Extensions

Individual tax returns (Form 1040) are due Monday, April 18th. Returns postmarked after this date, unless properly extended, incur a failure-to-file penalty on the balance due of 5% per month (to a maximum of 25%). Additionally, there are also failure-to-pay penalties and interest charges as well.

You can file for an automatic six-month extension by filing Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return) on or before the April 18th filing deadline.

The instructions for filing a Form 4868 require taxpayers to:

• Properly estimate their tax liability using the information available to them;
• Enter their total tax liability on line 4 of Form 4868; and
• File Form 4868 by the regular due date of their return.

Normally, filing this form results in an automatic six-month extension of time to file without any late-filing penalty. However, filing this form does not extend time to pay any income tax liability due.

Some people have the misconception that the filed extension also applies to extending the time when taxes are due. This is not true and you should note that balances due in excess of 10% of the total tax shown on the return will incur penalties and interest for underpayment.

One thing to note is the requirement to "properly estimate" the tax liability. It is possible for the IRS to invalidate an improper extension (one that didn't estimate the tax liability) exposing the taxpayer to substantial failure-to-file penalties. This isn't something I've seen a lot of but given the need for additional revenues and computer sophistication, it easy to imagine this becoming more prevalent.

Accordingly, my advice is to make sure you spend a little time properly estimating your tax liability before sending off your extension. It is risky to just put down zeros when you know you owe taxes.

And as a final note, don't forget to properly extend any state and/or local returns as well. Some will accept the federal extension and some won't. You need to check their specific rules. As with the federal government, the extensions to file do not extend the time to pay any taxes due.

Small Business Incentives in the Recovery Act

The $787 billion American Recovery and Reinvestment Act of 2009 provides nearly $300 billion in tax relief.  As a stimulus package, over $280 billion in tax relief is targeted for 2009 and 2010.  Keeping with the Obama administration view that small business is the principal engine for job growth, the act has some nice benefits for small to medium size businesses.  Please note that this is a high-level overview and you should probably see a CPA or qualified tax accountant for more information about your specific situation.

CAPITAL  EXPENDITURES

One benefit for small business is the ability to immediately expense major capital purchases through the use of Code Sec. 179 and bonus depreciation (Code Sec. 168(k)).  Code Sec. 179 is limited to small business as it begins to phase out when a company spends more than $800,000 on eligible purchases.

First-year expensing was once limited to $25,000 per year and then increased to $100,000.  In 2008, the limit was increased to $250,000, and the act extended this limit through 2009.    Businesses that qualify should take advantage of this opportunity because the limit reverts to around $125,000 in 2010 with a $500,000 phase-out and could go even lower in 2011.

NOL CARRYBACKS

The act allows corporations, partnerships and sole proprietors to carryback 2008 losses for five years rather than the two years allowed in the previous law.  NOLs can provide an immediate and significant cash infusion for a cash-starved business running at a current loss if they had income in any of the previous five years.

I was consulting with a business last week who was struggling with cash flow in this current economic environment and was able to identify over $40,000 of cash sitting in his 2008 loss.  His current CPA firm had been sitting on their S-Corp return for over 6 weeks (crappy service but that is a blog entry for another day).  I recommended he light a fire under them or bring it to TriLibrium to tap into this tax refund ASAP.

The five year carryback only applies to companies with average sales of less than  $15 million over a three year period.  It should also be noted that if a business has already filed their 2008 return and elected to forgo the carryback, there is a provision in the act that allows taxpayers to revoke that election by making a new election before April 18, 2009.

QUALIFIED SMALL BUSINESS STOCK

Owners of qualified small-business stock could previously exclude 50 percent of the realized gain on the stock if the stock was acquired when issued and held for five years.  The act increased the exclusion to 75 percent of the gain, for stock issued after February 17, 2009 through the end of 2010. 

I should also point out that start-ups should consider the benefits of Code Sec. 1244.  I see far too many lay people choose the LLC model without understanding the options and benefits of other forms of business.

S CORPS

I don’t want to go into all the details but will say that the act has some special rules that would apply to C corporations that converted to an S corporation in 2001 or 2002 and are facing downsizing and need to unload assets.

ESTIMATED TAXES

The safe harbor for estimated taxes was reduced from 100 percent to 90 percent of prior year’s tax, or 90 percent of the current year’s tax.  This safe harbor is limited to taxpayers with less than $500,000 of adjusted gross income, where more than 50 percent of income is derived from a business with an average of less than 500 employees in 2008.  This benefit applies only to 2009 but should lower estimated tax payments for many people.