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Amending tax returns and other changes that can benefit your business

Management, Resources | May 1, 2016 | By:

Every marine fabrication business faces an increasing amount of red tape in the form of rules, regulations, fees and taxes. At the same time enforcement on every level is becoming more aggressive and issue-focused—with even more costly results.

Experienced fabricators know that tax mistakes are sometimes inevitable. Fortunately, a combination of unique tax write-offs and strategies can help any marine fabricator avoid potential pitfalls and make many of the changes necessary to grow the operation’s profitability.

Correcting or amending a tax return because of errors, omissions, mistakes, overlooked deductions or changes in tax laws is actually encouraged by the Internal Revenue Service (IRS). Although few taxpayers amend their returns to report additional income, some changes can mean substantial tax savings.

Generally, a marine fabrication business or owner can change his or her mind about previously reported income and deductions within three years from the time the return was filed, or within two years from the time the tax was fully paid, whichever is later. If the refund claim involves the deductibility of bad debts or worthless securities, the period is seven years.

Filing amended returns

To file an amended return, individuals and sole proprietors use Form 1040X, Amended U.S. Individual Income Tax Return. A corporation that filed Form 1120 uses Form 1120X, Amended U.S. Corporation Income Tax Return. S corporations and partnerships check a box on the Form 1120S, U.S. Income Tax Return for an S Corporation, or Form 1065, U.S. Return of Partnership Income.

Uncle Sam also requires marine fabrication business owners to guess their income for the coming year—and pay an estimated tax bill by making installment payments over the course of the year. Unfortunately, after the annual tax bill has been estimated and payments computed, changes in income, adjustments, deductions, credits, or exemptions may make it necessary to refigure any remaining installments.

If an incorporated fabricator figures and deposits his or her estimated tax only to find that the operation’s tax liability for the year will be more or less than originally estimated, refiguring any remaining estimated payments will be necessary, especially if an overpayment might result. Of course, an immediate catchup payment should be made to reduce any penalty that might result from underpaying either earlier or remaining installments.

Accounting methods

Not too surprisingly, there is no “right” accounting method for all businesses. Both cash accounting and accrual accounting have their pros and cons. The basic difference between cash and accrual methods of accounting lies in the timing of revenues and expenses.

The cash basis method of accounting recognizes revenues when money comes into the marine fabrication business and recognizes expenses when money is paid out. Cash basis doesn’t recognize accounts receivable or payable. Only when a bill is paid does an operation using the cash method of accounting recognize an expense.

Unfortunately, once an accounting method has been selected, the approval of the IRS is usually required before changing that method—even when the change is demanded by the IRS. Remember, an operation’s accounting method includes not only the overall method of accounting used, but also the accounting treatment used for all transactions, income and expenses.

The IRS’s Form 3115, Application for Change in Accounting Method, is used to request a change in either an overall accounting method or the accounting treatment of any item. Naturally, there are some instances when a shop owner and his or her incorporated marine fabrication business can obtain automatic consent from the IRS to change to certain accounting methods, but professional assistance may be required.

In other instances, you can file Form 3115 using the advance consent request procedures.
If the requested change is approved, the business will receive a letter that states the IRS ruling
on the requested change. At that time a fee may be required.

Considering business entities

Changing circumstances, changes in the tax laws and even the success of the marine fabrication shop might prompt a reassessment of the type of entity under which the business operates. It makes sense to ensure you are using the best entity to provide your business with the most benefits and consistently lowest tax bill.

After all, although many tax law provisions apply to all business entities, there are some areas of the law that specifically target each entity. Choosing among the various entities can result in significant differences in federal income tax treatment, but there is more to choosing the right structure for a fabrication business than taxes.

Not only will the decision to change the marine fabrication business’s entity have an impact on how much is paid in taxes, it will also affect the amount of paperwork required for the business, the personal liability faced by the principals and, especially important in today’s economy, the operation’s ability to raise money.

Making these and other changes may require the services of a professional tax advisor, perhaps one who is even more experienced than the business’s current advisers. As the business grows, the need for professional advice, assistance and guidance may become more acute, requiring the services of better-skilled professionals.

Fortunately, there are skilled professionals just waiting to serve fabricators and their businesses. The first step to finding the right professional requires an inventory of what your business actually needs in the way of services and advice and, most importantly, how much you can afford to pay for that advice or services.

Shopping for a professional is a necessity in today’s business economy, and many professionals
offer free first meetings for discussion of the fabricator’s expectations, services needed and provided, extent of involvement by the professional and the portion of the work the fabricator expects to shoulder, time constraints and, above all, costs.

It is not tacky to discuss fees before engaging the services of a professional, although money should not be the sole criteria for selecting that professional. Finding a professional at an affordable price is a process that will involve a lot of scrutiny.

Mark E. Battersby, based in Ardmore, Pa., specializes in writing about taxes and finance-related topics.

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