Why Small Biz Owners May Want to Extend the July 15 Tax Deadline
Thanks to relief provided by the IRS, your corporation’s 2019 federal income tax return (Form 1120) deadline has been extended to 7/15. With that, here are some important tax planning options to consider between now and then.
Claim 100% First-Year Bonus Depreciation – or not
Businesses can claim 100% of first-year bonus depreciation for qualifying business assets placed in service between 9/28/17 and 12/31/22. This means you can write off the entire cost of those assets on the federal income tax return for the year the assets are placed in service. This is allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets, off-the-shelf software, and real estate qualified improvement property (QIP).
While claiming 100% first-year bonus depreciation whenever allowed is usually a “tax smart” move, think twice if you anticipate higher tax rates in the future. Should that be the case, consider foregoing bonus depreciation and instead depreciating the assets in question over a number of years. The depreciation write-offs will offset income in future years that might be taxed at higher rates (maybe much higher). The choice to claim 100% first-year bonus depreciation, or not, is made on your still-unfiled federal income tax return.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) offers a five-year carryback privilege for any business net operating loss (NOL) that arises in a tax year beginning in 2018-2020. Claiming 100% first-year bonus depreciation can potentially create or increase an NOL. You can then carry back the NOL to an earlier tax year and recover some or all of the federal income tax paid for that year. So, this factor argues in favor of claiming 100% first-year bonus depreciation on your still-unfiled return.
Retroactive COVID-19 Business Tax Relief Provisions
The CARES Act includes a number of retroactive tax relief provisions for business taxpayers. These retroactive provisions can impact your still-unfiled return.
- As stated earlier, the CARES Act allows an NOL that arises in a tax year beginning in 2018-2020 to be carried back five years. So, an NOL reported on your still-unfiled return can be carried back to an earlier tax year to recover some or all of the federal income tax paid for that that year. Because federal income tax rates were generally higher in years before the Tax Cuts and Jobs Act (TCJA) took effect, NOLs carried back to pre-TCJA years can yield big tax refunds.
- The CARES Act also fixed a TCJA drafting error to allow faster depreciation for real estate qualified improvement property (QIP) placed in service after the TCJA took effect. QIP is generally defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was placed in service. The CARES Act correction allows 100% first-year bonus depreciation for QIP placed in service in 2018-2022. Alternatively, you can choose to depreciate QIP placed in service in 2018 and beyond over 15 years. The choice to claim 100% first-year bonus depreciation for QIP, or not, is made on your still-unfiled federal income tax return.
- An unfavorable TCJA provision disallowed current federal income tax deductions for so-called excess business losses incurred by individual taxpayers in tax years beginning in 2018-2025. An excess business loss is one that exceeds $250,000 or $500,000 for a married joint-filing couple. The CARES Act suspended the excess business loss disallowance rule for losses that arise in tax years beginning in 2018-2020. Good!
Small Biz Owners Should Consider Extending Returns Past July 15
Business taxpayers have lots of things to consider for their still-unfiled federal income tax returns. With that in mind, recognize that things are very different this time around. You have COVID-19 tax relief provisions to evaluate, some of which are retroactive. You have the upcoming November general election to think about. The outcome of that election could have major tax implications for future years. What you choose to do with your still-unfiled tax return can impact taxable income in those future years. With these factors in the mix, businesses should consider extending the due date past July 15 to allow more time to get things settled.
How to Extend
The standard procedures must be followed to extend filing deadlines for federal income tax returns past July 15. You can extend the deadline for your personal 2019 return (Form 1040) to October 15 by submitting (Form 4868) to the IRS. Extend the deadline for the return of a business entity by submitting Form 7004.
Before Deciding to Extend
Before acting on any of this, we advise speaking to a tax professional or your accountant. Extending return due dates past July 15, is probably a wise move in some cases. But remember, there’s a lot to consider and it’s always best to consult a tax pro first.