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Section 444 Elections and Section 7519 Payments
By Timothy Jalbert
Section 444 of the IRC allows S corporations and Partnerships to elect a tax year that is not a “permitted year” (a year ended December 31 or a year end approved by the Secretary for a business purpose). The election is made on by filing Form 8716 “Election to Have a Tax Year Other Than a Required Tax Year.” When such an election is made, Section 7519 requires that the S corporation make required payment(s) to the IRS equal to the amount of tax that would have been paid by the shareholders if the S corporation had a calendar year end. The payment(s) made is held “on deposit” and is a cumulative balance. Note, if the calculated amount due is less than $500 then no payment is required. The required payment is due on or before May 15 of the following calendar year in which the election year began.
Calculation of the Required Payment (example)
The required payment is calculated as follows:
|
|
|
Example(a) |
Notes |
|
(1) |
Base Year Net Income |
100,000 |
Must be positive number |
|
(2) |
Deferral ratio |
25% |
Number of deferred months divided by 12 |
|
(3) |
Deferred Base Year Income |
25,000 |
Line 1 x line 2 |
|
(4) |
Applicable base year payments |
30,000 |
Payments made in base year |
|
(5) |
Net applicable payments |
7,500 |
Line 2 x line 4 |
|
(6) |
Actual applicable payments made during the deferral period |
0 |
In this example the S corporation made no applicable payments in the deferral period |
|
(7) |
Applicable payment amount |
7,500 |
Greater of (Line 5 - Line 6) or 0 |
|
(8) |
Net base year income |
32,500 |
Line 3 + Line 7 |
|
(9) |
Tax rate |
40.6% |
40.6% for 2014 |
|
(10) |
Required Payment |
13,195 |
Line 8 x Line 9 |
|
(11) |
Required payments “on deposit” |
6,000 |
Net carryover from base year |
|
(12) |
Total required payment (refund) for current year |
7,195 |
Line 10 – Line 11 |
|
|||
Based on the above example, the S corporation taxpayer would have to make a payment of $7,195 by May 15, 2015 and would have an “on deposit” applicable payment amount of $13,195 to be used in the following year’s calculation.
Payment Procedure
Form 8752 is used to calculate the Section 7519 payment (or refund). The payment can be made electronically or by filing the Form 8752 “Required Payment or Refund Under Section 7519.” If a Form 8752 is filed, it should be file separately. If a Form 8752 is filed and a mistake is later found, a new Form 8752 may be filed with the corrected information and the words “Amended Return” should be written across the top of the form.
For more information or assistance with IRC Section 444 Elections and Section 7519 Payments call Timothy Jalbert or Thomas Brady at (781) 273-3000.
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