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How to avoid penalties for underpayment of estimated taxes

The second-quarter deadline for all estimated tax payments just recently passed. This means we are officially in the second half of fiscal year 2018, so it’s the perfect time for an internal tax analysis and self-audit. This will allow time before the end of the year to adjust to avoid bigger headaches down the road.

Because of the Tax Cuts and Jobs Act of 2017, there is more ambiguity about what income could qualify for the pass-through deduction of 20 percent. Self-employed business owners who pass through income on their personal tax returns – such as those who own sole proprietorships, S-Corps, partnerships and LLCs – should definitely take the time now to perform a mid-year check of their tax strategy.

Underpayment penalties (and interest charges)

Unless adequate estimated quarterly tax payments are made, consequences could follow. These include:

  • Underpayment interest, charged at five percent of the total tax liability
  • Underpayment penalty charges (for those owing at over $1,000 or who didn’t pay at least 90 percent of the total tax liability)

Though penalties might be abated in some circumstances (a natural disaster or “casualty event,” or sudden-onset disability, for example) if it would be “inequitable” to apply them, ambiguity in IRS guidance about the topic typically wouldn’t qualify for penalty abatement.

Safe-harbor rules

Even if business owners aren’t sure exactly how new tax rules impact them, it’s still possible to avoid penalties. For example, when in doubt, pay at least 100 percent (110 percent if the personal gross income exceeds $150,000) of last year’s payment. This allows protection under the IRS’s “safe-harbor” provisions, which means that the IRS generally won’t apply any underpayment penalties.

Business tax issues are complex, but there’s still time to address them before the end of the year. Consult an experienced tax attorney to learn more about tax strategies that best fit your unique situation.


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