If you don’t pay the IRS on time…

Missing or falling behind in tax payments to the IRS is NOT a good situation. There are several forms of correspondence the IRS will send you. Among these notices, CP 11, and related ones like 11a/14/22a/22e/23 all communicate a balance due. CP 501 and CP 503 are reminders a balance is due; CP 504 is a final notice a balance is due! You are charged interest on taxes not paid by appropriate due dates REGARDLESS of whether or not you were granted an extension of time to file your return. Interest rates have ranged from 7 percent to 10 percent since 1994. Interest calculations include penalties imposed for failure to file and/or negligence, fraud, etc and are charged from the due date of the return, including extensions.

The IRS also penalizes you if you file your federal tax return late. If you don’t file your personal return by April 15 (or an extended due date), the penalty is usually 5 percent of the amount due for each month or part of a month your return is late, unless you have a reasonable explanation. Paying your taxes late will incur a penalty too. Payment methods through the Internet or by phone through the Electronic Tax Payment System (EFTPS) supported by live Customer Service representatives are available 24×7. A penalty of 0.5 percent (up to but not in excess of 25 percent) of the unpaid amount for each month or part of a month the tax is not paid is typically imposed. You can make estimated payments weekly, biweekly, and monthly. If however, you are late paying ANY of the four quarterly estimated payments, you may still be charged a penalty even if your final return shows a refund due. Penalties, in addition to the interest charged for late payments, are applied to any unpaid tax on the return.

If you believe you can justify filing late (and not having requested an extension prior to April 15), write a personal statement and attach it to your return. In addition, Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts should accompany any waiver requests. Whether or not your explanation is accepted, the penalty usually is NOT more than 25 percent of the tax due. If you file your federal return more than 60 days beyond April 15 (say after July 15), the minimum penalty will be the smaller of $100 or the amount of any tax you owe.

What is depreciation?

What is depreciation?  In business, we deduct our expenses from our income.  Business “stuff” we use, deplete, or wear down lowers our revenue and our taxable income.  If the “useful life” of the “stuff” we use to produce income extends beyond one tax year, we need another way to still recover our original cost. This “long-term” method of cost recovery is called depreciation. There are five tests for depreciating property:

  • You must own it.
  • You must use it (place in service) for business or other income-producing activities.
  • You must be able to determine its useful life.
  • The useful life must be greater than one year.
  • It must be qualified property according to IRS rules as stated in IRS Pub 946, How to Depreciate Property.

For property placed in service after 1986, you generally use the Modified Accelerated Cost Recovery System (MACRS).  Prior to 1987, other methods to recover costs, like for example, Accelerated Cost Recovery System (ACRS), were used as detailed in IRS Pub 534, Depreciating Property Placed in Service Before 1987.

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