In the midst of election season, bipartisanship persists. House Ways and Means Committee member Darin LaHood (R-IL) introduced new bill H.R. 8864, known as the Tax Administration Simplification Act, aimed at reforming common tax filings. The bill has garnered support from six cosponsors — three Democrats and three Republicans alike. The Tax Administration Simplification Act is based on three recommendations of the National Taxpayer Advocate (NTA) to improve the tax filing process:
- Extend the time for S corporation elections
- Adjust estimated tax payment deadlines
- Treat last-minute electronic tax payments as filed on time
S Corporation Elections
The problem identified by the NTA is that individuals who incorporate their small businesses often miss the deadline for electing S corporation status because the election deadline is before the tax return deadline. Current law says the election can be made at any time during the preceding taxable year or any time on or before the 15th day of the third month of the current taxable year. Calendar year businesses must file by March 15, while fiscal year entities must file by the 15th day of the third month following the fiscal year close. Elections are filed on Form 2553. As a result, taxpayers frequently have to obtain permission to make late elections.
The proposed legislation would allow taxpayers to elect “S” status on their first timely-filed S corporation income tax returns, Form 1120-S. In this way, taxpayers can make a quick decision to elect S status while their tax returns are being prepared. The NTA explains that failure to make the election can cause “significant adverse tax consequences for businesses, such as incurring taxation at the corporate level and rendering shareholders ineligible to deduct operating losses on their individual income tax returns.”
In fiscal year 2022, over 5.5 million S corporation returns were filed, which accounted for 71% of all corporate returns. The value of an S corporation election increased for many taxpayers with the passage of the TCJA, which allows the 20% QBI deduction for individual owners of passthrough businesses and sole proprietorships.
Estimated Tax Payment Deadlines
The current schedule for individuals paying estimated taxes is complicated. Payments are not made quarterly at 3-month intervals; instead, payments are spaced at 3-month, 2-month, 3-month and 4-month intervals (April 15, June 15, September 15 and January 15). The NTA says this confuses taxpayers and makes it difficult to calculate net income, especially because these dates do not correspond to the regular 3-month quarters that most small businesses use for their books and records.
The simple approach the legislation takes is to revise the estimated tax payment deadlines to correspond to calendar quarters. The bill sets the payment deadlines for individuals to 15 days after the end of each calendar quarter: April 15, July 15, October 15 and January 15. This schedule is “more logical” and would “make it easier for taxpayers to remember and comply with the due dates,” according to the NTA.
Last-minute Electronic Payments
The final change in the legislation is to consider electronic payments on-time if they are submitted online by midnight, even if the IRS processes them the following day. Currently, if a taxpayer mails a payment or tax return to the IRS that is postmarked by midnight on the due date, it is still considered timely, even if it is received a week later. This is commonly referred to as the “mailbox rule;” however, if the taxpayer submits the same payment or return electronically on the due date, it will be considered late if the IRS receives and processes it the next day.
This rule favors paper transmission, the NTA observes, which is “exactly the opposite incentive that the rules should provide.” Applying the “mailbox rule” to electronic payments will boost the IRS’s efforts to encourage greater use of digital services and reduce the additional cost and burden on taxpayers and the IRS of using paper filings.
Outlook
During this election season, it is unlikely for many bills to make it through Congress, especially small tax bills; however, the bipartisan nature of this legislation signals that the provisions could be wrapped into any omnibus tax bill to be negotiated in the future. Touting the cross-party nature of his proposal, Rep. LaHood has stated, “I am proud to lead this bipartisan effort and look forward to working with my Ways and Means colleagues to streamline the tax filing process.” In short, these welcome changes are on the table.
For more information on how these proposed changes could impact your business or to discuss your tax planning needs, please contact our team of experts. We’re here to help you navigate these developments with ease.