For many businesses, the tax filing deadlines are a source of intense stress. Of course, no one wants to leave their tax filings until the last minute and risk penalties. But sometimes, that dreaded due date might arrive before you’re ready for it.
Luckily, with a tax extension, the IRS will give you an extra six months to file your business return.
In this blog, we’ll guide you through the extension process. We’ll cover everything from applying to getting your taxes in order, so that you don’t need extensions in the future.
Understanding Tax Extensions
As the name suggests, tax extensions give six months longer to file a business tax return. But remember that it doesn’t give you more time to pay your taxes. You’ll still need to pay what you owe by your original tax deadline. Not doing this can lead to fines and penalties with interest.
There are different types of extensions available. These include:
- Federal extensions. Here, the IRS gives you more time to file your federal tax return.
- State tax extensions. Many states impose business taxes, and some may allow you to apply for extensions.
- Local exemptions. Some counties or cities also impose business taxes, and grant extensions.
Note that state and local tax extension procedures can vary. This article focuses on federal extensions. If you need assistance with extensions for your local or state returns,reach out to one of our expert CPAs.
Federal tax extensions
Under certain circumstances, your business may qualify for an automatic federal tax extension. For example, if it is located in a federally declared disaster area, or if you’re a US citizen living abroad.
You can apply for a federal tax extension electronically, through IRS Free File, by mail, or through a tax professional.
If you have a sole proprietorship or SMLLC, you’ll need to complete Form 4868. Partnerships, C Corps, and S Corps must use Form 7004 to request an extension.
When are Extensions Applicable?
There are a number of reasons your business may need to file an extension. For instance, you may have changed accounting staff or have incomplete records. Alternatively, you might be waiting for supporting documents from third parties, or there may have been an emergency in your office.
No matter why, it’s possible to request an extension as long as you meet the qualifying criteria. These include:
- Having a qualifying business type. Your business must be required to file a federal tax return. C and S Corps, Partnerships and SMLLCs can all request extensions using the forms mentioned above. Sole Proprietors requesting an extension will also need to follow the extension process for their individual tax returns.
- Applying on time. If your business needs a tax extension, it’s important to request one before the original due date of your return. These deadlines depend on your business entity type.
- Paying your estimated taxes. As mentioned above, a tax extension doesn’t give you more time to pay the IRS. You still need to pay your taxes due.
Deadline for extension requests
Tax extensions must be filed before your business tax return’s due date.
- Partnerships, S corporations, and LLCs taxed as partnerships need to submit returns or extension requests by March 15.
- Sole proprietorships, C corporations, and LLCs taxed as C corporations must do so by April 15.
However, if your business has elected a tax year-end other than December 31st, your return due date will differ from these general rules.
If you miss the above deadlines, and haven’t filed for a tax extension in time, it’s vital to file your return as soon as possible. You will be subject to late filing fees with interest. So, the sooner you file, the better.
How to File a Tax Extension
The most important step in filing an extension is to ensure you’re using the correct form. Any errors or mistakes might lead to your request being rejected.
Form 4868
This form is used by sole proprietors who have completed Schedule C on their individual tax returns (Form 1040).
To begin with, you must calculate your tax liability, including withholding and estimated taxes. Then you’ll need to complete the form, listing relevant information like your name, address, Social Security Number (SSN), as well as your calculated tax liability and the amount of payments you’ve already made.
Once the form is complete, you can submit it electronically, or by mail, before your original tax return due date. If you owe additional tax, you should pay it when you submit your form. If you can’t pay the entire amount, pay as much as possible to lower any penalties or interest.
Form 7004
Corporations, partnerships, SMLLCs, and certain trusts and estates must complete this form. It grants an automatic extension for six months, provided that you’ve completed the form correctly.
Like Form 4868, start by calculating your tax liability. Then complete Part I, by entering your business name, tax identification number, address, and the applicable form code for your tax return.
Then you can fill in Part II:
- Complete line 2 if you have a foreign corporation
- Complete line 3 if your business is a parent company for a consolidated tax return.
- The box on line 4 should be checked if your business qualifies for an extended deadline (like partnerships and corporations keeping their books and records abroad).
- Line 5 is where you indicate the tax year for which you’re requesting an extension.
- Your estimated tax liability, payments made, and credits you intend to take should be noted on lines 6 to 8.
The request can be submitted electronically or by mail, along with your payment.
Alternatively, you can have a tax professional assist you with these forms, to ensure that they’re submitted accurately, and on time.
Consequences of Failing to File or Late Filing
Not submitting your return or doing it late can cost you – literally. The IRS penalty for not filing on time is five percent of the tax you owe, up to a maximum of 25%. This is calculated based on how late you file your tax return, and the amount of unpaid tax as of the original payment due date.
If you haven’t paid your taxes on time, your business will also be subject to failure to pay penalties. These amount to 0.5% of the unpaid taxes for each month the tax is unpaid, until a maximum of 25% of your unpaid taxes.
Note that these penalties and fines are also all subject to hefty interest. Depending on how long your return is overdue, or the amount of time you’ve not paid taxes, there’s also the risk of legal actions against your business. This can seriously affect your reputation, and your bottom line.
Late filing also means your business could miss out on potential tax breaks like credits and deductions. What’s more, they can affect your future filings and even increase the chances of being audited.
However, if you can prove to the IRS that there is reasonable cause for a late return or your payment, they may waive the penalties. Similarly, if your business has never had compliance issues and it’s a first-time offense, you may be eligible for a one-time abatement of penalties.
Tips for Filing Tax Extensions
With an effective tax strategy in place, you shouldn’t need to file for tax extensions. However, in the unfortunate event that this is unavoidable, here’s how to make the process as easy as possible.
Make sure everything is completely accurate
From your calculations of estimated taxes, to filling in the right forms and submitting them, ensure that there are no mistakes or discrepancies anywhere in your documentation. In fact, consider double- or triple-checking everything before you submit. This not only speeds up any communication with the IRS, but can prevent your request from potentially being rejected.
Plan ahead
With proactive preparation, you can eliminate the risk of late filings. Start your tax planning as early as possible, to give yourself enough time to complete the right documentation, gather the right evidence, and make the most of potential tax breaks and savings.
Don’t be afraid to ask for help
Taxes are daunting. But with assistance from a tax pro or CPA, they don’t have to be. From helping you keep track of your records, to avoiding common tax mistakes, experts like Fusion CPA can do the heavy lifting for you, so that you can focus on your core business.
When we handle your taxes, we don’t just want to make the process stress-free. We also want to save you money.
So if you’d like to see how we can create a tax strategy to align with your business goals, schedule a Discovery Call with one of our CPAs.
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.