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2011

Tax-extensions.pngby Erin McDermott

 

Is your small business’s annual tax-season game of Beat the Clock becoming too much of a nail-biter?

 

As rules have become more complex in recent years, the stigma of seeking a tax-filing extension has lessened, with more than 11 million U.S. taxpayers filing for one each year. The need to have extra time to file a return has grown as the complexity of the tax system has increased. “You have to look at the rules to believe it. Life has become so much more complicated,” says Abraham Schneier, senior technical manager for taxation at the American Institute of CPAs and a certified financial planner. The IRS requires you to pay your taxes or make your estimates on time, but as for requesting an extension, “The IRS doesn’t make much of a fuss these days, as long as you’re paying them on time.”              

 

The deadline for filing for an extension for corporations and partnerships is Tuesday, March 15—use Form 7004. For individuals and sole proprietorships, the due date for Form 4868 is Monday, April 18. (Tax Day is bumped back from the traditional April 15 this year because of Emancipation Day in Washington, D.C.) Both forms can be filed electronically. Once filed, you have six months to get your return to the IRS, making your new deadlines September 15 and October 18, respectively. (What about the higher threat of an audit if you file an extension? Accountants today dub that an old wives’ tale.)

 

But being late with your return doesn’t mean you don’t have to pay on time. Uncle Sam expects a good-faith estimate of the amount due and a check for what you think you owe on your due date. If you underestimate, expect to be charged interest and penalties on the amount due until the date your return is filed. If you overestimate, don’t expect a refund until the IRS gets your return.

 

One idea to protect yourself from penalties if you do underestimate comes from Judith Flaxman, an assistant professor of accounting at Temple University's Fox School of Business in Philadelphia, who is also a CPA with 24 years of experience preparing taxes for small businesses. Add the amount of next year’s first-quarter estimated payment to your check for this year’s estimated balance due. When you complete the extended return, indicate that all overpayment be applied to next year’s taxes. That way if you were a few dollars short in your original estimate of tax due for the filing year, it just leaves you short on your first estimated payment and you can add more to your next estimate to make up the difference. (One other reminder: Make sure you let your state tax authority know, too, and file for an extension with them as well.)

 

Talking to some longtime CPAs and tax preparers, here are a few good reasons that their clients have needed to buy some extra time over the years:

 

Reason 1: You don't have all of your documents

For small businesses, there’s a mountain of paperwork when it comes to tax time—from receipts to depreciation calculations to employee expenses. The bane of many accountants’ existence is the notoriously late Form 1065, also known as Schedule K-1, which reports the income, losses, and deductions of partnerships. Because so much of the information required to put the form together depends on getting information from others, accountants say it can create an elaborate holding pattern, waiting for one party to come up with a number to permit the others to complete their final figures—a standoff that can even drag into the summer months. “CPAs are unable to give out incomplete information,” Schneier says.

 

Reason 2: Something happens to you, your business, or your accountant

In the aftermath of Hurricane Katrina in the late summer of 2005, the IRS extended several key deadlines for quarterly tax estimates until early 2006. Millions of individuals and businesses filed for extensions for the full year in the scramble to produce documents and calculate losses. Schneier described the nightmare one accountant faced after early-spring flooding took out her office in the middle of tax season—her clients’ documents somehow survived the rising waters, but the disruption to the business made for extensive delays in tax preparation.


Reason 3: You need more time to make some decisions or find more resources

For 2010 and 2011, Congress authorized taxpayers with traditional IRAs to roll over to a Roth IRA to take advantage of a one-time option to spread the tax from the conversion across 2011 and 2012. However, some may be hedging their bets on what tax rates will be—and will take the six-month IRS filing extension to determine if the conversion was the right decision, thereby retaining the option to switch back to the traditional IRA.

 

The same goes for small businesses that need to account for profit sharing but don’t have the cash on hand to make the contribution. The profit-sharing contribution must be made by the due date of the return, so extending the return gives the business extra time to accumulate the required cash.

 

Reason 4: You’re still adapting to tax-law changes for 2010

The dawn of tax year 2010 brought with it many rules that some small businesses and entrepreneurs are still struggling to address. New laws that expanded deductions for startups—now up to $10,000 for the initial year—and revised calculations for depreciation of equipment and real-estate property are just the start. There are also employer health-care credits for employees that make less than $50,000, which require careful new computations, and a change in how health-care coverage for sole proprietorships affects calculation of self-employment taxes.

 

It’s enough to make even seasoned accountants take a step back and widen the scope of what deductions may be in play. For small businesses, “a prudent owner will say ‘There are a lot more things here for us to look at,’ ” says Temple’s Flaxman. “Let’s explore all the options provided by the tax laws and make sure we’ve taken greatest advantage of them.”

Small-business-tax-deductions-article.jpgby Reed Richardson.

 

At the end of a volatile year, a flurry of changes to the tax code passed, many of which could have a significant impact on the financial fortunes of small businesses and start-ups. Here’s a rundown of what changed, what didn’t, and what you need to know before filing your taxes for 2010.

 

Section 179 Expensing: In an effort to reward businesses that invested in expansion and infrastructure last year, the federal government more than doubled the maximum allowable Section 179 expense deduction on business property to $500,000 for 2010, up from $122,000 just four years earlier. Likewise, the annual Section 179 investment limit, or phase-out threshold, jumped to $2 million, nearly four times what it was in 2007. Assets that qualify for Section 179 expensing run the gamut from heavy machinery and production equipment to smaller, durable items like office computers, copiers, and printers. (For more on what’s expensable, check out IRS Publication 946.) As usual, a business must have placed the item into service during the 2010 calendar year. With these generous expensing rules, many small businesses would be wise to forego depreciating any new capital investments from last year and instead write off the entire amount in 2010.

 

Bonus First-Year Depreciation: For the 2010 tax year, the bonus first-year depreciation provision, which allows a business to write off up to half of a newly purchased asset’s cost, was once again extended. So, for example, if a small business spent $750,000 on a new assembly line last year, it would be able to write off $500,000 using Section 179 expensing (mentioned in previous item) and then claim an additional $125,000 in bonus, first-year depreciated value, which would leave just $125,000 in taxable value to depreciate over the coming years. To figure out your own potential tax savings, try using this online Section 179 and bonus depreciation calculator.

 

Poll-Tax-Software2.pngStartup Expenses: For 2010, Congress raised the deductible amount of startup expenses to $10,000. However, keep in mind that for startup expenditures that exceeded $60,000 last year, the new law reduces the total deductible amount on a dollar-for-dollar basis. So, an entrepreneur claiming $62,000 in startup expenditures would only be eligible for an $8,000 deduction and someone with $70,000 in start-up expenses would see their deduction shrink to zero.

 

Net Operating Loss (NOL) Carryback: Continuing again for 2010 is the provision that allows eligible small businesses to spread out general business credits over the previous five years. This change—the normal carryback limit is one year—allows struggling start-ups and small businesses to even out their receipts over a greater amount of time. For instance, a business that lost $200,000 in 2010 is able to amend its returns back through 2005—years where the company may have made profits—and generate some much needed capital in the form of tax refunds.

 

Take note, though, that the bevy of last-minute tax law changes from Congress could create a backlog at the IRS and, hence, NOL refunds could take an extended amount of time to process. (For an expedited refund, file IRS Form 1139: http://www.irs.gov/pub/irs-pdf/f1139.pdf). Also, note that NOL carrybacks are only available to small businesses formed as sole proprietorships, partnerships, or C-corporations that aren’t publicly traded. Gross annual receipts also have to be under $50 million for the previous three years.

 

Mileage, Transportation, and Business Travel Deductions: For 2010, the standard business mileage deduction was 50 cents per mile. Use of a vehicle for a deductible move and charity purposes stands at 16.5 and 14 cents, respectively. As was the case previously, business-related parking costs and tolls are still deductible, as are taxi, shuttle bus, and rental car expenses related to your business. And keep in mind that if the actual business travel expenses for your car will total more than the standard deduction, you can choose to itemize those expenses instead to get the larger deduction.

 

In 2010, employers were once again allowed to pay up to $230 per month, tax-free, to their employees to cover the cost of parking. The rate on tax-free public transit passes for employees gained parity with parking in 2010 and was nearly doubled to $230 a month as well.  

 

Payroll Taxes: While the self-employment tax rate and Social Security tax rate for employers remained unchanged from 2007, the maximum amount susceptible to taxation for both of these was raised from $97,500 to $102,000. Also, the federal unemployment tax rate (FUTA), previously set to decrease to 6.0% after 2007, was instead kept at 6.2% and has remained at that rate ever since.

 

Health Care Tax Credit: As part of the comprehensive health care reform law enacted last spring, qualifying small businesses are eligible for a tax credit of up to 35 percent of their premium payments made in 2010. For more on the eligibility rules and to view some sample business scenarios along with their corresponding tax credit eligibility, click on this IRS fact sheet. To calculate your individual small business’s potential tax credits, go online and print out the IRS’s simple, three-step worksheet.

 

Health Savings Account (HSA) Deductions: In 2010, employer contributions into an employee’s Health Savings Account (HSA) could be made tax-free up to $3,050 for individuals and $6,150 for families. (Slightly higher tax-free contribution limits—$4,050 and $7,150, respectively—were applicable for employees that reached age 55 at any time during the year.) To qualify, the employer’s high deductible health plan had to have an annual deductible of at least $1,200 for individuals or $2,400 for families and limit annual out-of-pocket expenses to no more than $5,950 for individuals and $11,900 for families.

 

Self-Employment Taxes: The maximum amount of net income subject to Social Security taxes for the self-employed remained at $106,800 for 2010. All net income above $400 is subject to Medicare taxes as well. Also, in an important change for the 2010 tax year only, self-employed business owners that meet certain guidelines can deduct the cost of health insurance premiums paid for themselves and their family when computing self-employment taxes (as opposed to income taxes only).

 

Expired Tax Benefits: For 2010, the partial exclusion from taxes on the first $2,400 in unemployment benefits was eliminated. So, if you were laid off and collected unemployment before starting a business last year, you’ll have to pay taxes on the entire amount of unemployment collected.

 

Finally, don’t forget that the tax filing (and extension) deadlines for your business depend upon the structure of your business you own. Corporations (both C- and S-type) that file any version of Form 1120 must do so by March 15, 2011, while partnerships and sole proprietorships file on the individual tax schedule, which must be postmarked no later than April 18 of this year. And remember, even if you’re filing for an extension, you must still pay your estimated tax due by the original filing deadline or your business will be charged a late penalty. (For more details and important dates, check out the IRS’s online tax calendar for small business.)

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