While far too many professional snow removal and ice management contractors believe little can be done after the end of their tax year to reap tax benefits, ensuring that legitimate deductions aren’t neglected is vital all year ‘round -– even after the so-called “tax season.” Fortunately, existing procedures and forms permit any contractor to change his or her mind about many of the items on filed tax returns.
It may surprise many snow operators to learn that the tax deadlines imposed by our lawmakers are flexible. While moves made to structure transactions for the most favorable impact on the annual tax bill may be limited, postponing the filing of the tax returns reporting those transactions or changing your mind on already reported transactions is permitted.
MONEY NOW, RETURNS LATER
It goes without saying Uncle Sam, in the form of the Internal Revenue Service, wants its money sooner rather than later. That means pre-paying an estimated tax bill usually in four quarterly installments. It also means fully paying the expected tax bill on or before the deadline, either March 15 or April 15 for most businesses and individuals using a calendar year.
Despite the strict pre-payment rules, extensions of time to make those payments are often granted for specific groups of taxpayers, usually those suffering from a natural disaster or unusual circumstances. Under special circumstances, the payment of tax can be extended for a reasonable period, not longer than six months.
A NEW TIMETABLE
In an attempt to stagger filing deadlines so that tax returns of entities that “pass-through” income and losses, such as partnerships and S corporations, are now due by March 15th as opposed to April 15th. Regular “C” corporation tax returns are now due by April 15th as opposed to March 15th.
It should also be kept in mind that the IRS is no longer granting automatic extensions for filing Form W-2. To stop the increase of identity theft, lawmakers require employers to file Forms W-2, W-3 and 1099-MISC statements to the IRS and the Social Security Administration by Jan. 31, 2018.
EXTENDING THE TIMETABLE
Today, using Form 4868, “Automatic Extension of Time to File a U.S. Individual Tax Return,” a snow and ice removal contractor can obtain an automatic, six-month extension of time in which to file tax returns. Naturally, a proper estimate of tax liability is required.
Incorporated businesses may obtain the automatic six-month extension of time to file income tax returns by submitting Form 7004, “Application for Automatic 6-Month Extension of Time to File Certain Business, Income Tax, Information, and other Returns.” Form 7004, is also used to obtain a six-month extension for filing some excise, income, information and other returns.
The automatic six-month extension of time to file also applies to the returns of pass-through entities such as partnerships, S corporations and limited liability companies (LLCs). Remember, the Form 7004 does not extend the time for payment of tax.
What type of entity will generate the most favorable tax treatment for the snow and ice removal business? The so-called “check-the-box” regulations allow everyone to rexamine the type of business entity currently used. That’s right, regardless of how it was formed or operated, a contractor can select the type of business entity to be used for tax purposes.
Not only can a partnership choose to be treated as a corporation, separating the partners from the business, the members of those increasingly popular limited liability companies (LLCs) can choose to be treated as either a corporation or as a partnership for tax purposes. And, best of all, it can all be accomplised by simply “checking-the-box.”
Unfortunately, incorporated snow removal and ice management businesses cannot take advantage of the “check-the-box” rules. But for all others, the flexibility provided by the “check-the-box” regulations offer planning opportunities.
While the IRS’s “check-the-box” tax rules permit many choose to be treated as a corporation or a partnership right on the tax return, the decision is far more complex – and longer-lasting – than that. Now might be a good time to discuss the operating form of the activity with a tax professional. In fact, it is always a good idea to run all tax-related strategies, deductions and transactions by a professionals.
Once the tax returns have been filed, if a snow removal contractor determines the operation’s tax bill is incorrect, changes can be made on an amended tax return. After all, under our tax rules, you can change your mind about many of the income, credits and deductions on an already-filed tax return.
Although the IRS reports few taxpayers amend their tax returns to report additional income, correcting or amending any return because of errors, omissions, mistakes or overlooked deductions – as well as to report additional income – are encouraged.
Snow removal and ice management businesses – or their owners – can change their mind about previously reported income and deductions within three years from the time the return was filed, or within two years from the time the tax was fully paid, whichever is later. Should the refund claim involve the deductibility of bad debts or worthless securities, the period is seven years.
Individuals, sole proprietors, etc., use Form 1040X. A corporation that filed Form 1120 uses Form 1120X to file an amended return.
TAX TAIL SHOULD NOT WAG THE DOG
There is a great deal of pressure in many snow removal contractors to continue cutting costs, including taxes. This coincides with increased scrutiny of tax returns on many levels of government. Identifying opportunities for tax deductions without running afoul of cash-strapped, state and local tax authorities should play a role in the planning process.
On a similar note, the financial or operational strengths of a business transaction should always stand on their own, aside from any tax benefits derived from them. There is also the question of whether a tax deduction should be taken or if legally feasible, ignored.
An excellent illustration of the flexibility of our tax rules are those governing bonuses. A snow removal business operating on the accrual basis has the opportunity to fix the amount of employees’ bonus payments before Jan. 1 – but to pay them early in the following year. Generally, the bonuses are not taxable to the recipient until 2015, but are deductible on the operation’s 2014 tax return — so long as announced before the end of 2009, and paid before March 16, 2015.
On the other hand, while few small businesses are in a position to pay employee bonuses, a snow and ice management business may benefit by delaying income until next year. Remember, however, there is constructive receipt when income is made available to the business.
Why would any contractor ignore perfectly good, legitimate tax deductions? After all, it is not easy trying to break a life-long habit of minimizing income and maximizing deductions to produce a low tax bill.
Surprisingly, however, the lowest tax bills often result from legitimate tax deductions postponed or ignored.
Deferring or postponing the receipt of income in a tax year when profits are up often results in a lower tax bill for both that year, as well as in later years when income can be offset by a larger-than-usual amount of deductions.
As is the case with start-up expenses, deferring deductions until a tax year when profits – and a higher tax bracket – make them more valuable is often a legitimate option for many small business owners.
TAX PLANNING ALL THE TIME
Although tax planning should be a year-round process, a number of year-end strategies can reduce not only last year’s tax bill, but future tax bills. The owners and managers of every snow removal and ice management businesses should be the taking steps necessary to claim the resurrected tax breaks recently “extended,” as well as to ensure the success of the operation.
Obviously, the best time to think about tax strategies is during the course of the tax year. Postponing income or profitable transactions until next year when they might not be quite as likely to put the business – or its owner – into a higher tax bracket, is often a legitimate tax-saving strategy. Although the IRS may occasionally disagree, the courts strongly back every taxpayer's right to choose the course of action that will result in the lowest legal tax liability.
Today, thanks to an extended time period in which tax returns can be filed and an even longer period in which to change or amend already-filed tax returns, the so-called “tax season” has become a year ‘round event. And what better time to guarantee that all deductions have been claimed while, simultaneously incorporating overlooked or ignored tax strategies into the 2016 tax plans of you and your snow removal and ice management business than right now?
Naturally, the assistance of a tax professional may be necessary when taking advantage of those tax breaks that have been extended and ensuring that the 2014 tax bill is an accurate one.