Late Payment Penalties and Your Business Tax Returns



If you have not filed your business income tax returns in a timely fashion you should know about the failure to file penalties from the IRS. The incentive to file on time via the late filing penalty is significant. Here are the penalties for late filing of tax returns for a partnership, S Corporation, and a C Corporation. 

Late Filing of Return for a Partnership


Here is what is included in the instructions from the IRS for the partnership tax return form 1065 for 2019:

A penalty is assessed against the partnership if it is required to file a partnership return and it (a) fails to file the return by the due date, including extensions, or (b) files a return that fails to show all the information required, unless such failure is due to reasonable cause. The penalty is $205 for each month or part of a month (for a maximum of 12 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership's tax year for which the return is due. 

Late filing of return for an S-Corporation

Here is what is included in the instructions from the IRS for an S-Corporation tax return form 1120S for 2019:

A penalty may be assessed if the return is filed after the due date (including extensions) or the return doesn't show all the information required, unless each failure is due to reasonable cause. For returns on which no tax is due, the penalty is $205 for each month or part of a month (up to 12 months) the return is late or doesn't include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation's tax year for which the return is due. If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is more than 60 days late is the smaller of the tax due or $435.

Late filing of return for a C Corporation

A corporation that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is more than 60 days late is the smaller of the tax due or $435. The penalty will not be imposed if the corporation can show that the failure to file on time was due to reasonable cause.

You really don't want to be late filing your business tax returns, partnerships form 1065, S Corporations form 1120-S, and C Corporations form 1120. The late filing fees are particularly painful. However, if you have neglected to file back tax returns you probably want an idea of what your penalties will be. One of my clients came to me needing to file years of back tax returns for his business. As you can see once your business returns are over a year late the penalties are stiff. There may be a possibility of getting the penalties abated under certain circumstances, but that is a subject for another blog post. 

For help filing your back tax returns and potentially representing you before the IRS and the states to work out payment arrangements for your amounts due feel free to contact me via email to arrange an appointment to discuss your situation. My email address is found below.



Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com





Posts - IRS Collection Issues and Options:






Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

President Trump's Tax Returns: Cancellation of Debt

 


The New York Times article bout President Trump's tax returns has people asking how someone can avoid paying taxes on income from cancellation of debt. Here are some quotes from the New York Times article that have spurred these questions:

"Mr. Trump’s avoidance of income taxes is one of the most striking discoveries in his tax returns, especially given the vast wash of income itemized elsewhere in those filings."

 

"... the tax returns reveal that he has failed to pay back ... a total of $287 million since 2010.

The I.R.S. considers forgiven debt to be income, but Mr. Trump was able to avoid taxes on much of that money by reducing his ability to declare future business losses. For the rest, he took advantage of a provision of the Great Recession bailout that allowed income from canceled debt to be completely deferred for five years, then spread out evenly over the next five. He declared the first $28.2 million in 2014."

 How can someone avoid taxes on Cancellation of Debt income? There is not enough information in the article to explain how President Trump allegedly did this, but we can look the IRS Tax Code Section 108 for an explanation of how it can be done.  IRS topic No. 431 says the following:

"In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs. The canceled debt isn't taxable, however, if the law specifically allows you to exclude it from gross income."

"EXCLUSIONS from Gross Income:

1. Debt canceled in a Title 11 bankruptcy case

2. Debt canceled to the extent insolvent

3. Cancellation of qualified farm indebtedness

4. Cancellation of qualified real property business indebtedness

5. Cancellation of qualified principal residence indebtedness that is discharged subject to an arrangement that is entered into and evidenced in writing before January 1, 2021"

So someone or an entity who has debts cancelled may not have to report that cancelled debt as income on their tax return that year. But that may not mean that it has really avoided tax treatment but likely it has just be delayed. Notice these further comments from Topic No. 431:

"Generally, if you exclude canceled debt from income under one of the exclusions listed above, you must reduce certain tax attributes (certain credits and carryovers, losses and carryovers, basis of assets, etc.) (but not below zero) by the amount excluded. You must attach to your tax return a Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) PDF to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes."

Notice that while the cancelled debt may not be taxable in the year it was cancelled, but in addition it could then affect other tax attributes like basis which could affect the future gains reported on the sale of the property, assuming the property or asset is still owned or still in business. 

This is a rather simplified discussion of Cancelation of Debt income. Hopefully it is sufficient to give you an idea of how a person or an entity may not need to report Cancellation of Debt income on its taxes in the year it was cancelled. 

The IRS Will Likely Respond to the Negative Reactions to This News

"For every action there is an equal and opposite reaction". When the IRS is made to look bad and people are asking questions about what some prominent people have done, especially if it doesn't seem right or fair, you can believe there will be a reaction from the IRS. Perhaps they will use the public outcry over this situation to get more funding. At any rate you can count on the IRS getting more aggressive to collect taxes. If you need to file back taxes, clean up over aggressive tax returns, or need help with your tax debts, now is the time to act. Contact me today using my email address below to setup an initial consultation.




Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com





Posts:






Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

PPP Loan Forgiveness - What is Happening?



What is happening with PPP loan forgiveness? Every time I speak with one of my clients with a PPP loan they ask about PPP loan forgiveness and I get emails about why different banks don't have their forgiveness site up yet. Here is some of the news I am getting from various banks. 

Banks are waiting for new legislation impacting PPP loan forgiveness

The email I received today from Square Capital says:

"Congress is currently discussing a bill that can make it easier for you to apply and qualify for PPP loan forgiveness. We are waiting to release our forgiveness application until we get more information from Congress on this bill so you can apply for the largest forgiveness amount possible."

I received a similar email from another bank back on August 11th saying basically the same thing. So the banks are not ready and they will let you know when they are ready.

What Are They Saying?

The Square Capital email referenced an article with more information. It includes "potential changes may include:

  • Automatic forgiveness for businesses who received $150,000 or less in PPP funds who can attest they've made a best effort to comply with the program requirements.
  • More ways to use your funds and qualify for forgiveness, including paying for operating costs, property damage, supplier costs, and worker protection expenses.
That is great but it is just potential changes~! 

What they think they do know

Independent contractors who file a 1040 schedule C are wondering how much of their loan will be forgiven considering that don't pay themselves payroll wages. Here is what the Square article says:

"As an independent contractor, sole proprietor, or self-employed individual, if your covered period is eight weeks, you get eight weeks of your 2019 net profit (as reported on your Form 1040 Schedule C) forgiven, capped at $15,385 per individual. If your covered period is 24 weeks, you get 2.5 months of your 2019 net profit (as reported on your Form 1040 Schedule C) forgiven, capped at $20,833 per individual. This is called the Owner Compensation Replacement and was recently introduced by the SBA. To get your remaining PPP funds forgiven, you will need to spend it on business utilities, rent, and mortgage interest expenses (to the extent such expenses are deductible on your Form 1040 Schedule C)."

What about EIDL grants?

 Again, the Square article says:

"If you received both an EIDL advance and a PPP loan, the CARES Act specifies that the EIDL advance will be deducted from your PPP loan forgiveness amount."

The Square article is really good and you can check it out here. It addresses what you will need to apply for forgiveness, what types of costs can be included in forgiveness, and other questions. 

This is not a big part of what the CPA Superhero does but so many people are wondering about this subject, I thought I would put out a quick post on it. Most of what I do includes preparing income tax returns and helping people with tax issues with the IRS and the states, like filing back tax returns and working out payment arrangements for taxes that they cannot pay at this time. For information about tax issues see some of my posts listed below. If you need help with these services contact me today using my email below to arrange for an initial consultation. 



Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com





Posts:





Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

bAD DEBT Expense

Hear me out please. I am going to address bad debt expense to clear up a common misconception and hopefully I can write this an understandab...