Extensions & Section 475 MTM elections are due by April 15

By Robert A. Green, CPA and Darren L. Neuschwander, CPA

The deadline for filing a 2012 individual and partnership income tax return is April 15, 2013. (The deadline for filing a 2012 S-corporation and calendar-year C-corporation income tax return was March 15, 2013.) Also, external 2013 Section 475 MTM elections for existing individual and partnership taxpayers are due April 15, 2013.

Unfortunately, there's no Form 1127-A economic hardship relief for 2012, but the IRS announced today new relief on late-payment penalties in connection with fiscal-cliff tax law changes.

On March 20, 2013, the IRS published IR-2013-31. “The Internal Revenue Service today provided late-payment penalty relief to individuals and businesses requesting a tax-filing extension because they are attaching to their returns any of the forms that couldn't be filed until after January. The relief applies to the late-payment penalty, normally 0.5% per month, charged on tax payments made after the regular filing deadline. This relief applies to any of the forms delayed until February or March, primarily due to the January enactment of the American Taxpayer Relief Act. Taxpayers using forms

A complete list of eligible forms can be found in Notice 2013-24, posted today on IRS.gov. Individuals and businesses qualify for this relief if they properly request an extension to file their 2012 returns. Eligible taxpayers need not make any special notation on their extension request, but as usual, they must properly estimate their expected tax liability and pay the estimated amount by the original due date of the return. The return must be filed and payment for any additional amount due must be made by the extended due date. Interest still applies to any tax payment made after the original deadline. Further details on this relief, including instructions for responding to penalty notices, is available in Notice 2013-24.”

If you had a schedule/form that was not available until late February or March this year, such as Form 4562 (most business traders have this form for deprecation), you're eligible for this relief. If you file a good faith estimate/extension by April 15, 2013 and still owe taxes with the filing of the extended return that has one of these late-issued forms, the late-payment penalty on the outstanding balance will be waived.

The April 15 deadline for filing 2012 tax returns is unreasonable for most securities traders because they're just receiving complex and error-prone 1099-Bs now. (See our

) No worries. The IRS grants automatic extensions until Oct. 15, 2013 for individuals and Sept. 16, 2013 for entities (because the 15th is a Sunday) if you file a valid automatic extension by the original tax deadline above.

Pass-through entities — like a partnership or S-corporation tax return which most trading businesses use — file a simple automatic extension IRS Form 7004. It's a very easy filing since there's no federal tax due. Most states also don't tax pass-through entities; some accept the federal Form 7004 and others have their own state extension form.

Don't miss filing these entity extension forms on time. Missing the deadline will trigger late-filing federal penalties of $189 per partner, per month (up to five months), and state late-filing penalties generally will apply, too. There is no good excuse in our book for missing the extension filing deadline, since it doesn't require a calculation of tax liability.

A valid automatic extension for individuals is different, as individuals need to calculate and pay their taxes owed by the April 15 deadline. Generally, “valid” means you have to pay at least 90% of your 2012 tax liability calculated in good faith with the automatic extension filed by the original tax deadline of April 15, 2013. It's an extension to file, not an extension to pay. For further details on what good faith means, see our

.

To make these calculations, enter your 2012 tax information statements like W-2s, 1099s and K-1s into tax software and use conservative estimates for items you are not sure about like wash sales and trader tax status-related business expenses.

If you have material income in Q1 2013 for which there are no tax withholdings, you may owe 2013 estimated taxes by April 15. Rather than pay a separate Q1 2013 estimated tax payment, overpay your 2012 extension instead. That gives you a bigger cushion on final 2012 tax liability, ensuring your 2012 extension is valid. If there is an overpayment on your 2012 tax return, you can apply that credit to Q1 2013 estimated taxes later on.

To accommodate taxpayers in the last recession, the IRS allowed taxpayers to use “economic hardship” as a reason for granting relief from late-payment penalties in 2011. Taxpayers could file Form 1127-A (2011) “Application for Extension of Time for Payment of Income Tax Due to Economic Hardship” as explained in our

.

As of this date, the IRS has not issued Form 1127-A economic hardship relief for 2012, so taxpayers need to qualify for penalty relief under more restrictive Form 1127, “Application for Extension of Time for Payment of Tax Due to Undue Hardship.” Form 1127 instructions state “File Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return ... and do not file Form 1127 (instead).”

Some states don't require an automatic extension if you're overpaid, as they accept federal extensions. Generally in all states, if you owe taxes, you need to file a state extension with 90% payment, too. Check the extension rules in your state. States tend to be less accommodating than the IRS in waiving penalties, so it's usually wise to cover your state first if you are short on cash.

Making a

could be tricky based on using unreliable trading gain or loss tax information from the cost-basis reporting mess. This information can affect your decision to file or skip the Section 475 MTM election. Generally, we recommend Section 475 MTM on securities only, providing the business trader doesn't have capital loss carryovers. Traders need capital gains to use up capital loss carryovers — not Section 475 MTM ordinary income. On the other hand, wash sales from 2012 can be converted into Section 475 MTM ordinary losses in 2013 with a Section 475 MTM election.

It's important to read Chapter 2 of

on Section 475 MTM elections. We cover many different examples of decision making. Blowing a Section 475 MTM election decision is the biggest mistake business traders make. Our guide contains the Section 475 MTM election statement. It's a two-step process for existing taxpayers: First, file the Section 475 MTM election statement by April 15 for individuals and partnerships. Second, file a Form 3115 with the 2013 tax return in 2014. If you have questions about Section 475 MTM, consider a

with Robert A. Green, CPA.

Section 475 MTM is beneficial because it exempts business traders from the onerous Form 8949 (cost-basis reporting), wash sale losses and the capital loss limitation of $3,000 against ordinary income. Section 475 MTM transactions are reported on Form 4797 Part II (ordinary gain or loss) and these business ordinary losses are part of a NOL two-year carryback and/or 20-year forward.

Note: You can't attach a Section 475 MTM election to an e-filed automatic extension. You must mail the extension with a Section 475 MTM election statement attached to the federal extension Form 4868. “New taxpayers” like new entities in 2013 file Section 475 MTM elections internally within 75 days of inception of the new entity.

If you need help with a last-minute extension filing – and perhaps a Section 475 MTM election too — consider a

with Robert A. Green, CPA. A few weeks before the April 15 deadline, we stop taking on tax compliance clients, as we don't have sufficient time left to review all tax information, plus we open items and issues. Robert A. Green, CPA has time to work with new clients to prepare quickie extensions based on their key tax information documents like W-2s and summarized tax information like trading gains or losses and expenses. We do these quickie extensions with no liability to our firm. Clients are then welcome to sign up for our full tax compliance service after the extension deadline. This system has served everyone well over the years. If you have any questions, please

soon.

Focus on what's important now for April 15: filing a valid extension and considering a Section 475 MTM election for 2013. Consider a consultation with our Robert A. Green, CPA to discuss these issues and more. Don't bury your head in the tax quick sand — that's always the worst choice.