Covering Your Assets: Should you use estimates to file your tax return? (Voices)
Covering Your Assets
Many business owners are scrambling to file their taxes by the extended due date, October 15, 2020.
A common question I get from people is what to do if they are still missing information for the tax return.
The AICPA Statement on Standards for Tax Services No. 4, “Use of Estimates,” provides the guidance in this situation. The statement informs CPAs that they can advise on estimates used in the preparation of a tax return, but the taxpayer has the responsibility to provide the estimated data.
Unless prohibited by statute or by rule, a member may use the taxpayer’s estimates in the preparation of a tax return. A key provision that is often overlooked is that a taxpayer’s estimates should be presented in a manner that does not imply greater accuracy than exists.
This generally means that an estimated number should be rounded. After all, “estimating” that you had $4,746 in repairs looks like an actual number not an estimate. In this case, a taxpayer is better served rounding to $4,700.
The guidance goes on to state that specific disclosure that an estimate is used for an item in the return is not generally required; however, such disclosure should be made in unusual circumstances where nondisclosure might mislead the taxing authority regarding the degree of accuracy of the return as a whole.
Some examples of unusual circumstances include the following:
- a. A taxpayer has died or is ill at the time the return must be filed.
- b. A taxpayer has not received a Schedule K-1 for a pass-through entity at the time the tax return is to be filed.
- c. There is litigation pending (for example, a bankruptcy proceeding) that bears on the return.
- d. Fire, computer failure, or natural disaster has destroyed the relevant records.
The most important part of this equation is to file your tax return on time, even if you have to estimate to do so. There are many elections, etc., that must be made on a timely filed return.
Let’s say for example that you have had nominal income over the last five years. In 2019, you started a business, and got an SBA loan and purchased significant equipment. You feel certain that you will have a loss for the year. The business is booming now, and you don’t have time to gather the information to file an accurate return.
You consider simply filing late because if you don’t owe tax, there will not be penalties. While logical, this decision could prove costly.
Namely, with nominal income going back 5 years, unless you elect to forego carrying the net operating loss back, you will be required to. The impact of that decision will then be to have less loss available to carry forward against the high-income tax years.
Another important consideration is whether to opt out of bonus depreciation on the equipment purchases. This is especially important with self-employment taxes.
Also, the late filing penalties are brutal! Better to estimate and amend than file late, I always say. This is true even if you do not owe tax. Granted, the late filing penalties are based on the tax due with the return; however, if the IRS later determines that you owed tax, you will regret not filing on time.
As a sidebar, you may be wondering if you should file a tax return to secure your $1,200 Economic Impact Payment (EIP). It is true that if you are not required to file a tax return, you can file simply one to get your EIP payment. As an alternative, you can register with the IRS to have the EIP sent to you without filing a tax return.
The IRS announced that taxpayers now have until November 21, 2020, to register for EIP. This new date will provide an additional five weeks beyond the original deadline.
The IRS urges people who don’t typically file a tax return — and haven’t received an Economic Impact Payment to register as quickly as possible using the “Non-Filers: Enter Info Here” tool on IRS.gov. The tool will not be available after November 21.
These rules are general in nature. Consult your CPA to determine how they apply to your specific situation.
Mike Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His weekly NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. Reach at email@example.com. CLA’s Beth Silver assisted with writing this article.
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