The IRS announced a three-month tax filing and payment extension to Boston-area taxpayers and others affected by the explosions at the Boston Marathon. As a result, no filing and payment penalties will be due as long as returns are filed and payments are made by July 15, 2013. This relief automatically applies to all individual taxpayers who live in Suffolk County, Mass., including the City of Boston; as well as victims, their families, first responders, others impacted by this tragedy who live outside Suffolk County and taxpayers whose tax return preparers were adversely affected.
Eligible taxpayers living outside Suffolk County can claim this relief by calling 1-866-562-5227 starting Tuesday, April 23, and identifying themselves to the IRS before filing a return or making a payment. Eligible taxpayers who receive penalty notices from the IRS can also call this number to have the penalties abated. Eligible taxpayers who need more time to file their returns may receive an additional extension to October 15, 2013, by filing Form 4868 by July 15, 2013.
Filing deadline extension – Business entities must certify tax status by April 12 to be listed in Corporations Book.
The DOR is extending the deadline for business entities to certify their tax status through an online application on WebFile for Business, entitled Annual Certification of Entity Tax Status, until close of business April 12, 2013. (The filing deadline had previously been April 1st.) The annual Corporations Book is used by local assessors to determine which businesses qualify for various property tax exemptions afforded entities that are classified as corporations for federal and state income tax purposes.
A corporation that has not completed the online application by April 12 may be omitted from the Corporations Book and may not receive personal property tax exemptions to which it would otherwise be entitled.
If you have never used WebFile for Business, you will need to register your business to access the application for certification. Please note that it takes a minimum of two days to confirm registration for WebFile for Business, and the Corporations Book Application cannot be filled in until that confirmation is received. Entities included in a combined return must separately register in WebFile for Business and separately file the entity status certification.
Note that an entity that is exempt from taxation under section 501 of the Internal Revenue Code is not considered a business corporation for purposes of local property taxation, and is thus not required to fill out the Corporations Book Application.
Estimated Tax Responsibilities and Avoiding Underpayment Penalties:
Below, we have included some helpful information relative to your estimated tax responsibilities and how to avoid underpayment penalties.
The IRS assesses penalties for underpayment of income tax. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
What are the requirements to avoid penalties?
The required annual payment for most individuals is the LOWER of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. Certain high-income individuals must meet a more rigorous requirement. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.
Can you provide some examples?
For example, if your total tax paid on the 2012 tax return was $10,000 and you are anticipating significantly higher income for 2013, the IRS is content as long as you pay in $10,000 via withholding or through even quarterly payments. Any additional balances due on the 2013 tax return will need to be paid with the 2013 filing by April 15, 2014.
Should your income decrease significantly in the subsequent year (2013), you would default to the 90% of tax shown on the current year return. By way of example, if you paid in $100,000 in tax for 2012, and you expect your income tax to be 50% less than it was in 2012, you would need to pay in 90% of $50,000 or $45,000 to avoid penalty. In this situation, we often recommend considering a tax projection to make sure you are adequately paid in.
What if I change from a salaried employee to self-employed?
This will require that you switch to quarterly estimate tax payments and adhere to the 90% current year tax or 100% of prior year tax rule as stated above.
What if I am a salaried employee and my withholdings are not adequate?
You would be subject to penalties if you do not update your W-4 kept on file by your employer. We recommend that you review and update your W-4 form. The W-4 form provides you the option to claim an additional set withholding amount over and above what they are taking. It is not uncommon to be filing Married 0 exemptions and still be short on your required payments due to other income circumstances, lack of deductions, etc. Your other alternative would be to pay in the difference via quarterly estimated tax payments.
What if your self-employment income is not steady throughout the year?
Most individuals make estimated tax payments in four installments. In other words, we determine the required annual payment, then divide that number by four and make four equal payments by the due dates. But you may be able to make smaller payments under the annualized income method. This method is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business that you operate in a resort area during June, July, and Aug., no estimated payment is required before Sept. 15. You may also want to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities which you sell at various times during the year.
Are there circumstances where the underpayment penalties do not apply?
The underpayment penalty doesn’t apply to you:
1. if the total tax shown on your return is less than $1,000 after subtracting withholding tax paid;
2. if you were a U.S. citizen or resident for the entire preceding year, that year was 12 months, and you had no tax liability for that year;
3. if you are a farmer or fisherman and pay your entire estimated tax by Jan. 15 of the following year, or pay your entire estimated tax by Mar. 1 of the following year and also file your tax return by that date; or
4. for the fourth (Jan. 15) installment, if you aren’t a farmer or fisherman, file your return by Jan. 31 of the following year, and pay your tax in full.
Will an extension buy me some time to pay my taxes?
No. An extension of time to file a tax return is NOT an extension of time to pay the tax due under the return. You must pay in 90% of the anticipated tax come extension time to avoid penalties.
How are the penalties and interest calculated?
The addition to tax is one-half of 1% of the tax not paid, for each month (or part of the month) it remains unpaid, up to a maximum of 25%. The penalty increases to 1% per month beginning with either the 10th day after notice of levy is given or the day on which notice and demand is made. Interest on underpayments of tax is imposed at the federal short-term rate plus three percentage points. These rates are adjusted quarterly.
In addition, IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable or against good conscience to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.
When are the 2013 estimated tax payments due and where can I find my coupons?
Your first quarterly estimate for 2013 is due April 15th and subsequent payments are due June 15th, September 15th, and January 15th.
If your 2012 return has been filed, we have included the quarterly estimates with your tax package and have loaded the appropriate forms to your portal. If for whatever reason, you have not received these forms or do not have a portal set-up, please contact our office and we will be happy to provide them.
Please contact us if you have any estimated tax payment questions or if your situation has changed and you need some assistance with figuring out your obligation to pay in quarterly estimates.
RESIDENTIAL ENERGY CREDIT – 2012
The American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) provides benefits to homeowners like you by extending the Credit for Nonbusiness Energy Property (CNEP) for 2012 and 2013. The 2012 Taxpayer Relief Act does not modify the general requirements for the CNEP.
As you may know, the CNEP can be taken when qualified energy efficient improvements or expenditures are made for your principal residence, including new insulation; replacement windows, skylights and doors; central air conditioners; certain water heaters, furnaces or boilers; and a new metal or asphalt roof specifically treated to reduce heat loss. The CNEP, which was not available for the 2008 tax year, is extended for eligible property placed in service after December 31, 2011, and before January 1, 2014. In order to qualify for the CNEP, there must be a reasonable expectation that the qualified energy efficiency improvements will remain in use for at least five years.
For 2012 and 2013, the CNEP is equal to ten percent of qualified energy efficiency improvements installed plus qualified residential energy property expenditures. The maximum CNEP is equal to $500 after reduction by CNEP credits previously allowed after 2005.
The CNEP is often confused with the Residential Energy Efficient Property (REEP) credit, which was previously extended through 2016. Both are energy credits available to homeowners; however, the REEP credit involves expenditures for solar electric property; solar water heating property; fuel cell power plants; small wind energy property; and geothermal heat pump property.
Please do not hesitate to contact us should you have any questions regarding the residential energy credit or any other provision from the 2012 American Taxpayer Relief Act.
We are highlighting some of the business provisions included in the 2012 American Taxpayer Relief Act which was put in place on January 1, 2013. The new law includes some valuable business tax incentives. Many of these business tax incentives are temporary so taxpayers have a limited window in which to maximize their potential tax savings.
Depending on how a business activity is structured, it may be taxed as a corporation or its owners may pay taxes at the individual rates. The American Taxpayer Relief Act permanently extends the Bush-era income tax cuts except for single individuals with taxable income above $400,000; married couples filing joint returns with taxable income above $450,000; and heads of household with taxable income above $425,000. Income above these thresholds will be taxed at a 39.6 percent rate, effective January 1, 2013. The $400,000/$450,000/$425,000 thresholds, which will be adjusted for inflation after 2013, are also used to determine the point at which the maximum tax rate on capital gains and dividends for an individual rises from 15 percent to 20 percent.
Bonus depreciation is one of the most important tax benefits available to businesses, large or small. In recent years, bonus depreciation has reached 100 percent, which gave taxpayers the opportunity to write off 100 percent of qualifying asset purchases immediately. For 2012, bonus depreciation remained available but was reduced to 50 percent. The American Taxpayer Relief Act extends 50 percent bonus depreciation through 2013 (through 2014 in the case of certain period production property and transportation property). The American Taxpayer Relief Act also provides that a taxpayer otherwise eligible for additional first-year depreciation may elect to claim additional research or minimum tax credits in lieu of claiming depreciation for qualified property.
While not quite as attractive as 100 percent bonus depreciation, 50 percent bonus depreciation is valuable. For example, a $100,000 piece of equipment with a five-year MACRS life would qualify for a $60,000 write-off: $50,000 in bonus depreciation plus 20 percent of the remaining $50,000 in basis as “regular” accelerated depreciation, taking into account a half-year convention.
Bonus depreciation also relates to the vehicle depreciation dollar limits under Code Sec. 280F. This provision imposes dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile/truck in service within a business and for each succeeding year. Because of the new law, the first-year depreciation cap for passenger automobile/truck placed in service in 2013 is increased by $8,000.
Bonus depreciation, unlike Code Sec. 179 expensing (discussed below), is not capped at a dollar threshold. However, only new property qualifies for bonus depreciation. Code Sec. 179 expensing, in contrast, can be claimed for both new and used property and qualifying property may be expensed at 100 percent.
The American Taxpayer Relief Act enhances or extends several expensing provisions. These include Code Sec. 179 small business expensing, 15-year recovery period for qualified leasehold and retail improvements and restaurant property, special expensing rules for film and television productions, and a seven-year recovery for motorsports complexes.
Code Sec. 179 expensing. In recent years, Congress has repeatedly increased dollar and investment limits under Code Sec. 179 to encourage spending by businesses. For tax years beginning in 2010 and 2011, the Code Sec. 179 dollar and investment limits were $500,000 and $2 million, respectively. The American Taxpayer Relief Act boosts the dollar and investment limits for 2012 and 2013 to their 2011 amounts ($500,000 and $2 million) and adjusts those amounts for inflation. Keep in mind that the increase is temporary. The Code Sec. 179 dollar and investment limits are scheduled, unless changed by Congress, to decrease to $25,000 and $200,000, respectively, after 2013. The new law also provides that off-the-shelf computer software qualifies as eligible property for Code Sec. 179 expensing. The software must be placed in service in a tax year beginning before 2014. Additionally, the American Taxpayer Relief Act allows taxpayers to treat up to $250,000 of qualified leasehold and retail improvement property as well as qualified restaurant property, as eligible for Code Sec. 179 expensing.
Leasehold, retail and restaurant property. The American Taxpayer Relief Act extends for 2012 and 2013 the special treatment of qualified leasehold and retail improvement property and qualified restaurant property as eligible for a 15-year recovery period. Otherwise, this property generally is depreciated over a 39-year recovery period. To take advantage of this enhanced expensing, the qualified property must be placed in service before January 1, 2014.
Film and television. A special expensing rule allows taxpayers to elect to deduct certain costs of a qualified film or television production in the year the costs are paid or incurred. The American Taxpayer Relief Act extends this rule through 2013.
Motorsports property. Qualified motorsports complexes may be eligible for a seven-year straight line cost recovery period. The American Taxpayer Relief Act extends this treatment through 2013.
Work Opportunity Tax Credit
The WOTC expired after 2011 with an exception for employers that hire qualified veterans. The American Taxpayer Relief Act extends the WOTC (including the special rules for veterans) through 2013. Each new employee hired from a targeted group generally entitles an employer to a credit equal to 40 percent of first-year wages, up to $6,000.
Research Tax Credit and Other Incentives
The American Taxpayer Relief Act extends through 2013 the Code Sec. 41 research tax credit. The credit had expired after 2011. The new law, however, does not make the credit permanent as had been proposed by President Obama and some lawmakers.
Along with the research tax credit, the American Taxpayer Relief Act also revives through 2013 many other expired incentives, including:
- Employer wage credit for activated military reservists
- Reduced recognition period for S corporation built-in gains tax
- Indian employment credit and accelerated depreciation for business property on Indian reservations
- Code Sec. 45 production tax credit for renewable energy
- Credits for biodiesel and ethanol
- Incentives for manufacturers of energy-efficient new homes and appliances
- Railroad track maintenance credit
- Mine rescue team training credit
Unlike many of the individual incentives in the American Taxpayer Relief Act, many of the business tax benefits are not made permanent. As a result, planning to maximize tax savings under these extended incentives takes on a new urgency. Please contact us should you have any questions regarding the 2012 American Taxpayer Relief Act and how it may impact your situation.
Very truly yours,
Newburg & Company, LLP