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The 90 day tax delay ‘applies to the income taxes only’: expert

Daniel Pilla, a Tax Litigation Consultant, author and advocate for taxpayer's rights, joins On The Move to discuss the recent changes to the tax deadline and what it means for taxpayers.

Video Transcript

ADAM SHAPIRO: The Dow is now up almost 1,130 points. The S&P 500 up 113 points. NASDAQ is up 276 points. Even the Russell 2000 is gaining today, up more than 6%.

We want to turn our attention to taxes. Dan Pilla is an expert in IRS procedure and an advocate of taxpayer rights. He's author of "Small Business Tax Guide," and he's joining us now as part of our Taxes Made Simple segment which is brought to you by TurboTax. Dan, thank you for being here. Does coronavirus, other than pushing the filing dates back into July, change much for small business owners, because many are shut down right now?

DANIEL PILLA: Well, yeah, and the problem with this, Adam, is the extension that the IRS granted last week, from April 15 to July 15, applies to income taxes only. All right? This is very important for people to understand that we're only talking about an income tax filing and an income tax payment extension. It does not apply to employment taxes.

So small businesses still have to file their 941 forms, their employment tax returns, on time, and they still have to make the employment tax deposits on time. And of course, that begs the question, what happens if you can't do that? And that, you, know that opens up a whole different vein of discussion here.

JULIA LA ROCHE: Hey, Dan, it's Julia La Roche. You were just talking about that businesses still have to file on time. My question for you though is, since I guess effectively we're in a new tax year and a lot of small businesses are hurting, I know it's a little early, but how can they even start to think about some of the implications that they might be seeing at their own business for the following year, the following tax season?

DANIEL PILLA: Well, that's a real good question, Julia, because we're in 2020, and so small business people, particularly self-employed people, have a responsibility to make estimated payments of their income tax liability in 2020 for 2020. Self-employed people don't have the luxury-- if you want to call it that-- of wage withholding, where the employer takes the money out of the check every, you know, pay period. Self-employed people have to make those deposits on an ongoing basis.

But here's the thing you need to understand, and that is this. Your estimated tax payments for 2020 are based on your 2020 income. So if your first quarter or first and second quarter income is significantly reduced because of this catastrophe that we're living through, then obviously, your estimated payment is going to be down as well. So what businesses need to do is run an ongoing profit and loss analysis of their current activities, quarter by quarter, and pay their estimated payments based on current profit and loss.

JULIE HYMAN: Dan, it's Julie here, and as you look at what businesses are doing here, obviously, there are some measures in the stimulus bill when it passes, hopefully, that will benefit them. What do they need to know from a tax perspective that's in the bill that you've seen up until this point? We know that, as part of it, if they take out loans, for example, and then use that money for payroll, then it will be forgiven, but do they still have to pay taxes on that?

DANIEL PILLA: Well, any time you receive a loan, Julie, regardless of who the loan is from, whether it's from the federal government or, you know, Aunt Murtha, it doesn't make any difference. That loan is not considered taxable income to the business. Now, here is where you get into difficulty. If the loan is forgiven, then there may be forgiveness of debt income that arises.

I happen to have written a book called "How to Eliminate Taxes on Debt Forgiveness." It talks about all of the exceptions to the general rule that says income from forgiveness of debt is taxable. And so you know, there's a lot of opportunity here to avoid taxes on an income.

What we don't know at this point is exactly what this bill is going to look like when it comes out. You know, I've been paying attention. Of course, you guys have been paying attention. And it's still in flux, and we still don't know exactly what it's going to look like.

But I will tell you this-- anytime you make a payment, regardless of the source of funds-- now, forget the source of funds for a second-- anytime you make a payment that's an ordinary necessary business expense-- and certainly wage payments to your employees is an ordinary and necessary business expense-- that's a tax deduction for the business. Anytime you get a loan from a third party, I don't care who it's from, that loan is not income to the business. So we've got those tax truths to work with, just as a starting point, and then we just have to see what the bill looks like when it comes out.

ADAM SHAPIRO: Dan, I'm not advocating anyone break the law, but given the unprecedented nature of the crisis we're in and businesses which have not yet filed their 2019 taxes in this year, 2020, who may not be coming back after the crisis passes, the enforcement from the IRS, we know that the staff has gotten smaller and smaller. Do they go after small businesses the way they might have maybe 10 or 20 years ago?

DANIEL PILLA: Well, they were doing it up through last week, Adam, for sure, no question about that. Now, I just received a news bulletin from the Internal Revenue Service from yesterday afternoon. It's not even on their website yet. That says that they're going to back off on enforcement between now and July 15th.

But here's what businesses need to understand. All right? We talked we talked about the automatic extension, from April 15th to July 15th. You don't need to file an application for that. That's across the board on the income taxes.

But there's two other strategies everybody, not just businesses, but everybody needs to know about that's going to help them through this. If you still can't file your tax return by July 15th, the extended date, you can use IRS form 4868, 4868 and get another six months to file your tax return. Adam, that's automatic. You don't need a reason for that. You simply submit that form on or before July 15th, and you will get six more months to file your return, automatically, without penalties.

Now, let's talk about payment for a minute. The payment of the taxes due July 15, that's been extended from April to July, just like the filing obligation. But if you can't pay your taxes by July the 15th, there is a second strategy that's available. And the IRS just frankly lies about this to people, and they have lied about it for 60 years, and I don't know why they're doing it now. It just seems to be the nature of the animal with this agency.

But in any event, the strategy that's available by law is IRS form 1127. That's 1, 1, 2, 7. It's called an Application for an Extension of Time to Pay the Taxes, and if you submit that by July 15th, you can get six additional months to pay the tax without penalty.

Now, the hitch here, Adam, is that's not automatic. You have to make a showing in the form of hardship, and hardship is defined by law as being unable to pay your current necessary business or living expenses as a result of circumstances beyond your control. And that's certainly the model we've got right now, I'm sure everybody would agree.

ADAM SHAPIRO: All right. Daniel Pilla is a tax litigation consultant, also an author of "Small Business Tax Guide." The book is coming out April 14th of this year. We appreciate your being here.