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Avoiding estimated tax underpayment penalties

The deadline for second quarter estimated tax payments was last week. And summer is a good time to do a mid-year tax analysis because there is still time to make changes if necessary.

This year, there are some unanswered questions about exactly what income will qualify for the 20 percent pass-through entity deduction. If you are self-employed and run business income through your personal tax return (sole proprietors, LLCs, S Corps and partnerships), this mid-year checkup is even more important.

Underpayment penalties and interest

For business owners who do not pay enough in estimated quarterly taxes, there are two general consequences:

  • Underpayment penalty – this applies if you owed more than $1,000 or failed to pay at least 90 percent
  • Interest of five percent on underpayments

Penalty abatement is available in limited circumstances, such as a disaster, casualty event or another unusual circumstance that makes it inequitable to apply. It’s not clear if lack of specific IRS guidance would qualify.

Take advantage of safe-harbor rules

What do you do when you do not know exactly how changing tax rules will affect your individual circumstances? Pay 100 percent (or 110 percent generally for those with adjusted gross income over $150,000) of what you owed last year.

By paying the same amount that you owed last year, you receive protection under IRS safe-harbor rules. The Service generally will not apply a penalty regardless of how much you owe for 2018.

If you have business tax problems that have been getting worse every year, now is the time solve them. A tax attorney can explain available options after finding out more about your unique situation.

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