While Treasury’s response to the ongoing COVID-19 crisis by automatically extending certain filing deadlines and payments is welcomed news to many, waiting until July 15th to file and/or pay your taxes may have unintended adverse consequences. Here are five reasons why you may want to consider submitting your return early.
Reason #1 – You may be entitled to a Refund
If you are expecting a refund, there is absolutely no reason to wait. The sooner you file, the faster your refund will be processed. Don’t forget. The Government doesn’t pay interest on refunds due to originally filed returns.
Reason #2 – You may Owe Taxes on June 15th
Those individuals who are self-employed or have taxable income largely from sources that do not withhold taxes (e.g., interest, dividends, rents, etc.) are familiar with the concept of making Estimated Tax Payments. These payments are generally due on April 15th, June 15th, September 15th and January 15th (the following year) for the current taxable year. Such payments are based on either projected tax liabilities for the current year or on a “safe harbor” rule, which uses the tax liability of the preceding year as the threshold for the safe harbor.
For example, a self-employed individual who estimates that her tax liability will be $20,000 in 2020 will be required to pay this amount in quarterly installments of $5,000 each to avoid underpayment of estimated tax penalties. Alternatively, if this individual’s 2019 tax liability were $10,000, the minimum quarterly payment to avoid penalty would be $2,500. However, to establish this safe harbor payment, a taxpayer needs to know what their actual 2019 tax liability is. While Treasury has extended the due date for the 1st quarter payment to July 15th (the original due date is April 15th), no such extension has been granted for the June 15th payment. If you wait until July 15th to determine your 2019 liability, you won’t be able to assess your June 15th Safe Harbor payment amount.
Reason #3 – Not everything Due April 15th Has Been Extended
Even though the deadline for a considerable number of forms and payments has been extended, an equally significant amount has not. Taxpayers lulled into a false lack of urgency may miss critical filing deadlines not tied to the “return due date” and, as such, subject themselves to unnecessary late filing and payment penalties, as well as critical election opportunities. Following is a partial list:
Estate and Gift Tax Returns – Decedents’ estates with filing due dates falling between April 15th and July 15th (i.e., nine months after the date of death) are still required to file Form 706 or request an extension. Also, any taxable gifts made in 2019 and reportable on Form 709 by April 15th, unless an extension is filed. This includes Gift Tax returns reporting the election to qualify specific contributions to Sec. 529 plans as qualifying for the annual exclusion amount for the next five years.
Federal Excise Taxes – Many businesses are subject to various federal excise taxes on the use or consumption of certain products such as motor fuels, cigarettes, and alcohol or some activities, like gambling. Form 720, the form generally used to report such taxes, is due quarterly, one month after the end of the quarter. The due date for the quarter ended March 2020 is April 30, 2020, which has not been extended.
Payroll and Other Information Returns – The deadline for filing payroll tax returns, as well as making required payments, has not been extended. Nor has the date for filing information returns, such as Forms 1099.
Fiscal-Year Filers – Treasury has stated that businesses reporting on a year ending other than December 31st (Fiscal-year Filers) will receive the same benefits as those reporting on a calendar year, if the due date (either original or extended) falls on April 15th. However, there is no indication that the deferred payment required for fiscal-year flow-through entities (S-Corporations and Partnerships) making a Sec. 444 election will be extended. It appears Form 8752 and any required payment are still due by May 15th.
Not All States Have Adopted the Federal Extension – While many states consider a valid federal extension to be valid for state purposes, many still require the filing of an extension. In addition, some states may still require payment on April 15th. If you file in multiple states, this may be an issue and something you should verify sooner rather than later to avoid potential penalties.
Reason #4 – There May be Tax Planning Strategies That Require Action Before the July 15th Deadline
Most tax strategies need implementation before the end of the year. However, some allow taxpayers to make elections with the benefit of hindsight. Examples of this are contributions to an IRA or HSA (Health Savings Account), which under the temporary tax deadline postponement, are allowed on or before July 15th. But, some tax strategies require action regardless of the tax return deadline. Here are some examples:
Qualified Opportunity Zone Investments – To qualify for favorable tax benefits, which include deferral and reduction of capital gains tax, investments must be made within the window prescribed by law. This window generally starts from the date the gain is recognized and ends six months after. For investors who have gains flowing from partnership investments, this window may start December 31st for gains flowing through from a K-1 and end on June 29th, 2020. However, if you wait until July 15th to determine whether or not investing in a QOZ is beneficial, you’re too late.
Sec. 1031 Exchanges – Just like QOZ’s, the statutory timelines must be adhered to regardless of the extended due date of your return. That means replacement property will still need to be correctly identified in 45 days and transferred within 180 days. However, it appears that taxpayers who have Sec. 1031 deadlines, which occur after the April 15th due date, may satisfy these statutory dates without the need to file an extension.
Traders and 475 elections – “It’s not yet certain if the IRS will accept a 2020 Section 475 election submitted by July 15, 2020, in conformity with the postponed tax filing deadline”, according to an article recently published by Forbes. (Updated: April 15th Tax Deadline Moved to July 15, Robert Green, Contributor). The article goes on to say that it would afford traders 90 days of additional hindsight. “If the IRS does not explicitly address this question, then a TTS trader with a massive 2020 YTD trading loss might want to file a protective extension request with 475 election statement attachment by April 15, 2020, to play it safe.”
Reason #5 – Your Tax Advisor Will Appreciate You
This last reason may sound a bit self-serving, but it is worth mentioning none-the-less. Even though the April 15th deadline has been extended, there is no mention of extending the “extended due date” (October 15th). Practitioners will now be faced with an extremely compressed filing season if taxpayers wait until July 15th to resume their tax preparation activities. What was historically a six-month filing season after April 15th will now be cut to 3 months. Not only will this put pressure on firms’ resources, but it may open the door to filing errors and missed planning opportunities.
As a fellow practitioner and good friend of mine likes to say, “You don’t want to buy the car that comes off the assembly line at 5 o’clock on Friday!”