By now you have most likely heard from your tax advisor or via news outlets about the Tax Cuts and Jobs Act (TCJA). The biggest tax overhaul since 1986, these new rules – along with new revenue recognition rules and partnership audit rules – have given individuals, business owners, and their advisors a great deal of information to process. The TCJA, signed into law in December 2017, went into effect for tax years 2018 and forward. Further complicating planning is the fact some provisions are scheduled to expire or phase out at different increments between now and 12/31/2025.
Why Could an Extension be the Smartest Decision You Make This Year, For Yourself or Your Business?
Because there are several new provisions that will require considerations from multiple points of view and that require analysis of both the long- and short-term consequences of any decisions and elections, an extension is likely the best way to ensure time for accurate completion of all that work entails. The more time your tax professional has to review your return and the various scenarios, the better your tax position will likely be. In addition, you should allow yourself extra time to review your return and have a consultation or two with your tax advisors to consider all the implications of the decisions made this filing season.
The interplay of the new Qualified Business Income (QBI) deduction with new elections available under the TCJA could significantly change your bottom line. You and your advisors may need to consider how a small business may treat inventory, whether or not to change accounting methods from accrual to cash, whether to elect more generous bonus depreciation and Section 179 depreciation, in addition to discussing new excess business loss rules, business interest and net operating loss rules (just to name a few). As such, filing an extension for 2018’s tax return could be the difference between significant tax savings and that “missed the bus feeling” next year when it is too late to change anything for the 2018 tax year.
Most elections will need to be made by the due date, including extensions, of a timely filed 2018 tax return. For pass-through entities such as Partnerships and S Corporations, that date is 9/16/19, and for Corporations and Individual returns that date is 10/15/19. This additional time will allow you and your advisors to not only review the implications for 2018’s tax filing, but to also develop a good idea of your 2019 tax picture. This delayed filing will effectively offer a crystal ball experience – allowing you and your advisors the opportunity to peer into future tax filings and determine what may be best for your 2019 and forward filings as well.
What About State Tax Returns?
Do you need one more reason to extend your tax return? This tax season has already officially started and not only are we still waiting for further clarification and guidance from the IRS, but most states have only just begun to tackle how they will address the massive changes to Federal tax law. Most states have some nonconformity in their tax legislation, meaning they will not accept for state tax purposes what the Federal government has allowed at their level. As of this publication, the DC metro area and most of the country have not fully addressed these changes, nor have they finalized forms for filing. If you are doing business in multiple states, this is an even more important reason to wait to finalize your return and file an extension. A rush to complete a return just for the sake of filing by the original deadline may cost you more in both current and future tax.
Don’t Wait on Partnership Audit Rules Opt-out Decision
One important decision that cannot wait, however, is that of the Partnership Audit Rules and whether to opt-out. This determination needs to be decided by the regular due date of Partnership tax returns: 3/15/19. Some partnerships, such as those that have trusts as partners, are not eligible to opt-out, so amendments or addendums to those partnership agreements should be made prior to the March 15th deadline. This document will help to decide who the Partnership Representative will be, how they will be chosen, and other important details, including any potential personal liability protection for the Partnership Representative. For more information about these new rules, check out our webinar.
An Extension to File is Not an Extension to Pay Your Taxes
This cannot be emphasized enough: an extension to file is not an extension to pay your taxes. It doesn’t seem fair because you may not have all the information to accurately estimate the tax due, especially with all the new legislation. However, the tax payment is due on the original due date of the tax return.
A typical best practice here would be to pay not only what your anticipated tax due would be, but also your first quarter estimated payment for 2019 as your extension payment, since they are both due at the same time. This will minimize the risk of a late payment penalty should your actual balance due be different than anticipated. If this larger extension payment results in an overpayment, the overpayment can either be applied to your 2019 estimated tax payments or refunded.
Why Do Taxpayers Usually File an Extension?
According to the IRS Filing Season Statistics, about 10% of individuals filed extensions for 2017, while the number of business extensions is not readily available. However, for many individuals the sole reason they may postpone their filings is that their business pass-through K-1 reporting documents are not yet ready. There are quite a few reasons why taxpayers choose to file extensions in any typical year. These include:
- Missing documentation
- Strategic extension to have additional time to fund a self-employed retirement plan
- Pending litigation
- Travel overseas
- Special circumstances – illness, disaster, death
- Ran out of time/procrastination
- Complicated tax issues
- Sale of assets
- Business income
- Net operating losses
- Issues with prior year return that need to be resolved
For the 2018 tax filing season, extending your tax return to allow for additional analysis may be the most sound business decision you can make for now, and the future.
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Written by: Erin Kidd, EA
Erin Kidd is the Tax Individual Practice Supervisor at Thompson Greenspon and has nearly a decade of tax experience specializing in individual taxation. Throughout her career, she has focused on simplifying complex tax issues and educating clients to maximize their tax benefits and plan for future events. Erin is responsible for the review of individual Federal and multi-state tax returns, managing the firm’s Military Spouse Remote Preparer Program, preparation of individual tax returns with international taxation and reporting requirements, and assisting with the resolution of client issues with Federal and State Taxing Authorities.
Erin holds a Bachelor’s and Master’s Degree in Business Administration from Morehead State University, is an Enrolled Agent, a federally licensed tax preparer who has unlimited rights to practice before the IRS, and an Accredited Financial Counselor ®. She has been recognized by the Garrison Commands of West Point, NY and Fort Leavenworth, KS for her contributions to the military community for her work with the installations’ Volunteer Income Tax Assistance Centers.