Although a lot of energy and attention are paid to Tax Day on April 15, business owners actually are required to be ahead of the game. March 15 is a crucial deadline to keep in mind if you have an LLC, partnership, or S-corporation, and if that date slips past you, it could be a very costly error indeed.
The following IRS small-business’ (pass-through entities’) tax returns are due on March 15:
• Form 1120-S: Income tax return for S-corporations
• Form 1065: Income tax return for LLC members (excluding single member LLCs) and partnerships
• For California business customers: Make sure you pay the minimum $800 California franchise fee for any of your S-corporations and multiple-member LLCs (partnerships are exempt from this tax).
If your business is one of these entities, missing this deadline is an expensive mistake. Even if your 1120-S or 1065 is filed one day late and you haven’t filed for an extension, you must pay a penalty of $235 per month (starting on day one), per shareholder/member, for up to 12 months — even if your business took a loss.
If we had our druthers, CPAs would prefer to wait to file small-business income taxes until April, when individual returns are due. This enables us to incorporate last-minute changes due to life events, wait for all necessary forms to be in hand, and avoid the potential need to file an amendment later.
This is why we usually recommend filing Form 7004, the Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. Filing one of these by the March 15 deadline grants you an automatic six-month deadline extension to file your business income tax. NOTE: Any tax due (often to state agencies) still must be paid by March 15; you’ll need to know what you owe and send it by the deadline (although there likely won’t be any federal tax due for these entity types).
It’s early March, so we still have a little time to file these! As long as our office has a letter of engagement on file for your business, you can simply contact us and we’ll file the request for extension for you.
Pass-Through Entity Elective Tax (PTE Tax)
When the Tax Cuts and Jobs Act (TCJA) passed under the Trump administration in 2018, the biggest change to the tax code involved limiting itemized deductions to $10,000 (so-called SALT limitation). A lot of high-income earners who pay a sizable amount of tax (for example, $50,000 or $100,000) to their state became ineligible to deduct state income taxes above $10,000. In response, several states that have state income taxes, including California and Indiana, came up with an approach called a Pass-Through Entity Tax.
In California, which is where many of our clients operate, it works like this: For tax years beginning January 1, 2021, and running through December 31, 2025, the state allows qualifying pass-through entities (PTEs) to elect to pay an entity-level state tax on income. By doing so, they can then receive a credit on their state personal income tax. This tax is calculated at 9.3% of the business’ net income.
For example, an LLC owner whose net income of $10,000 could elect to pay $930 in PTE tax. That would reduce the owner’s federal personal taxable income by $930 and give the business owner a credit for the same amount to be applied to their California personal income tax. This totally legal maneuver allows for the deduction of state income tax on the business tax return and circumvents the $10,000 SALT limitation.
Because this is an elective tax, you must elect to participate every year.
• In the first year of participation, you must pay $1,000 by June 15, 2024, and the balance would be due by March 25, 2025.
• In year two and after, you must pay $1,000 or 50% of your PTE tax for the previous year, whichever is less. The remaining amount owed must be paid by March 15 of the following year.
• If you elected for your business to participate in the PTE tax last year, your second payment is due THIS MONTH, on March 15, 2024.
Using my previous example of an LLC with a net income of $10,000, the PTE tax would be only $930. Because 50% of $930 is less than $1,000, you would be required to pay $475 to utilize this strategy for the current year. Any overpayment would be refunded to you, or it could be applied to the next year’s payment.
If you’re not sure whether the PTE tax makes sense for your business, or if you have questions about filing a business tax return or extension, please give us a call! In the meantime, happy tax season!