TAX+BUSINESS
ALERT
Newsletter by Hawkins Ash CPAs
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In this edition
May 1, 2018
Choosing Between a Calendar Tax Year and a Fiscal Tax Year
Get an Early Tax “Refund” by Adjusting Your Withholding
3 Strategies for Handling Estimated Tax Payments
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Choosing Between a Calendar Tax Year and a Fiscal Tax Year
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What’s a fiscal tax year?
A fiscal tax year consists of 12 consecutive months that don’t begin on January 1 or end on December 31 — for example, July 1 through June 30. The year doesn’t necessarily need to end on the last day of a month. It might end on the same day each year, such as the last Friday in March. (This is known as a 52- or 53-week year.)
Flow-through entities (partnerships, S corporations and, typically, limited liability companies) using a fiscal tax year must file their returns by the 15th day of the third month following the close of their fiscal year. So, if their fiscal year ends on March 31, they need to file their returns by June 15. (Fiscal-year C corporations generally must file their returns by the 15th day of the fourth month following the fiscal year close.)
When does it make sense?
A key factor to consider is that, if you adopt a fiscal tax year, you must use the same period in maintaining your books and reporting income and expenses. For many seasonal businesses, a fiscal year can present a more accurate picture of the company’s performance.
For example, a snowplowing business might make the bulk of its revenue between November and March. Splitting the revenue between December and January to adhere to a calendar year end would make obtaining a solid picture of performance over a single season difficult.
In addition, if many businesses within your industry use a fiscal year end and you want to compare your performance to that of your peers, you’ll probably achieve a more accurate comparison if you’re using the same fiscal year.
Before deciding to change your fiscal year, be aware that the IRS requires businesses that don’t keep books and have no annual accounting period, as well as most sole proprietorships, to use a calendar year.
Does it matter?
If your company decides to change its tax year, you’ll need to obtain permission from the IRS. The change also will likely create a one-time “short tax year” — a tax year that’s less than 12 months. In this case, your income tax typically will be based on annualized income and expenses. But you might be able to use a relief procedure under Section 443(b)(2) of the Internal Revenue Code to reduce your tax bill.
Although choosing a tax year may seem like a minor administrative matter, it can have an impact on how and when a company pays taxes. We can help you determine whether a calendar or fiscal year makes more sense for your business.
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Get an Early Tax “Refund” by Adjusting Your Withholding
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Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.
Fortunately, there’s a way to begin collecting your 2018 refund now: You can review the amounts you’re having withheld and/or what estimated tax payments you’re making, and adjust them to keep more money in your pocket during the year.
Choosing to adjust
It’s particularly important to check your withholding and/or estimated tax payments if:
- You received an especially large 2017 refund,
- You’ve gotten married or divorced or added a dependent,
- You’ve bought a home,
- You’ve started or lost a job, or
- Your investment income has changed significantly.
Even if you haven’t encountered any major life changes during the past year, changes in the tax law may affect withholding levels, making it worthwhile to double-check your withholding or estimated tax payments.
Making a change
You can modify your withholding at any time during the year, or even more than once within a year. To do so, you simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can make adjustments each time quarterly payments are due.
While reducing withholdings or estimated tax payments will, indeed, put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax throughout the year on a timely basis, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the April 2019 deadline.
Getting help
One timely reason to consider adjusting your withholding is the passage of the Tax Cuts and Jobs Act late last year. In fact, the IRS had to revise its withholding tables to account for the increase to the standard deduction, suspension of personal exemptions, and changes in tax rates and brackets. If you’d like help determining what your withholding or estimated tax payments should be for the rest of the year, please contact us.
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Contact:
Jill Wrensch
Direct: 715.384.1989
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3 Strategies for Handling Estimated Tax Payments
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In today’s economy, many individuals are self-employed. Others generate income from interest, rent or dividends. If these circumstances sound familiar, you might be at risk of penalties if you don’t pay enough tax during the year through estimated tax payments and withholding. Here are three strategies to help avoid underpayment penalties:
1.) Know the minimum payment rules.
For you to avoid penalties, your estimated payments and withholding must equal at least:
- 90% of your tax liability for the year,
- 110% of your tax for the previous year, or
- 100% of your tax for the previous year if your adjusted gross income for the previous year was $150,000 or less ($75,000 or less if married filing separately).
2.) Use the annualized income installment method.
This method often benefits taxpayers who have large variability in income by month due to bonuses, investment gains and losses, or seasonal income — especially if it’s skewed toward year end. Annualizing calculates the tax due based on income, gains, losses and deductions through each “quarterly” estimated tax period.
3.) Estimate your tax liability and increase withholding.
If, as year end approaches, you determine you’ve underpaid, consider having the tax shortfall withheld from your salary or year-end bonus by December 31. Because withholding is considered to have been paid ratably throughout the year, this is often a better strategy than making up the difference with an increased quarterly tax payment, which may trigger penalties for earlier quarters.
Finally, beware that you also could incur interest and penalties if you’re subject to the additional 0.9% Medicare tax and it isn’t withheld from your pay and you don’t make sufficient estimated tax payments. Please contact us for help with this tricky tax task.
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Contact:
David Howell, EA
Direct: 920.337.4550
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More Resources from CPA-HQ
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How to Create a Budget in QuickBooks
Budgets show how well your company is meeting its goals for the year.
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Changes in C Corporation Tax Rates
For large, profitable corporations this can be a significant tax cut.
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How to Start Preparing Your Nonprofit for the New Liquidity Disclosures
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