Evan Piccirillo

Overtime loss in Boston Bruins vs. IRS

iStock

iStock

Posted by Evan Piccirillo, CPA

In 2017, a high-profile case (Jacobs v. Commissioner) pitted the owner of the Boston Bruins, an NHL hockey team, against the IRS, and the Bruins won—but… thanks to the Tax Cuts and Jobs Act (TCJA) we all lost.

The IRS had denied tax deductions relating to meals that the team provided to players and other staff for road games; these costs were not included in those employees’ wages and therefore, according to the IRS, only 50% deductible. The Bruins argued that the cost of meals counted as fully-deductible de minimis fringe benefits rather than only 50% deductible meals and entertainment expenses. The disagreement went to court and the ruling was in favor of the Bruins, but stretched the definition of certain aspects of the code that would allow for a full deduction.

Prior to the TCJA going into effect in 2018, taxpayers were allowed to deduct 100% of the costs of meals provided to employees if those costs were included in the wages of the employee. There was an exception to the requirement to include the costs in the employee’s wages if the facility providing the meals is on or near the business premises of the employer and the meals were considered provided for the convenience of the employer, along with some other technicalities which I won’t get into here.

A major part of the case hinged on the definition of “business premises.” Because these meals were on the road, the IRS argued that they could not be on the business premises of the employer. The Bruins claimed that travel was in the very nature of their business and the hotel space became their “business premises” since they had team meetings and attendance was mandatory. Like I said, it seems like a stretch of the definition, and in a recent “Action on Decision” memo released by the IRS they make it clear that those aspects of the ruling do not create a precedent for other taxpayers to follow. The IRS also stated it would narrowly apply this decision only to sports teams with very similar facts—not much help for the rest of us.

Ultimately, the big win by the Bruins in this case is not much to celebrate, because thanks to the TCJA effective 1/1/18, such de minimis fringe benefits are only 50% deductible. The worse news is that these expenses are nondeductible beginning on 1/1/26. Sorry, sports teams (and fans)!

The changes to deductibility of meals and entertainment under the TCJA don’t stop at de minimis fringe benefits and impact a much broader base of taxpayers than sports teams. If you have questions about how you are treating meals and entertainment expenses for your business, please reach out to your tax advisor. Or REM. We know a thing or two about this sort of thing.

New York, land of itemized deductions

New York Itemized Deductions 2.png

Posted by Evan Piccirillo, CPA

As we discussed previously, under the Tax Cuts and Jobs Act (TCJA), most itemized deductions have been suspended or limited for the next eight years. That fact, coupled with the nearly doubled standard deduction, means that most taxpayers will no longer itemize deductions on their federal tax return. Many might be led to infer that we no longer need to gather receipts and other tax deduction documents like we had in the past. You might even be thinking “Finally, something in the TCJA that resembles the simplification that the term ‘tax reform’ would suggest.”

Not so fast… New York State threw us a curve ball.

Prior to 2018, in most cases if taxpayers took the standard deduction on their federal return, then they would have to use the standard deduction on their New York return. Now New York will allow all taxpayers to itemize, even if they take the standard on their federal. In addition, virtually all the categories of itemized deductions that were suspended under the TCJA for federal returns are still allowable for New York returns. This means you will have to provide your tax preparer with:

  • amounts paid for charity

  • personal casualty losses

  • real estate and foreign taxes paid (you still can’t deduct New York taxes on your New York return)

  • interest paid, including mortgage interest

  • medical expenses, if they exceed 10% of federal AGI

  • certain job expenses and other miscellaneous itemized deduction, subject to limits

Many of these deductions are subject to limits for New York that differ from federal limits.  Also, keep in mind that the New York standard deduction is only $16,050 for a married couple while the federal standard deduction is $24,000.  It very well may be the case that taxpayers with itemized deductions that fall between those amounts (and in excess of those amounts) will want to tax advantage of this change in New York.

Although this is actually a benefit for taxpayers (more deductions) it adds yet another layer of complexity to an already tangled web of information and misinformation in the public conversation.  If you were under the impression that your facts lined up in such a way that you were done with tracking personal deductions, it is very likely that you were wrong.

I hope you didn’t throw away those receipts…

Beware: dangerous tax account transcript scam runs rampant

iStock and REM Cycle

iStock and REM Cycle

Posted by Evan Piccirillo, CPA

Here is something important to know: the IRS does not send unsolicited emails to taxpayers. Please remember that; it just might save your assets.

Due to a spike in reported cases, the IRS has recently warned taxpayers of a scam involving the malware known as “Emotet.” Emotet is a computer virus distributed as a trojan, meaning that it is sent under the guise of something legitimate. In this case, you may receive an email about a tax account transcript from the IRS. If you open an attachment or click on a link, you are at risk of the virus finding its way onto your machine. The malevolent parties will send the fraudulent email to thousands of email addresses, hoping that a few will take the bait. This process is commonly referred to as phishing (no relation to the band Phish). Once the malware has infected a computer or network, information can be stolen and used maliciously by outside parties. The warning from the IRS is primarily directed towards businesses, but it is a good reminder for all taxpayers that the IRS has a very specific methodology when reaching out to taxpayers.

In nearly all cases, the IRS will first reach out through the mail in letter form, referred to as a notice. The notice will contain information about why the IRS has attempted to contact you and actions to take, if any. The common reasons to receive a notice are: an adjustment to a tax return, a request for a tax return, a tax bill, or being selected for an audit. Here is something else important: immediately turn that notice over to your tax preparer. A timely response is important when resolving IRS notices. If the IRS has not received a response to an initial notice or several follow-up notices, a representative may indeed show up in person.

Here are some red flags that may clue you in on an attempted scam: You are asked for a specific type of payment like a gift card, you are asked to provide credit card numbers over the phone, you are not advised of your rights as a taxpayer. Also, be very suspicious if you are threatened with law enforcement if you don’t pay. I urge you to be cautiously skeptical and always reach out to your tax preparer or advisor before responding.

Lucky for us, the IRS has provided useful information, details, and links on their website to help taxpayers identify what is legitimate and what is bogus.

I recently received a voicemail from “the IRS” using a computerized voice informing me that an arrest warrant had been issued for me. Oh, dear! And both me and my assets were being monitored—very scary! They demanded immediate payment and left a direct line for me to call them back. I called, but sadly no one answered. Fortunately for me, I am fairly well-informed and realized right away that this is a poor attempt at a scam. Whew! I hope that after reading this, you’ll be well-informed, too.

Introducing: the new business loss limitation

iStock

iStock

Posted by Evan Piccirillo, CPA

A new provision included in the Tax Cuts and Jobs Act introduces the concept of excess business losses (EBLs). Beginning in tax years starting after December 31, 2017, a tax deduction for losses from business activities that exceed $250k for single filers and $500k for married filers are considered EBLs and will be disallowed.

Digging into this piece of hastily-written code section we don’t find much in the way of details, but we do get some important information:

  1. The EBL converts to a net operating loss (NOL) in the following year

  2. EBLs are figured by aggregating the income and loss from trades or businesses that exceed the limit

  3. The limits of $250k and $500k are indexed for inflation

  4. The limitation is applied at the partner or shareholder level in the case of a partnership or S corporation, respectively

  5. The EBL is figured after the other business loss limits: basis, at-risk, and passive activity

  6. This provision is set to expire in 2026

What does it all mean?

Taxpayers may not be able to shelter as much of their other types of income with losses from their active trades or businesses. Also, the NOLs generated from these EBLs are the new flavor of NOL which cannot be carried back, will be carried forward indefinitely, and are limited in their usage to 80% of taxable income. These NOLs are less potent than their predecessors, but the upside is that they don’t expire. We’ll have more on the NOL topic in a future article.

What don’t we know?

  • Does this limitation apply to trusts? The prevailing belief is that it does.

  • Are wages and/or guaranteed payments from sources subject to this limit considered to be trade or business income and therefore aggregated to figure the EBL? It seems they should be included, but this requires further guidance.

  • Will other items of income and loss such as interest income or 1231 gains/losses from sources subject to this limitation be aggregated to figure the EBL? This is also unclear and will require further guidance.

Let’s take a look at a simplified example:

A single taxpayer has nonbusiness income of $400k and net allowable business losses of $350K. Under these circumstances in 2017, this taxpayer would be able to shelter most of their income with the business losses and only pay tax on $50k of income ($400k - 350k = $50k). With the same set of facts in 2018, the taxpayer’s business losses will be limited to $250k and tax will be paid on $150k ($400k – 250k = $150k), resulting in a $100k swing in income. The EBL of $100k will convert to a NOL to be used in future years, which is nice, but this taxpayer still needs to pay tax presently on an extra $100k of income. Not an ideal outcome for our hypothetical taxpayer.

This limitation adds yet another layer of complexity to an already complex tax planning landscape. If your tax situation resembles what you have just read, you should consult with your tax advisor to see if there is anything you can do before the end of the year to account for this potentially expensive tax consequence.

Navigating the Tax Cuts and Jobs Act: Volume 4 – Individual year-end planning

TCJA series header.png

Posted by Evan Piccirillo, CPA

[Editor’s note: this is one of an ongoing series of articles parsing and clarifying the tax reform commonly known as the Tax Cuts and Jobs Act. Previous articles are linked at the end of the post.]

Nearly everything involving taxes in our country has been acutely affected by the Tax Cuts and Jobs Act (TCJA). Unfortunately, owing and paying tax are still necessary and required in most cases, but on the other hand we are treading on new terrain for year-end tax planning. We will explore some actions taxpayers can make before the end of 2018 that can provide a tax benefit.

Itemized deductions

The only itemized deductions that have survived the TCJA are:

  1. medical expenses in excess of 7.5% of adjusted gross income

  2. state income and real estate taxes, limited to $10k

  3. mortgage interest including home equity interest paid, subject to limits

  4. charity

One of the most impactful changes to individual taxpayers is the limitation on state income tax and real estate tax paid (the so-called SaLT deduction) to $10,000. Many taxpayers, especially those in high-tax states, were itemizing their deductions primarily due to their state tax burden. Couple this limit with the drastic increase of the standard deduction ($24k for married filing joint taxpayers), and you will find most taxpayers will no longer itemize their deductions.

Tax planning points

  1. Bunching deductions. If you have significant deductions that are just below the standard deduction, you might consider “bunching” your deductions, i.e. paying charitable contributions on January 1st and December 31st of year one, and then not making such contributions in year two. As a result, you will itemize deductions in year one and tax the standard deduction in year two, then alternate this method each year.

  2. For estimated taxpayers, there is no more pressure to get your 4th quarter estimated state tax payment in on or before December 31st since you will likely already exceed the $10k cap, and therefore receive no benefit from paying the estimate two weeks early (they are due January 15th).

Sec. 199A – The 20% Deduction

To put individual taxpayers on more even ground with corporations that now have a 21% flat tax rate, the TCJA provides a deduction of up to 20% of income from pass-through entities. Depending on the income level of a taxpayer and the type of business that generates the income, this 20% deduction may be limited or altogether eliminated. We will discuss this provision in depth in a different article, but we will explore basic tax planning here.

Tax planning points

  1. For s-corporation shareholders, consider adjusting owner’s salaries to maximize the deduction. If a taxpayer’s income is over the threshold and the business is qualified, the 20% deduction may be limited to 50% of the wages paid by the company. Since only the pass-through income and not the wages earned from the company get the benefit of a 20% deduction you would prefer the pass-through income to be as high as possible and the wages paid to be as low as possible. There is a sweet spot in the relationship between the wages and the pass-through income that will offer the optimal deduction assuming the owner’s compensation is still considered to be reasonable.

  2. An alternate limitation is 25% of wages plus 2.5% of depreciable property. Taxpayers might consider making an investment in tangible property for the business before the end of the year, especially in partnerships or sole proprietorships where owners are precluded from paying themselves wages. There are also enhanced accelerated depreciation incentives in the new tax law that make this an even sweeter deal.

Gain Deferral – Qualified Opportunity Zones

An incredible tax deferral tool provided by the TCJA is the advent of qualified opportunity funds (QOFs) which are entities that invest in qualified opportunity zones (QOZs). QOZs are economically depressed areas that have been identified by state governments. The intention of the law is to spur economic investment in these depressed areas. QOFs may present an attractive option for taxpayers that have significantly appreciated property and would like to dispose, but do not want to pay tax on the gain.

Tax planning points

A taxpayer may defer paying tax on a capital gain, if they invest the gain in a QOF within a 180-day window. If specified holding periods are met, those taxpayers may receive a deemed step up in basis of up to 15%, thereby permanently eliminating tax on that portion of the gain. In addition, the appreciation on the investment in the QOF is not taxed if held 10 years.

Bottom line

Only two months remain in 2018, but that is enough time for savvy taxpayers to take advantage of some of the changes to the tax code… and these are just a few of the options available to taxpayers looking to decrease their federal tax liability. As always, consult with your advisor before taking it upon yourself to engage in any of these tactics. Everyone’s personal income tax situation is nuanced, and certain actions may not yield expected results.


Wayfair II: Congress strikes back

 
Cart - Wayfair 01.png
 

Posted by Evan Piccirillo, CPA

In June of 2018, the Supreme Court rendered their Wayfair Decision, apparently giving states license to much more aggressively legislate sales tax laws for out-of-state vendors. With the longstanding and archaic physical presence standard seemingly abolished, states and their local jurisdictions were granted a method of increasing tax revenues without going through the unpopular process of raising tax rates, but instead increasing their tax base. What a concept!

Obviously, businesses dealing primarily in interstate retail sales were most upset to hear this news. Cost of compliance with respect to registering to do business and perpetually filing various tax returns in many jurisdictions can be burdensome. In addition, states might seek to retroactively impose tax on prior-period sales, opening an unanticipated floodgate of tax, penalties, and interest. Smaller businesses that lack the infrastructure to deal with these compliance matters are particularly vulnerable. Since sales and use taxes are “trust-fund” taxes and business owners can be held liable, the exposure for businesses in these areas could be crippling.

Arguably, the primary concern over the Wayfair decision is the uncertainty left in its wake. Some states have acted quickly to pass laws aiming to scoop up as much cash as possible as quickly as possible. Business aren’t sure if they should scramble to register now and begin filing returns and collecting sales tax or if they should take a wait-and-see approach.

Luckily for businesses, Congress has stepped in to save the day (you don’t hear that very often). A bipartisan bill with a good chance of passing was introduced in the house (you don’t hear that very often either) called the “Online Sales Simplicity and Small Business Relief Act.” What the bill lacks in naming creativity, it makes up for in substance. The bill seeks to clear up problems and provide structure and order left in the pandemonium created by the Court’s decision.

The bill sets a cut-off date for sales prior to June 21, 2018; no sale tax collection on transactions prior (which is the date the decision was rendered). It calls for a phase-in of compliance beginning in January of 2019. It also establishes a small business exemption for sellers with gross annual receipts of less than $10 million per year. Lastly, the bill seeks to compel states to work together to develop a “compact” that defines what gives rise to nexus and decreases the burden of compliance on taxpayers.

Hopefully this shred of sanity in such a chaotic time will survive our legislative process and become law. Either way, businesses that have out-of-state retail sales should take steps to identify potential exposure in applicable jurisdictions, paying special attention to those states that have already passed legislation that ignores the physical presence standard and act accordingly.

Pitfalls of the New IRS Interest Expense Limitation

Posted by Evan Piccirillo, CPA

EDITOR'S NOTE: This article is also featured in the August 7, 2018 edition of the New York Real Estate Journal.

The sweeping revision to the U.S. tax code known as the Tax Cuts and Jobs Act contains many provisions that present pitfalls and planning opportunities.  One such provision limits the tax deduction on interest expense.  This presents certain tax-planning considerations for taxpayers, especially those who do business relating to real estate.

Under the revised code, the federal tax deduction for net business interest expense is limited to 30% of a taxpayer’s “adjusted income” at the entity level, with the excess carrying forward indefinitely.  Adjusted income under this provision is business earnings before interest, and until tax years beginning in 2022, before depreciation and amortization as well.  Net operating losses and the new 20% pass-through deduction are ignored when determining adjusted income.  For example, in 2019 a taxpayer has $40 of taxable income, $30 of interest expense, and $10 of depreciation and amortization.  Adjusted income is $80 ($40 + $30 + $10) and the limit on interest deduction is $24 ($80 * 30%).  In this case, $6 ($30 - $24) carries forward to the subsequent year.

This limitation is a detriment to taxpayers who finance a significant portion of their operations with debt, which is common when operating rental real estate.  Furthermore, rental property debt is often refinanced in order to distribute cash representing the appreciation of the property’s value, usually to fund additional acquisitions.  Since the debt doesn’t go away the excess interest may keep carrying forward, in effect permanently.  Some businesses may have to consider changing their method of financing operations to shift from debt to equity to counter the limitation.

Fortunately, in certain situations taxpayers can avoid limiting their interest deduction.  

The Small Business Exemption

Taxpayers with average gross receipts of less than $25 million over the previous three years ($25M test) are exempt from the interest limitation described above.  Since $25M is a high threshold, many taxpayers will be relieved to hear about this exemption, if not for the following pitfalls:

Pitfall 1 - Aggregation rules

The $25M test for the small business exemption is applied using somewhat complex aggregation rules.  Receipts from entities with common ownership are grouped together for the test.  If the group fails the $25M test, the entities in that group will not be able to avoid the limitation this way.  For example, two rental properties are owned in partnerships by two individuals, split 50/50.  Each property has average gross receipts of $15M, well below $25M.  But the receipts of these properties are combined for the small business test.  In this case, $30M is greater than $25M, so both partnerships fail the test and are subject to the limitation.  This provision is meant to counter the obvious strategy of splitting up existing businesses into smaller companies to avoid the limitation.

Pitfall 2 - Entities with limited investors

Taxpayers who realize taxable losses and have more than 35% of their ownership comprised of limited investors may also fall into the “tax shelter” trap.  Consider a rental property owned by a partnership of five individuals, each with a 20% interest.  Three partners are actively engaged in the business; the other two are limited partners. If the property experiences a tax loss in a given year, it is considered a “tax shelter” in this context, since a ratable amount of the loss is allocated to the two limited partners whose ownership exceeds 35%.  In this case, the small business exemption does not apply, regardless of the results of the $25M test; therefore the interest deduction is subject to limitation.  This “tax shelter” test is applied each year, which means that in profitable years, the limit may not apply, but in loss years it will.  Consider buying out limited investor interest that exceeds 35% to avoid this trap.

Electing Real Property Trade or Business

If a taxpayer does business in the real estate industry and elects to depreciate real property under the Alternative Depreciation System (ADS), that taxpayer will not be subject to the limitation.  ADS provides for a slower recovery period than usual and doesn’t allow the instant cost recovery of bonus depreciation. If you are willing to decrease your annual depreciation deductions, you can get out of this limitation regardless of the other factors.

The ADS election may seem an obvious choice, but benefit and cost must be weighed before making a decision.  The election is irrevocable; long-term consequences must be considered.  Also, an entity that may be subject to the 30% limitation might have enough adjusted income to absorb all interest expense, nullifying the benefit of the election.  In addition, losing the benefit of bonus depreciation can be a significant drawback.

All businesses need to understand the consequences of the new interest deduction limitation, but real estate businesses have an extra option to reduce their tax liability.  Shifting debt to equity, buying out limited investors, and (for real estate businesses) making the ADS election are viable options to counterbalance the new limitation.

The IRS is not amused with states' attempts to circumvent federal tax changes

 
 

The recently enacted Tax Cuts and Jobs Act (TCJA) makes some potentially detrimental changes to state and local tax (SaLT) deductions, namely a limitation on the tax deduction of $10k for married filers and $5k for single filers for state taxes.  Prior to the TCJA, there was no such limitation (even though some taxpayers were hit with the Alternative Minimum Tax, but that is a different discussion).  This presents a problem for taxpayers in “high-tax” states: any jurisdiction that imposes a high income tax, a high property tax, or both, such as New York, New Jersey, California, and Connecticut.  The TCJA did not cap the deduction on charitable contributions; in fact, they increased the limit from 50% to 60% of adjusted gross income for certain types of gifts, and even then excess contributions are allowed to be carried over into subsequent years.

If only there was some way to decrease the amount of state taxes paid to say, less than $10K, while at the same time increasing charitable gifts!  State legislators in these high-tax states were quick to cook up a work-around to this change and came up with a doozy.  States will establish state-run charitable trust funds.  Taxpayers would be allowed a state tax credit of some percent (New York provides 85%; New Jersey, 90%) of their contribution to these funds, and in theory, also get a deduction on their federal tax return for a charitable contribution.  Thus, states would shift the character of payment from one category to the other and there will be much rejoicing (and tax deductions).

 
and-there-was-much-rejoicing.jpg
 

The IRS wasted little time responding and announced that they will release proposed regulations to provide guidance to taxpayers on how the IRS is the authority on the characterization of charitable contribution and it doesn’t matter what the states say.  The central factors in determining if a charitable contribution is deductible is that it 1) is paid to a qualified organization (which the states’ trust funds can meet) and 2) the deduction must be reduced by any benefit the taxpayer receives.  If you have been paying attention, you will have noticed that, in this arrangement, the taxpayer would receive a benefit for their contribution in the form of a tax credit, and therefore they would have to reduce their charitable contribution deduction by the state tax credit they received.  This results in a net zero benefit to taxpayers.

More than anything, this is posturing by politicians in state and federal positions.  Unfortunately for those of us in high-tax states, we will have to deal with paying taxes to our state and not getting the benefit we were used to getting in the past.  There are other important issues that states will have to address in the wake of the TCJA which we will discuss in future posts.  If you would like to complain about this or other topics, reach out to your trusted advisor, or give me a call.

Tax Cuts and Jobs Act Supplemental: Meals and entertainment

Posted by Evan Piccirillo, CPA

For years, many businesses have been keeping track of expenses for meals and entertainment in a single account with little need to communicate with their accountant; it was understood that 50 cents of each dollar would be a tax deduction. No more. Effective January 1, 2018, the Tax Cuts and Jobs Act (“TCJA”) makes notable changes to the tax treatment of certain disbursements relating to these categories of expense. As a result, the accounting for these expenses needs to be reconsidered. Let me break it down for you.

Prior to 2018, meals and entertainment expenses were limited to a 50% tax deduction, unless certain exceptions applied that would allow a 100% deduction. Under the TCJA, entertainment expenses are 0% tax deductible, with very few exceptions, while meal expenses are generally still 50% deductible, with some important changes to the exceptions. Understanding these exceptions is critical to ensuring your business receives the proper tax deduction.

Here is a list of fully (100%) deductible meal expenses:

  • Expenses included in the wages of the employee or included in income of the non-employee recipient (i.e. in W-2 wages of the employee or on a 1099 to a non-employee)
  • Expenses for an employee event (like a party)
  • Expenses for the general public (either as advertising/promotion or goodwill)

Here are 50% deductible expenses:

  • Meals with clients
  • Employee travel meals
  • Meals provided to employees for the convenience of the employer (but 0% after 2025)

And the 0% deductible expenses:

  • Entertainment for employees or clients (including sports and events tickets, membership dues to clubs, etc.)

Aside from the 50% to 0% change to entertainment expenses, the next most notable change is that of 100% to 50% (and later to 0% after 2025) to meals provided to employees for the convenience of the employer. In the past, these were considered de minimis fringe benefits and received a dollar-for-dollar tax deduction, but under the new law these kinds of expenses must be included in an employee’s income to be 100% deductible or fall to the 50% category. Not good for hungry employees and their employers.

To accommodate these new tax rules, businesses have to disambiguate meals and entertainment into entertainment (which is nondeductible), meals that are 50% deductible, and meals that are 100% deductible on their books. In absence of these separate ledger accounts, tax preparers will have to inquire about the allocation and taxpayers will need to analyze the charges booked to such an account, which can add time and contribute to errors.

Additionally, employers may need to review their policies and procedures for providing meals and/or entertainment to their employees and clients. Certainly they will need to reconsider those sports facility box seats. Also, since parties for employees are 100% deductible, perhaps it’s time for businesses to start throwing more parties?

If you would like additional guidance on this topic, contact your trusted advisor to assist you in making decisions going forward and to establish sound procedures to properly account for meals and entertainment expenses on a prospective basis.

Tax procrastination: the most dangerous game

 
Procrastination red die.png
 

April 15. This is the deadline set by the IRS for filing your personal tax return.  (It’s usually April 15; this year, it happened to be pushed back to April 18, as a result of the 15th falling on a Saturday and then the observance of Emancipation Day in Washington, D.C. the following Monday, but that is a different story).  As most of us know, the IRS allows taxpayers to file an extension granting six additional months (usually to October 15… Because this date falls on a Sunday this year, the extension deadline is October 16).  But, and this is a big but, the extension grants only additional time to file, not additional time to pay. This point should be made abundantly clear to taxpayers, because no one wants to be hit with late payment penalties.  And most of us seem to completely disregard the first five months and push off getting our tax information to our preparers until we glance up at the calendar and realize we are almost out of time.

This is a dangerous game to play, for multiple reasons.

Most preparers have a full docket of work from the end of summer right through the extended due date.  This is due in part to procrastination of taxpayers and preparers, as well as a schedule in which multiple deadlines occur in rapid succession. The deadline for pass-through entities is September 15 (just one month prior to the deadline for personal returns), and trust returns are due September 30 (just two weeks prior).  When some of the information required isn’t available, this can create a butterfly effect.

Not all of the required information may be immediately available, but this is not a good reason to neglect sending over the readily-available information to your preparer.

Add the overwhelming amount of work to the complexity of tax law and expertise required to properly prepare a tax return, and one can see how there is an increased likelihood of errors, omissions, and/or missed opportunities.  This is a serious no-no for tax professionals.

The more time a preparer has to consider options and the presentation of facts, the more value can be added.  Additionally, there is greater opportunity to consider actions that can be taken in the subsequent year (which we are usually in the middle of when we are looking at last year’s information) or future years that can be favorable to the taxpayer.  Timing matters.

For estimated taxpayers, timing is of increased importance.  If your tax liability has changed and the prior year’s tax has been underpaid or overpaid, waiting until the deadline could leave you having paid three quarters of estimated taxes at the incorrect amounts.  This can result in penalties for underpayment of estimated tax or, even worse, giving excess interest-free loans to the government (oh, the humanity!).

None of the above addresses a more intangible issue, which is finality; crossing something off a list.  Getting your return filed offers just such a feeling, and I urge you to experience it.  Your preparer will thank you, too.

Bottom line? Don’t treat the filing of an extension as permission to procrastinate for six months, but rather just a short window to have everything lined up to comfortably make the extended due date in spite of any outstanding information.