APRIL 3, 2015
It’s tax season again. No matter how organized I am, each year I find myself scrambling to meet the deadline. I always thought this last-minute crunch was normal—sure, I’d procrastinate, but high achiever that I am, I’d forfeit sleep before asking the Internal Revenue Service for more time.
However, given the complexity of the 73,000-plus page U.S. Income Tax Code, I’ve come to realize that not all of the 11 million Americans who file extensions are procrastinating. In fact, many are making a wise financial decision.
Tamara Sipos, a CPA and partner at Gallina LLC, a San Francisco-based accounting firm, says there are two key reasons it can pay to ask Uncle Sam for an extra six months to file your tax returns.
While filing an extension will not affect the April 15 deadline to claim IRA contributions, it does give you an extra six months to fund your Simplified Employee Pension (SEP-IRA). That cushion may be just what you need to save up enough cash (as much as $52,000 for 2014 and $53,000 for 2015) to fully fund your SEP-IRA for the year.
Moreover, an extension will give you significantly more time to reverse a change to your IRA. Since income limits on IRA conversions were lifted back in 2010, it’s common practice for individuals to convert their traditional IRAs into Roth IRAs to take advantage of tax-free retirement distributions.
However, converting your IRA creates a tax liability, and by the time you file your return, it may be a decision you regret (especially if the market underperformed and/or your income exceeded your expectations and elevated you into a higher tax bracket). But all is not lost.
“Thanks to an idiosyncrasy in the tax code, if an adverse tax situation was created by your conversion, you get a do-over and can ‘re-characterize’ (aka reverse) the entire transaction,” Sipos says.
In late 2013 the IRS added Tangible Property Regulations (TPRs) that must be followed on your 2014 return. “Given their complexity, and the potential tax benefits to your business, an extension is likely a wise move,” Sipos says.
TPRs apply to all tangible property and provide much-needed clarity for deciding whether an expense should be deducted or capitalized and depreciated. Every business entity, as well as individuals who operate sole proprietorships or have rental property, will need to adhere to the new rules.
“Here’s the good news,” Sipos says. “Taxpayers who have significant fixed assets with remaining depreciation, or real property, may uncover large current and future tax deductions.”
Understanding how these regulations affect your business is critical to maximizing deductions while maintaining compliance. It’s a laborious task that is going to take extra time to figure out in this first year of enforcement, so that extension may be necessary.
Sipos points out that to take advantage of these rules, you must file Form 3115, Application for a Change in Accounting Method, both with your 2014 tax return and separately to the IRS. Furthermore, there are annual elections that must be completed with your return in order to be in compliance.
Still confused? It isn’t easy, which is why I’m filing an extension this year and happily paying my accountant to figure it all out. That way, I should end up with more money in my business and less going to Uncle Sam.