to health coverage continues to be excludable from an employee’s income, and is not taxable. This reporting is for informational purposes only and will provide employees with useful and comparable consumer information on the cost of their health care coverage. The value of the health care coverage will be reported in Box 12 of the Form W-2, with Code DD to identify the amount. There is no reporting on the Form W-3 of the total of these amounts for all the employer’s employees. In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee.
- The Affordable Care Act requires employers with at least 50 full-time workers to offer employee health insurance. Each year, those employers must send a statement (Form 1095-C) to all employees eligible for coverage and also report to IRS. Form 1094-C acts as a cover sheet for the 1095-C reporting information to be sent only to the IRS. For more information
- The maximum individual annual contribution is increasing to $3,350 (over 55 may add $1,000 = $4,350).
- The maximum family annual contribution is increasing to $6,750 (over 55 may add $1,000 = $7,750).
Pension Limits Increasing
- The 401(k) annual contribution limit remains at $18,000 (individuals over 50 may contribute $24,000). For more information on various retirement plan limits click here.
If you are utilizing payroll software, you should receive a new tax table update, or it will be available for download. Updates will need to be installed after running 2015 year-end reports, and before processing any payroll for 2016. Be certain to update your tables and closely review your first payroll in 2016. Again, change the SUI and ETT rates in your software, if necessary. If you need to re-run any 2015 reports after changing rates, you must revert back to the 2015 information, re-run reporting, then update to 2016 information again.
If you have any questions regarding your software, payroll taxes, or 1099s, don’t hesitate to contact our office. Please ask for one of our qualified Core Accounting Services Department staff members to assist you.
- Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
- Businesses should buy machinery and equipment before year-end and, under the generally applicable "half-year convention," secure a half-year's worth of depreciation deductions in 2015.
- Unless retroactively changed by legislation, property expensing is greatly reduced in 2015; making qualifying expenditures can still reap thousands of dollars in current deductions that you wouldn't otherwise receive. Beginning in 2015, the expensing limit is $25,000, and the investment-based reduction for the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.