Filing income taxes can be an arduous task for busy small business owners. It’s tempting to put it off because it isn’t fun (unless you really love accounting) and it’s a lot of work. Wouldn’t it be nice if the IRS could give you a break? As it turns out, they do! Somewhat. The IRS offers something called a tax extension.
Individuals, S-corporations or C-corporations can request an extra six months to complete their filing.
The IRS tax extension gives individuals until October 15 (or the next business day), while corporations have until September 15 (or the next business day) to file their tax paperwork.
The tax extension is for the paperwork only! The IRS still requires you to pay the amount that you owe in income by the original deadline.
One of the benefits of having the tax extension is that you get more time to get your income tax paperwork together, which is great for entrepreneurs spinning lots of different plates.
Plus, if you had a hard time finding a CPA to work with and understand your business, now you have more time to find the right one. In addition, you’re often automatically granted a state extension when you apply for a federal tax extension. But don’t take that for granted; be sure to double-check to make sure you have an extension on both.
Related: 2021 tax calendar for small business owners
On the other hand, if your problem is financial disorganization or a bookkeeping phobia, a tax extension might only prolong the inevitable reckoning.
Instead, take some time to get your small business bookkeeping in order now.
It will help you determine how much you should pay the IRS in income tax, and will prevent you from facing yet another income tax deadline in six months.
Disclaimer: This content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
How to file for a tax extension
Here’s how to file for a tax extension:
- For individuals: Fill out Form 4868.
- For businesses and corporations: Fill out Form 7004 for automatic extension of time to file certain business income tax, information and other returns.
- For corporations expecting a net operating loss carryback, fill out Form 1138 for extension of time for payment of taxes.
For more specific information, visit the IRS site that outlines tax extension information.
Related: How to file taxes as a new online seller
What happens when you file for an income tax extension?
The question then becomes whether or not you should go ahead and pay the IRS or wait and accrue penalty fees. Let’s break it down:
Say you’re an individual or an S corporation and you’ve been granted a tax extension. You have time to estimate the taxes you owe, so you decide to go ahead and pay the IRS what you think you will owe them. In order do that, you will need to use the form 1040ES to work out your estimated tax, as all businesses are different.
Related: What’s the deal with quarterly estimated taxes?
As either an S corp or an individual, if you have been in business for awhile, you can also refer to last year’s form. Make note of all your income and deductions for this year’s form and see what the total tax was that you paid last year.
Aim to pay 100 percent to 110 percent of that number to avoid underpayment and the resulting penalties and interest.
If you, as an individual or S corporation, decide to take an extension and not pay at the first due date, be aware that the IRS charges 5 percent a month in penalties or up to 25 percent of the total tax. If your payment is more than 60 days late, you will be charged a minimum penalty of the less of $435 or 100 percent of the taxes owed.
While it is true that you will most likely be given the tax extension, as more than 97 percent f the requests are fulfilled, do not take it for granted that it will happen. Be sure to give yourself plenty of time to figure out what you owe.
