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Tax Smart Real Estate Investors Podcast
372. How Top Investors Handle Tax Deadlines (Strategic Extensions Explained)
00:26:20
Tax extensions aren’t something to avoid. They’re…
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- [00:00]
Podcast Announcer
You're now listening to the Tax Smart REI Podcast, the number one tax podcast for real estate investors,
- [00:06]
Podcast Producer
your source for all things real estate, accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process, and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors, and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.
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Nate Sosa
Hey, everybody. Welcome to another episode of the taxmart REI Podcast. No, Tom, today it is a show. With me, your host, Nate Sosa, and our guest co host today, Justin Shore. So, guys, we're super pumped to have Justin back on and really pumped, honestly, for today's conversation. So before we jump in today's conversation, which will be about extensions and the stigma around them, I'll pause right here for a quick note.
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Podcast Announcer
You've probably never found a real estate newsletter worth reading, and that's because we hadn't created ours yet. The REI Daily is a newsletter you actually want to read whether you own one property or 100. We created this for you. Each issue delivers crucial tax saving strategies, legislative updates, as well as real estate market insights. Everything you need to stay sharp and ahead of the game. Get the real estate and tax news that actually matters straight to your inbox. Subscribe to the REI Daily newsletter today@therealestatecpa.com subscribe. That's it for now and right back into today's episode.
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Nate Sosa
And now we're back. Justin, one big question that everyone has always around tax time is should I file an extension? And honestly, Justin, I'd like to know what you personally do. Actually, that would probably be good insight for everybody out there.
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Justin Shore
Yeah. Yeah, absolutely. Yeah. Should I or should I? It's always our same answer, right? It depends. Right. But I'll tell you what I do. Yeah, I honestly, I file an extension every year. I can't really remember the last time that I didn't file. I mean, it was probably 10, 11 years ago, I would say just before I had any kind of ownership in any businesses. Right. That's the last time that I filed on time every year. I think maybe I'll do it earlier this year, but believe it or not, I think most of the other, like, tax professionals that are listeners of the show might be thinking that they're in the same boat. You think we get our stuff done February 1, be ready on the get go, but nope. I'm typically a September, maybe sometimes an October filer myself, so.
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Nate Sosa
Hold on, Justin, you're an accountant you're an accountant, you're a tax expert, and you don't file your tax returns on time.
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Justin Shore
Nope, nope.
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Nate Sosa
I'm going to make sure that's clear.
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Justin Shore
Always on extension.
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Nate Sosa
Guys, let me tell you, too, I too, am always on extension. And I also might be my own worst client because I might file on the last possible day, some days or last possible month. Don't be like me. Don't be like me at all. It's like, do a better job, work with someone on the front end. Helps you gather your docs and get all that stuff together. Has a really cool organizer, maybe that helps you get everything uploaded and whatnot. But basically what Justin and I are saying, it's okay to be in an extension. Justin, why is there so much stigma around extensions? Can you give some, like, actual factual guidance around them?
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Justin Shore
Yeah, you know, I think the first thing, too is we even kind of use some of this verbiage already, is that it's like the. This fear of, like, I don't want to file late. And the purpose of the extension is to give you an extension of time to file so that it's technically not late, it's still on time. Again, if you're, you know, for example, filing a 1040, your personal return, that extension gets you from April 15 to October 15. Right. So we don't want to say that we're filing late. It's not that we've missed a deadline, per se. So I think that's probably just like, in. From like, even a basic standpoint, the first big stigma is feeling like you're filing late, I think, is the first big one.
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Nate Sosa
Yeah. So, like, it's totally fine. Right. And so some people talk about the fact that, well, it's going to trigger an audit. Is that true at all?
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Justin Shore
Yeah. You know, there's no data out there to. To support any kind of English that, like, the IRS is more likely to auto you if you file an extension. And in fact, they're considered to be very routine. And the IRS expects every year tens of millions of taxpayers file an extension. It's a very, very regular type of process. And, yeah, there's some thought out there that the IRS would actually would prefer and that you file extensions in some case, really for two main reasons. When you file an extension, you're likely going to file a more accurate tax return because you can take more time, or your preparer could take more time, have more due care, and they would prefer them to be more correct as opposed to them being rushed. And frankly, you know, to Some degree. Also, it's. They're in the same boat as us tax professionals are in. And that spring is very busy. There are hundreds of millions, actually that do get filed by 4:15. So there's plenty of things coming in through their pipeline in the spring as well. So I wouldn't say that they're going to want to penalize anybody for filing extensions on that side of things, too.
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Nate Sosa
Yeah, Justin, I couldn't agree more. Extensions are good things. Right. They give us time to get everything in order, make sure everything's done correctly, too. Right. Like, we want to double check and review and make sure they like, we don't want to rush our own. I think the biggest thing think about is when people go like, well, my client, my accountant just wants more time to get my tax turned on. It's like, your accountant just doesn't want to have more time to get your tax turned down. They want to make sure that what you provided them is actually good. Right. That's the one thing we run into a lot is that, you know, real estate investors, we are all. We're all running by the seat of our pants at times. And so we like to drop things into Excel or we like to, you know, quickly do our quickbook bank feeds, whatever it winds up being right. And then we don't actually pay attention to what we're doing. And then we send it to our accountants, like, okay, great. Like, hey, man, I'm sorry, but this doesn't look fully completed. It's missing six months of information. Right. And they go, oh, crud, I didn't realize that. Well, because you rushed to see if you could get filed on time. And honestly, you didn't really need to, like, I totally get. People want to get their refunds, get access to that capital, but at the same time, it's like, we've got to make sure we do things accurately and correctly.
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Justin Shore
Yeah. And definitely going back. So just like that concern of, like, audit risk there, too, while while there's nothing to indicate that filing extension leads to an audit, we do know for sure that errors and mistakes on a tax return, very unequivocally, that absolutely increases your audit risk. So if you had to kind of weigh the two against each other and definitely say you've got way more risk and mistakes being made. And in fact, one of the most common audit triggers out there is just a 1099 that got reported to you, and then you miss putting that on your return. Right. And it could even be something as minuscule as I got a 1099 Int for the couple hundred dollars of interest that my bank paid to me on a money market account or something like that. You know, they can be small items like that, but just the fact that an income item was not reported can be a really quick big red flag for an IRS audit. So taking that extra time to get those in there is definitely worth it in my opinion.
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Nate Sosa
Yeah. So, Justin, something else too that I think that you mentioned to me before is that you've done some work for and with some pretty large companies out there. What did they do? Did they file on time? I guess like these really big departments with like 100 plus staff. Dedicated, right. This is not dedicated not to multiple tax returns, but to one company's tax return. Right. And again, there's multiple tax returns that fall under that umbrella per se. Right. But what did they do?
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Justin Shore
Yeah, yeah. So a little bit of background for me is very early on in my career and so being in public accounting, worked for a Fortune 500 company in their tax department. And so we would work on supplying all the income tax information and getting returns filed and things like that. And long before I ever got there, they would file extensions every single year. And while I was there, they would file extensions every year. And it's frankly just because the bigger, more vast the company is, the more complex it's going to be and so the more time it takes to prepare a return. But even at that level, you know, being what I would say stewards of, you know, billions of dollars of investor money, even companies that are that large, that have dozens, and some of These large Fortune 500 companies have hundreds of tax staff working on this stuff. So the amount of resources and the amount of professionals that they're throwing at it is pretty gargantuan compared to what we would consider like small to mid sized businesses. Right. And they're dealing with tax liability figures that are in the hundreds of millions and often billions of dollars. Even those organizations, those companies are filing on extension every year. If you needed a more, more weights to like how important it is to work on extension.
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Nate Sosa
Totally. Right. It's just like buys more time, right? It's like that's all it does, it buys more time to file. Now let's take one important note I think that we need to think about here is that this is just an extension to file, which means if you did not file this extension, you would be assessed a failure to file penalty. How much is that penalty?
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Justin Shore
Yeah, it's 5% of the amount that was due with the return for every Month that you're late. So, and the weird thing is with IRS in like what it considers to be a quote unquote month is that one day is a month. Like it's that when you're in that first month of being late so you can have that 5% penalty on the amount due. So what that really means is if you are filing your return, let's say on May 1, and you fail to get an extension in, and when the return gets completed, it shows that, that you owe $10,000. Even though we're only like, what is that, like 15, 16 days late, you'd still get that 5% on that $10,000amount due. So you have an extra $500. And then that climbs every time you go into like the next month, another 5%. It luckily maxes out at 25% once you're five months late. But that's definitely. Nobody wants to. It's not like a good news. Nobody wants to have a 25% penalty for sure.
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Nate Sosa
No. So what I'm hearing there is like just by not doing this, the Form 4868. Right. That's all that. That's what this form is called. By not doing that, you basically probably get yourself two months of penalties. Like that. Right? It's like basically two. And like the penalty stack too. Like Justin was saying a second ago, this penalty stacks so it is accrued.
- [09:46]
Podcast Announcer
Hey, real quick, if you've been a long time listen to the show, then you know we give everything away for free from how to use the real estate professional status and the short term rental loophole to save tens of thousands of dollars on taxes to upcoming tax changes. We don't hold anything back. And the only way we're able to help more real estate investors is if you rate, review and share the show. It just takes 15 seconds to leave a quick rating review or share with a friend who may find this information useful on their real estate journey. That's all for now. We'll dive right back into today's episode.
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Nate Sosa
Okay, so we filed the extension. Cool. We're done. So those who have refunds, right. Actually doesn't affect them. And the reason why is because there was no tax due. Now to know that you got to figure out your tax return. Right? That's the important part to actually know if you're going to receive a refund. But that actually the file to extension doesn't do anything about your tax liability, does it, Justin?
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Justin Shore
Right, right. It's really important to note that it's an extension of Time to file, but not an extension of time to pay.
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Nate Sosa
Right. Super emphasize this piece is that this is an extension to file, not pay. So that means on April 15th you have to pay something to avoid penalties. Now, what are the penalties involved with this? Justin, I know you're actually really familiar with this.
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Justin Shore
Yeah, yeah. So specifically, our April 15 deadline, if there is an amount due with your returns, you're not one of those lucky folks that's in a refund position. Right. Because you didn't work with Hall CPA early enough to get your real estate benefit, a refund. Right. But realistically, if, if you have a, what's referred to as a failure to pay penalty, which is going to be, okay, we owe something on April 15, we didn't make that payment by then. So it could be we're making that payment later, say in June, for example, anytime after April 15th, then we're going to have a half a percent penalty on the amount that was due that it'll get tacked on and it's half a percent per month. So again, this is completely separate. So if we file the extension, we're avoiding that failure to file penalty when we go and file, say in June, but we aren't necessarily avoiding that failure to pay penalty. We could have that half a percent per month stack up. And like in that example, if we're paying in June, we'd have that still have that 1% failure to pay penalty that would get kicked in.
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Nate Sosa
So how do we fix that, Justin? Like I know people talk about, like we hear safe harbor estimates are paying quarterly. Right. People ask that all the time, is that how we fix that and keep from having to be hit with that penalty?
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Justin Shore
Yeah. Yeah. So, you know, making quarterly estimates definitely helps, but where the. I would say that the last line of defense there is making an extension payment. Because again, it's all about, with a failure to pay penalty, it's all about are you fully paid in for your total tax liability by April 15. And so even if you made quarterly estimates throughout the year, if you get to April 15 and or post April 15 and your tax return shows that amount due, even though you made quarterly estimates, and it could even be quarterly estimates that were based off of the safe harbor, which we'll talk about here in a minute, you can still get that failure to pay penalty if on April 15th you're not paid in enough. So having a calculated extension payment is not a bad idea.
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Nate Sosa
So that fixes your underpayment penalty. Right. I think there's the other penalty that Exists. Gosh, there's so many penalties for not filing my tax returns. Right. It sounds like I need to work with someone to figure that out.
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Justin Shore
They come at you from every angle, that's for sure.
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Nate Sosa
Yeah. Okay, so doing the quarterly estimates helps us with our underpayment penalty, is that correct? Not our failure to pay penalty.
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Justin Shore
Correct. Correct. Yeah. So to kind of like before we get going to underpayment penalty, like that recap is, again, you can. Even if you make your quarterly estimated payments, you can still incur that failure to pay penalty if you pay after April 15. Now, the underpayment penalty, that's very confusing because these all sounds very similar. Like, these terms and these words that we're using of like failure to pay underpayment, like, it sounds like those should be interchangeable, but they are very specific terms that we're using here because they are actually different penalties. And the rules and how, like, they are calculated are completely different from one another. So when we're looking at an underpayment penalty, this one can arise because it's all about payments that were made, for the most part, you could say, like, during the actual tax year. So we're recording this in the spring of 2026. So we're talking about 2025 tax returns here. What we're really looking at is what kind of estimated payments did you make in the 2025 tax year? I say largely 2025, because the fourth quarter payment is actually in January 15th. 2026 is when it was due. But to avoid the underpayment penalty, you've got to make those quarterly estimated payments throughout the year, or you've got to have W2 withholding coming out of your paycheck. Because W2 withholding is another form of an estimated payment. And you could just think about it that way. But it's actually just. It's happening way more frequently. Right. For, like, most people, W2 roles are having those amounts come out every couple of weeks in their paychecks. So it's like you're making 24 or 26 estimated payments throughout the year. It's just your employers handling it for you.
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Nate Sosa
Right.
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Justin Shore
But those amounts have to be paid in throughout the year. And the IRS does not want you to just pay that full amount on April 15th. They want to get their installments throughout the year. And why? Well, all of us are investors here talking, right? Like, there's definitely time value of money. There's roi. Like, the government wants that in the first quarter, the second quarter of last year. They don't want to allow you to wait all the way up until the spring of the current year to make that payment. So the way that underpayment penalty works is they base it off of what your tax liability was for the entire year of 2025, and then make that assumption that you should pay a quarter of that in by each one of the quarterly due dates. And I will say one of the more goofy things that. One of the goofy things Iris does that's really confusing on this, too, is that we call them quarterly estimated payments because they roughly happen each quarter. They don't happen all after the quarter has ended.
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Nate Sosa
Right.
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Justin Shore
So that's also goofy. Tripwire, you got to watch out for when you're making these payments is it's April 15, June 15, September 15, and then January 15. So we do have some kind of weird dates that are in there. Now, the problem is, is if you. Again, if we get to. Let's say we get to our April 15 filing deadline, you go, okay, I need to be paid in by at least whatever my tax liability is. Even if you pay that amount on April 15, when you go to, let's say, make this extension or make this extension payment, you can still incur an underpayment penalty for not having been paid in enough during the actual tax year by meeting those quarterly deadlines.
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Nate Sosa
Justin, can you give us a quick recap for that? Actually, there's a lot that you just kind of boiled in. So let's go. One more recap for that.
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Justin Shore
Yeah, you know, so I'm a big example type of person, too, just to make this more realistic of, like, how this actually works. And so let's say at the beginning of 2025, you projected out or assumed that your tax liability was going to be $40,000. So you go, okay, great. That's easy math. We'll break that into four quarterly payments of $10,000. Right. Would have fast forward it's now spring of 2026, and you get ready to file your return and find out, Nope, the 40,000 was incorrect. We should have paid in $60,000 in total. So instead of $10,000 quarterlies, we should have made $15,000 quarterlies. The way that the IRS looks at that is, okay, you made a $10,000 payment by April 15th last year for the first quarter, but that means they'll say you're underpaid by five that quarter. And what they're going to do is then look to see how late are you on making that payment. Well, if we were a diligent taxpayer, and we kept making those $10,000 payments each quarter. What they'll actually do is go, oh, you made a second quarter, $10,000 payment as well. They don't apply all of that to the second quarter. They actually drag some of that second quarter payment back towards the first quarter to say, hey, that was catching you up for the first quarter payment. So they'll actually grab 5,000 out of that second quarter and say that's actually just catching you up for the first quarter. And then they'll calculate that underpayment penalty based off of that amount of time that you're underpaid for the first quarter. What's the problem with that, though, is, well, shoot, if they grab 5,000 of my $10,000 Q2 payment to say that that's for Q1, now my Q2 is underpaid even more. It's not underpaid by 5,000, it's underpaid by 10. And so then you can kind of see where this is going is that's going to keep rolling forward into the next quarter, the next quarter. And so that is also why I would say for a lot of, like, taxpayers that are facing this for the first time, like, if you are, it's the first year that you've owned your own business and you're not in that situation where you have W2 withholdings covering everything for you, it can get really complicated pretty quickly. And it does make it a little bit more difficult to estimate what exactly your underpayment penalty is going to be if you don't fully understand that system to be able to project all that out. So it just makes it that much more important to make those payments throughout the year. Make sure that if your income does increase even towards the end of the year, that you increase those estimates as well. So, but that, that's kind of just a quick, quick real life, kind of a real world example on how that could work and how those dominoes could fall on you a little bit.
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Nate Sosa
Yeah, no, it's a great, It's a great example, Justin. So kind of just to recap that too, is basically, well, you got to make quarterly payments. The first one is due 4:15 the same day your extension payment's due. So what some people do actually is they kind of group those together and make one payment. And so then they overpay. Right? So they actually can apply it to Q1. So just FYI, I know it's a recap. So a little bit FY, a little bit of a PS in there, but pay quarterly. By paying quarterly, you'll be saved from the underpayment penalty. And then to save yourself from the failure to pay penalty that will accrue, you need to figure out what your projected 2025 income is going to be, right? And so you can do that in so many different ways. You can work with someone, try and figure it out on your own, right? Do all kinds of different things to figure that out. But that's how you're going to sit. Basically. Like Justin saying the government says, hey, cool, we gave you a loan of our money for a couple months, right? That's what they're basically saying. And so they're charging you one, penalties for doing that because they're saying, hey, you're not supposed to have this money. And then two, also we want our interest, right? We loaned you money. We at least want a little bit of interest. And hey, then everybody can go, cool, I got 7% interest rate in this economy, maybe it makes sense, but who knows, right? But just an FYI on that, on the overall process, right? So extensions are not bad. Extensions are actually good. They're helpful for us. They also give us the time that we like. But at the same time we have. We should be looking into making some kind of extension payment. That being said, right. We can look and estimate, right? As like if you work with your account estimate to see, hey, this is what my projection is going to be, right? And hey, projections are projections for a reason. They are looking into the future. They're prophesying. They are not actually going to tell you this is what the number is going to be. Things can be off. Things can sometimes be missed or overlooked. So just FYI on that too, as we're getting into this extension season, everyone that we want, like these things are absolute. Like the extensions are good. Extension payments are probably a little better. Also, quarterly payments are probably best. Anything you'd want to add there, Justin?
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Justin Shore
Yeah, no, it's a good point. Just to bring up the interest that you don't want to forget about that. That is also that they will charge interest on the penalties as well as the tax. So that can add up on you pretty quick. But yeah, it's kind of like, yeah, first round of defense, quarterly estimated payments. Best way to go, making sure we're avoiding that underpayment penalty, you could say, throughout the year. And then if, okay, we find out we're a little bit underpaid, that's where that extension payment comes in at that last line of defense to make sure that failure to Pay penalty post April 15 doesn't sneak up on us either.
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Nate Sosa
Yep, totally. And so another reminder, if you're getting a refund, right. So this is typically folks who maybe did a short, went for the short term rental strategy, did a cost irrigation study. Right. Assuming all of that goes according to plan, there's times it cannot go according to plan. You might be in a refund position and in that case, these items might not apply to you. However, probably good to at least double check or at least have had a conversation with someone to make sure that it's going to go well. Right. That's just a double check on that piece. Right. So overall, Justin laid that out very perfectly. First line on defense doing the estimated tax payments. Right. So we can't go back and fix that in 2025, but we can get that corrected going forward in 2026. Right. If you're a business owner, real estate owner, something of that nature. Also don't forget that extension payment. Let's get something in so at least can help abate part of that penalty. So I think it's a smart idea to do that. Assuming you had a payment from the last year. Right. Maybe you're always in a refund position because you're constantly buying real estate. Hey, maybe you don't need to worry about this. Justin, anything you'd like to finish off with about this today before we sign off?
- [22:18]
Justin Shore
Yeah, yeah. You know, kind of a quirky tidbit that you just made me think of too, is that a lot of our clients that will make that extension payment and then also be making in conjunction, basically at the Same time a first quarter of 2026 Estimated payment as well. Something that I think a lot of people, especially again, a lot of investors are thinking about, okay, you know, time value of money and all these types of things too, is that, well, I don't want to overpay too much because then if I am, I'm okay with filing in say, September or even October. But if I wind up in a refund position, that's, you know, dollars that I would rather get back like a little bit sooner. But the nice thing with that is that a lot of people may not realize is what you can do when you're filing your return, say that's in September, late. You can have that overpayment as a basically a checkbox type of situation. You can have that overpayment applied as a payment towards your 2026 liability. So it's basically saying like, hey, nope, go ahead and keep the refund. But I just want that to roll forward as one of my payments. And the really nice part with that is the way that that works effectively, like chronologically is then the IRS treats that as if it was a Q1 estimated payment for you on your 2026. So that can often work to your advantage. And we have all our clients that will actually, you know, that will say, hey, okay, I know my extension payment only needs to be X amount of dollars, but I'm actually going to increase it by more and then just yes, have that become a Q1 estimated payment for me when I roll that forward instead of taking the refund in September or something like that. So, yeah, definitely gives you more flexibility, I'd say.
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Nate Sosa
I totally agree, Justin. That's a great tip. And any tidbit, and anyone that has an S corporation or that runs W2 salaries, right, you can actually run that through your last payroll of the tax year. There are some issues that come with that. So just FYI, that's not a perfect strategy. But say you're caught right at the last minute and go, gosh, I haven't done any of my estimates. It is a way that you can help get all your estimates done all at once. So just FYI on that piece. But okay, Justin, last thing to say. Anything else you got before we sign off today?
- [24:18]
Justin Shore
No, I think we covered pretty much everything there.
- [24:21]
Nate Sosa
That's great. Justin. Thanks so much again for coming on the podcast. We always love you having a guest.
- [24:26]
Podcast Announcer
Thanks.
- [24:27]
Nate Sosa
Also at hall cpa, right now we are hiring for tax advisors and sales representatives. So if you want to work, if you're. If you're an accountant or CPA and you want to work with Justin, go check out our links. And then you go check out our links. We have postings all over on LinkedIn. Go check those out for tax advisors and sell reps. So everyone, thanks so much for coming on today. And this has been another episode of the Tax Smart REI Podcast.
- [24:50]
Podcast Announcer
The Tax Smart Real Estate Investors Podcast is for general information purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. Information on the podcast may not constitute the most up to date legal or other information. No reader, user or listener of this podcast should act or refrain from acting on the basis of the information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Use of and access to this podcast or any of the links or resources contained or mentioned within the podcast. Show or Show Notes do not create a relationship between the reader, user or listener of the podcast and the host, contributors or guests. Any mention of third party vendors, products or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging any vendor. For more information, reference the show notes or description of this episode.
- [25:37]
Podcast Producer
Thanks for listening to today's show. If you enjoyed the show, please find us on itunes and leave us a review. You can also email us@contactherealestatecpa.com with any feedback or topic suggestions. We are always taking on new clients and with the new tax laws in play, you really don't want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs to become a client. Navigate to our client page@therealestatecpa.com and fill out a web form with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.