Shutting Down a Business? File Your Final Taxes On Time and Avoid the Short Year Trap.

Filing a late partnership or S corporation tax return has gotten increasingly expensive over the last 10 years. In 2006, the penalty per month, per partner/shareholder was $50. For 2018 that penalty is $195 per month, per partner/shareholder. This means that if a partnership with two partners who fail to file an extension for their tax return, but still file by September 15th would face $1,950 in penalties from the IRS. The maximum months that penalties can be assessed are 12, but consider the client who may be a few years behind in filings and has multiple shareholders. These penalties can quickly reach the $10,000 plus mark.

If you are a business owner the above situation may not apply to you. You always file timely or get an extension and feel confident your tax professional filed your income tax returns when they said they did.  Yes, we have seen cases where the client believed the tax returns were filed when in fact they were not. Relying on a professional alone is not sufficient cause for the IRS to provide penalty relief. If you are someone out there dealing with penalty issues from the IRS there can be relief and we can help you reduce or alleviate those penalties. For the purposes of this blog, let’s assume all returns have been filed timely.

Where business owners can fall into what I will call the “short year trap” is when a change in ownership of the business occurs or the business is sold. The requirement to file a tax return is by the 15th of the 3rd month following the date the entity’s tax year ended for S Corporations and the 15th of the 4th month following the date the entity’s tax year ended for partnership. Notice that these instructions say the entity’s tax year ended – not the end of the calendar year. If you are a sole owner of a S corporation, sell your business, and shut down all entity operations on 7/15/2018 there is a tax return filing requirement before 3/15/2019. The same requirements apply with a technical termination of a partnership. If a sale of exchange of 50% or more of the ownership occurs in a 12 month period, that is a technical termination and a final tax return must be filed.

Contact Adam Shay CPA Firm in Wilmington NC for Help

Like with most tax returns, extensions are available, but you need to notify your CPA in Wilmington NC, at a minimum, when these events occur to help make sure you are in compliance and avoid late filing penalties. We want to be involved with and notified by our clients before these transactions happen to help walk them through the tax implications of selling a business, ending a partnership, or changing ownership. Even if the business no longer exists, the IRS may have the ability to reach individual assets to collect these penalties. Avoid falling into the short year trap by keeping communication open with your tax professional, Adam Shay CPA Wilmington NC.

Catching Up on Missed Rental Property Depreciation

If you own a rental property, do you know if you have taken all of the possible deductions?  The number one item that I see most commonly missed for a rental property on self-prepared tax returns is depreciation.  You are allowed to depreciate residential rental property over 27.5 years and commercial rental property over 39 years.  To calculate the depreciation, you will need the cost basis of the property, which is what you paid for it.  Make sure you allocate a portion of the basis to land, another common error on tax returns.  The land portion is not depreciable.

Why is it important to depreciate the property?  Whenever you sell or dispose of the property, you have to calculate gain or loss on the property.  Gain or loss is calculated in the following manner:

Sales Price

Less Cost Basis (including land)

Plus Accumulated Depreciation

= Gain/Loss

If there is a gain, the accumulated depreciation is recaptured and taxed at ordinary income tax rates, up to the amount of the gain.  If there is any balance remaining after the depreciation recapture, the remainder is taxed at favorable capital gains tax rates.  If the IRS were to calculate the gain on the property, they would treat the property as if it had been depreciated, and you would not get to deduct the missed depreciation as an expense, but would pay ordinary tax rates on the accumulated depreciation calculated up to the amount of gain.  Therefore, you want to make sure you are getting that depreciation deduction every year.

You may be very concerned at this point if you have not been taking depreciation, but fear not because we have some solutions for you.  The first option is to amend prior year tax returns to deduct the depreciation on the tax returns.  There is a drawback to this option: you can only amend tax returns filed in the prior 3 years, so if depreciation was missed prior to those 3 years you would still be missing out on the depreciation.

The second option to catch up missed depreciation is to file a 3115 Application for Change in Accounting Method.  Filing this would allow you to capture any missed depreciation as far back as necessary, versus only being able to go back 3 years for amended returns.  The form is filed with the current tax return and all of the depreciation is deducted in the current year as a Section 481(a) adjustment.  The 3115 is a very in-depth form, so do not try this at home!  You will want to use a tax professional to handle the 3115.

If you are reading this and want to take advantage of the 3115 or amending returns to capture missed depreciation, our accountant Wilmington NC will be happy to assist you.