Questions linger from the 2023 tax season

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The crew at PCO Bookkeepers has completed another tax preparation season, preparing more than 1,700 income tax returns and other related returns for our client companies and owners. They prepared more than 7,500 1099 forms and more than 200 state tangible returns.

All this work has given some insight into income, tax liabilities and attitudes toward taxes. Here are a few common questions raised by clients this year:

What is the due date for tax returns that have been put on extension?
The due date for S corporations (S-Corp.) and partnerships is Sept. 15, 2024. For C corporations (C-Corp.) and individual tax returns, it’s Oct. 15, 2024.

Will I incur any penalties for not making estimated payments?
Tax payments need to be made throughout the year at least quarterly using estimated payment vouchers or withholding through your paycheck. The minimum tax to pay during the year to avoid underpayment penalties is either:

▶ 90 percent of the current year tax

▶ 100 percent of the prior year tax (110 percent if your adjusted gross income was over a certain threshold)

Does an extension to file give you an extension to pay your taxes?
Nope. Any amount owed once you file your return over the amount you paid with your extension is subject to a 0.5 percent penalty per month of the tax. It’s due per month, plus interest.

Will buying trucks or equipment reduce my tax bill?
Purchasing a capital asset allows you to expense it — thereby reducing taxable income — over time. There are three ways to depreciate asset purchases:

1. Depreciating the asset over its “useful life.” For vehicles, it’s usually five years.

2. Using IRC Sec. 179, which allows immediate expensing of the entire asset. A 179 deduction can reduce income to zero, but it cannot create a loss.

3. Bonus depreciation because in 2023, you can deduct up to 80 percent of the cost of the asset — with the balance being deducted over the useful life of the asset.

Dan Gordon, CPA

Can I deduct business losses against other types of income?
Yes, but you may be limited. Let me explain:

▶ Basis limitation: You can only deduct losses up to your tax basis in a pass-through business (partnerships and S-Corp.). This generally includes your initial investment and any subsequent contributions, plus undistributed profits that were previously taxed.

▶ At-risk limitation: You typically can’t deduct losses greater than the amount you have “at risk” in the business. This includes amounts personally invested and certain types of debt for which you are personally liable.

▶ Passive activity loss limitation: If you don’t materially participate in the business, losses may be considered passive losses. These generally only offset passive income, not income from wages or active business participation.

▶ Excess business loss limitation: For tax years beginning in 2018 and later, the excess business loss (EBL) limitation restricts the overall business loss deduction for non-corporate taxpayers. The thresholds were $500,000 for married filing jointly and $250,000 for all other taxpayers (with inflation adjustments).

Is the employee retention credit (ERC), the most famous tax credit of the COVID-19 era, taxable?
Sort of. Here’s why:

▶ Tax credit, not income: The ERC is a refundable tax credit, meaning it directly reduces your tax liability, dollar for dollar. This is different from a deduction that lowers your taxable income.

▶ Reduced wage deduction: Instead of treating the ERC as income, you must reduce your payroll expense deduction on your tax return by the amount of the ERC you claim. This ensures you don’t get a “double tax benefit.”

▶ Taxes owed: If you receive an ERC, you need to either amend your 2020 and 2021 tax returns or submit an administrative adjustment request as you will owe taxes on the amount received.

While this list covers several common questions that were asked of us, there are plenty of others I haven’t addressed here. Feel free to contact us with your questions or contact your tax advisor.