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Archives for November 2016

New Deadlines for 2016 Tax Forms–Avoid Late Penalties!

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time-371226_1920As you know, the tax system is made up of all types of deadlines.  This year, deadlines that we have long been accustomed to are changing.  These changing deadlines apply to Forms W-2 and 1099-MISC as well as to income tax forms such as the Form 1065 for entities taxed as partnerships and the Form 1120 for C corporations.  This post will describe the new deadlines for each of these items.

Forms W-2 and 1099-MISC

When a business pays a worker who is not an employee $600 or more in a year, the business must file an information return using Form 1099-MISC (miscellaneous income) to report the payments.  Likewise, an employer must report wages paid to employees on Form W-2.  In prior years, these forms had to be provided to the worker by January 31 of the following year and copies were required to be filed with the IRS (Form 1099-MISC) and the Social Security Administration (Form W-2) by the last day of February, or by March 31 if filing electronically.

Starting with 2016 forms (due in 2017), the due dates for IRS and Social Security Administration have been accelerated to January 31 of the following year (no longer the last day of February, or March 31 for electronic filers).  So, 2016 Forms W-2 and 1099-MISC will need to be filed with the government by January  31, 2017–the same date that the forms have to be provided to workers.

Failing to file these returns timely can result in significant penalties–beginning at $50 per 1099-MISC or W-2 filed late.

Form 1065 (U.S. Return of Partnership Income)

Under prior law, partnership tax returns were due three and a half months after the end of the year (i.e., April 15).  Since the partnership tax return was due on the same day as personal income tax returns, many owners of partnerships (or LLCs taxed as partnerships) did not receive their Form K-1 from the partnership in time to file their personal returns by the April 15 personal income tax deadline.

Beginning with 2016 partnership tax returns, the deadline has been moved up to two and a half months after the end of the partnership tax year (i.e., March 15).  Six month extensions to September 15 are available.

It is important to either timely file the partnership tax return or to request an extension.  If the return is filed late, the penalty is $195 per owner per month!  So if a five member LLC unaware of the new deadline files a partnership tax return on April 15, the return is one month late and the penalty is $975.

Form 1120 (U.S. Corporation Income tax Return)

The deadline for C CORPORATION tax returns has been two and a half months after the end of the corporate year (generally March 15).  Beginning with 2016 C corporation tax returns, the deadline has been moved back to three and a half months after the end of the corporate tax year (generally April 15).  Since C corporations are not flow-through tax entities, the owner’s personal tax return is not dependent on the filing of the C corporation tax return.   Delaying the C corporation deadline and accelerating the partnership tax return deadline therefore makes some sense.

Form 1120S (U.S. Return of S Corporation Income)

No changes here–the deadline is still March 15.

FinCen Form 114 (FBAR)

In prior years, foreign bank accounts had to be reported to the IRS by June 30, and no extensions were allowed.  Beginning this year, the due date for FinCen 114 will be April 15 of the following year, but a six month extension will now be allowed.  The  extension will last to October 15.

Under the Internal Revenue Code, if a due date falls on a holiday or weekend, the return is due on the next business day.  Unfortunately, the FinCen 114 form is required under the Bank Secrecy Act of 1970 and not under the Internal Revenue Code–so if the April 15 deadline for FinCen 114 falls on a holiday or weekend, the due date will not be delayed to the next business day (even though the Form 1040 will be delayed to the next working day).

So this tax season, April 15 is on a Saturday and Monday, April 17 is Emancipation Day, so the Form 1040 due date will be April 18.  Since the FinCen 114 is outside of the Internal Revenue Code, its due date remains April 15.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

IRS Scrutinizing Aggressive Tax Strategy

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captive insuranceI always get a kick when I see a book or an article with “what your CPA doesn’t want you to know” in the title.  The strategy that is being pushed is either a well established strategy that most competent CPAs already know about or the strategy is a sham.  One strategy that fits more closely into the latter category is the captive insurance company.

The Basics of a Captive Insurance Company

Basically this strategy involves a profitable business that sets up a related captive insurance company.  The business enters into an insurance agreement with the related insurance company to cover risk the likelihood of which is almost certain never to occur.  The business will take a deduction for the insurance premiums.  The captive insurance company files an election under IRC  Section 831(b) to only pay tax on investment income–basically the captive insurance company does not pay tax on the premiums it receives–it only pays tax on the investment income it earns on the premiums.

Example:  Sham-How Corp is expecting profit of $200,000 this year.  To shelter some of its income, it forms a captive insurance company.  It then takes out a policy covering risk of a Godzilla attack.  It pays the captive insurance company $100,000 in premiums.  Sham-How Corp takes a $100,000 deduction.  The captive insurance company does not pay tax on the $100,000 of premiums it receives–it only pays tax on the investment income it earns on the $100,000.  Wanting to push its luck even more, Sham-How Corp then borrows $100,000 from the insurance company (loans are tax-free).

The Party is Ending

While these transactions have worked, they are very aggressive.  The IRS is classifying captive insurance arrangements as a transaction of interest.  This classification requires businesses entering into these transactions to disclose the transaction to the IRS.  This will subject the transaction to close scrutiny–someone just called the cops and the party is winding down.

Why the Scrutiny?

The IRS is scrutinizing captive insurance arrangements because these arrangements tend to have the following characteristics:

  • the coverage involves an implausible risk
  • the coverage does not match a business need or risk of the business
  • the description of the coverage in the insurance policy is vague, ambiguous, or illusory
  • the coverage duplicates coverage provided to the business by an unrelated, commercial insurance company, and the policy with the commercial insurer often has a far smaller premium.

The premiums paid to the captive insurance company have one or more of the following characteristics:

  • the insurance premiums are designed to be deductible
  • the payments are determined without an underwriting or actuarial analysis that conforms to insurance industry standards
  • the premium payments are not made consistently with the schedule in the policy
  • the premiums are set without comparing the amounts of the premiums to premiums that would be made under policies with unrelated insurance companies

The management of the captive insurance company has one or more of the following characteristics:

  • the insurance company fails to comply with some or all of the laws applicable to insurance companies in the jurisdiction where it is organized
  • the insurance company does not issue policies or binders in a timely manner consistent with industry standards
  • the insurance company does not have defined claims administration procedures that are consistent with industry standards
  • the insured does not file claims for each loss that is covered by the policy
  • the insurance company does not have adequate capital
  • the insurance company invests its capital in illiquid or speculative assets usually not held by insurance companies
  • the insurance company loans or otherwise transfers its capital to the business, related businesses, or owners of the business.

For tax strategies that work, give us a call at 248-538-5331.

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.