By Mark E. Battersby
Many rural building business owners and managers frequently find themselves caught up in the tax process — often when it is too late to have a real impact on their tax bills.
Fortunately, it is not too late to benefit from last year’s transactions on this year’s tax returns. In fact, how many of last year’s transactions are treated on the 2011 tax returns may have a significant impact on 2012’s budget figures — and its tax bill.
It may surprise many builders and contractors to learn that the tax deadlines imposed by our lawmakers are flexible. Admittedly, under our tax laws, a transaction must be completed prior to the end of the tax year in order to have an impact on the tax bill. While that means December 31 for most builders, as well as building businesses using a calendar year, it doesn’t mean that there is nothing that can be done after that date to lower taxes.
That’s right, while moves made to structure transactions for the most favorable impact on the annual tax bill are limited to postponing the filing of the tax returns reporting those transactions or changing your mind on already reported transactions is permitted.
A good example of potentially tax-reducing actions that can be undertaken after the close of the tax year involve the so-called “check-the-box” regulations that allow business owners, managers and their advisors to re-examine the type of business entity currently used. That’s right, regardless of how it was formed or operated, a contractor or building business can select the type of business entity it wishes to use for tax purposes.
Not only can a partnership choose to be treated as a corporation, separating the partners from the business, the members of those increasingly popular limited liability companies (LLCs) can choose to be treated as either a corporation or as a partnership for tax purposes. And, best of all, it can all be accomplished by simply “checking-the-box” on the annual tax return.
While incorporated building businesses cannot take advantage of the “check-the-box” rules, for all others, the flexibility provided by the “check-the-box” regulations offer planning opportunities.
When it comes to the deadline for paying taxes, Uncle Sam, in the form of the Internal Revenue Service, wants its money sooner rather than later. That means pre-paying an estimated tax bill usually in four quarterly installments. It also means fully paying the expected tax bill on or before the deadline, either March 15 or April 15 for most businesses and individuals using a calendar year.
Even with the strict pre-payment requirements, extensions of time to make those payments are often granted for specific groups of taxpayers, usually those suffering from a natural disaster or unusual circumstances. Under special circumstances, the payment of tax can be extended for a reasonable period, not longer than six months.
Today, using Form 4868, “Automatic Extension of Time to File a U.S. Individual Tax Return,” a builder or contractor can obtain an automatic, six-month extension of time in which to file tax returns. Naturally, a proper estimate of tax liability is required.
Incorporated building businesses can also obtain an automatic six-month extension of time to file income tax returns by submitting Form 7004, “Application for Automatic 6-Month Extension of Time to File Certain Business, Income Tax, Information, and other Returns.” Form 7004 is also used to obtain a six-month extension for filing some excise, income, information and other returns.
The automatic six-month extension of time to file also applies to the returns of pass-through entities such as partnerships, S corporations and limited liability companies (LLCs). Remember, however, the Form 7004 does not extend the time for payment of tax.
Now might be a good time to think about the deadline for payment of estimated taxes, about avoiding the penalties for ignoring or guessing wrong about those estimated taxes required of most businesses and self-employed individuals by their deadlines.
Under our tax laws, the Internal Revenue Code, an incorporated building business that anticipates a tax bill of $500 or more is required to estimate its income tax liability for the current year.
Failure to make a timely payment that accurately reflects the tax liability of the building business results in penalties. In fact, underpayment of any of any required estimated tax installment results in a penalty for the entire period of that underpayment. The addition to tax is based on the underpayment interest rate determined quarterly by the IRS. For underpayments, Form 2220, “Underpayment of Tax by A Corporation” can be utilized.
Surprisingly, all is not over merely because a deadline has passed. Once the tax returns have been filed, if any builder or contractor determines the operation’s tax bill is incorrect, changes can be made on an amended tax return. That’s right, anyone can change their mind about the operation’s income, as well as about many of the credits or deductions that might have been included on an already-filed tax return.
Correcting or amending any return because of errors, omissions, mistakes or overlooked deductions — as well as to report additional income — is encouraged by the IRS. The IRS assures everyone that changing their mind about previously reported deductions or income will not increase the likelihood of an audit. But, why would anyone want to change or amend their already-filed tax returns? The answers vary widely and include changes that might be needed as a result of some of last year’s many tax law changes, overlooked write-offs, newly discovered records or simple errors.
Generally, a building business — or its owner — can change their mind about previously reported income and deductions within three years from the time the return was filed, or within two years from the time the tax was fully paid, whichever is later. Should the refund claim involve the deductibility of bad debts or worthless securities, the period is seven years.
Individuals, sole proprietors, etc., use Form 1040X, Amended Individual Tax Return. A corporation that filed Form 1120 uses Form 1120X, Amended U.S. Corporation Income Tax Return, to file an amended return, while S corporations and partnerships check a box on the Form 1120S or Form 1065.
While there is a great deal of pressure in many building businesses to continue cutting costs, including taxes, the financial or operational strengths of a business transaction should always stand on their own, aside from any tax benefits derived from them. There is also the question of whether a tax deduction should be taken or if legally, feasible, ignored.
It is always a good idea to run all tax-related strategies, deductions and transactions by the professionals your operation should be relying on. Professionals are not just for taxes, there are also legal, liability and other concerns.
Today, thanks to an extended time period in which tax returns can be filed and an even longer period in which to change or amend already-filed tax returns, the so-called “tax season” has become a year ‘round event. After all, what better time to guarantee that all deductions have been claimed for 2011 while simultaneously incorporating any overlooked or ignored tax strategies into the 2012 tax plans of you and your building business, than right now? RB
Mark Battersby is an expert in tax and financial matters. With more than 30 years experience in small business issues, he lectures and writes extensively on business topics. Contact him at 610-789-2480 or MEBatt12@Earthlink.net.