United States

Will 2017 be the year to extend your 2016 tax return?

An extension may provide time to react to possible tax reforms

INSIGHT ARTICLE  | 

Filing an extension is generally a straightforward process that can be quite beneficial when additional time is needed to ensure that tax filings are correct and complete. The extension provides additional time to review records and transactions to ensure proper reporting and optimal treatment of items. There are, however, many other reasons why a taxpayer may benefit from the filing of an extension.

Tax reform may turn temporary benefits into permanent savings

Taxpayers may be able to make certain accounting method changes that can result in the acceleration of deductions or the deferral of income. In the past, taxpayers may have paid less attention to these ‘timing’ issues, but as we have previously discussed (see our article, On the horizon: Tax reform), the prospect of tax reform brings the possibility of lower tax rates, which increases the benefits of accelerating deductions or deferring income. Accelerating a $1 of expense into a 35 percent or greater tax year and then repaying it back in a 15-20 percent tax year nets the taxpayer 15-20 percent or greater permanent difference. While many of the actions outlined in our prior discussion must be taken prior to year-end, other decisions may wait until the tax return is due, properly extended.

Many elections and method changes can be made on an extended tax return

An extended tax return provides additional time to make decisions related to accounting methods. Some decisions are common (such as the election to expense certain capital assets), while others may be part of a larger strategy (such as a decision to accelerate income recognition from an installment sale).

Similarly, an extended tax return provides additional time to request certain accounting method changes. While these changes may be more complex than most elections, taxpayers who may have overlooked or decided to forgo accounting method changes in the past may now wish to revisit these decisions if tax rates decline. Those taxpayers who have extended their tax returns will have additional time to determine the appropriateness of a specific accounting method and implement the accounting method changes.

An extension provides additional time to make certain payments that can be deducted in a prior year

In certain instances, taxpayers are able to deduct payments in a prior year despite making payment after the end of the tax year, as long as payment is made before the tax return is filed (by way of the recurring item exception for example). An extended tax return can thus extend the payment period.

An extension gives certain individuals additional time to make retirement plan contributions or recharacterizations

Certain individual taxpayers have until the extended due date of their tax returns to fund self-employed retirement plans. Others that have traditional IRAs and Roth IRAs may elect, up until the extended due date, to recharacterize contributions to a Roth IRA as contributions to a traditional IRA or vice versa to consider effects on deductible contributions and tax on future distributions.

New tax due dates in 2016 for partnerships

This filing season brings with it a shortened filing period for entities that are treated as partnerships (such as limited partnerships, limited liability companies and limited lability partnerships). While calendar year partnerships have historically had a due date of April 15, starting in 2017, this due date will be March 15. If additional time is needed to complete these returns, entities filing as partnerships may wish to file an extension.

New partnership audit rules

In addition to changes in due dates, this filing season marks the first time that entities can choose to elect into the newly created partnership audit regime (see previous article). However, many of the regulations and guidance related to these rules are still to come. Filing an extension may allow taxpayers to make such an election after additional guidance related to these rules has been issued.

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