New Year New Tax Rules
Some tips for delaying payments and avoiding penalties
December 31, 2009
Everyone's tight for money, and that includes our beloved state. A publicized but still little-known change went into effect for businesses last July: all General Excise and Transient Accommodation Tax returns are now due on the 20th instead of the end of the month.
Although this doesn't raise any more money it gave the appearance to our state legislators of speeding up tax payments to the state. Thankfully the State Department of Taxation delayed the effective date until January 2010 in order to have more time to get the message out. So you still may not know (because you haven't been penalized yet) that your returns are now due on the 20th.
If you don't file and pay by the new due date you'll be assessed a 5 percent penalty. However, there's a way around that. In fact, there are a number of "gotchas" for businesses filing their taxes, offset by equally valuable opportunities to avoid those penalties and delay payments. This is your guide to the best ones for GET and TAT taxes. Save it, you'll be glad you did.
Late filing penalty
This is the easiest to avoid. It's assessed at the very high rate of 5 percent a month each month you're late, up to a maximum of 25 percent. You can avoid it by simply filing on time—without a payment. Conventional wisdom holds that if you can't pay the tax, filing late is your only recourse. This is absolutely 180 degrees wrong—if you can't pay the tax the only way to avoid the penalty is to file on time. If you do then the penalty can never be assessed. Also, file online at hawaii.gov/tax. You have to set up an account under the E-services link, but you get four great advantages: it's free, no need to make a trip to the post office, you have absolute proof of timely filing (very important) and finally the state records exactly what you want it to (which with paper filings is definitely not the case—they're lost or entered incorrectly more often than they should be).
Late payment penalty
If you've filed on time, this is the next one you have to avoid. However, while this penalty is high—20 percent—the rules for when it's assessed are still very lenient. The penalty isn't assessed until 60 days after the due date of the return. This means if you were filing your taxes for November, to avoid this penalty you wouldn't have had to make your payment until February 18. Why? Well, the tax return was due on December 20, and 60 days after that is February—less two extra days for December and January 31. You will be charged interest, but that is at a very low 0.66 a month (8 percent annually).
Apply your payments correctly
When you make a payment, make sure your voucher very clearly states the period you're paying for. This is important because if you want to avoid that 20 percent penalty, your payment has to be posted correctly—and state law says that payments not specifically allocated can be applied elsewhere (i.e. another period's penalties and interest) first. Generally it's not a good idea to mail it in because you won't get a confirmation that the payment is applied to the correct period. Either walk it in with a copy of the check and voucher to be stamped by the state tax office (and save that as proof), or better yet use the E-services system to make your payment electronically. Although this will cost a buck and you won't get the two-day to two-week float you typically get from writing a check you can be absolutely sure that your payment is correctly applied.
At all costs avoid cascading penalties and interest
If your business is struggling so much that you've fallen months behind and just can't make a payment yet, it's more important to stay current than to pay older balances. For example, if you still could not make that November payment on February 18, you will be assessed the 20 percent. However, next month if you can only make one payment, don't pay November's. Pay December's instead. If you pay November's, which has already been assessed the 20 percent penalty, you'll be assessed a new 20 percent penalty on December's. This is called cascading penalties—don't make this easy mistake. While emotionally you think the older one is more important, once it's been penalized, avoiding additional penalties is more important.
Once you do file those taxes, the state will start sending collection letters sooner than it would have if you didn't file (and perhaps that dreaded "Notice of Intent to Levy"– which you must respond to). However, if you follow the above steps the amount you do owe the state will be far more manageable, and hopefully your business will ride out this terrible economic storm.
Doug Levin is a Maui-based CPA
Doug Levin, MauiTime
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