Important 2016 Business Tax Law Changes
Mileage Rate, Social Security Maximum, Depreciation and Expenses
Before you prepare your 2016 business taxes or turn them over to your tax preparer or do payroll taxes, you need to know about these 2016 tax changes.
Included in this list are changes to the Social Security maximum, IRS standard mileage rates, and new additional Medicare taxes that affect self-employed individuals.
IRS Standard Mileage Rate
The IRS standard mileage rate has changed for 2016. The business mileage rate and medical/moving rate have decreased from 2015; the charitable driving rate is the same as 2015.
- 54 cents per mile for business miles
- 19 cents per mile for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
These rates are in effect for the entire year for businesses taking the standard mileage deduction.
Businesses may decide to deduct mileage using either the standard mileage rate or actual expenses. If you drive less than 50% for business, you probably want to use the standard rate, but if you drive over 50% for business, adding actual expenses might be better. Read more about the standard mileage rate vs. actual miles.
Per Diem Rates for 2016
Business travel expenses may be recorded and deducted in several ways. One way is to use per diems (daily rates). These per diem rates are set by the General Services Administration (GSA), based on cost of living information. Per diems are usually used for employees who travel, giving them a daily allowance for meals/incidentals and lodging. Use this lookup table to find per diem rates. Note that the per diem rates change on October 1, to coincide with the federal government fiscal year.
Social Security Withholding Maximum
The tax rate for Social Security remains the same, and the maximum deduction from an employee's pay has remained the same as 2015, at $118,500. Here's how this maximum works: When an employee's income reaches the maximum for the year, no further OASDI (Social Security) tax is withheld. The employer must continue to pay Social Security tax for that employee, and the Medicare tax has no maximum.
The maximum also affects small business owners who must pay self-employment tax.
If a business owner also has income from employment, employment income is considered first, then earnings from self-employment. Read more about how the Social Security maximum works for income from employment and self-employment.
Section 179 Deductions for Business Asset Purchases
Businesses can expense the entire cost of qualifying equipment in the year of purchase under Section 179, rather than spreading out the cost over multiple years by using regular depreciation.
Recent tax law changes now make the Section 179 deduction amount permanent, so it won't change for the 2016 tax year and beyond.
For 2016 and beyond, here are the limits:
- $500,000 maximum on individual items of new and used equipment and purchased computer software. Read more about the requirements for applying a Section 179 deduction to sport utility vehicles.
- Your business can spend up to a maximum of $2 million on Section 179 equipment. The deduction is reduced above this amount.
Bonus depreciation is an additional amount of depreciation that can be taken on purchases of new business assets, including equipment and vehicles. This depreciation amount is in addition to any Section 179 deduction (described above).
A 2015 tax law change fixed the bonus depreciation amounts for the next five years. The bonus depreciation amount will be at 50% for 2015, 2016, and 2017, reduced to 40% for 2018 and 2019. That is, if you purchase a piece of business equipment at $10,000 in 2016, you can claim an expense for bonus depreciation of $5,000, in addition to the Section 179 amount above.
Limits on Expensing Assets Increased
The IRS has increased the amount you can take as an expense for business assets purchased in 2016. The new higher amount is $2,500 per invoice. So, if you purchased a new computer for your business in 2016, you can include the entire amount (up to the $2,500 maximum) as an expense instead of depreciating it. The savings is in the time it takes to calculate depreciation and file tax forms for those calculations.