By Tina Chunn, Aprio
As taxpayers are finalizing their individual income tax returns for the extended deadline, it is important to note the timing of payments and credits to avoid penalties being assessed. There is a commonly accepted practice in Georgia, for example, of purchasing entertainment tax credits to offset a tax penalty that resulted (or is expected to result) from a late tax return filing or a late tax payment. The question often arises whether the date the return is due or the date the return is filed determines if certain penalties apply.
This timing difference was recently addressed in a Georgia letter ruling, where a taxpayer planned to purchase Georgia film credits to offset his income tax liability. The taxpayer had filed a valid Georgia extension for his 2015 Georgia income tax return to extend his deadline to Oct. 17, 2016 (Oct. 15 fell on a Saturday). The taxpayer planned to purchase 2015 film tax credits generated by a production company. By doing so, the taxpayer would not have any income tax liability due on his originally filed 2015 income tax return, taking into account the amount of tax credits purchased combined with any payments he made prior to April 15, 2016.
Unfortunately, the taxpayer was not able to purchase the credits until after Oct. 17, 2016, and so he delayed filing his original 2015 income tax return until after he purchased the tax credits, resulting in a late filed original 2015 income tax return. The taxpayer expected not to owe any penalty since the amount that he ultimately owed on that return was zero.
However, Georgia ruled that late filing and late payment penalties are properly assessed. Specifically, the state reasoned that the statutes imposing those penalties require that each penalty be calculated based on the amount of tax that should have been shown on the return that should have been filed by the deadline (taking extensions into account).  The ruling states (emphasis in original):
There is no provision in the statute for reducing the amount of tax required to be shown on a timely-filed return based upon the potential tax consequences of entertainment tax credits that will be purchased after the taxpayer’s return is due, at some future date, and for which the taxpayer delays the timely filing of his return. . . . The taxpayer may only take into account any credits on hand at that time the return is due to be filed, so if the taxpayer has not pre-paid sufficient taxes on the payment due date such that a tax deficiency exists on the filing due date, the taxpayer is subject to a late payment penalty.
Thus, taxpayers will not be able to escape late payment and late filing penalties based on credits that are purchased after the due date for filing the return. The appropriate process for taxpayers to follow is to pay any taxes owed by the April 15 deadline, considering any credits on hand or that will be on hand by the extension return deadline. The return should then be filed no later than the statutory deadline reflecting any tax due as of that date. If the taxpayer subsequently purchases tax credits resulting in an overpayment of tax, the taxpayer may then request a refund for the amount of overpaid taxes, but note that any penalties or interest previously assessed will not be refunded.
The SALT team at Aprio is experienced with individual income tax filing and payment requirements and the use of tax credits to minimize or eliminate any potential assessment of penalties. We can assist you with your individual income tax filing/payment planning process to ensure that you do not get exposed to these penalties. We constantly monitor these and other important state tax issues in order to assist you with your specific tax situation, and we will include any significant developments in future issues of the Aprio SALT Newsletter.