Unforeseen circumstances can occur with small businesses, causing them to file their federal taxes late and to seek an extension. The new tax law, the Tax Cuts and Jobs Act (TCJA), which was passed in December 2017, also impacted companies.
There were many changes made that affect every type of business, including the new depreciation limits, the increased bonus depreciation, making entertainment expenses non-deductible, and simplifying accounting methods for small businesses or those with average gross receipts under $25 million, said John Blake, a CPA and partner at Klatzkin & Company, a Hamilton, N.J.-based accounting, tax and audit company.
The larger changes depend on how the business is organized. For businesses which are considered pass-through entities, the biggest part of the tax reform is the qualified business income deduction. If the business is organized as a C-corporation, the biggest change is the reduction of corporate tax rates to a flat 21 percent.
The new tax law affects businesses profoundly, said Valerie Chambers, an associate professor of accounting at Stetson University in DeLand, Fla.
Small businesses might be able to use the cash basis now, while they could not under the old law, she said. However, companies with net operating losses or substantial interest expense might find those deductions limited. International companies face an entirely different system of taxation, moving from global taxation with a foreign tax credit, to a quasi-territorial model of taxation.
Companies such as an LLC or S-corporation must file a federal return or extension by March 15, Blake said. A business that is a pass-through entity is required to file a federal return or extension by March 15, unless it is a sole proprietorship. For companies that are C-corporations, the most common type of business structure, a return or request for extension must be filed by April 15.
Companies that were unable to get organized and are not sure what amount to pay for the year can utilize the safe harbor rule. Corporations can pay either 100 percent of the current-year tax, or prior-year tax for small corporations if the amount of tax owed is more than $500, he said.
“By filing for an extension and making an estimated payment, taxpayers can minimize their tax penalty exposure.”
For pass-through entities, business owners can pay 110 percent of the prior-year tax to avoid any penalties and interest for late filing.
Avoiding filing for an extension is a red flag to the IRS, and companies accrue even more penalties on top of their tax bill. Business owners also face late fees and penalties if their state income tax bill is late.
“When life intervenes and tax returns cannot be completed by the original deadline, it is best for taxpayers to file an extension and simultaneously make an estimated payment of the taxes due,” Chambers said. “There are penalties for not filing and separate penalties for not paying the tax due. By filing for an extension and making an estimated payment, taxpayers can minimize their tax penalty exposure.”
The penalties for failure to file can be steep, especially for a smaller company that has not been in business for many years. The penalties are 5 percent of the outstanding tax for up to five months. The interest is determined using the federal short-term rate, plus 3 percent with interest compounding daily.
Companies that are filing their taxes late and lack enough cash flow to pay their entire tax bill have several options.
Taxpayers in this situation should consider making monthly estimated tax payments instead of quarterly estimated tax payments, said Chambers. Taxpayers will catch up faster, minimizing penalties. The IRS also allows businesses to make semi-weekly or weekly payments, which may make it easier for a burgeoning firm to budget and avoid getting behind on a tax bill.
“You can’t get blood from a stone, but by paying in smaller but more frequent amounts, these payments seem less painful than the larger quarterly payments to most people,” Chambers said.
Small businesses are eligible to pay their taxes with credit cards. However, larger corporations, S-corps and partnerships are not allowed to pay taxes via credit or debit cards. Businesses who file Forms 1065, 1120 or 1120S are excluded—only select forms listed by the IRS are eligible for credit card payments.
The best option for a small business owner is to either sign up for a long-term payment plan with the IRS or pay with a 0 percent APR credit card because the interest rates will be lower than a small business loan or a personal loan.
Owners who opt to use a credit card will have to pay processing fees to the credit card issuers, along with the interest accrued.
The IRS has approved three credit card processors, and they charge fees ranging from 1.87-1.99 percent, said Ted Rossman, an analyst at CreditCards.com, an Austin, Texas-based credit card reviews, insights and recommendations company.
“In most cases, this will wipe out the value of any rewards you might earn, but there are a few exceptions. The Citi Double Cash is essentially a 2 percent cash back card (1 percent when you make purchases and 1 percent when you pay it off). Other similar business cards include the Blue Business Plus from American Express and Capital One’s Spark Miles for Business card. In these instances, you’d make a slight profit using a credit card,” Rossman said.
“If you don’t spend enough in your normal course of business to hit that spending threshold, it could be worth paying taxes with the card,” Rossman said. “In many cases, you’d come out ahead even after subtracting the processing fee.”
“If you don’t spend enough in your normal course of business to hit that spending threshold, it could be worth paying taxes with the card.”
Business owners need to be conscious of setting aside money from earnings to pay quarterly taxes, which can add up quickly.
“Put money into a different bank account that you won’t touch until it comes time to make an estimated payment or pay an amount due with a return,” said Blake. “Keep in mind, different states have their own rules for penalties and interest for late filing and late payment. In fact, some states charge higher interest rates.”