Jay Payne, CPA
Jay Payne, CPA, tax partner, BDO Seidman, LLP, 2201 E. Camelback Rd., Phoenix 85016. He specializes in federal income taxation of closely held businesses.
If your business overpaid its taxes during 2007 — or incurred a loss entitling it to a carryback refund of prior years’ taxes — you’ll want to get your refund as soon as possible. Here’s how…
A regular C corporation that overpaid quarterly estimated taxes during 2007 can obtain a “quick refund” of them by filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, after the close of its tax year.
The form can be filed as soon as the first day of the following year — January 1, 2008, for calendar-year businesses. The IRS says that it will act on the application (send the refund, ask for more information, or reject it based on inaccurate or incomplete information) within 45 days.
Advantage: The business can obtain its refund before it files its tax return — long before, if it obtains a six-month return-filing extension by filing Form 7004, Application for Automatic 6-Month Extension of Time to File Certain Business Income Tax, Information, and Other Returns. For calendar-year businesses, an extension delays the due date of the 2007 tax return to September 15, 2008 (from March 15). The quick refund can be received up to five months before then, as soon as mid-April.
Rules for using Form 4466…
It must be filed before the earlier of the unextended due date of the corporation’s tax return (March 15 for calendar-year businesses) or the date on which the return is actually filed.
The overpayment to be refunded must be at least $500, and also exceed 10% of the final expected tax liability.
If the requested quick refund turns out to be too large, it will cause a tax underpayment from the date of the refund to which the IRS will add interest and a penalty based on the underpaid amount.
What to do: If you want to obtain a quick refund for your corporation, prepare now to file the refund request as soon after year-end as possible.
Caution: The refund sought on Form 4466 will probably be an estimate of the actual tax overpayment, since the final return for the year hasn’t yet been prepared. When deciding the amount of a refund to request, balance the risk of asking for too much and incurring a penalty against the value of getting the largest possible quick refund that can be reasonably requested.
Many small businesses have their income taxed on the personal tax returns of their owners. These include sole proprietorships and pass-through entities, such as partnerships and S corporations.
These entities do not pay estimated tax themselves — instead, their owners personally pay estimated tax on the income received from them (combined with other personal income).
There is no Form 4466 equivalent for personal returns, but a fast-refund result similar to that from filing the form can be obtained by managing estimated tax payments. How…
If personal estimated taxes for 2007 are overpaid, reduce or eliminate your final estimated payment for the year, due on January 15, 2008.
If estimated tax remains overpaid, reduce or eliminate your first estimated tax payment for 2008, due on April 15. Then, when you file your 2007 tax return, elect to apply your 2007 overpayment to your 2008 taxes, making up for the estimated payment you cut.
Result: You save cash on April 15, 2008, due to your overpayment of 2007 tax. You effectively get an advance payment of your 2007 refund before you file your 2007 tax return, especially if you delay filing by getting an extension. So a person could get this “effective advance refund” similar to what a corporation could get by filing Form 4466.
If your business incurred a net operating loss during 2007, it can obtain an expedited carryback refund of taxes paid for the two prior years, 2006 and 2005. This can provide a cash inflow at a time of need.
The carryback applies the 2007 loss to offset income previously reported for 2005 and 2006 and to obtain a refund of the taxes paid on that income. If the loss is large enough so that some of it remains afterward, the remaining loss is carried forward for up to 20 years to offset future income.
To obtain an expedited carryback refund, a regular corporation files Form 1139, Corporation Application for Tentative Refund. The IRS is required to respond within 90 days (send the refund, ask for more information, or reject it based on inaccurate or incomplete information).
Rules: Form 1139 must be filed on or after the date that the tax return for the year is filed, showing the loss to be carried back. To get the quickest refund, prepare to file the firm’s tax return as soon as possible. Filing deadline: One year after the end of the loss year. For calendar-year businesses that incurred a 2007 loss, it’s December 31, 2008.
If this deadline is missed, the business can still obtain a refund of the taxes paid for the prior two years (to the extent of its offsetting losses) by preparing amended tax returns for the prior years — but that is a more complex task than filing Form 1139 and will delay the refund’s arrival.
Strategy: The business can waive a net operating loss carryback and instead carry its entire loss forward for up to 20 years. This makes sense if the business expects to be in a much higher tax bracket in future years than it was in the past two, so that a given loss will save more dollars of tax in the future.
When deciding whether or not to waive a carryback, consider the value of “cash in hand” obtained within 90 days against the value of possibly larger tax savings not received until later years.
To waive a loss carryback and elect a carryforward, you must attach a statement to your tax return stating your intent —
have your tax professional attach the correct technical wording for you.
An individual who is an owner of a sole proprietorship or pass-through entity can obtain an expedited carryback refund of two prior years of taxes by filing Form 1045, Application for Tentative Refund, also to get a refund in 90 days.
The rules and timing requirements for filing Form 1045 are generally the same as those for filing Form 1139. Again, a carryback loss can be waived to carry the loss forward.
But a personal carryback refund can also be based on nonbusiness casualty and theft losses.
Caution: The computations on Form 1045 are very complex, as they separate out the effect of business and personal items on your tax bottom line, and probably should be performed for you by an expert.
Carryback refunds for periods longer than two years may be allowed for specific items, such as product liability losses and losses from hurricanes and other natural disasters. Details: See instructions for Forms 1139 and 1045.