Documentation Needs and Extensions Rise Thanks to Tax Reform
What You Need to Know About Filing Your 2019 Tax Return
By Jennifer Allen, CPA
When the Tax Cuts & Jobs Act (TCJA) was announced, everyone from tax providers to television news anchors to government officials warned taxpayers that this significant of a change would come with obstacles. There was a mountain of new considerations for each taxpayer to consider and some areas where clarification was needed from the IRS. A year later and much of the same holds true. When it comes to taxes, it seems as if change is a constant we have come to expect.
Extensions Continue to Rise
The magnitude of this tax reform legislation caused many taxpayers to file for an extension to submit their returns after April 15. Actually, the IRS expected more than 14 million extension requests in 2019; a big departure from the 5.5 million business tax extensions typically requested. The additional six-month period provided more time for guidance to be issued – guidance that would ensure returns were accurate and didn’t require more taxes to be paid than legally obligated. In this case, an extension was a great opportunity for businesses and individuals to take extra time to fully use and maximize the opportunities available through the new law.
It is expected that the extension trend will continue for the 2019 filing period. While the thought of going on extension can be scary, it’s not. Typically, once the paperwork is filed, you automatically are granted an extension. However, it’s important to note that an extension does not give you more time to pay; you still have to pay an estimate of the amount due by the initial filing deadline.
Some people speculate that extensions increase your likelihood of being audited by the IRS. That is not true. There are a number of factors that trigger an audit, but they are tied to the accuracy of the information submitted. Taking extra time to file actually helps ensure you are submitting the most accurate information possible.
Learn more about extensions in What is an Extension & What Does it Mean for You.
More Documentation Will be Needed
Taxpayers have had to disclose more information to comply with the new law than in previous years. In addition, complications gathering and submitting this information have arose. All of this requires more effort on your part and that of your tax preparer.
Here are some of the areas that will be more time consuming:
- At-Risk and Passive Activity. Business owners using S-corps and partnerships for tax purposes will have to provide documentation to help determine at-risk activity and passive/non-passive activity.
- Qualified Business Income Deduction. More detail on Section 199A, the qualified business income deduction, will be needed by each business type.
- Partnership Interest Reporting. For reporting investments in partnership interests (Schedule K-1), businesses will see a significant increase in the required documentation. Changes for 2019 reporting include ownership disclosures, capital account details, net built-in gain and breakdown of guaranteed payments for payments of services or capital.
- Tax Basis (K-1) Partnership Reporting Requirement. If you have not been reporting on tax basis schedules previously, taxpayers must begin calculating and changing their reporting method. This is because Schedule K-1 capital account reconciliation schedule L previously could be tracked on GAAP, tax or 704c basis, but is now required to be reported on the tax basis.
Year two of the TCJA continues to bring changes to filing requirements. With so much uncertainty, careful tax planning is key. Start early, work closely with your tax advisor, and leverage an extension and you are setting yourself up for continued success. Contact your Adams Brown advisor to get started today.