Preparing your business's tax return takes time. For some, it may be hard to meet the federal filing date. The IRS has a mechanism in place to extend the deadline.
- The IRS has a relatively easy way to extend the amount of time you need to file your taxes.
- An IRS tax extension only deals with the filing part – payment is still due on April 15.
- There are very few reasons why the IRS would reject your application for an extension, as long as you correctly follow the process.
- This article is for any small business owner who wants to know more about the IRS' tax extension policy.
It's happened to all of us – we've known about a looming deadline, and despite our best attempts, we just couldn't meet it and need an extension. As a small business owner, one of those deadlines to keep in the back of your head is the federal deadline to file your taxes. Luckily, the IRS offers a tax extension to give you more time to prepare and file your tax return past the April 15 due date.
What is an IRS tax extension?
An IRS tax extension is a way for the federal taxation agency to give taxpayers more time to file their returns. While the federal Tax Day falls on April 15, unless it lands on a weekend or legal holiday, a tax extension pushes the due date back six months. Though that extension affords taxpayers more time to file their paperwork, Mark Puzdrak, a CPA and partner at Puzdrak CPA, said that doesn't provide a payment extension.
"The major misconception for extensions is that they are an extension of time to pay the tax," Puzdrak told Business News Daily. "This is not new. Every year we remind clients that there will be penalties if the full amount of tax due is not remitted by the due date."
In 2021, tax filing season begins on Feb. 12; this is the soonest the IRS begins accepting and processing income tax returns for the 2020 tax year. The tax filing deadline is once again April 15, but tax extensions can push that date back to July 15.
COVID-19 and IRS tax extensions
Due to the pandemic, the federal government pushed back its tax deadline from April to July last year. Those extensions were for 2019 tax returns, with approved extensions getting pushed back even further from July to October.
This year, the IRS is taking steps to speed its tax refund process by starting the process in February. Officials said they needed the additional time, approximately a month after the agency normally begins accepting returns, so it can program and test IRS systems for their ability to handle the tax law changes that went into effect on Dec. 27, 2020. Like last year, the tax extension for the 2020 tax year is Oct. 15.
Key takeaway: An IRS tax extension is a helpful tool for taxpayers that need more time, especially during the COVID-19 pandemic.
How do you file an IRS tax extension?
When filing for a tax extension, the process is largely automatic. Small business owners (and regular taxpayers alike) can fill out and remit an extension form to the IRS either online through a dedicated tax software program or by mail before the April 15 deadline. All taxpayers are eligible for such an extension if they need it, with no restrictions or limitations when doing so. As businesses are still working on opening up, reducing tax liability should be a focus in the short term.
"As long as the information submitted on the application is accurate, and the form is filed by the tax filing deadline, the IRS will grant the extension," said Mark Jaeger, director of tax development at TaxAct.
Once you're approved for an extension, your deadline for filing a tax return gets pushed back six months. For 2021, you can get an extension to October 15 to file your 2020 tax return.
Key takeaway: Filing an IRS tax return is a straightforward process. You can apply for an extension online, via tax software, or by completing the corresponding IRS form and mailing it to the IRS.
When should you file a tax extension?
Considerations for filing your tax extension need to be made before the April 15 filing deadline. Failing to do so could lead to problems with the IRS, as you will miss the deadline and be subject to a late filing penalty.
A rule of thumb for when you should file for an extension, according to Puzdrak, is just after you assess your tax situation.
"After your assessment, you should know if you need more information, if you have all the information and you don't have the funds to pay the tax, or if you are waiting to make a retirement contribution," he said. "If you owe tax and you are making a payment with the extension, I recommend waiting until April to make the payment."
There are a handful of common reasons for filing an extension. These include:
- More information is needed. Filing your taxes requires a lot of specific data, which may not be provided in time. One particular case is when one business needs a K-1 form from another, but they haven't received that form yet so they can finish completing and filing their return. The former business will need more time as it waits for the latter's tax information.
Unexpected delays. Family emergencies, national crises and other major roadblocks can hamper a taxpayer's ability to sit down to collect all relevant information and get to filling out paperwork. In this instance, the taxpayer in question could just extend the filing deadline to catch up.
Retirement contributions. If given an extension, businesses can have more time to make contributions to certain retirement plans, like an SEP and a 401(k). One area where this could happen, Puzdrak said, is in the case of a small business that operates seasonally. "If a bulk of their income doesn't come in until July, August, or September, that business may file an extension to extend the filing date and extend the date to make the retirement contributions," he said.
- Don't have the money. Though it's true that the tax extension does not provide a taxpayer with more time to pay their taxes, Puzdrak did mention that corporate and individual taxpayers can file an extension if they don't have the funds to pay the tax due. "It's not the best strategy, but it does happen," he said. "Taxpayers will have a penalty for not making the full payment at the time of the extension, but the amount is usually nominal in relation to the amount of tax due."
Key takeaway: Among the reasons you may need to file for an extension are that more information is needed before filing, outside circumstances like a family emergency are preventing you from meeting the deadline and more time is needed to make retirement plan contributions.
Can the IRS reject an extension?
As long as the correct form is filed on time and the information listed on it is accurate, there's very little reason for the IRS to deny an extension. Most extension requests are approved by the IRS, but errors tend to be the most common reason that they don't get approved, especially "if the form includes an incorrect Social Security number or the last name doesn't match what the IRS has one file," Jaeger said.
Pay particular attention to your business or personal information when filing the form. If addresses changed or some other major identifying piece of information is now different since the last time you corresponded with the IRS, agents may not be able to attach your request to your tax information. You can inform the IRS of major changes through a related tax form, like IRS Form 8822, for example.
Key takeaway: There's very little reason for the IRS to reject a tax extension application as long as the information you're providing is accurate.
Which tax extension form should you use?
For small businesses, including partnerships, multimember LLCs, corporations, S corporations, IRS Form 7004 is the form you will need.
The form also requires businesses to declare whether they are a foreign corporation that doesn't have a location in the United States, among other questions. Other important information includes whether the company is a corporation or partnership that falls under Regulations section 1.6081-5 and how much the total balance due is for that tax year's return.
If you are operating a business as a sole proprietor or single-member LLC, the form you would fill out for a tax extension is the same as the one that normal taxpayers file: IRS Form 4868. This is because in the eyes of the IRS, there's very little distinction between your business and your personal finances.
Key takeaway: There are two types of IRS tax extension forms that could apply to your specific situation. Be sure to use the right one when filing for an extension.