The deadline for Q2 estimated tax payments was June 15. It highlights a problem with the 20 percent deduction for qualified business income for “pass-through” entities – generally sole practitioners, LLCs, S Corps and partnerships.
Tax professionals are still waiting on IRS guidance with the specifics of how this pass-through deduction will work. Many question what income will qualify for the deduction. This all makes it more difficult than usual to calculate estimated tax payments.
Underpayment penalty and interest
Underpaying quarterly tax payments opens a business to underpayment penalties. The IRS also applies interest of five percent to underpayments by the day. This means if your business was unable to pay as much as you hoped by June 15, it still makes sense to pay what you can as soon as possible rather than waiting to Q3 or next April.
A surprising tax bill can also be impossible to pay depending on cash flow, which may mean digging out for a year or more.
It is not clear if the IRS will offer some leeway or penalty abatement for business owners regarding underpayment penalties, since it has not yet provided clarification of the 20 percent pass-through deduction. The safer assumption is that it will not.
Mid-year still provides time
Lawmakers, in including U.S. Representative Richard Neal (D-Mass), have asked the IRS earlier this year for more guidance. Rep. Neal stated, “Taxpayers are left struggling to understand its implication, and opportunities to exploit its ambiguities abound.”
This is the year to seek professional tax counsel when planning quarterly tax payments. Making quarterly payments equal to 100 percent (110 percent if your gross income was over $150,000 last year) of 2017 taxes will qualify you for IRS safe-harbor rules. Even if your business grew and you owe more taxes, this usually can avoid underpayment penalties. On the other hand, if business has slowed, reducing estimated payments may be appropriate.
If a business tax problem has been compounding over several years, a tax attorney can help identify a solution. There are options available. Take action, before the IRS begins to utilize its onerous collections tactics that may even involve seizing business property.