Vernoia, Enterline + Brewer, CPA LLC

Archive for April, 2013

FAQ: How are LLCs taxed?

An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn’t mind the IRS default entity classification does not necessarily need to file Form 8832.

“Check-the-Box” Election

An LLC with more than one member can elect:

  • Partnership
  • Corporation
  • S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

An LLC with only one member can elect:

  • Disregarded entity
  • Corporation
  • S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

The IRS will assign these classifications if no entity election is filed for an LLC (the default rules):

  • any business entity that is not a corporation is classified as a partnership
  • any entity that is wholly-owned by a single person will be disregarded as an entity separate from its owner (taxed as a sole proprietorship).

Typically, an LLC with more than one member will elect to be taxed as a partnership, whereas a single-member LLC will elect to be disregarded and taxed as a sole proprietorship.

If you have any questions relating to LLCs, their benefits, drawbacks, or their treatment under the Tax Code, please contact our offices at (908) 725-4414.

How do I: prove timely filing of my income tax return?

A return or a payment that is mailed to the IRS is timely filed or paid if it is delivered on or before its due date. A return with a U.S. postmark, which is delivered after its due date, is timely filed if the date of the postmark is no later than the due date, the return was properly addressed, and the return had proper postage. The timely mailing/timely filing rule also applies when a taxpayer receives a filing extension. If an envelope has a post office postmark and a non-post office postmark, the latter is disregarded and the post office postmark determines the filing date.

Comment. The timely filing, timely mailing rule requires that the return be postmarked within the prescribed filing period. Thus, an individual return postmarked April 16 and received on April 20 is considered filed on April 20.

Private carriers. A return delivered by a designated private carrier is timely if the carrier marks or records the return no later than the due date of the return. However, a return delivered by means other than the U.S. mail or a designated private carrier must be delivered to the appropriate IRS office on or before its due date to be timely.

The IRS can designate a private carrier if the carrier: is available to the general public; is as timely and reliable as U.S. first class mail; records the date on which the package was given to it for delivery; and satisfies other conditions. The IRS has identified DHL Express, Federal Express, and United Parcel Service as designated carriers.

No postmarks; other postmarksIf there is no postmark, the taxpayer may establish the mailing date by extrinsic evidence. A return in an envelope with a foreign postmark or private meter machine postmark is timely filed if the postmark is on or before the due date of the return and the return is received no later than if it had been postmarked by the postal service on the last day for filing the return.

Registered, certifiedA receipt showing that a return was sent by registered or certified mail is proof that the return was delivered to the place that it was addressed. Returns sent by registered mail are deemed to be postmarked on the date of registration. Returns sent by certified mail are deemed to be postmarked on the date stamped on the receipt, under the timely mailed, timely filed rule. However, if a taxpayer mails a return certified but does not obtain a certified receipt, the postmark on the envelope determines the filing date.

Comment. A taxpayer mailing a return on or near its due date should use registered or certified mail with a postmarked receipt. Documents sent in this manner are automatically timely filed.

Electronic. An electronically-filed return with a timely electronic postmark is timely filed, provided that the return is filed in the manner prescribed for electronic returns. An electronic postmark is a record of the date and time, in the taxpayer’s time zone, that an authorized electronic return transmitter receives the e-filed document on its host system.

Updated Form 941, Employer’s Quarterly Federal Tax Return

The IRS recently announced the availability of updated Form 941, Employer’s Quarterly Federal Tax Return for 2013, and its instructions. Revised Form 941 and its instructions reflect the January 1, 2013 effective date of the 0.9 percent Additional Medicare Tax, expiration of the payroll tax holiday and other changes. In addition to imposing new obligations on employers, the Additional Medicare Tax presents under- and over-withholding pitfalls for impacted employees.

0.9 Percent Additional Medicare Tax

The IRS reminded employers that the Additional Medicare Tax, enacted by the Patient Protection and Affordable Care Act (PPACA) applies effective January 1, 2013. The Additional Medicare Tax is imposed to the extent covered wages, compensation and/or self-employment income exceed threshold amounts ($200,000 for single individuals, $250,000 for married couples filing joint returns and $125,000 for married couples filing separately). Employers, however, must withhold Additional Medicare Tax from wages paid to an individual in excess of $200,000 in a calendar year, without regard to the individual employee’s filing status or other wages/compensation.

It is up to the employee to make adjustments to account for any shortfall (if subject to the $125,000 threshold or if the combined wages of a married couple exceed $250,000) or overage (if subject to the $250,000 threshold). Employees cannot request additional withholding specifically for Additional Medicare Tax but can request a change in overall income taxes withheld by their employer. Taxpayers anticipating they will owe Additional Medicare Tax, and who did not request additional income tax withholding, may need to make estimated tax payments.

The standard Medicare tax equals 1.45 percent of covered wages. The 1.45 percent employee-share of Medicare tax is matched by the employer. There is no employer match for the Additional Medicare Tax, however.

The IRS further explained that an employer must begin withholding the 0.9 percent Additional Medicare Tax in the pay period in which they pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. The IRS has added line 5d, Taxable wages & tips subject to Additional Medicare Tax withholding, to Form 941.

Payroll Tax Holiday Ends

The IRS also has reminded taxpayers that the OASDI tax rate is 6.2 percent for both employers and employees for calendar year 2013. The payroll tax holiday, effective for calendar years 2011 and 2012, was not renewed by the American Taxpayer Relief Act of 2012 (ATRA) or other legislation and has expired. The Social Security wage base for calendar year 2013 is $113,700, up from $110,100 for calendar year 2012. The payroll tax holiday had reduced the employee-share of OASDI taxes from 6.2 percent to 4.2 percent (with a comparable benefit for self-employed individuals).

Simplified taxation for Small Business Tax Reform?

Many small business benefits incorporated into the Tax Code are complicated and, arguably, in need of reform. House Ways and Means Committee chair Dave Camp, R-Mich., recently released a draft proposal containing numerous tax reform measures specifically designed to simplify taxation of small businesses and partnerships. According to a report by the National Federal of Independent Business, cited by Camp, small business owners spend approximately $18 to $19 billion every year in tax compliance costs. Camp’s proposal addresses this and other issues by recommending lower tax rates, permanent Code Sec. 179 expensing, expansion of the cash accounting method, unification of tax filing rules for S corps and partnerships, and more.

Camp’s dedication to tax reform, if not his specific proposals, carry credibility on both sides of the aisle on Capitol Hill. If the momentum toward tax reform continues to grow, Camp’s current efforts will likely shape at least a portion of its overall framework.

Proposed reforms

Code Sec. 179 expensing – The American Taxpayer Relief Act of 2012 (ATRA) extended the $500,000 expensing limit and $2 million dollar limit through the end of 2013. Camp’s proposal would make permanent Code Sec. 179 expensing for certain depreciable business property for businesses, but would lower the limits allowed for costs of qualifying property placed in service after 2013. A business would be allowed to deduct the costs of up to $250,000 in qualifying property placed in service during a tax year after 2013 (down from $500,000 in 2013). The allowance would be subject to a dollar limit threshold of $800,000 under the proposal (down from $2 million in 2013). The proposal would also provide for an annual adjustment of the limits for inflation.

Cash method of accounting – Camp’s proposal would expand availability of the cash method of accounting for certain business entities that do not currently have the option to use the simpler cash method under which items of income accrue when received and expenses are counted when actually paid.

Uniform capitalization rules – Camp’s proposal would expand the number of business taxpayers exempt from the Code Sec. 263A uniform capitalization rules (UNICAP) that require businesses to capitalize certain direct and indirect costs for items such as materials, labor, or production that are allocable to real or tangible personal property that the taxpayer produced for certain trade, business, or resale purposes.

Current law provides an exception for small businesses that have average annual gross receipts of less than $10 million and acquire property for resale. Camp’s draft proposal would expand the exception to also cover small business producers of real or tangible property.

Start up expenses – Camp’s proposal would simplify the Tax Code’s current treatment of the $5,000 deduction for start-up expenses by consolidating the provisions of Code Secs. 248 and 709, which govern organizational expenditures for corporations and partnerships, under the start-up expense deduction provisions of Code Sec. 195. The draft proposal would also increase the current Code Sec. 195 deduction limit from $5,000 to $10,000, subject to a phaseout limit of $60,000 (up from $50,000).

Business tax return deadlines – Camp’s proposal would shift due dates for Form 1065, U.S. Return of Partnership Income, Form 1120S, U.S. Income Tax Return for an S Corporation, and, with respect to C Corporations, Form 1120, U.S. Corporation Income Tax Return. The deadlines would change from April 15 (Form 1065) and March 15 (Forms 1120 and 1120S) to March 15 (Form 1065), April 15 (Form 1120) and April 1 (Form 1120S). The proposal would also provide an option to file six-month extensions for all three forms.

Passthrough reform

Passthrough entities such as S Corps and partnerships are stymied by the Tax Code’s complexity, according to Camp. Because an estimated 65 percent of new jobs over the past 17 years were created by small businesses formed as unincorporated passthrough entities, Camp’s proposal set forth several recommendations for drastic reform of the current passthrough regime such as enacting a shorter recognition period for a newly elected S Corp’s built-in gains under Code Sec. 1374 and increasing the threshold at which an S corporation’s net passive income becomes subject to the highest corporate tax rate.

Alternatively, Camp has also proposed a drastic rewrite of current Subchapters K and S, which govern taxation of partnerships and S Corps. The Tax Code would contain one unified set of rules under a new Subchapter K for taxation of partnerships and passthrough corporations. The new Subchapter K would expand eligibility of most passthrough corporations to elect S Corp treatment, loosen current restrictions on who may be an S Corp shareholder, impose a withholding requirement on a passthrough with respect to certain amounts of each passthrough owner’s distributive share, and more.

IRS ready with limited penalty relief on extensions

As April 15 approaches, the IRS is preparing for a surge of last-minute filers and taxpayers seeking an automatic extension of time to file their 2012 returns. The IRS received more than 148 million individual income tax returns in 2012, and that number is expected to rise in 2013. The increase in returns and the expectation from taxpayers that refunds will be paid within 21 days has put some pressures on the IRS. At the same time, the IRS is preparing for employee furloughs because of sequestration (across-the-board) spending cuts. However, high-ranking IRS officials have indicated that furloughs, if necessary, would not start until after the 2013 filing season.

Filing season delays

The 2013 filing season got off to a delayed start because of late tax legislation. President Obama signed the American Taxpayer Relief Act of 2012 into law on January 2, 2013. The IRS had originally planned to open the 2013 filing season on January 24, 2013. That date was moved to January 30, 2013 to give the agency more time to reprogram its processing systems for changes to the tax laws made by ATRA, and there were many. By January 30, the IRS had successfully updated many of its processing systems but needed more time for certain forms. Included in this group were widely-used forms such as Form 44562, Depreciation and Amortization and Form 5695, Residential Energy Credits.

On March 4, the IRS announced that it was accepting all 2012 returns after completing reprogramming of all of its processing systems. Since March 4, it appears that all ATRA-affected forms are being processed although some taxpayers have experienced delays. These include taxpayers claiming education credits on Form 8863. In some cases, the delay has been attributed to taxpayers failing to complete all of Form 8863 and leaving out certain information. Additionally, taxpayers claiming the adoption credit on Form 8839 must file their 2012 returns on paper. Paper returns are processed more slowly than electronically-filed returns.

Extensions

Taxpayers can request an automatic six-month extension (through October 15, 2013) by filing Form 4868, Application For Automatic Extension of Time To File U.S. Individual Tax Return. Remember that filing an extension to file is not an extension of time to pay. An extension gives taxpayers extra time to file their return but does not extend the time to pay any tax due.

Penalty abatement

To help taxpayers, the IRS is providing late-payment penalty relief to individuals and businesses requesting a tax-filing extension because they are attaching to their returns any of the ATRA-affected forms that could not be filed until after January. The IRS will abate the penalty for failure to pay if the taxpayer requests a filing extension, pays the estimated tax liability by the due date, and pays any remaining tax by the extended due date of the return.

Without this abatement, taxpayers would be subject to a penalty of one percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid. The failure to pay penalty can be as much as 25 percent of the unpaid taxes.

While the IRS can abate penalties, it has no authority under the tax laws to stop interest from running on taxes owed after April 15th.

Refunds

The IRS paid out $110 billion in refunds in 2012, and is likely to match or exceed that number in 2013. Taxpayers have become accustomed to checking on the status of the refunds on the IRS website. Traffic on the IRS’s popular “Where’s My Refund?” online tool is so heavy that the agency is reminding taxpayers to limit their usage to once a day. Where’s My Refund? is updated daily, usually at night. The IRS has requested that taxpayers use Where’s My Refund? at off-peak times, such as evenings and weekends.

Those who are owed a refund should realize that the IRS does not pay interest on it. Although a taxpayer may file a return that claims a refund under the same circumstances that would deserve penalty abatement this year if taxes were owed, the IRS will not pay interest on that refund.

Budget cuts

Sequestration, effective March 1, 2013, imposed $85 billion in spending reductions across the federal government. In response, many federal agencies, including the IRS, are expected to furlough employees.

The IRS is working to minimize employee furloughs, a senior agency official recently said. Potentially, IRS employees are looking at five to seven furlough days. Previously, Acting IRS Commissioner Steven Miller told agency employees that furloughs will not take place until after the filing season. If that is the case, IRS employees would likely experience furloughs between May and before the end of the of the government’s fiscal year on September 30, 2013. It is unclear at this time what IRS operations, if any, could be spared from furloughs or if cuts in other areas, such as travel, could reduce the number of furlough days. The IRS is reportedly engaged in discussions with the union that represents its employees.

Sequestration has also caused the IRS to reduce the amount of awards paid to whistleblowers. Additionally, the IRS has announced that certain tax credits also have been affected by sequestration. These include the Code Sec. 45R small employer health insurance tax credit and the credits under Code Sec. 6431 for certain qualifying bonds.

If you have any questions about requesting an extension, penalty abatement, or any other questions about the 2013 filing season, please contact our office at (908) 725-4414