Annualized method of estimated taxes

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taxspecialst 17 years ago

When doing the annualized method - is there a requirement for which quarter(s) the income from pass-thru entities is to be picked-up?

It first blush I'd figure a smooth recognition of the K-1, by using hindsight once the K-1 was in hand. But then, that's not really a fair way to do it. Especially. if say the K-1 is for a year-ended January 31st. For a January 31st year-end pass-thru entity, I think that perhaps the fair thing to do would be to pick up the whole K-1 in the 1st quarter.

Using that same logic of fairness, I'd think that a K-1 with a year- end of December 31st should all be picked up in the 4th quarter. But then, perhaps that isn't fair either, since it is possible that the pass-thru entity earned the income prior to the 4th quarter. But then again, even if the pass-thru income was earned early in the year, the individual taxpayer would not necessarily be privy to that information, so he couldn't make the determination at the time, even if using hindsight after the K-1 was issued.

All I've found so far is IRS Publication 505 that says: "Enter your AGI for the period. This is your gross income, including your share of partnership of S corporation income or loss, for the period..." It doesn't say "your theoretical ratable share of each quarters' earnings as earned during each quarter by the entity." nor does it say "your actual pass-thru share as of the year-end date of the K-1."

Any thoughts ...or any rulings on this issue?

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ed 17 years ago

In general, if you are trying to determine your AI installments in advance as they come due it's more difficult than applying the Ai after-the-fact. If you are a 2% or more owner of the S-corp, the trustee of a trust, or a general partner you must include the net in your AI calculations as of 3/31, 5/31, 8/31 and 12/31. In most cases this shouldn't be a problem, but iet might require your CPA to issue quarterly reports within 15 days after the close of each tax quarter.

If you are a limited partner of a public entinty that can only declare its earning on an annual basis, you report its net income iin the quarter it is declared. If the income isn't reported until after Jan

15 of the following year, you can't include it in the AI, but it wold be includiable in the "90% of current years' tax" safe harbor calculations. If you are the benificiary of a trust and can ask the trustee for the quarterly information, you must report it. If you cannot get the tax/non-tax makeup of distributions you get, use your best judgement as to what type of indome it is, or guess, using last year's data or other indications.

In other words, if you do, or can, know quarterly results they must be included in AI calculations.

ed

There are specific rules for fiscal year entities which I cna't recall ofhand.

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removeps-groups 17 years ago

But there's a problem. Say the company with a fiscal year from Jan 1 to Dec 31 makes 1M profit in each of its quarters. They don't distribute any money until Dec 31, and at that time they distribute

3.5M to say two (2) 50% shareholders. Are you saying that the shareholders have to report this 3.5M as received in equal amounts every quarter and pay taxes on it? But how can they pay taxes if they haven't received any money?

Or let's say that the company intends to distribute 3.5/40‡.5% of its profit to shareholders. Let's say for Q1, the two shareholders report 875k of income on their tax return for that quarter and pay taxes on it. But in the fourth quarter, the company decides to not pay the 3.5M but instead reinvest it, such as buy buying more equipment. Then the person would have overpaid tax for the first quarter.

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ed 17 years ago

They can distribute enough to pay taxes due. If they have the knowledge and auhority and there is a profit to distribute it is constructively received.

My discussion was for pass through entity such as a S-corp or partnership, not necessarily for a a C-Corp. It is unfortunate that they hanged their minds, but if the AI method works against them, they can always resort o the "last year's tax" or "90% of current year's tax" safe harbors (which are automatically built into the AI method).

ed

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Annualized method of estimated taxes

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