Most people think that federal income taxes are inscrutable, but we all have to deal with them anyway. For small-business owners, there can be particular concerns.
Here are some of the most common small-business tax questions I’ve been receiving this year.
I don’t offer health insurance to my employees. Can I reimburse them for their health coverage that they buy on their own?
This can be a very complicated area because of the Affordable Care Act (ACA). Employers with fewer than 50 full-time and full-time equivalent employees are not required under ACA to offer health coverage, although many smaller employers do so anyway. The Kaiser Family Foundation reports that 47 percent of employers with three to nine employees offered coverage in 2015. Some small-business owners that don't offer coverage would like to help defray their employees’ costs for individual coverage. Here’s the problem: The government didn’t want small employers sending workers to the government’s Marketplace, where they’d receive a subsidy in the form of the premium tax credit. So the IRS stated that there’d be a $100 per employee per day penalty for reimbursements (the IRS waived the penalty only through June 30, 2015).
That said, there are still some strategies you can use to help employees with their premium costs:
- You can increase your employees’ compensation so they can afford their own coverage. As long as there no requirement that they use the compensation for this purpose, you won’t be penalized. Of course, the additional compensation is taxable to them and subject to employment taxes.
- You may be able to reimburse an employee for coverage he or she obtains through a spouse’s employer’s plan. The IRS has stated in an informal pronouncement that as long as the spouse pays for the coverage under the spouse’s employer’s plan on an after-tax basis, the reimbursement is not taxable to the employee. For example, you can set up a health reimbursement arrangement (HRA) and reimburse an employee for coverage obtained through his/her spouse’s employer’s plan. The IRS stated, “The fact that the insured group health plan is provided by [the spouse’s] employer and not [the employee’s] employer does not change the result under these facts.”
Note: Legislation proposed last year and still under consideration would permit reimbursements without penalty for employees who do not obtain their individual coverage through the exchange (H.R. 2911 and S. 1697).
I’m an independent contractor and take $5,000 a month from my business bank account to cover my personal expenses. Can I deduct this?
While wages and salaries are paid to employees, self-employed individuals aren’t employees; they can’t receive salaries. Whatever you take for your personal expenses is a nondeductible “draw.”
What is the best retirement plan for my business?
There’s no single answer. There are many options for small businesses and independent contractors to use, including SEPs, 401(k)s and SIMPLE-IRAs. The one you choose depends on various factors, such as the cost of covering employees, the profitability of the business, the age to retirement and the willingness to deal with administrative hassles. The IRS offers some guidance in Choosing a Retirement Solution for Your Small Business and Retirement Plans for Small Business.
Lease or Buy?
I need a new pickup truck for my business this year. Is it better to buy or lease it?
This may be more of a business question than a tax question. Leasing may be less costly than buying the vehicle and may enable you to drive a more expensive one than if you purchase it. However, leasing is only practical if the miles you drive are not more than the annual mileage cap on the lease (e.g., 15,000 miles), because driving additional miles can get pricey.
From a tax perspective, you can take deductions whether you buy or lease the truck. For example, the same IRS standard mileage rate (54 cents per mile in 2016) applies to vehicles that are owned or leased. If you don’t use this rate and instead deduct your actual expenses, you can deduct lease payments (although there’s an offset for expensive light trucks and vans) or depreciation if you buy the vehicle (such to annual dollar limits on this write-off), plus the same other operating costs for leased or owned vehicles (gasoline, repairs). Work with a CPA to help decide the better option for your situation.
Home Office Deduction
Is taking a home office deduction an audit red flag?
Who knows? The IRS has not said that it is, and there’s only anecdotal evidence that taking a home office deduction exposes you to any greater audit risk than you otherwise face. I think that there’s no special audit risk for taking the deduction, because:
- More than half (52 percent) of all businesses in the U.S. are now home-based. The IRS likely will not audit them all just because of the home office deduction.
- The IRS has created a simplified home office deduction in recognition of the widespread use of home offices and the desire by home-based business owners for an easy way to figure the write-off.
However, be wary of taking the deduction unless entitled to it. Find details about eligibility for a home office deduction in IRS Publication 587.
Join the discussion with other small-business owners here.
For more tips on how to help ease your way through tax season, access our exclusive guide, It’s Tax Time: A Business Owner’s Survival Guide.