Q: The deadline to file income tax returns is fast approaching, and I don’t have the time to get all my information together.
What can I do?
A: If your tax return is not going to be filed by April 15, you may choose to file an “Application for Automatic Extension of Time,” otherwise known as Form 4868. An extension means that you are extending the filing of your income tax return until Oct. 15. By filing the extension application, you will eliminate the late filing penalty.
However, you will have to estimate the amount of tax you owe when you send in the extension form. The IRS can invalidate an extension if tax is understated. An extension is valid even though the estimate due is not paid. If you’re in a refund situation and you file an extension, there will not be any underpayment penalties.
Q: I just got my income tax return completed, and I owe the IRS more money than I can put together to pay them. What can I do?
A: File the return on time or file for an extension to avoid a late filing penalty of 5 percent per month, up to 25 percent. Pay as much as possible when you file your return or extension. Mail the balance when you receive the IRS notice of tax due.
Paying by credit card is another option, but this can be costly because of high interest rates. You can request an installment agreement by filing Form 9465 with your tax return if you owe not more that $25,000. The tax must be paid within five years.
Any taxpayers who have an installment agreement for a prior year cannot file Form 9465. In that case, they will have to negotiate with the IRS.
Q: What is cancellation of debt?
A: Cancellation of debt is when a commercial lender lent you money for something – usually for a major purchase such as an automobile, boat or home – and the property was subsequently foreclosed on or repossessed. The lender forgives your obligation to pay it, and thus you have cancellation of debt.
If this occurs, you will receive a Form 1099C and will need to show the income on your income tax return. Loan proceeds are not income to you when you receive it; therefore, if you don’t have to pay it back, it does become income.
Q: Is the cancellation of debt always taxable income?
A: Not always. Debt discharged through bankruptcy is not considered taxable income. If you were insolvent when your debt was canceled, your debt may not be considered taxable income. Remember you are insolvent when your total debt is more than the fair market value of your assets.
Q: I lost my home to foreclosure. Are there going to be any tax consequences?
A: There are three possible consequences that you need to consider:
Taxable cancellation of debt income (see previous question).
A reportable gain from the sale or foreclosure of your home, though this will be extremely rare. It does happen sometimes, though, with equipment.
Be aware that a new tax law has been signed into law to render some gains on foreclosures of homes, i.e., taxable cancellation of debt, non-taxable if you qualify.
Q: My company has no income for the year. Do I have to file an income tax return?
A: It depends on how you have your business set up.
A partnership must file an income tax return unless it did not receive income or is not claiming any expenses for the year. A corporation must file an income tax return whether it has taxable income or not. If a sole proprietorship has no income or expenses, nothing needs to be filed for that company. LL
Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax professional.
Written by Howard Abrams of PBS Tax & Bookkeeping Service. Contributions were made by Shasta May, director of business development for PBS. For more information, call 1-800-697-5153 or visit pbstax.com.