Tax Day, April 15, comes quickly every year. Even with diligent preparation, some businesses and individuals need more time before filing their formal returns.
Just like with individual tax returns, small and medium-size businesses, as well as larger corporations, can request an extension instead of filing before the April 15 deadline. While filing an extension won't grant extra time to pay what you owe, it creates additional flexibility so you can finalize all the details for your tax return.
Whether you are a sole proprietor, part of a small to midsize business or a larger corporation, thinking through tax implications early and understanding the parameters about filing are critical to avoiding penalties or underpaying your tax obligation.
What is a tax extension?
According to Daniel Glassman, a tax attorney with the Florida-based Gunster law firm, tax extensions grant you extra time to file your return. However, your tax payment is still due by April 15. Because tax returns that have been granted an extension won't be complete, he added, those who file for an extension must estimate what their tax payment will be and pay that amount instead.
"You should have some idea of what your overall income and expenses were, and you are required to estimate what your tax liability is," Glassman said. "If you either don't make that kind of good-faith estimate or are very far off, you could be subject to a penalty for failing to pay."
Glassman noted that a tax extension is not an opportunity to delay payment to the government, but rather, it's a way to give people more time to get their paperwork in order.
"A lot of times, businesses don't always have the ability to get all of their accounting done and all of the information into a format where the return can be filed," he said. "The law allows you to file for an extension."
There are specific deadlines that vary for business types. For an S corporation, the return or extension is due by the 15th day of the third month after the end of the tax year. For a C corporation, the extension is due by the 15th day of the fourth month after the end of the tax year.
Glassman said that if the extension request is granted – and nearly all of them are – individuals are given an extra six months, until Oct. 15, and partnerships have an additional five months, until Sept. 15, to file a tax return.
"You will likely get a response from the IRS, so if you don't get that response in three to four weeks, then you might want to follow up," Glassman said. "But if you have proof that you mailed the extension request timely, then you ultimately should receive the extension."
Those who overestimate their extension payment can either get that amount refunded or apply it to the next year's tax bill, Glassman said. The right choice will depend on the needs of the organization.
When filing for an extension, it's critical to have the proper paperwork submitted to the IRS before the April 15 deadline. Those who don't file for the extension, and don't file and pay their taxes on time face late filing penalties, Glassman said. Two penalties may apply, according to the IRS. One penalty for filing late and another for paying late.
According to the IRS, the penalty for filing late is usually 5% of the unpaid taxes for each month or part of a month that a return is late, up to 25%. In addition, those who don't pay their taxes on time face a penalty of 0.5% of their unpaid taxes for each month after the due date, also up to 25%.
S corporations and partnerships, which aren't taxed by the federal government because their shareholders pay individual income taxes on profits they receive, are penalized $195 per partner or shareholder per month, for up to 12 months, for not filing on time.
Glassman advised those who know they will need some more time not to wait to request an extension. You can file for an extension for personal income taxes with IRS Form 4868.
"It is a relatively simple process, but it is important that you follow the proper procedure," Glassman said. "There is no real remedy if you don't do it properly."
Filing a business tax extension
The IRS posts the proper forms for filing an extension on its site, along with instructions and specifics about the regulations. IRS form 4868 can also be used by sole proprietorships that file a Schedule C with a personal return and single member limited liability companies (LLCs).
Corporations, LLCs and more expansive businesses use IRS form 7004. As with an individual return, submitting this form is an automatic request for a six-month extension to file your business's income taxes.
Federal tax extension forms can be submitted electronically. The IRS offers details on its site with online fillable forms, as well as details for authorized IRS e-file providers. Many bookkeeping platforms integrate filing taxes into their platforms – explore this option with your preferred tax filing or bookkeeping service.
Filing an official extension is not a way to avoid paying the taxes you owe. The expectation is to pay the anticipated amount of tax owed. The extension is for the sole purpose of providing the flexibility to file the remaining paperwork within the six-month extension.
There is no process for filing an additional extension beyond the one you're granted through October 15. A return can still be completed after this date, just expect to pay additional penalties. However, it's a case where it's definitely better late than never as to avoid additional penalties by further delaying the filing of a return. The IRS notes that a failure-to-file penalty is generally more than the failure-to-pay penalty.
Preparing for the tax season
There are a number of ways to prepare for the upcoming tax season. The IRS offers a paycheck checkup tool to help you ensure the right amount is being withheld from each paycheck. Additionally, a tax withholding estimator compares one's tax estimate to the current withholding. These resources should be in addition to any internal analysis that your accountant (or accounting team) is doing as part of their assessment of expenses.
Nonetheless, knowing the rules about extensions can help you or your business team make the right decision when it comes to filing before the deadline or stretching it out for six months.
Working closely with your tax preparer, you can decide if filing an extension is the right choice for your business. Businesses should be cognizant of any changes to expenses or other nuances in the tax regulations.
If more time would be helpful, there's no real drawback to taking advantage of the extension the IRS offers.