Category: Tax Compliance

Unlock State & Local Tax Deductions With A SALT Cap Workaround

June 22, 2021 | By: Robert A. Green, CPA | Read it on

Updates: As states progress on SALT cap workaround legislation, I will update that news at the bottom of this post. Also, see my August 3, 2021 blog post, How to Deduct State and Local Taxes Above SALT Cap.

Since 2018, taxpayers living in high-tax states have been unable to take an itemized deduction of state and local taxes over a limitation (known as the “SALT” cap) of $10,000 per year. This limitation came from the 2017 Tax Cuts and Jobs Act (TCJA) and is effective for tax years 2018 through 2025. But the good news is that some states have a workaround, which I cover in this post.

On Nov. 9, 2020, Treasury and the IRS issued Notice 2020-75, which says they “intend to issue proposed regulations to clarify that State and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment.”

The Workaround
To date, state laws for SALT cap workarounds vary, but the general idea is that a pass-through entity (PTE) assesses a tax at the state’s rate on individuals. The state then grants the respective owners of the PTE a tax credit on their state personal income tax return. The SALT cap only applies to individual taxes, not PTE entity-level taxes. Other states subject the PTE to an entity-level tax and then exclude that respective PTE income from the owner’s state tax return.

Check the latest news in your state to see if your state has enacted a SALT cap workaround when the tax law is effective (i.e., 2021 or 2022) and how it works. For example, Connecticut made the PTE tax mandatory for the SALT cap workaround strategy. Most of the other states make it elective, giving the taxpayer more choices; however, don’t miss the election deadline. Consult your tax advisor to see how this strategy might save you money and whether you should consider forming a pass-through entity soon in 2021.

Traders seem to qualify for the SALT cap workaround
Many traders eligible for trader tax status (TTS) already use a PTE like a spousal-member LLC/partnership or single-member LLC/S-Corp. TTS traders need an S-Corp to pay officer compensation to unlock health insurance and retirement plan deductions, which otherwise are not allowed on trading gains that are unearned income.

A TTS trader in securities, commodities, and other financial products, has business expense treatment. A TTS trader actively buys and sells capital assets with capital gains and losses, or Section 475 ordinary gains and losses, if elected on a timely basis.

Here’s an example: In 2021, Joe Trader pays $35,000 of state income taxes on the S-Corp level using a SALT cap workaround. His S-Corp net income is $500,000, subject to a state tax rate of 7%. Joe reaches his SALT cap of $10,000 with real estate taxes of $11,000, so he loses a $1,000 deduction. Joe deducts $35,000 of the S-Corp state taxes from his gross income saving $12,950 in federal taxes ($35,000 state tax deduction x 37% top marginal federal tax rate). Without a SALT cap workaround, Joe would have $36,000 of non-deductible SALT.

Next steps
Many accountants had taken a wait-and-see approach on SALT cap workaround strategies since IRS approval was uncertain before the November 2020 IRS notice mentioned above. In addition, the IRS and Treasury previously rejected recharacterizing SALT payments as charitable contributions, which a few states attempted.

This PTE tax approach is not foreign; some southeastern states use PTE composite returns to assess tax on non-resident owners. 

Some tax pundits expected the Biden administration to repeal the SALT cap. However, President Biden’s FY 2022 budget and recent infrastructure bills do not include the reversal of the SALT cap. Congressional Republicans are resistant to undermine TCJA. Some Congressional Democrats stated they might not support Biden’s infrastructure bills unless they fix the SALT cap. Stay tuned!

The PTE tax might be a better solution than pre-TCJA law when SALT was an itemized deduction and a preference for alternative minimum tax (AMT).

Updated news by state below

IRS Signals Approval of Entity-Level SALT Cap Workaround, But States Should Still Think Twice (Tax Foundation Nov. 11, 2020)
“Treasury and IRS signaled their intention to bless one type of state workaround for the $10,000 State and Local Tax (SALT) deduction cap: entity-level taxes that allow owners of pass-through businesses to pay an additional state tax at the business level, with an offsetting credit against their individual income tax liability. Since the SALT deduction cap does not apply to business taxes, this functionally allows these owners to avoid the cap, since the entity-level tax substitutes for their income tax payment, which would have been subject to a capped deduction.”

“Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin have all adopted entity-level taxes which offer credits against the owners’ personal tax liability. In Connecticut, the entity-level tax is mandatory. In the other six states, it is elective; business owners can choose to pay it and claim the credit, or may decline if it is not in their best interest to go that route.”

New Jersey enacts SALT deduction cap workaround (Grant Thorton Feb. 14, 2020)

California Lawmakers, Governor Float SALT Cap Workaround Plans (Bloomberg Tax Jan. 14, 2021)
“A new California Senate bill (SB 104) would give pass-throughs—partnerships, limited liability companies, and S corporations—the option to pay an entity-level income tax that would be fully deductible. The bill doesn’t specify a tax rate yet. Individuals who are members of those businesses would exclude the amount the entity pays from their gross income.” (Governor) Newsom’s proposal is narrower, applying only to S corporations. It would give those businesses the option to pay a 13.3% income tax rather than the 1.5% that California currently imposes on S corporations. Shareholders would get a tax credit equal to 13.3% of their passed-through income. Under current California law, an S corporation’s income is also taxable at the shareholder level.”
Calif. Gov. Updates Budget With Tax Rebates, SALT Workaround (Law360 May 14, 2021)
California budget deal reached: More stimulus payments and tax relief (Spidell News June 28, 2021)
“The Governor and legislative leaders announced that they have reached a budget deal. Major tax-related items contained in the deal include an elective passthrough entity tax, which provides a work-around to the $10,000 SALT deduction limitation for owners of passthrough entities…These provisions are contained in draft legislation that has not yet been enacted, although it is anticipated that these bills will be passed within the next week or two.” https://leginfo.legislature.ca.gov/
SALT Cap Workaround, Tax Credit Boosts Go To California Governor (Bloomberg Tax July 1, 2021)
“A California workaround to the $10,000 federal cap on state and local tax deductions, expanded tax credits, and new grants for businesses are included in bills lawmakers sent Thursday to Gov. Gavin Newsom (D). Tax policy changes in a bill lawmakers passed Thursday (A.B. 150) include a workaround for the $10,000 cap on state and local tax deductions for S corporations and their shareholders. The corporations could pay 9.3% income tax rather than the 1.5% rate California currently imposes. Shareholders would get a tax credit equal to 9.3% of their passed-through income. The workaround would be in effect for taxable years 2021 through 2025 and taxpayers would have to use the option on original, timely filed tax returns.
Calif. Joins States With SALT Cap Workaround (Law360 July 16, 2021)
“Gov. Gavin Newsom, a Democrat, signed A.B. 150… he reiterated his position that the cap on the SALT deduction should be lifted but said California would provide “a partial fix” for S corporations and other pass-throughs. California’s SALT workaround for pass-through entities will be an elective tax that the entity pays on behalf of partners. The partners can then receive a credit. The tax rate will be 9.3% and will fall on the distributive shares of income of the partners. Individual partners can choose not to consent, but the entity can still elect to pay the tax. Those partners who do consent will get a nonrefundable credit that equals the amount of tax paid by the entity on the partners’ behalf. The pass-through workaround will begin for tax year 2021 and sunset after tax year 2025, according to the analysis.”
SALT workaround elective passthrough entity tax (Spidell’s California Minute July 18, 2021)
Passthrough entity tax FAQs released by FTB (Spidell Sept. 30, 2021)
“The FTB anticipates releasing the new passthrough entity tax voucher before December 2021. That voucher will provide instructions on how to make the elective tax payment going forward. Note that for federal purposes, the entities will only benefit from the reduction of net income on the 2021 K-1s if the payment is made before the end of the entity’s 2021 taxable year.”
Help with pass-through entity elective tax FAQs (FTB)
“A qualified entity must make the election on its original, timely filed return.”

New York Includes SALT Cap Workaround in Budget Deal (Bloomberg April 6, 2021)
“The deal between New York Gov. Andrew Cuomo (D) and Democratic legislative leaders, announced Tuesday, would allow pass-through businesses to pay taxes at the entity level. The entity-level tax would be offset by a corresponding individual income tax credit.”
New York Governor Signs Bill That Could Provide Pass-Through Entities a SALT Deduction Cap Workaround (NYSSCPA April 10, 2021)
New York State Budget Provides A Work Around To The Federal SALT Cap For Certain Business Entities (Forbes May 27, 2021)
SALT Cap Workaround Rules Due Soon From New York Tax Department (Bloomberg Tax Aug. 19, 2021)
“New York business owners hankering to seize on a fresh tax break may get guidance from the state’s tax department as early as next week, according to a source familiar with the matter.”
NYS Tax Department: New guidance and election application for optional pass-through entity tax (NYS Tax Dept, Aug. 25, 2021) The New York State Tax Department has issued a technical memorandum and webpage to provide information on the new optional PTET.
New York State’s New Pass-Through Entity Tax – The CPA Journal (CPA Journal Aug. 2021)
“Election. To file and pay PTE tax, an eligible partnership or S corporation must make an irrevocable election by the first estimated payment due date, which is March 15 of the calendar year prior to the year in which the PTE tax return is required. The election is made annually and will be effective for the current taxable year. For the 2021 tax year only, an election must be made by October 15, 2021.
New York Pass Through Entity Tax Update & How to Actually Make the Election (linkedin.com) (Sept. 21, 2021)
New York’s Passthrough Entity Tax (CliftonLarsonAllen LLP Sept. 30, 2021). 
“Only an authorized person, as defined, may make this election on behalf of an eligible S corporation or partnership. The PTET election application can be filed electronically by creating a business online services account with the New York State Department of Taxation and Finance.

Alabama Lawmakers Advance Changes to SALT Cap Workaround (Tax Notes April 15, 2021)
Ala. Floats Rule For SALT Cap Workaround (Law360 Sept. 1, 2021)
“The rule, published in Tuesday’s state register, would provide that required annual payments are the lesser of 100% of the tax shown for the taxable year or 100% of the tax shown for the preceding year. The proposed rule also provides that while an entity is transitioning to being taxed at the entity level, required estimated quarterly payments will be 25% of the required annual payment.”

La. Senate Approves SALT Cap Workaround For Pass-Throughs (Law360 May 23, 2021)

SALT Workarounds Spread to More States as Democrats Seek Repeal (Bloomberg Tax April 27, 2021)
“Seven states, including California and Illinois, are poised to join nearly a dozen others like New York and New Jersey that have skirted around the federal cap on state and local tax deductions as the prospect of a federal fix remains elusive. New York and Idaho both recently passed legislation to work around the controversial 2017 tax law feature known as the SALT cap. Georgia and Arizona are awaiting their governors’ approvals of similar SALT cap workarounds, and lawmakers in California, Massachusetts, Illinois, North Carolina, and South Carolina are debating bills of the same nature.” (See the state map of states included in the workaround.)

Massachusetts Lawmakers Push SALT Cap Workaround in Budget (Bloomberg Tax May 11, 2021)
Mass. Senate OKs Budget With Child Credit, SALT Workaround (Law360 June 2, 2021)
“The pass-through provision is similar to other entity-level taxes that states have either enacted or are considering as a workaround to the $10,000 state and local tax deduction cap. The pass-through entity-level tax provisions would take effect for taxable years beginning on and after Jan. 1, 2021.”
Mass. Legislators Pass Budget With SALT Workaround, Credits (Law360 July 9, 2021)
“The Massachusetts Legislature unanimously passed a fiscal year 2022 budget Friday that would establish an entity-level tax for pass-through businesses…would allow an entity-level tax on pass-throughs and provide a credit against a member’s share of that tax.”
Mass. Gov.’s Budget Creates Tax Credits, Vetoes Deduction Delay (Law360 July 19, 2021)
“Republican Gov. Charlie Baker on Friday signed the budget bill while returning to the Legislature a provision that would allow an entity-level tax on pass-throughs and provide a credit against a member’s share of that tax, asking it to increase the credit portion. Baker returned the pass-through provision to the state Legislature with proposed amendments that would increase a member’s credit from 90% of their share in the entity’s tax to 100% of their tax share, saying that taxpayers should collect the full benefit as struggling businesses emerge from the pandemic. The pass-through entity-level tax provisions will take effect for taxable years beginning on and after Jan. 1, 2021.”
Massachusetts Lawmakers Override Governor on SALT Cap Fix (1) (Bloomberg Tax July 29, 2021)
“Both the governor and lawmakers agreed to a SALT cap fix that would allow individuals to get around the $10,000 deduction limit by having pass-through entities they are members of, like S corporations, pay the 5% state excise tax, instead of having income flow to individual members for taxation. The lawmakers’ measure, however, would allow the individual members a credit equal to the share of state taxes owed, multiplied by 0.9. This would bring in $90 million annually to the state, they estimate. Baker had wanted a 100% credit for individual members.” 
Capital gains and Section 475 ordinary income is taxed at the 12% rate. 

SC Offers SALT Cap Workaround Through Entity-Level Tax (Law360 May 19, 2021)
“Republican Gov. Henry McMaster signed S.B. 627 on Monday, allowing partnerships and S corporations to make an annual election to pay a 3% tax at the entity level while offering a corresponding income exclusion for owners and partners. The bill will take effect starting in tax year 2021.”

Illinois Assembly Approves SALT Workarounds for Partnerships (Bloomberg Tax May 31, 2021)
Illinois Enacts SALT Cap Workaround for Pass-Through Businesses  (Bloomberg Tax Aug. 27, 2021)
Gov. “Pritzker signed S.B. 2531, which allows partnerships and S corporations to pay their income tax at the entity-level rate of 4.95% and then claim a credit on their state return.” The annual election is irrevocable and the tax benefit is available for tax years ending on or after Dec. 31, 2021, and before Jan. 1, 2026.
Ill. Offers Estimated Payment Penalty Relief For Entity-Level Tax (Law30 Sept. 9, 2021)
“Illinois will waive penalties for late estimated payments for the state’s new entity-level tax that acts as a workaround to the federal cap on state and local tax deductions, the state Department of Revenue announced Thursday.”

SALT Workaround for Pass-Throughs Advances to Michigan Governor (Bloomberg Tax June 23, 2021)
“The SALT cap workaround bill (H.B. 4288) could provide roughly $190 million in federal tax relief for Michigan businesses without costing the state a dime, according to a legislative fiscal statement. The measure would let pass-through businesses pay state and local taxes at the entity level starting in tax year 2021, allowing the full deduction of these taxes on federal returns instead of limiting the deduction amount the entity owners can currently claim on their flow-through income.”
Mich. Gov. Vetoes SALT Deduction Cap Workaround Bill (Law360, July 14, 2021).
Michigan’s governor vetoed a bill seeking to create an entity-level tax for pass-through businesses to sidestep the federal cap on state and local tax deductions, saying the bill’s $5 million cost to implement should be part of broader budget negotiations.
Mich. Lawmakers OK Budget Funding SALT Cap Workaround (Law360 Sept. 23, 2021)
“Michigan lawmakers approved a nearly $70 billion budget that includes funding necessary to implement a state and local tax deduction cap workaround for pass-throughs that the governor previously vetoed due to reservations about the program’s cost.”
Michigan Budget Funds SALT Cap Workaround (Law360 Sept. 29, 2021)
“Michigan Gov. Gretchen Whitmer signed the state’s budget Wednesday, including a provision with funding necessary to implement a state and local tax deduction cap workaround for pass-throughs that she previously vetoed due to reservations about the program’s cost.”
Mich. House Fast-Tracks Refiled SALT Cap Workaround Bill (Law360 Oct. 7, 2021)
“Michigan lawmakers moved quickly Thursday to allow a vote on a refiled entity-level tax bill to sidestep the $10,000 federal cap on state and local tax deductions, following the governor’s pledge to support the program after its funding was secured.”
Michigan House Passes Refiled SALT Cap Workaround Bill (Law360 Oct. 14, 2021).
“Michigan’s House of Representatives passed legislation Thursday that would offer an entity-level tax permitting pass-through businesses to sidestep the $10,000 federal cap on state and local tax deductions — a program for which the state’s budget specifically earmarked funding.”

 

Democrats consider ‘SALT’ relief for state and local tax deductions (NBC News June 24, 2021)

Georgia Enacts Salt Cap Workaround For Tax Years Starting In 2022 (Windham Brannon)
House Bill 149, which was signed into law, creates a SALT cap workaround for Georgia partnerships and subchapter S corporations.”

Maryland’s SALT Workaround: Impacts and Planning Opportunities (March 12, 2021)

Rhode Island Budgets For Salt Workaround (Aug. 2019)

Wisconsin enacts SALT deduction workaround with pass-through tax (Dec. 17, 2018)

IRS Provides Clarity Regarding Oklahoma’s Salt Cap Workaround (March 3, 2021)

North Carolina Republicans Introduce SALT Cap Workaround (Tax Notes April 8, 2021)
NC House OKs Budget With Tax Cuts, SALT Cap Workaround (Law 360 Aug. 13, 2021)
“Democratic Gov. Roy Cooper opposes H.B. 334.”

Ore. Senate OKs Trimming Biz Tax Break, SALT Workaround (Law360, June 17, 2021)
“Under S.B. 727, the state would create an elective entity-level tax on qualifying pass-through entities. The tax rate would be 9% for the first $250,000 of income and 9.9% for income above $250,000. If an entity elects to pay the tax, the owners would be allowed an offsetting tax credit to claim on their personal income tax returns.”

Colo. Lawmakers OK Entity-Level Taxation To Skirt SALT Cap (Law360, June 9, 2021)
“Under the bill, the state would allow pass-through entities to elect to pay an entity-level tax for income tax years beginning on or after Jan. 1, 2022. The entity-level tax rate would be 4.55%, the same as the state’s flat income tax rate.”
Colo. Limits Tax Breaks, OKs SALT Workaround In Tax Overhaul (Law360, June 24, 2021)
Gov. signed “H.B. 1327 provides for the entity-level tax to circumvent the $10,000 SALT cap.”

Pa. Bill Seeks Entity-Level Tax To Bypass SALT Deduction Cap (Law360 June 29, 2021)
“H.B. 1709, introduced Monday by Rep. Martina A. White, R-Philadelphia, would allow partnerships and S corporations to elect to be taxed at the entity level while providing an offsetting credit to owners and shareholders.”

Arizona House Panel OKs Entity-Level Tax To Skirt SALT Cap (Law360 Feb. 18, 2021)
Ariz. Adopts High-Earner Tax Bypass, SALT Cap Workaround  (Law360 July 12, 2021)
“Arizona will create an alternative business income tax and an entity-level tax, bypassing both a state income tax surcharge on high earners and the federal cap on state and local tax deductions under two bills signed by the governor. H.B. 2838 will allow partnerships and S corporations to elect to pay a 4.5% tax at the entity level and offer a credit to the entity’s partners, members or shareholders for their pro rata share of the tax, according to a bill analysis. The entity-level tax election will be available only if all of an entity’s members, partners or shareholders are Arizona residents. The bill will take effect on Jan. 1, 2022, and the credit is allowed to be carried forward for up to five consecutive years.”

A Closer Look at Minnesota’s Proposed SALT Cap Workaround (Minnesota Center for Fiscal Excellence)
Minn. To Offer SALT Cap Workaround, PPP Loan Tax Relief (Law360 July 1, 2021)
“Democratic Gov. Tim Walz signed into law H.B. 9. The law creates an entity-level tax for pass-through entities with a refundable credit for entity members, allowing them to bypass the $10,000 state and local tax cap…starting tax year 2021”

Ark. Bill Floats SALT Cap Workaround With Pass-Through Tax (Law360 Jan. 20, 2021)

Some states now offer certain business owners a workaround for cap on state and local tax deduction (CNBC July 22, 2021)

Sens. Endorse Easing SALT Cap, Killing ARPA Tax Cut Limits (Law360 Aug. 11, 2021)
“Under the budget resolution Democrats advanced early Wednesday, a priority for the Senate Finance Committee would be “SALT cap relief.” No definition of relief or other detail is provided… Sen. Chuck Grassley, R-Iowa, offered an amendment to the budget resolution to leave the SALT cap untouched, calling the SALT deduction a provision “that mainly benefits the wealthy.” However, the amendment failed 48-51.”

California Drivers And Ohio Musicians: SALT In Review (Law360 Sept. 3, 2021)
“The good folks at the Institute on Taxation and Economic Policy released a report on potential changes to the SALT deduction limits. ITEP looked at several scenarios:”

NJ Dem Reps Say No SALT Cap Repeal, No Reconciliation (Law360 Sept. 20, 2021)
“A group of New Jersey congressional Democrats said Monday that they will vote against a proposed $3.5 trillion reconciliation bill unless the federal deduction for state and local taxes is fully restored.”

Entity-Level Taxes Grow, But Future Uncertain, Tax Atty Says (Law360 Sept. 23, 2021)
“Although 20 states have adopted pass-through taxes at the entity level as a workaround to the $10,000 cap on the federal deduction for state and local taxes paid, these regimes face a highly uncertain future, a tax professional said Thursday. This month, Democrats on the House Ways and Means Committee released a preliminary $2.9 trillion package of tax increases that left out a repeal of the SALT cap. But House Ways and Means Chairman Richard E. Neal, D-Mass, and Ways and Means members Rep. Bill Pascrell, D-N.J. and Rep. Tom Suozzi, D-N.Y., said afterward that although the measure was left out, they were committed to enacting a law “that will include meaningful SALT relief.”

2nd Circ. Rejects States’ Challenge To Fed. SALT Cap (Law360 Oct. 5, 2021)
“The federal $10,000 deduction cap on state and local taxes is constitutional, the Second Circuit said Tuesday, finding a challenge to the limitation by Maryland, New York, New Jersey and Connecticut…”

SALT-Cap Relief Faces Rollback as Democrats Eye Less Spending (Bloomberg Tax Oct. 4, 2021)
“Democrats risk settling for a less generous expansion of the state and local tax deduction than previously hoped after President Joe Biden conceded that lawmakers will have to scale back his economic agenda to get it enacted.”

Ohio Bill Seeks Entity-Level Tax To Bypass SALT Cap (Law360 Oct. 6, 2021)
“Under the (proposed) bill, entities that elect to be taxed at the entity level would have to make separate, irrevocable elections each tax year, starting in the entity’s tax year that begins in 2022. The tax rate would be 5% for 2022 and would then be the rate on taxable business income, currently 3%, for later years.”

Darren L. Neuschwander, CPA, contributed to this blog post. 

 

 

 

 

 

 

 

 

 

 

 

 

 


The IRS postponed the 2020 individual tax deadline to May 17

April 6, 2021 | By: Robert A. Green, CPA

The IRS postponed the 2020 individual tax filing and payment deadline to May 17, 2021, including the 2021 Section 475 election. For Texas, Oklahoma, and Louisiana residents, the deadlines are June 15, 2021. 

April 13, 2021: The IRS continues to assert that 2021 first quarter estimated tax payments are due April 15, even though they postponed the 2020 individual tax filing and payment deadline to May 17, 2021. See IRS notice Electing To Apply a 2020 Return Overpayment From a May 17 Payment with Extension Request to 2021 Estimated Taxes

March 29, 2021: The good news is the individual Section 475 election is due May 17, 2021, with the 2020 tax return or extension. The IRS issued formal guidance Notice 2021-21, “Relief For Form 1040 Filers Affected By Ongoing Coronavirus Disease 2019 Pandemic.” The IRS notice states, “Finally, elections that are made or required to be made on a timely filed Form 1040 series (or attachment to such form) will be timely made if filed on such form or attachment, as appropriate, on or before May 17, 2021.” The IRS notice also postponed the 2020 IRA and HSA contribution tax deadline to May 17, 2021.

March 17, 2021: Tax Day for individuals extended to May 17: Treasury, IRS extend filing and payment deadline. “The Treasury Department and Internal Revenue Service announced today that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. The IRS will be providing formal guidance in the coming days. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed. This relief does not apply to (2021) estimated tax payments that are due on April 15, 2021. The IRS urges taxpayers to check with their state tax agencies for those details.” (IRS Issue Number: IR-2021-59). Intuit: State Tax Deadline Updates. The postponement does not apply to C-Corps, trusts, and estates.

Feb. 22, 2021: For residents of Texas, Oklahoma, and Louisiana, the IRS postponed the April 15, 2021 tax filing and payment deadline until June 15, 2021, after a federal disaster declaration in February 2021 due to winter storms. It also extended the 2021 Q1 estimated income tax payment deadline from April 15 to June 15, 2021. The delay includes various 2020 business returns due on March 15, including partnerships and S-Corps. The postponement also applies to the 2021 Section 475 election for individuals and pass-through entities in these three states.


Traders Should Focus On Q4 Estimated Taxes Due Jan. 15

September 25, 2020 | By: Robert A. Green, CPA | Read it on

Many traders have substantial trading gains for 2020 YTD, and they might owe 2020 estimated taxes paid to the IRS quarterly. Unlike wages, taxes aren’t withheld from trading gains. Others can wait on tax payments until April 15, 2021, when they file their 2020 tax return or extension.

The first two-quarters of estimated tax payments were due July 15, 2020 (the postponed date due to Covid), Q3 was due on Sept. 15, 2020, and Q4 is due on Jan. 15, 2021. Many new traders didn’t submit estimated payments for the first three quarters, waiting to see what Q4 brings. With full transparency at year-end, traders can make Q4 payments with more clarity. Some traders view estimated taxes similar to a margin loan with interest rates of 5% for Q1 and Q2, and 3% for Q3.

The safe-harbor rule for paying estimated taxes says there’s no penalty for underpayment if the payment equals 90% of the current-year tax bill or 100% of the previous year’s amount (whichever is lower). If your prior-year adjusted gross income (AGI) exceeded $150,000 or $75,000 if married filing separately, then the safe-harbor rate rises to 110%. 

Suppose your 2019 tax liability was $40,000, and AGI was over $150,000. Assume 2020 taxes will be approximately $100,000, and you haven’t paid estimates going into Q4. Using the safe-harbor rule, you can spread out the payment, submitting $44,000 (110% of $40,000) with a Q4 voucher on Jan. 15, 2021, and paying the balance of $56,000 by April 15, 2021. This is an excellent option to consider instead of sending $90,000 in Q4 (90% of $100,000). Consider setting aside that tax money due April 15 rather than risking it in the financial markets in Q1 2021. I’ve seen some traders lose their tax money owed and get into trouble with the IRS. 

In the above example, the trader should calculate the underpayment of estimated tax penalties for Q1, Q2, and Q3 on the 2020 Form 2210. Consider using Form 2210’s Annualized Income Installment Method (page 4) if the trader generated most of his trading income later in the year. The default method on 2210 allocates the annual income to each quarter, respectively.

If your 2019 income tax liability is significantly higher than your 2020 tax liability, consider covering 90% of the current year’s taxes with estimated taxes. Check your state’s estimated tax rules, too.

Learn more about estimated taxes at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

Employees have another way to avoid underpayment of estimated tax penalties on non-wage income. They can ask employers to increase their wage tax withholding in November and December, which the IRS treats as equally made throughout the year.

Darren Neuschwander CPA contributed to this blog post.


April 15 Tax Deadline Moved To July 15 (Live Updates)

May 20, 2020 | By: Robert A. Green, CPA | Read it on

Updates

May 20: 2019 calendar-year partnership and S-Corp tax returns, and 2020 Section 475 elections for partnerships and S-Corps, were due March 16, 2020. These pass-through tax returns and entity 475 elections are not eligible for virus tax relief with the July 15, 2020 postponement deadline. Postponement relief is limited to 2019 tax returns due April 1, 2020, or after, and the March 16 deadline was before April 1. However, fiscal-year partnership or S-Corp tax returns due on April 1, 2020, or later are eligible for the July 15 deadline.

Traders have calendar-year partnerships and S-Corps, so these entities are not eligible for the July 15 postponement date. Most traders filed 2019 partnership or S-Corp extensions by March 16, some along with 2020 Section 475 elections for the entity. Some of these traders asked our firm if their entity could take advantage of the postponed deadline for making a Section 475 MTM election. The answer is no. Individual traders (sole proprietors) are eligible for July 15 relief for filing 2019 individual tax returns, extensions, and 2020 individual Section 475 elections.

April 10: All states with a personal income tax have extended their April 15 due dates. (See AICPA state filing conformity chart that they update.)

April 9: IRS Notice 2020-23, dated April 9, states on page 7: “Finally, elections that are made or required to be made on a timely filed Specified Form (or attachment to a Specified Form) shall be timely made if filed on such Specified Form or attachment, as appropriate, on or before July 15, 2020.”

Good news: TTS traders as sole proprietor individuals now have to July 15, 2020, to elect Section 475(f) for 2020, as the 475 MTM election is an attachment to a specified form, either F1040 or F4868. Previously, we recommended TTS traders elect 475 by April 15, 2020, to play it safe.

The June 15, 2020 deadlines for U.S. residents abroad and also Q2 2020 estimated tax vouchers are also moved to July 15, 2020. (See IR-2020-66, April 9, 2020). The July 15 deadline now also applies to trusts and estates: “Today’s notice expands this relief to additional returns, tax payments and other actions. As a result, the extensions generally now apply to all taxpayers that have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020. Individuals, trusts, estates, corporations and other non-corporate tax filers qualify for the extra time. This means that anyone, including Americans who live and work abroad, can now wait until July 15 to file their 2019 federal income tax return and pay any tax due.”

March 25: 

475 elections: Our Darren Neuschwander CPA communicated with the IRS Chief Counsel’s office for making Section 475(f) MTM elections about whether to file a Section 475 MTM election by April 15 or July 15. (See the full update on our separate blog post Massive Market Losses? Elect 475 For Enormous Tax Savings.)

State taxes: AICPA State Tax Filing Relief Chart for Coronavirus: The AICPA has compiled this chart with the latest developments on state tax filings related to coronavirus, including states that conformed to the IRS postponement of the April 15 deadline to July 15. Not all states have conformed; for example, New Jersey had not as of March 25. 

AICPA Calls on Treasury, IRS to Provide Extensive Relief to Taxpayers. IRS Notice 2020-18 and related FAQs are helpful, but I agree with the AICPA that taxpayers need broader relief from Treasury. See the IRS Coronavirus Tax Relief page.

March 24: The IRS published FAQs to support Notice 2020-18 for the tax deadline postponement to July 15: Filing and Payment Deadlines Questions and Answers. CPA industry groups will likely ask for another round of FAQs to address unanswered questions. It’s important to note that FAQs are not yet “substantial authority,” as tax notices are, and the IRS often changes FAQs at a future date like it recently did with cryptocurrency.

Here’s what we know:

  • The IRS moved the IRA and HSA contribution deadlines from April 15 to July 15 (Q17 and Q21).
  • July 15 extensions: FAQ A12. “If you are an individual, you can request an automatic extension to file your Federal income tax return if you can’t file by the July 15 deadline. The easiest and fastest way to request a filing extension is to electronically file Form 4868 through your tax professional, tax software, or using the Free File link on IRS.gov. Businesses, including trusts, must file Form 7004. You must request the automatic extension by July 15, 2020. If you properly estimate your 2019 tax liability using the information available to you and file an extension form by July 15, 2020, your tax return will be due on Oct. 15, 2020. To avoid interest and penalties when filing your tax return after July 15, 2020, pay the tax you estimate as due with your extension request.”
  • Elections: The FAQs don’t mention the word “elections,” including the Section 475 election for TTS traders. The Section 475 MTM election wording comes directly from Rev Proc 99-17, which states:

    “The (election) statement must be filed not later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year and must be attached either to that  return or, if applicable, to a request for an extension of time to file that return.”

    It seems logical to conclude that a 2020 Section 475 election is due July 15, but this has not been confirmed yet. 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 to play it safe.

March 23: After Treasury moved the tax deadline to July 15, a newer version of the CARES Act bill removed the section about shifting the tax deadline “and elections” to July 15. The IRS has not yet addressed moving elections and IRA and HSA deadlines to July 15. The open question is: Can TTS traders submit a 475 election by July 15, 2020? The regular due date for a 475 election is April 15. Treasury and the IRS promised FAQs about the deadline postponement soon, and hopefully, it will answer open questions about elections, IRAs, and HSAs.

March 20: Treasury Secretary Steven Mnuchin announced President Trump’s directive to move the April 15 tax deadline to July 15, 2020, thereby postponing tax filings and tax payments for all taxpayers. The new rules in Notice 2020-18 remove the $1M cap on individuals included in the superseded Notice 2020-17, so all tax payments are penalty and interest-free until July 15. Mnuchin said the extension would give “all taxpayers and business this additional time” to file returns and make tax payments “without interest or penalties.” The Treasury Department promised FAQs soon. Hopefully, all states will follow suit with this federal change, so taxpayers don’t face conflicting rules.

Congress should proceed with new legislation like the Coronavirus Aid, Relief, and Economic Security Act to provide additional tax relief, beyond the Treasury Department moving tax deadline to July 15. Senate Majority Leader Mitch McConnell’s CARES Act bill temporarily suspends the Tax Cuts and Jobs Act business loss limitations, including reauthorizing NOL five-year carrybacks, repealing the excess business loss (EBL) limitation, and loosening the business interest expense limitation. That’s fantastic news, as businesses need tax relief for losses ASAP. Here are the related CARES Act provisions:

  • 2203: Section 172(b)(1) – “Net Operating loss carrybacks and carryovers” – Special Rule for losses arising in 2018, 2019 and 2020, such loss shall be a net operating loss carryback to each of the five taxable years preceding the taxable year of such loss.
  • 2203: Temporary repeal of 80% income limitation to deduct a 2018 and forward NOL for year beginning before 2021.
  • 2204: Repeal of 461(l) for 2018, 2019, and 2020 – excess business losses
  • 2206: 163(j) special rules for 2019 and 2020, increasing ATI percentage from 30% to 50% for limitation on business interest

CPA industry groups are also asking Congress to raise the $3,000 capital loss limitation, which they never indexed for inflation. Stay tuned.

March 19: Senator John Thune introduced a two-page bill Tax Filing Relief for America Act “To extend the due date for the return and payment of Federal income taxes to July 15, 2020, for taxable year 2019.” Treasury and the IRS recently issued guidance to delay certain tax payments for 90 days until July 15. Still, Treasury did not postpone the April 15 tax filing deadline, putting an undue burden on taxpayers and accountants. Thune’s legislation syncs tax filings with tax payments in a simple manner, whereas Treasury’s guidance is causing tremendous confusion. Leader McConnell just introduced the Coronavirus Aid, Relief, and Economic Security Act, which incorporates Thune’s bill. Thanks to the AICPA for pushing Congress and Treasury hard to get this critical April 15 tax relief. See the AICPA Coronavirus Resource Center. Stay tuned.

March 18: Treasury issued guidance in Notice 2020-17. It’s now official: As usual, individuals must file extensions on Form 4868 by April 15. Submitting this form with little tax information avoids excessive late-filing penalties, which are 5% per month up to 25% maximum on balance-due payments. The coronavirus relief only allows individuals to defer income tax payments up to $1M until July 15, without application of interest and “penalties,” and I think they mean late-payment penalties of 0.5% per month up to 5% maximum. Taxpayers can file a one-page extension Form 4868 without making tax payments until July 15. That should make quick work of the extension, which is essential as many taxpayers and accountants are overwhelmed with the impact of coronavirus. This Treasury guidance includes deferral for Q1 2020 estimated tax payments due by April 15, but not Q2 on June 15. (See IRS Notice 2020-17 with highlights.)

March 17: Treasury Secretary Mnuchin said if you owe a tax payment to the IRS, you can defer up to $1M as an individual and $10M as a C-corp. Tax payments will be interest and penalty-free if you file within 90 days of the April 15 deadline. “All you have to do is file your taxes,” he said. “You’ll automatically not get charged interest and penalties.” We need to see the fine print; there are many open questions. Mnuchin’s statement indicates taxpayers should still file an automatic extension on Form 4868 by April 15 to extend the tax return filing deadline six-months until Oct. 15. If a taxpayer cannot file an extension by April 15 due to the impact of coronavirus, then the IRS would be hard-pressed to deny reasonable cause for abatement of late-filing penalties.

— Per Bloomberg Tax, “Updates to make clear that taxpayers still must file by April 15 or seek an extension.” And, “The administration is also considering delaying the estimated quarterly tax payments that self-employed workers and businesses pay the IRS throughout the year, according to two people familiar with the matter. The first payment is typically due April 15.”

— Traders should file Section 475 elections by the April 15, 2020 deadline, since Treasury didn’t change the April 15 deadline; it is providing a 90-day extension for tax payments. I doubt Treasury wants to give traders 90 more days of hindsight on making 475 elections.

March 15: AICPA News: “Based upon our conversations, we anticipate that Treasury and the IRS will announce this week an extension of the April 15 deadline by as much as 90 days, and a waiver of penalties and interest for most taxpayers. Additionally, Treasury and the IRS are aware of the major deadline for businesses tomorrow, March 16, and the challenges facing taxpayers and tax preparers in meeting that deadline. They have indicated that they would be generous in determining reasonable cause abatement of any penalties for taxpayers and tax preparers unable to file in a timely manner.”

March 13 at 3 pm ET: Per Tax Talks, “President Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the coronavirus. This declaration allows the Treasury Department and the IRS to extend the deadline for certain taxpayers and small businesses to pay taxes until December 31, 2020 as Treasury Secretary Steven Mnuchin suggested earlier this week.”

Per Bloomberg Law News (with this declaration), “The IRS can choose from a range of powers: abating penalties for failing to file or pay taxes, or postponing federal tax filing and payment deadlines without interest or penalties accruing, according to the agency’s Internal Revenue Manual posted on its website.”

March 13 at 1 pm ET: The president will probably use federal emergency powers today to direct the Treasury Department to provide tax filing and late payment relief. I hope the Treasury Department considers the AICPA proposals. (See the AICPA coronavirus resource center and the AICPA state filing conformity chart that they will update.)

The original blog post, dated March 12, 2020:

The Administration and Congressional leaders are negotiating stimulus measures to provide relief for the coronavirus pandemic, which might include loosening rules for the April 15 tax deadline.

In his Oval Office speech on March 11, the president proposed tax-payment relief for “certain individuals and businesses.” That might be too narrow, and hopefully, this relief will apply to all taxpayers since the virus is spreading fast around the county and causing wide-spread economic harm. It would be challenging to identify “federally declared disaster areas” eligible for tax relief. Blanket across the board tax relief is warranted. Treasury Secretary Mnuchin said the delay would cover “virtually all Americans other than the super-rich.”

Under current law, individual taxpayers must file 2019 income tax returns or an automatic extension form 4868 by April 15, 2020. An extension filing delays this for six months (Oct. 15). However, the IRS and states want taxpayers to make 2019 tax payments on time by April 15, 2020. The IRS uses a complicated regime of penalties and interest charges to incentivize taxpayers to make tax payments by April 15.

If a taxpayer misses the April 15 deadline, the IRS charges them a “late-filing penalty” of 5% per month, up to a maximum of five months for a total penalty of 25%. It would be unconscionable for the IRS to charge a coronavirus victim such a hefty penalty because they couldn’t file a one-page extension on time. I expect that IRS relief should make this automatic extension genuinely “automatic” by doing away with a requirement to submit a form 4868.

The IRS “late-payment penalty” addresses when a taxpayer should make tax payments that are due. IRS coronavirus relief should loosen the late-penalty rules, too. Under current law, the IRS would charge a late-payment penalty if the taxpayer did not pay at least 90% of their tax liability by April 15. The late-payment penalty is 0.5% per month, up to five months for a maximum of 2.5%. The IRS allows the taxpayer to request abatement of late-payment and late-filing penalties based on a “reasonable cause.” Contracting coronavirus sounds like a reasonable cause. The IRS calculates penalties and interest based on the tax payment paid after April 15. The current interest rate on late payments is 4.5%.

Hopefully, states follow suit with the IRS and enact coordinated tax relief over the April 15 deadline. States might use a different payment percentage to avoid late-payment penalties.

Accounting industry group weighs in
The AICPA issued a press release AICPA Calls for Indiv. & Business Tax Relief Amid Coronavirus Pandemic, dated March 11, 2020. My partner Darren Neuschwander CPA serves on the AICPA Individual & Self-Employed Tax Technical Resource Panel and helped draft this AICPA letter. (Darren will be serving as the vice-chair of the panel effective May 21, 2020, for the 2020-2021 year.)

The AICPA letter recommended an automatic extension for all taxpayers, without having to submit form 4868. The AICPA also suggested reducing the 90% payment rule to 70%, figuring the IRS might then provide the relief to all taxpayers. The AICPA letter further recommends: “Waive interest through October 15, 2020; and waive underpayment penalties for 2020 estimated tax payments if paid by September 15, 2020.” See the letter for their other recommendations.

On CNBC this morning, Jim Cramer called for tax payment relief across the board for all taxpayers and businesses. It seems the public and media’s first impression of this story is that no tax payments will be due April 15 with an automatic extension and 100% relief for interest and all types of penalties. The fine print of the penalty regime has always been confusing to many. Let’s wait to see the final tax law changes if any.

Special issues for traders
A 2020 Section 475 election is due by April 15 for individual traders eligible for trader tax status (TTS). (It’s March 16 for existing partnerships and S-Corps.) The election procedure requires a taxpayer to attach a 2020 Section 475 election statement to their 2019 tax return or extension filing made by the April 15, 2020 deadline. The IRS might allow an automatic extension, or it could extend the filing date altogether. However, I don’t expect the IRS to address 475 elections specifically. Therefore, it’s safer to mail the IRS a Form 4868 automatic extension and staple the election statement to it by April 15, 2020, according to current law. Alternatively, file a complete 2019 tax return and include the 475 election by April 15. This year traders are counting on a 475 election to convert year-to-date capital losses into ordinary losses due to massive volatility in Q1 2020. (See Massive Market Losses? Elect 475 For Enormous Tax Savings.)

It’s worth noting that the late-payment penalty is small and sort of like a margin loan; a maximum amount of 2.5% isn’t that bad for six months’ use of money.

If you do choose to postpone tax payments, be careful not to risk your tax funds owed the IRS in the financial markets as that might compound your cash flow problems.

This tax relief is like interest forbearance where banks allow a delay in mortgage payments, which many financial institutions offered to do in this crisis. It’s time for the U.S. Treasury to provide tax-payment forbearance, too.

See our blog post on extensions from last year Tax Extensions: 12 Tips To Save You Money.

Please share this blog post with Administration and Congressional leaders.

Darren Neuschwander, CPA, contributed to this blog post.

 


CARES Act Allows 5-Year NOL Carrybacks For Immediate Tax Refunds

April 9, 2020 | By: Robert A. Green, CPA | Read it on

Live Updates:

April 13: IRS Provides NOL Guidance and Deadline Extension:  Rev. Proc. 2020-24 issues guidance on IRC Sec. 172(b)(1), amended by Sec. 2303 of the CARES Act, which requires taxpayers to carry back NOLs arising in tax years beginning in 2018, 2019, and 2020 to the five preceding tax years, unless the taxpayer elects to waive or reduce the carryback period.” (Checkpoint.)

April 9: 
IRS provides guidance under the CARES Act to taxpayers with net operating losses. IR-2020-67, April 9, 2020 — “The Internal Revenue Service today issued guidance providing tax relief under the CARES Act for taxpayers with net operating losses. Recently the IRS issued tax relief for partnerships filing amended returns.”

The six-month extension of time for filing NOL forms: In Notice 2020-26 (PDF), “the IRS grants a six-month extension of time to file Form 1045 or Form 1139, as applicable, with respect to the carryback of a net operating loss that arose in any taxable year that began during the calendar year 2018 and that ended on or before June 30, 2019.  Individuals, trusts, and estates would file Form 1045 (PDF), and corporations would file Form 1139 (PDF).” (The IRS is temporarily allowing taxpayers to fax in these forms.)

Good news: TTS traders have until June 30, 2020, to file a 2018 Form 1045 for a 2018 NOL. They should get moving on these NOL carrybacks ASAP. Otherwise, they need Form 1040X which takes longer to process by the IRS.

March 28: On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This bill includes significant economic aid and tax relief provisions. Some tax relief applies retroactively to 2018, 2019, and 2020. Today, I focus on NOL carrybacks.

If you have a net operating loss (NOL) from business activities in 2018, 2019, and 2020, you should consider filing NOL carryback claims going back five years. 

Active traders who are eligible for trader tax status (TTS) are considered businesses with NOLs. A TTS trader might have significant trading expenses or Section 475 ordinary losses comprising an NOL. 

CARES temporarily suspends tax-loss limitations from the Tax Cuts and Jobs Act (TCJA) for 2018, 2019, and 2020. TCJA had repealed two-year NOL carrybacks, only allowing NOL carryforwards limited to 80% of the subsequent year’s taxable income. As you may remember, TCJA introduced the excess business loss (EBL) limitation, where aggregate business losses over an EBL threshold ($500,000 for married and $250,000 for other taxpayers for 2018) were considered an NOL carryforward. 

CARES lifts these TCJA limitations and allows taxpayers to recalculate 2018 and 2019 NOLs and file refund claims going back five years for immediate tax relief. Taxpayers will be able to carryback 2020 NOLs five years, too, but not until they file 2020 tax returns in 2021. 

TTS traders with Section 475 ordinary losses and those without 475 but who have significant NOLs from expenses (i.e., borrow fees on short-selling) should consider NOL carrybacks, too. 

Here’s an example

Joe Smith, a TTS trader with Section 475, filed a 2018 income tax return showing a $400,000 NOL. Joe’s NOL came from trading expenses ($50,000) and Section 475 trading losses ($350,000); he had no other income or loss.

Under TCJA, Joe’s only option is an NOL carryforward; therefore, his draft 2019 tax return has a low income, utilizing a small portion of his NOL. Joe has more trading losses and expenses YTD for 2020, so he is holding a deferred tax asset. Joe is thrilled that CARES opens the door to NOL carrybacks because he had substantial taxable income from other activities in years previous to 2018. 

We await IRS and state guidance on CARES to indicate precisely how Joe and his tax preparer should proceed with NOL recalculation and carryback returns. We have questions:

  1. Must taxpayers with EBL limitations amend 2018 tax returns to remove EBL and recalculate NOLs? Is CARES retroactive application to 2018 and 2019 an optional or mandatory requirement? Some taxpayers might prefer to leave things the way they are under TCJA.
  2. CARES allows taxpayers to carryback NOLs from 2018, 2019, and 2020 five years. Usually, tax years close after three years, so how will this work for 2018 NOL five-year carrybacks? For example, 2016 income tax returns filed by April 15, 2017, might close three years after by April 15, 2020. Is that postponed to July 15, 2020, with the IRS relief? Can a taxpayer go back five years before 2018? 
  3. The usual tax deadline for filing a 2018 Form 1045 (Application for Tentative Refund) for NOL carrybacks was Dec. 31, 2019. Will this deadline be extended? (We prefer using this form since the IRS must address the form within 90 days.) Alternatively, taxpayers may use Form 1040X (Amended U.S. Individual Income Tax Return) for each NOL carryback year, which often takes the IRS six months or more to address and pay the refunds. Will the form be expedited during this unprecedented time? There are other procedural questions beyond the scope of this blog post.
  4. Which states will conform with CARES on these tax changes, especially NOL carryback refund claims? During the Great Recession of 2008 and 2009, stimulus tax legislation allowed generous NOL carrybacks. However, some states decoupled from federal law on those changes. For example, California did not allow NOL carrybacks at all, and it restricted NOL carryforwards in several ways. 

Stay tuned to our blog post as we seek answers to these questions. I plan to cover other CARES tax changes that affect TTS traders, too. 

March 27: Congress and President Trump enacted into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This “virus bill” includes significant economic aide and tax provisions to help all taxpayers. The House did not make any changes to the Senate version.

March 25: Senate Passes Updated Economic Relief Plan (CARES Act) for Individuals and Businesses (Tax Foundation). The final version of the law includes the tax-loss provisions covered in the March 20 update below. Here are the code sections from Thomson Reuters CheckPoint:

  • “NOLs arising in a tax year beginning after December 31, 2018 and before January 1, 2021 can be carried back to each of the five tax years preceding the tax year of such loss. (Code Sec. 172(b)(1) as amended by Act Sec. 2303(b)(1))
  • temporarily removes the taxable income limitation to allow an NOL to fully offset income. (Code Sec. 172(a), as amended by Act Sec. 2303(a)(1))
  • temporarily modifies the loss limitation for noncorporate taxpayers so they can deduct excess business losses arising in 2018, 2019, and 2020. (Code Sec. 461(l)(1), as amended by Act Sec. 2304(a))
  • temporarily and retroactively increases the limitation on the deductibility of interest expense under Code Sec. 163(j)(1) from 30% to 50% for tax years beginning in 2019 and 2020. (Code Sec. 163(j)(10)(A)(i) as amended by Act Sec. 2306(a)).” (See special rules for partnerships.)

March 20: Congress should proceed with new legislation like the Coronavirus Aid, Relief, and Economic Security Act, to provide additional tax relief, beyond the Treasury Department moving the April 15 tax deadline to July 15, 2020.

Senate Majority Leader Mitch McConnell’s CARES Act bill temporarily suspends the Tax Cuts and Jobs Act (TCJA) business loss limitations, including reauthorizing NOL five-year carrybacks, repealing the excess business loss (EBL) limitation, and loosening the business interest expense limitation. That’s fantastic news, as businesses need tax relief for losses ASAP. Here are the related CARES Act provisions:

  • 2203: Section 172(b)(1) – “Net operating loss carrybacks and carryovers” – Special Rule for losses arising in 2018, 2019, and 2020, such loss shall be a net operating loss carryback to each of the five taxable years preceding the taxable year of such loss.
  • 2203: Temporary repeal of 80% income limitation to deduct a 2018 and forward NOL for year beginning before 2021.
  • 2204: Repeal of 461(l) for 2018, 2019 and 2020 – excess business losses.
  • 2206: 163(j) special rules for 2019 and 2020, increasing ATI percentage from 30% to 50% for limitation on business interest.

CPA industry groups are also asking Congress to raise the $3,000 capital loss limitation, which was never indexed for inflation.

Treasury Secretary Steven Mnuchin announced President Trump’s directive to move the April 15 tax deadline to July 15, 2020, thereby postponing tax filings and tax payments for all taxpayers. Mnuchin said the extension would give “all taxpayers and business this additional time” to file returns and make tax payments “without interest or penalties.” I expect Treasury and the IRS will issue specific guidance soon. Hopefully, all states will follow suit with this federal change, so taxpayers don’t face conflicting rules.

Traders and 475 elections: Although it’s not guaranteed, I think the IRS might accept a 2020 Section 475 election submitted by July 15, 2020, since that is the new tax filing date. It would afford traders 90 days of additional hindsight. IRS FAQs might not address elections, although the CARES Act includes moving of election deadlines, too. If you have a massive Q1 2020 trading loss as a TTS trader, and you are counting on an NOL carryforward, or carryback if allowed, then it might be wise to file an extension by April 15, 2020, and attach a 2020 Section 475 election statement. I think you should be able to revise the election by July 15, 2020, if warranted. (See Massive Market Losses? Elect 475 For Enormous Tax Savings.)

March 19: Senator John Thune introduced a two-page bill Tax Filing Relief for America Act “To extend the due date for the return and payment of Federal income taxes to July 15, 2020, for taxable year 2019.” Treasury and the IRS recently issued guidance to delay certain tax payments for 90 days until July 15, 2020. Still, Treasury did not postpone the April 15 tax filing deadline, putting an undue burden on taxpayers and accountants. Thune’s legislation syncs tax filings with tax payments in a simple manner, whereas Treasury’s guidance is causing tremendous confusion. Senate Majority Leader Mitch McConnell introduced the Coronavirus Aid, Relief, and Economic Security Act, which incorporates Thune’s bill. Thanks to the AICPA for pushing Congress and Treasury hard to get this critical April 15 tax relief. Why rush an April 15 tax filing, exposing clients and accountants to coronavirus, if Treasury already postponed tax payments? See the AICPA Coronavirus Resource Center.

For prior updates, see Updated: April 15 Tax Deadline Moved To July 15.


March 16 Is Tax Deadline For S-Corp And Partnership Extensions And Elections (Live Updates)

February 27, 2020 | By: Robert A. Green, CPA | Read it on

Updates

May 20: 2019 calendar-year partnership and S-Corp tax returns, and 2020 Section 475 elections for partnerships and S-Corps, were due March 16, 2020. These pass-through tax returns and entity 475 elections are not eligible for virus tax relief with the July 15, 2020 postponement deadline. Postponement relief is limited to 2019 tax returns due April 1, 2020, or after, and the March 16 deadline was before April 1. However, fiscal-year partnership or S-Corp tax returns due on April 1, 2020, or later are eligible for the July 15 deadline.

Traders have calendar-year partnerships and S-Corps, so these entities are not eligible for the July 15 postponement date. Most traders filed 2019 partnership or S-Corp extensions by March 16, some along with 2020 Section 475 elections for the entity. Some of these traders asked our firm if their entity could take advantage of the postponed deadline for making a Section 475 MTM election. The answer is no. Individual traders (sole proprietors) are eligible for July 15 relief for filing 2019 individual tax returns, extensions, and 2020 individual Section 475 elections.

March 24: The IRS published FAQs to support Notice 2020-18 for the April 15 tax-deadline postponement to July 15: Filing and Payment Deadlines Questions and Answers. Unfortunately, 2019 partnership and S-Corp tax returns or extensions that were due March 16, 2020, are not eligible for this IRS relief. 

March 13: The president declared a national emergency (Stafford Act), allowing the IRS to postpone tax filings/payments and to remove penalties and interest. Partnership and S-Corps are due March 16, so I hope the IRS acts fast! (See April 15 Tax Deadline.Might Get Coronavirus Relief)

Original blog post, dated Feb. 27, 2020

March 16 is the deadline for filing 2019 S-Corp and partnership tax returns, or extensions, 2020 S-Corp elections for existing entities, and 2020 Section 475 elections for a pass-through entity. Don’t miss any of these tax filings or elections; it could cost you.

2019 S-Corp and partnership tax extensions
Extensions are easy to prepare and file for S-Corps and partnerships since they pass-through income and loss to the owner, usually an individual. Generally, pass-through entities are tax-filers, but not taxpayers.

S-Corps and partnerships use Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns). Extensions give six additional months to file a federal tax return — by Sept. 15, 2020.

Some states require a state extension filing, whereas others accept the federal extension. Some states have S-Corp franchise taxes, excise taxes, or minimum taxes, and payments are usually due with the extensions by March 16. LLCs filing as partnerships may have minimum taxes or annual reports due to the extension by March 16. States assess penalties and interest, often based on payments due.

See S-Corp 2019 Form 1120-S instructions, “Interest and Penalties” on page 4:

“Late filing of return. A penalty may be assessed if the return is filed after the due date (including extensions) or the return doesn’t show all the information required, unless each failure is due to reasonable cause. See Caution, earlier. For returns on which no tax is due, the penalty is $205 for each month or part of a month (up to 12 months) the return is late or doesn’t include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation’s tax year for which the return is due. If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is more than 60 days late is the smaller of the tax due or $435.

Failure to furnish information timely. For each failure to furnish Schedule K-1 to a shareholder when due and each failure to include on Schedule K-1 all the information required to be shown (or the inclusion of incorrect information), a $270 penalty may be imposed. If the requirement to report correct information is intentionally disregarded, each $270 penalty is increased to $550 or, if greater, 10% of the aggregate amount of items required to be reported. The penalty won’t be imposed if the corporation can show that not furnishing information timely was due to reasonable cause. See Caution, earlier.

If the corporation receives a notice about penalties after it files its return, send the IRS an explanation and we will determine if the corporation meets reasonable-cause criteria. Don’t attach an explanation when the corporation’s return is filed.”

See partnership 2019 Form 1065 instructions, “Penalties” on page 6:

“Late Filing of Return. A penalty is assessed against the partnership if it is required to file a partnership return and it (a) fails to file the return by the due date, including extensions, or (b) files a return that fails to show all the information required, unless such failure is due to reasonable cause. The penalty is $205 for each month or part of a month (for a maximum of 12 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership’s tax year for which the return is due. If the partnership receives a notice about a penalty after it files the return, the partnership may send the IRS an explanation and the Service will determine if the explanation meets reasonable-cause criteria. Do not attach an explanation when filing the return.

Failure To Furnish Information Timely. For each failure to furnish Schedule K-1 to a partner when due and each failure to include on Schedule K-1 all the information required to be shown (or the inclusion of incorrect information), a $270 penalty may be imposed for each Schedule K-1 for which a failure occurs. The maximum penalty is $3,339,000 for all such failures during a calendar year. If the requirement to report correct information is intentionally disregarded, each $270 penalty is increased to $550 or, if greater, 10% of the aggregate amount of items required to be reported. There is no limit to the amount of the penalty in the case of intentional disregard.”

2020 S-Corp elections

Traders qualifying for trader tax status (TTS) and interested in employee benefit plan deductions, including health insurance and retirement plan deductions, probably need an S-Corp. They should consider a 2020 S-Corp election on Form 2553 for an existing trading entity, due by March 16, 2020, or form a new company and file an S-Corp election within 75 days of inception. Most states accept the federal S-Corp election, but a few states do not; they require a separate S-Corp election filing by March 16. If you overlooked filing a 2019 S-Corp election by March 15, 2019 and intended to elect S-Corp tax treatment as of that date, you may qualify for IRS relief. (See Late Election Relief.) (Sole proprietor traders do not have self-employment income, which means they cannot have self-employed health insurance and retirement plan deductions. TTS partnerships face significant obstacles in achieving self-employment income.)

2020 Section 475 MTM elections for S-Corps and partnerships

TTS traders should consider attaching a 2020 Section 475 election statement to their 2019 tax return or extension due by March 16 for partnerships and S-Corps or by April 15 for individuals. Section 475 turns 2020 capital gains and losses into ordinary gains and losses, thereby avoiding the capital loss limitation and wash sale loss adjustments (tax loss insurance). Section 475 income, net of TTS expenses, is eligible for the “qualified business income” (QBI) deduction subject to taxable income limitations.

If a TTS partnership or S-Corp wants to revoke a prior-year Section 475 election, a revocation election statement is due by March 16, 2020.

If you need help, consider a consultation.


Home Office Tax Deductions Are Fantastic: Learn How To Do It

August 24, 2019 | By: Robert A. Green, CPA | Read it on

Since 1999, the home-office deduction is no longer a red flag — millions of Americans benefit from this deduction each year. Countless taxpayers run businesses from home, and the IRS understands this. The income-requirement rule also limits the use of this deduction for profitable enterprises, which appeases IRS concerns about abuse and hobby-loss businesses. Before the IRS liberalized home-office deduction rules in 1999, a more stringent requirement was that business taxpayers needed to meet clients in their home office. Now, the only requirement is administration work, and another principal office outside the home doesn’t negate the deduction.

Many small-business owners, including traders eligible for trader tax status (TTS), operate from a home office. Some of them also conduct their business from job locations using cloud computing, apps, and mobile devices. They can qualify for the home office expense deduction in this situation, as well. The IRS does not permit investors to take a home office deduction.

Convert personal home costs into business expense deductions. This same concept applies to many other items such as phone, Internet, furniture, fixtures, and more. Keep in mind that business income or TTS trading gains are needed to unlock most home-office deductions. If a business doesn’t have sufficient net income, the otherwise allowable home office deductions are carried over to the following tax years. (In this situation, hopefully, the person remains in the business and has net income in subsequent years to use the carryovers.)

There are several special requirements and rules for the home office deduction. A home office must be exclusively and regularly used for business, meaning children and guests can’t use this room. Report “indirect expenses” on Form 8829 and include every expense and cost related to the home. For example, include depreciation or rent, utilities, insurance, repairs and maintenance, security, cleaning, lawn care, and more.

Include mortgage interest and real property taxes, too, and this home-office portion doesn’t require income. The remaining part of mortgage interest expense and real property taxes are Schedule A itemized deductions.

Real property taxes on Schedule A are part of the new tax law (TCJA) SALT limitation. However, the home office portion or real property tax is not subject to the SALT limitation.

To calculate the home-office deduction, take the square footage of the home office (and all related business areas such as storage, hallways, and bathrooms). Divide that by the total square footage of the home (10-15% is customary). Alternatively, taxpayers can do the apportionment based on the room’s method. Form 8829 multiplies the home-office percentage by the indirect expenses. If the business files a partnership return, report home-office expenses as unreimbursed partnership expenses (UPE) on Schedule E. For S-Corps, use an accountable reimbursement plan before year-end.

Per Thomson Reuters/Tax & Accounting Client Letter (see list below):

“Sales of homes with home offices. If you sell-at a profit-a home that contains, or contained, a home office, the otherwise available $250,000/$500,000 exclusion for gain on the sale of a principal residence won’t apply to the portion of your profit equal to the amount of depreciation you claimed on the home office.”

Depreciation expenses on the home office over the years save taxes at ordinary income tax rates. Recapture of depreciation on a sale of the principal residence is taxed up to a 25% capital gains rate, which is unique to Section 1250 property. Tax deferral is another value. The rest of the home enjoys the exclusion of capital gain up to the limit.

If a taxpayer sells his principal residence at a loss, the net loss is not deductible. However, the recapture of depreciation income might not exceed the loss amount, meaning there is no taxable income from depreciation recapture to report on the tax return.

TCJA capped state and local income taxes, sales taxes, real property taxes, and personal property taxes (SALT) itemized deductions on Schedule A at $10,000 per year (any combination thereof), and $5,000 for married filing separately. TCJA also reduced itemized deduction limits on mortgage interest expenses and casualty losses.

Home office tax benefits for employees
Employers require some employees to work from a home office. The new tax law (TCJA) suspended unreimbursed employee business expenses as itemized deductions. That leaves only one other way to arrange a tax benefit for home office expenses. An employee can seek reimbursement from an employer for home office expenses through an accountable reimbursement plan. The employer deducts home office expenses and does not include this payment on the employee’s W-2 as taxable income.

Our below Thomson Reuters/Tax & Accounting Client Letter for “telecommuting employees” states:

“The convenience of the employer requirement is satisfied if: you maintain your home office as a condition of employment-in other words, if your employer specifically requires you to maintain the home office and work there; your home office is necessary for the functioning of your employer’s business; or your home office is necessary to allow you to perform your duties as an employee properly. The convenience of the employer requirement means that you must maintain your home office for your employer’s convenience, and not for your own. This requirement isn’t satisfied if your use of a home office is merely “appropriate and helpful” in doing your job.”

Client Letters from Thomson Reuters/Tax & Accounting:

  • Home office expense deduction for a self-employed taxpayer
  • Exclusion of gain on sale or exchange of principal residence
  • How the home sale exclusion applies to a residence used for residential and business (nonresidential) purposes or to produce rental income
  • Office at home for telecommuting employees
  • Converting a home into rental property

For access to these Client Letters from Thomson Reuters/Tax & Accounting, please join our email list. We send bulk emails a few times per month and include links to Client Letters.


A Rationale For Using QBI Tax Treatment For Traders

June 4, 2019 | By: Robert A. Green, CPA | Read it on

There are two opposing arguments made by tax professionals for applying Section 199A qualified business income (QBI) treatment on 2018 tax returns for traders with trader tax status (TTS).

Those for say Section 199A applies because Section 864(b)(2) is limited to nonresident traders only. U.S. resident TTS traders meet the requirements of Section 864(c)(3) “Other income from sources within United States.” As a result, a U.S. resident TTS trader has effectively connected income (ECI) and therefore, QBI. In this blog post, I refer to this stance as the affirmative or positive rationale.

Those against say Section 199A does not apply to U.S. resident TTS traders because Section 864(b)(2) applies to all traders. This scenario means that “trading for taxpayer’s own account” does not constitute ECI and therefore, QBI does not apply. In this blog post, I refer to this stance as the contrary or negative argument.

Here is what we know. Section 199A labeled TTS trading a “specified service trade or business” (SSTB). The contrary argument would lead to conflict: Why would 199A recognize TTS trading as an SSTB, if 864(b)(2) denied a QBI deduction to U.S. resident TTS traders? With the positive rationale, QBI includes TTS trading business expenses and Section 475 ordinary income/loss. QBI expressly excludes capital gains/losses, interest and dividend income, and forex and swap contract ordinary income/loss. A taxable income threshold, phase-in range, and income cap apply to SSTBs, which leads to some high-income taxpayers not receiving a 20% QBI deduction. (The QBI deduction rules are complex and beyond the scope of this blog post.)

Many traders filed 2018 tax extensions on March 15 (entities) and April 15 (individuals). Their tax preparers are waiting to resolve uncertainty over this issue before the tax return deadlines of Sept. 16, 2019, for partnerships and S-Corps and Oct. 15, 2019, for individual sole proprietorships.

A positive rationale to apply 199A to U.S. resident TTS traders
If you search the 199A final regs, you will find mention of 864(c) beneath the heading “Interaction of Sections 875(1) and 199A.” Section 875(1) states “a nonresident alien individual or foreign corporation shall be considered as being engaged in a trade or business within the United States if the partnership of which such individual or corporation is a member is so engaged.”

199A regs state, “Section 199A(c)(3)(A)(i) provides that for purposes of determining QBI, the term qualified items of income, gain, deduction, and loss means items of income, gain, deduction and loss to the extent such items are effectively connected with the conduct of a trade or business within the United States (within the meaning of section 864(c), determined by substituting ‘qualified trade or business (within the meaning of section 199A’ for ‘nonresident alien individual or a foreign corporation’ or for ‘a foreign corporation’ each place it appears).”

A U.S. resident TTS trader meets the definition of Section 864(c)(3) “Other income from sources within United States.”

“All income, gain, or loss from sources within the United States (other than income, gain, or loss to which paragraph (2) applies) shall be treated as effectively connected with the conduct of a trade or business within the United States.”

A U.S. resident TTS trader has Section 162 trade or business expenses. It’s consistent with 199A stating a TTS trading activity is an SSTB.

A U.S. resident TTS trader also meets the definition of 864(c)(2) “Periodical, etc., income from sources within United States—factors.”

“In determining whether income from sources within the United States of the types described in section 871(a)(1), section 871(h) , section 881(a), or section 881(c), or whether gain or loss from sources within the United States from the sale or exchange of capital assets, is effectively connected with the conduct of a trade or business within the United States, the factors taken into account shall include whether—

(A) The income, gain, or loss is derived from assets used in or held for use in the conduct of such trade or business, or

(B) The activities of such trade or business were a material factor in the realization of the income, gain, or loss. In determining whether an asset is used in or held for use in the conduct of such trade or business or whether the activities of such trade or business were a material factor in realizing an item of income, gain, or loss, due regard shall be given to whether or not such asset or such income, gain, or loss was accounted for through such trade or business.”

A U.S. resident TTS trading business uses the capital for the sale of capital assets to derive its income, and money is a material factor.

Section 871(a)(2) provides that a nonresident individual residing in the U.S. for more than 183 days per year is subject to a 30% tax on U.S.-source capital gains. (A tax treaty may provide relief.)

Some accountants think that Section 864(b)(2) prevents all traders, U.S. residents, and nonresidents, from using QBI treatment.

“Section 864(b) – the term a “trade or business within the U.S.” does not include:

Section 864(b)(1) – Performance of personal services for foreign employer.

Section 864(b)(2) – Trading in securities or commodities.

(A): Stocks and securities.
(i)   In general. Trading in stocks or securities through a resident broker, commission agent, custodian, or other independent agent.
(ii)   Trading for taxpayer’s own account. Trading in stocks or securities for the taxpayer’s own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in stocks or securities.
(C) Limitation. Subparagraphs (A)(i) and (B)(i) (for commodities) shall apply only if, at no time during the taxable year, the taxpayer has an office or other fixed place of business in the United States through which or by the direction of which the transactions in stocks or securities, or in commodities, as the case may be, are effected.”

The (C) Limitation relates to (i) nonresident investors engaging a U.S. broker. This exception applies if the nonresident does not have an office in the U.S. The exemption does not apply to (ii) “trading for taxpayer’s own account.”

In the 1.864-2 reg, there are several examples under “trading for taxpayer’s own account,” and all of the cases are for nonresident individuals and nonresident partnerships. If you read 864(b)(2)(A)(ii) as applying to nonresidents only, then it supports the affirmative rationale for using 199A on U.S. resident TTS traders.

Reg § 1.864-2(a) states:

“(a) In general. As used in part I (section 861 and following) and part II (section 871 and following), subchapter N, chapter 1 of the Code, and chapter 3 (section 1441 and following) of the Code, and the regulations thereunder, the term “engaged in trade or business within the United States” does not include the activities described in paragraphs (c) (trading in stocks or securities) and (d) (trading in commodities) of this section, but includes the performance of personal services within the United States at any time within the taxable year except to the extent otherwise provided in this section.”

The code sections in this heading are all for nonresidents:
861 – Income from sources within the United States
871 – Tax on nonresident alien individuals
Subchapter N – Tax based on income from sources within or without the United States
Chapter 3 – Withholding of tax on nonresident aliens and foreign corporations
1441: Withholding and reporting requirements for payments to a foreign person

Reg § 1.864-2(c) is for “trading in stocks or securities,” and (d) is for “trading in commodities.” Those sections discuss nonresident individuals and nonresident partnerships with U.S. brokerage accounts and explain that no matter how significant the volume of trades, that a nonresident trader does not have ECI in the U.S. This reg displays several examples, and all of them are for nonresidents. Again, this reg and related code Section 864(b)(2) is for nonresident traders only. A U.S. resident TTS trader is covered in Section 864(c), not in Section 864(b)(2).

The essential point is that the 199A regs do not state to “substitute qualified trade or business for nonresident or foreign” in Section 864(b) – so that code section remains applicable to nonresident traders only. The 199A regs required this substitution for 864(c) only.

Tax attorney Johnny Lyle J.D. weighs in:

“To read IRC Section 864(b) into the equation, you have to determine that the language ‘In the case of a qualified trade or business (within the meaning of section 199A) engaged in trade or business within the United States during the taxable year…’ requires you to determine ‘qualified trade or business under Section 199A,’ but then turn around and determine ‘trade or business within the United States’ under IRC Section 864(b),” Lyle said.

Further, Treasury Regulation Section 1.864-4, titled “U.S. source income effectively connected with U.S. business” states: “This section applies only to a nonresident alien individual or a foreign corporation that is engaged in a trade or business in the United States at some time during a taxable year beginning after December 31, 1966, and to the income, gain, or loss of such person from sources within the United States.”

Treasury Regulation Section 1.864-2, titled “Trade or business within the United States” uses only nonresident aliens and foreign corporations in its examples.

Lyle said two arguments could be made regarding Congress using the language specifically referencing IRC Section 864(c) in IRC Section 199A. First, if Congress wanted to incorporate Section 864(b) into the equation, it would have said effectively connected with the conduct of a trade or business within the United States (within the meaning of section 864) without reference to 864(c). Second, under the Treasury Regulations, 864(b) only applies to nonresident aliens. Therefore, the restriction in 864(b)(2)(A)(ii) would only apply to nonresident aliens, and a taxpayer who was a day trader, but not a nonresident alien, would not be excluded from ECI.

“If Congress intended to exclude all trader income, it would have done so under IRC Section 199A(c)(3)(B) rather than a more roundabout, back door way, rendering IRC Section 199A(d)(2)(B) meaningless,” Lyle said. “If Congress wanted to specifically incorporate Section 864(b), it would have worded it this way: …effectively connected (within the meaning of section 864(c)) with the conduct of a trade or business within the United States (within the meaning of section 864(b)), determined by substituting ‘qualified trade or business (within the meaning of section 199A)’ for ‘nonresident alien individual or a foreign corporation’ or for ‘a foreign corporation’ each place it appears.”

It gives me some pause that some big-four accountants prepared a few 2018 hedge fund partnership K-1s without applying 199A tax treatment. Their K-1 notes indicated reliance on Sections 864(c) and or 864(b) to skip the application of 199A. When we asked some big-four tax partners for clarification, they said they were not wedded to that position. Did these accountants take an easy way out, by reading Section 864(b)(2) out of context? The hedge fund investors would have been hurt with QBI treatment since they would have QBI losses from TTS trading business expenses. The hedge fund had capital gains, which QBI excludes. The hedge fund did not elect Section 475 ordinary income or loss, which QBI includes.

On the other side of the debate, I’ve seen some K-1s from proprietary trading firms, and all of those K-1s did report 199A information. They reported QBI income since they elected Section 475 on securities. I asked their tax preparers about it, and they said 864(b)(2) applies to foreign partnerships, not these U.S. trading partnerships.

I spoke with a tax attorney in IRS Office of Chief Counsel listed on the Section 199A regs, and he thought the positive rationale makes sense. He even accommodated my request to add Section 475 by name to inclusion in QBI in the final 199A regs. The IRS attorney did not raise Section 864(c) or 864(b)(2) as being a problem for U.S. resident TTS traders.

It’s time to complete 2018 tax returns even with remaining uncertainty. I suggest that U.S. resident TTS traders, living, working, and trading in the U.S. consider applying 199A to their trading business. Consult your tax advisor.

CPAs Darren Neuschwander and Adam Manning, and tax attorney Johnny Lyle contributed to this blog post.

See my prior blog posts on 199A for traders at https://greentradertax.com/uncertainty-about-using-qbi-tax-treatment-for-traders/


Tax Extensions: 12 Tips To Save You Money

March 12, 2019 | By: Robert A. Green, CPA | Read it on

Individual tax returns for 2018 are due April 15, 2019, however, most active traders aren’t ready to file on time. Some brokers issue corrected 1099Bs right up to the deadline, or even beyond. Many partnerships and S-Corps file extensions by March 15, 2019, and don’t issue Schedule K-1s to partners until after April 15. Many securities traders struggle with accounting for wash sale loss adjustments.

The new tax law (TCJA) raises additional complications on 2018 tax returns. There is uncertainty over QBI tax treatment for traders, so we suggest traders eligible for trader tax status (TTS) file extensions. (See Uncertainty About Using QBI Tax Treatment For Traders.)

The good news is traders don’t have to rush completion of their tax returns by April 15. They should take advantage of a simple one-page automatic extension along with payment of taxes owed to the IRS and state. Most active traders file extensions, and it’s helpful to them on many fronts.

Tip 1: Get a six-month extension of time
Request an automatic six-month extension of time to file individual federal and state income tax returns by Oct. 15, 2019. Form 4868 instructions point out how easy it is to get this automatic extension — no reason is required. It’s an extension of time to file a complete tax return, not an extension of time to pay taxes owed. Estimate and report what you think you owe for 2018 based on your tax information received.

Tip 2: Avoid penalties from the IRS and state for being late
Learn how IRS and state late-filing and late-payment penalties apply so you can avoid or reduce them to your satisfaction. 2018 Form 4868 (Application for Automatic Extension of Time To File U.S. Individual Income Tax Return) page two states:

Late Payment Penalty: The late payment penalty is usually ½ of 1% of any tax (other than estimated tax) not paid by the regular due date of your return, which is April 15, 2019, for calendar year filers (April 17, 2019, if you live in Maine or Massachusetts). It’s charged for each month or part of a month the tax is unpaid. The maximum penalty is 25%. The late payment penalty won’t be charged if you can show reasonable cause for not paying on time. Attach a statement to your return fully explaining the reason. Don’t attach the statement to Form 4868. You’re considered to have reasonable cause for the period covered by this automatic extension if both of the following requirements have been met. 1. At least 90% of the total tax on your 2018 return is paid on or before the regular due date of your return through withholding, estimated tax payments, or payments made with Form 4868. 2. The remaining balance is paid with your return.

Late Filing Penalty: A late filing penalty is usually charged if your return is filed after the due date (including extensions). The penalty is usually 5% of the amount due for each month or part of a month your return is late. The maximum penalty is 25%. If your return is more than 60 days late, the minimum penalty is $210 (adjusted for inflation) or the balance of the tax due on your return, whichever is smaller. You might not owe the penalty if you have a reasonable explanation for filing late. Attach a statement to your return fully explaining your reason for filing late. Don’t attach the statement to Form 4868.”

Tip 3: File an automatic extension even if you cannot pay
Even if you can’t pay what you estimate you owe, make sure to file the automatic extension form on time by April 15, 2019. It should help avoid the late-filing penalty, which is ten times more than the late-payment penalty. If you can’t pay in full, you should file your tax return or extension and pay as much as you can.

An example of late-payment and late-filing penalties: Assume your 2018 tax liability estimate is $50,000. Suppose you file an extension by April 15, 2019, but cannot pay any of your tax balance due. You file your actual tax return on the extended due date of Oct. 15, 2019, with full payment. A late-payment penalty applies because you did not pay 90% of your tax liability on April 15, 2019. The late-payment penalty is $1,500 (six months late x 0.5% per month x $50,000). Some traders view a late-payment penalty like a 6% margin loan, and it’s not tax-deductible.

By simply filing the extension on time in the above example, you avoided a late-filing penalty of $11,250 (six months late x 5% per month [25% maximum], less late-payment penalty factor of 2.5% = 22.5%; 22.5% x $50,000 = $11,250). Interest is also charged on taxes paid after April 15, 2019.

If you don’t expect to owe 2018 taxes by April 15, 2019, it’s easy to prepare an extension with no balance due. Make sure to file it on time to avoid a minimum penalty just in case you were wrong and do owe taxes for 2018.

Tip 4: Add a payment cushion for Q1 2019 estimated taxes due
Traders with 2019 year-to-date trading gains and significant tax liability in the past year should consider making quarterly estimated tax payments this year to avoid underestimated tax penalties. The IRS increased AFR interest rates in 2018 and 2019.

I recommend the following strategy for traders and business owners: Overpay your 2018 tax extension on April 15, 2019, and plan to apply an overpayment credit toward Q1 2019 estimated taxes. Most traders don’t make estimated tax payments until Q3 and or Q4 when they have more precise trading results. Why pay estimated taxes for Q1 and Q2 if you incur substantial trading losses later in the year?

It’s a better idea to pay an extra amount for the extension to set yourself up for three good choices: A cushion on 2018 if you underestimated your taxes, an overpayment credit toward 2019 taxes, or a tax refund for 2018 if no 2019 estimated taxes are due.

Tip 5: Consider a 2019 Section 475 MTM election
Traders eligible for trader tax status should consider attaching a 2019 Section 475 election statement to their 2018 tax return or extension. These are due by April 15, 2019, for individuals and corporations and March 15 for partnerships and S-Corps. Section 475 turns capital gains and losses into ordinary gains and losses, thereby avoiding the capital-loss limitation and wash-sale loss adjustments on securities (i.e., tax-loss insurance).

TTS traders might also derive an essential tax benefit from Section 475 ordinary income: TCJA’s 20% qualified business income (QBI) deduction. However, QBI treatment for traders is uncertain at this time. (Read Traders Elect Section 475 For Massive Tax Savings.)

Tip 6: File when it’s more convenient for you
Sophisticated and wealthy taxpayers know the “real” tax deadline is Oct. 15, 2019, for individuals and Sept. 16, 2019, for pass-through entities, including partnership and S-Corp tax returns. Pass-through entities file tax extensions by March 15, 2019. (See March 15 Is Tax Deadline For S-Corp And Partnership Extensions And Elections.)

You don’t have to wait until the last few days of the extension period like most wealthy taxpayers. Try to file your tax return in the summer months.

Tip 7: Be conservative with tax payments
I’ve always advised clients to be aggressive but legal with tax-return filings and look conservative with cash (tax money). Impress the IRS with your patience on overpayment credits and demonstrate you’re not hungry and perhaps overly aggressive to generate tax refunds. It’s a wise strategy for traders to apply overpayment credits toward estimated taxes owed on current-year trading income. You want to look like you’re going to be successful in the current tax year.

The additional time helps build tax positions like qualification for trader tax status in 2018 and 2019. It may open opportunities for new ideas on tax savings. A rushed return does not.

Tip 8: Get more time to fund qualified retirement plans
The extension also pushes back the deadline for paying money into qualified retirement plans including a Solo 401(k), SEP IRA and defined benefit plan. The deadline for 2018 IRA contributions is April 15, 2019.

Tip 9: Respect the policies of your accountants
Your accountant can prepare extension forms quickly for a nominal additional cost related to that job. There are no fees from the IRS or state for filing extensions. Be sure to give your accountant tax information received and estimates for missing data.

Your accountant begins your tax compliance (preparation) engagement, and he or she cuts it off when seeing a solid draft to use for extension filing purposes. Your accountant will wait for final tax information to arrive after April 15, 2019. Think of the extension as a half-time break. It’s not procrastination; accountants want tax returns finished.

Please don’t overwhelm your tax preparer the last few weeks and days before April 15 with minor details in a rush to file a complete tax return. Accounting firms with high standards of quality have internal deadlines for receiving tax information for completing tax returns. It’s unwise to pressure your accountant, which could lead to mistakes or oversights in a rush to file a complete return at the last minute. That doesn’t serve anyone well.

Tip 10: Securities traders should focus on trade accounting
It doesn’t matter if your capital loss is $50,000 or $75,000 at extension time: Either way, you’ll be reporting a capital loss limitation of $3,000 against other income. In this case, don’t get bogged down with trade accounting and reconciliation with Form 1099Bs until after April 15. The capital loss carryover impacts your decision to elect Section 475 MTM for 2019 by April 15, 2019, but an estimate is sufficient.

Consider wash-sale loss rules on securities: If you know these adjustments won’t change your $3,000 capital loss limitation, you can proceed with your extension filing. But if you suspect wash-sale loss adjustments could lead to reporting capital gains rather than losses, or if you aren’t sure of your capital gains amount, focus your efforts on trade accounting before April 15. (Consider our trade accounting service.) Try to do accounting work for year-to-date 2019; it also affects your decision-making on the 475 election.

Section 1256 contract traders can rely on the one-page 1099B showing aggregate profit or loss. Forex traders can depend on the broker’s online tax reports. Wash sales don’t apply to Section 1256 contracts and forex. Cryptocurrency traders should use coin trade accounting programs to generate Form 8949.

Tip 11: Don’t overlook state extensions and payments
Some states don’t require an automatic extension for overpaid returns; they accept the federal extension. If you owe state taxes, you need to file a state extension with payment. States tend to be less accommodating than the IRS in abating penalties, so it’s usually wise to cover your state taxes first if you’re short on cash. Check the extension rules in your state.

Tip 12: U.S. residents abroad should learn the particular rules
U.S. citizens or aliens residing overseas are allowed an automatic two-month extension until June 17, 2019, to file their tax return and pay any amount due without requesting an extension. (See Form 4868 page 2, and the IRS website.)

Darren Neuschwander CPA and Adam Manning CPA contributed to this blog post. 


March 15 Is Tax Deadline For S-Corp And Partnership Extensions And Elections

March 6, 2019 | By: Robert A. Green, CPA | Read it on

March 15, 2019, is the deadline for filing 2018 S-Corp and partnership tax returns, or extensions, 2019 S-Corp elections for existing entities, and 2019 Section 475 elections for a pass-through entity. Don’t miss any of these tax filings or elections; it could cost you.

2018 S-Corp and partnership tax extensions

Extensions are easy to prepare and file for S-Corps and partnerships since they pass through income and loss to the owner, usually an individual. Generally, pass-through entities are tax-filers, but not taxpayers. 2018 individual and calendar-year C-Corp tax returns or extensions, and Section 475 elections are due April 15, 2019. (See IRS Tax Calendars For 2019.)

For S-Corps and partnerships use Form 7004 (Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns). 2018 S-Corp and partnership extensions give six additional months to file a federal tax return, by Sep. 16, 2019.

Some states require a state extension filing, whereas others accept the federal extension. Some states have S-Corp franchise taxes, excise taxes, or minimum taxes, and payments are usually due with the extensions by March 15. LLCs filing as a partnership may have minimum taxes or annual reports due with the extension by March 15.

Late Filing Penalties: The IRS late filing penalty regime for S-Corps and partnerships is similar. The IRS assesses $210 for partnerships, $200 for S-Corps, per owner, per month, for a maximum of 12 months. Taxpayers may request penalty abatement based on reasonable cause after the IRS mails a penalty notice. Ignoring the extension deadline is not reasonable cause. There is also a $270 penalty for failure to furnish a Schedule K-1 to an owner on time, and the penalty is higher if intentionally disregarded. States assess penalties and interest, often based on payments due. (See more details about penalties and interest in Form 1065 and 1120S instructions.)

The new tax law TCJA’s Section 199A “qualified business income” (QBI) tax treatment might apply to TTS partnerships and S-Corps, whether they use Section 475 or not. TTS trading expenses are QBI losses. In my recent blog post, Uncertainty About Using QBI Tax Treatment For Traders, I suggest filing extensions to have additional time for a resolution of this matter.

2019 S-Corp elections

Traders qualifying for trader tax status and interested in employee benefit plan deductions, including health insurance and retirement plan deductions, probably need an S-Corp. They should consider a 2019 S-Corp election for an existing trading entity, due by March 15, 2019, or form a new entity and file an S-Corp election within 75 days of inception. Most states accept the federal S-Corp election, but a few states do not; they require a separate S-Corp election filing by March 15. If you overlooked filing a 2018 S-Corp election by March 15, 2018, and intended to elect S-Corp tax treatment as of that date, you may qualify for IRS relief. (See Late Election Relief.) (Sole proprietor traders do not have self-employment income, which means they cannot have self-employed health insurance and retirement plan deductions. TTS partnerships face significant obstacles in achieving self-employment income.)

2019 Section 475 MTM elections for S-Corps and partnerships

Traders, eligible for trader tax status, should consider attaching a 2019 Section 475 election statement to their 2018 tax return or extension due by March 15, 2019, for partnerships and S-Corps, or by April 15, for individuals and C-corps. Section 475 turns capital gains and losses into ordinary gains and losses thereby avoiding the capital loss limitation and wash sale loss adjustments (tax loss insurance). There might also be benefits to 475 income per the new tax law (TCJA) “qualified business income” (QBI) deduction subject to taxable income limitations. However, QBI tax treatment for traders is uncertain at this time. (Read Traders Elect Section 475 For Massive Tax Savings.)

If a trader wants to revoke a prior year Section 475 election, a revocation election statement is due by March 15, 2019. (See New IRS Rules Allow Free And Easy Section 475 Revocation.)

If you need help, consider a consultation or our tax compliance service.