Dollars & Sense

Income Tax Options

INCOME TAX AND OPTIONS

Question: The dead line to file income taxes is fast approaching and I don’t have the time to get all my information together. What can I do?

Answer: If your tax return is not going to be filed by April 15, 2008 you may choose to file an “Application for Automatic Extension of Time”, Form 4868. An extension means that you are extending the filing of your income tax return until October 15, 2008. By filing the extension application, you will eliminate the late filing penalty. You will have to estimate the amount of tax due. 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.

Question: I just got my income taxes completed and I owe the IRS more money than I can put together to pay them. What can I do?

Answer: File the return on time or file for an extension to avoid a late filing penalty of 5% per month up to 25%. Pay as much as possible with the 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. And lastly, you can request an installment agreement by filing form 9465 with your tax return if you owe not more that $25,000.00. The tax must be paid within five years. Any taxpayer who has an installment agreement for a prior year cannot file Form 9465. In that case, they will have to negotiate with the IRS.

Question: I formed a Limited Liability Company (LLC) and I don’t know what forms to file for my income taxes?

Answer: A LLC may be classified as a Sole Proprietorship, a Partnership or a Corporation. If the LLC has only one owner it will be considered a Sole Proprietorship. However, an election can be made to be treated as a Corporation. If the LLC has two or more owners it will be considered to be a Partnership unless an election is made to be treated as a Corporation. If the LLC does not elect its classifications, the Partnership or Sole Proprietorship will apply. The election we refer to is made with form 8832.

Question: My Company has no income for the year. Do I have to file an income tax return for it?

Answer: 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 they have taxable income or not. If the Sole Proprietorship has no income or expenses nothing needs to be filed for that company.

Question: What is cancellation of debt?

Answer: Cancellation of debt is when a commercial lender lent you money, for instance, to buy your home, and the home was subsequently foreclosed on. 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 you will need to show the income on your income tax return. Since loan proceeds are not income to you when you receive it, if you don’t have to pay it back then it does become income.

Question: Is the cancellation of debt always taxable income?

Answer: Not always. Debt discharged through bankruptcy is not considered taxable income. If you are insolvent when your debt was cancelled 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.

Question: I lost my home to foreclosure. Are there going to be any tax consequences?

Answer: There are three (3) possible consequences that you need to consider:
Taxable cancellation of debt income (see above).
A reportable gain from the distribution of the home. Though this will be extremely rare. (More common 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.

This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. Contributions to this article were made by Shasta May, Director of Business Development for PBS. If you would like further information, please contact us at 800-697-5153. See our Web Site at www.pbstax.com.