August 2018 Tax Snacks
Tax Snacks: Bite-size tax news and information on the fly
Dates to Remember
- Extended filing deadline for calendar year partnership/LLC, and S corporation returns (Forms 1065 and 1120S)
- Q3 estimate payment deadline for individuals, trusts, and calendar-year corporations
- Extended filing deadline for calendar year trust returns (Form 1041)
- Extended filing deadline for individual income tax returns (Form 1040)
- Filing deadline to report foreign financial account holdings (Form FinCEN 114)
Attentive readers may have noticed that many of our articles in recent months have focused on one aspect or another of the Tax Cuts and Jobs Act (TCJA) that was passed in late 2017. The reason this legislation is getting so much attention is that it overhauled much of the existing federal tax law. In some areas permanently while in others temporarily, it undid rules that had been in place for decades and added others, and we are operating in an entirely new environment. That environment, as it turns out, is quite foggy. While the rationale for many of the changes is apparent, the implementation is full of holes. We are left speculating how some of the calculations will work, or what situations and fact patterns are covered by some vague, new definitions.
The legislative branch, through Congress, writes the core of our tax laws, which become part of the Internal Revenue Code – the highest source of federal tax authority. The executive branch, through the Treasury Department, is expected or allowed to then write language that elaborates on or clarifies the Internal Revenue Code. Their additions take the form of Treasury Regulations – the second highest source of federal tax authority.
The TCJA took the form of new sections of Internal Revenue Code. We are now in the process of receiving new Treasury Regulations related to the TCJA, primarily in proposed form, on a somewhat regular basis. Some guidance is helpful, and some creates another question for every one that it answers. BNN’s tax experts continue to digest this information, and house it in one place for your convenience. For the latest articles, alerts, updates, and seminars (including upcoming breakfast discussions) please check out our Tax Reform Resource Center.
One of the least popular features of December’s Tax Cuts and Jobs Act (“TCJA”) was the new repatriation tax imposed by Internal Revenue Code Section 965. While many do not necessarily disagree with its approach (imposing a modest tax on deemed repatriation of money held overseas to encourage the subsequent actual transfer of that money back to the U.S.), it was wildly unpopular because of its timing: Most changes brought about by the TCJA were effective 1/1/18, allowing the impact of those changes to be punted in many cases until 4/15/19 (when many 2018 tax returns are filed). But the Sec. 965 tax was based on 2017 results, and created a brand new tax that was payable on 4/15/18, just weeks after anyone became aware of its existence. And because it taxes deemed transfers of cash and noncash property, some taxpayers were at a loss regarding how to fund it. Fortunately, an election was made available to spread the tax over an 8-year period, with only the first installment of those 8 being due on 4/15/18. What many affected taxpayers were not aware of, though, was that a sneaky feature buried in its implementation was about to make it worse. Explaining how requires a little knowledge of estimated tax payment methods.
For some taxpayers, W-2 withholdings are the only source of their payments to the IRS until they file their tax returns. At that point, shortfalls involve a payment to the IRS, and overpayments can produce a refund. But some taxpayers, like the self-employed or those with significant investments, have sources of income that are not covered by withholding, and they pay their taxes by means of quarterly estimated taxes paid directly (often by personal check) to the IRS. It just so happens that the first quarter payment is due on April 15, which is also the deadline by which the final payments are made on the prior year tax. For taxpayers who file an extension, a widely-used and completely legitimate tax funding method involves making a lone payment with their prior year extension that is increased by the amount of tax they expect to owe for Q1 of the current year. When their tax return is finalized (sometime before October 15), they will ask to have all or most of their overpayment applied to the following year (in fact, the overpayment is deliberate, both providing a cushion against errors in 4/15 extension estimates, and allowing one payment to take the place of two that otherwise would be due separately on the same date). Rolling Q1 estimates into the prior year’s extension payment is a very common practice that has long been welcomed by the IRS. The IRS gets its money, and there is no risk to the taxpayer, because excessive amounts can be refunded shortly after the tax return is filed.
Fast-forward to the TCJA, though, and a funny thing happened with deliberately-created overpayments of 2017 tax that were planned to cover Q1 (unintentional ones too). Payments of the Sec. 965 tax were also due on 4/15/18, but were made as separate payments, rather than as a component of other “regular” 1040 taxes. Unfortunately, those who availed themselves of the election to spread the payments over 8 years who also end up with an overpayment of their “regular” 1040 tax (including any deliberate overpayment legitimately designed to cover Q1 2018 tax) will find that the IRS will hijack the full amount of their overpayment and apply it toward all of their successive Sec. 965 payments (the total amount due in years 1-8). No refunds will be allowed from a 1040, and no overpayments can be applied toward 2018 regular income tax until every penny of the Sec. 965 tax is paid. Unless this goofy practice is rectified (let’s not hold our breaths that it will), this same situation will be encountered every year until 2025. It will discourage prepayments of tax at April 15, and possibly lead to many taxpayers low-balling their extension payments, resulting in penalties. And it will do so for taxpayers who are truly trying to comply with the law.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.