Drawing from the knowledge obtained from the 2014 tax filing season (which ends October 15, 2015, if a taxpayer extended the time to file), many entrepreneurs are planning ahead for 2015 and beyond.
When a taxpayer is preparing to file her tax return there are items and terminology that may come up such as organizing your tax records, documentation, quarterly estimates, penalties assessments, limits on deductions, capital gains and capital losses. In the tax community these terminologies are important and understanding what they mean is crucial to filing a complete and accurate return while avoiding unfavorable situations for the taxpayer. In this article we will discuss the importance of how to keep an organized set of tax records, of quarterly tax estimates, of understanding the limitations on deductions that require early planning, and of the impact of financial institutions credit requirements that include the timely filing of tax returns.
The key to a smooth tax filing experience is having access to all of your tax information early after year end, preferably by the middle of February. Also, keeping information organized will alleviate searching for documents that you may or may not have. Having this information early on in the tax filing process will allow you to review your tax records in detail and catch any mistakes made by the issuer which could help avoid contacting financial institutions, for example, at the last minute. In addition, having tax documentation early allows for a smoother preparation experience for you or your tax preparer. This could help avoid penalties from failing to file or pay on time due to missing material tax information. In a case like the one previously described, filing an extension would be an option if a taxpayer needs more time to gather information to file a complete tax return but it does not provide an extension to pay tax.
Filing and paying quarterly tax estimates is another good strategy used to help create a smooth tax filing experience. The importance of quarterly tax estimates are significant when a taxpayer forecasts for the current tax year she may be facing a substantial tax liability. One advantage for filing quarterly estimates is that it helps the taxpayer avoid underpayment penalties and interest. In a situation where there is a significant tax payment due at the end of the tax year that may not be feasible to pay, additional penalties and interest would accrue if the payment is not made right away. In fact, if a taxpayer is unable to pay the tax that is due, the Internal Review Service (“IRS”) may begin collection procedures including tax liens and levies. If estimated correctly, the taxpayer could pay little to nothing at the end of the tax year due the credits they would receive from making quarterly estimates throughout the year. Imagine having to write a check to the Internal Revenue Service (“IRS”) for $100,000 at the end of the year. That’s a hefty amount for someone who may not have the funds available for immediate payment. Instead, paying quarterly tax estimates in the amount of $25,000 each quarter would ease the pain of having to send one large sum at the end of the year that ultimately would be subject to underpayment penalties.
Let’s keep the positive tax filing experience going shall we?
Planning is another important factor in making the tax filing experience as smooth as possible. Sometimes, tax issues are complex and not very straightforward. Many taxpayers this past filing season struggled in understanding the impact the rules for deducting eligible expenses whether business or allowable personal expenses. Expenses related to the production of income, caps imposed on personal mortgage interest, limits on charitable contributions, passive activity losses and the treatment of interest expense from a trade or business and investment activities are a few of the areas that many taxpayers did not completely understand how each impacted their tax liability.
From a federal tax perspective, many taxpayers are unaware that for purposes of the net investment income tax of significant participation passive activities that in order for an individual to be considered as significantly participating in a passive activity as opposed to materially participating, that the taxpayer must participate in the activity for more than 100 hours but less than 500 hours during any given year. The positive to this is that the taxpayer only needs to participate 100 hours in a trade or business for the net income to be excluded from net investment income. The bad news is that a loss from this activity will be treated as a passive loss. Planning prior to the year end will help the taxpayer to understand the impact of these rules and help them address these issues.
Timing is also imperative when filing tax returns. Understanding when your tax return is due could help avoid major penalties and interest that would be generated if the tax return is filed late. This is in addition to not making tax payments on time. For example, as a small business owner you may have a financial institution financing your business or home and they may require that your individual tax return to be completed and filed by the April 15th deadline as well as your corporate tax return completed and filed by the March 15th deadline. Many financial institutions request that their customers do not extend the filing date of their returns to meet bank covenants that require submission of their tax returns. Not complying with your financial institution requirements or the IRS could be a costly mistake. Taxpayers should be aware of specific dates for deadlines to avoid these issues.
Post tax season analysis will assist a taxpayer in preparing her subsequent tax returns more accurately and timely. Remember, being organized is key and sets the foundation for a better tax filing season!
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