Estimated Taxes: Get Your Deductions Now

Written by Steven D. Beaucaire, MST
Vice President, Tax - Bedford Capital Consulting

Now that tax season is over, everyone is breathing the proverbial "sigh of relief". If anyone is thinking at all about taxes, it is long range planning for next tax season. However, we would like to point out an area that bears review if you have clients that pay estimated taxes. You can set into motion a strategy that minimizes estimated tax payments during the year, rather than waiting to save your clients on their next tax return.

Interestingly, just who is required to pay estimated taxes is not defined in either the Internal Revenue Code or the Regulations; rather, it is by driven by penalties for underpayment. In order to avoid this, any individual or corporation who would otherwise be subject to underpayment penalties (§6654(a) or §6655) is required to make periodic estimated payments throughout the year.

Normally, estimated tax is paid in four installments. The amount of any installment is based on: the normal estimated tax calculation (§6654(d)) or the amount necessary to fall within one of three exceptions (§6654(e)), whichever is smaller. Generally, we tax accountants like to use the exceptions because they often generate the smaller required payment and the IRS allows different exceptions to be used for each of the installment payments.

The exception that we want to examine is annualization, where the taxable income for a portion of the year is extrapolated to equal the whole year. Since deductions in this calculation are limited to those meeting the "all-events tests" under §461, only deductions you know about can be included in this calculation. How do you prove to the IRS that you know there is a deduction? You have a cost segregation study done by an engineer. It is this documented review that substantiates a claim for deductions and allows clients to hold on to more of their money from the start.

While there are many complexities to the calculation of estimated taxes, a closer look at cost segregation just might help both client and accountant breathe a little easier in 2007.