A new year brings exciting changes and resolutions in your personal and professional life, which can make for an overwhelming first quarter. With the six-month tax extension, you can take on new initiatives without letting existing responsibilities slip out of your control.
“Sometimes it's not feasible for a business to get their books closed and all tax matters completed by the original deadlines. Extensions are a regular and often necessary part of filing taxes because they allow business owners additional time to gather and organize their tax return information, and ensure that there is adequate time for tax return preparation.”
- The inDinero Tax Team
Both individuals and businesses can take advantage of the extension, which means business owners are in a unique position to extend both (or either) of their returns.
Ultimately, experts in tax and in business don’t have a definitive stance on whether or not to take the extension (aside from the ever-true adage, “do what is best for you and your business”). That said, filing a tax extension isn’t admitting defeat. If you’re a first time, a second time, or even a fifteenth time business owner, and this is your first time thinking about filing a tax extension, here are a few things to consider.
A compelling case for filing the extension: Avoiding the late filing penalty
Of the three most common—and most avoidable—tax penalties (late payment, interest on taxes owed, and late filing), the late filing penalty can be the most damaging.
The late filing penalty typically amounts to 5% of the unpaid taxes for each month or partial month that a tax return is past due. These fees start growing the day after the filing due date, and while this certainly adds up, it will never exceed 25% of your unpaid tax liability.
But that penalty is all the more preventable with the extension, and even easier to avoid than the other two tax penalties. With the extension, you’ll have six extra months to work with your CPA or tax filing expert and make sure your books are in the best shape possible to claim tax deductions and credits for your qualifying expenses and activities.
But do not neglect to pay your taxes on time—the filing extension does not extend the tax payment due date:
Although it seems like it should, the extension only extends the due date for filing your tax return, not for paying your business’s tax liability. For pre-profit businesses, this is almost a non-issue—no income usually means you won’t owe any tax liability.
For businesses who are turning a profit but want to utilize the extension, you need to estimate your tax liability and make a payment by the original due date. This is more or less to show the IRS you’re good for it—even if you underestimate, you should be able to minimize or avoid pricey penalties.
Get started with the business tax extension with this beginner’s guide blog post:
How will the business extension affect my personal tax return?
As a business owner, the biggest downside to filing a tax extension is that in almost every case it means you must also file a personal tax extension. This rings especially true for flow-through or pass-through entities, such as sole proprietors and single-member LLCs, where the tax responsibilities “flow through” to the individual partners.
Partners and owners at partnerships, multi-member LLCs, and Corporations all file taxes as individuals separate from their business entities. However, they’ll need information from the business’s return in order to file.
A primary example of this symbiotic relationship is the Schedule K-1 (aka Form 1065). If your business is an LLC, partnership, or an S Corp, you must issue K-1 forms every year to your partners or shareholders. This essentially acts as a W-2 to communicate earnings and income that those individuals will claim on their personal tax returns.
When those businesses file a tax extension, that means the partners and shareholders behind the organizations are left missing part of their information. They’ll need to file the personal extension on their own so that they can include the income or losses from that business venture on their tax return.
This shouldn’t be a deal breaker if you’re deciding whether to extend your business’s tax timeline, but it is important to communicate that decision to stakeholders and explain how it affects them.
What to do I even need to do before I file small business taxes anyway?
Depending on the complexity of your business, filing taxes can be simple and straightforward, but most of the time they are more of a headache. At the most basic, highest level, there are a few overarching responsibilities a small business owner must take care of before filing taxes:
Close your books:
- Make sure your business bank accounts, financial reporting systems, and general ledger are up to date for the entire year.
- Prepare your income statement (aka profit and loss, or P&L).
- Build your balance sheet for the year—at the end of the year, both sides should be in balance.
- Gather all necessary transaction documentation—loose receipts, records, invoices, etc.
Compile your business’s essential information:
- Assemble all entity & incorporation details.
- Be ready to share your stock/ownership information
- Pull together your payroll or 1099 information—especially if you’re an employer
- Foreign transactions
Talk to a CPA:
- Have an expert take a look at your P&L for deductible expenses.
- Identify your filing responsibilities based on your entity type, business model, location, etc.
- Find the forms you’ll need to file.
- Prepare and file your return.
Want a more comprehensive list for getting your books in order for tax season?
Let’s get diagnostic:
Are you going to have enough time to complete these tasks to prepare and file your tax return before your original due date?
If your answer is yes—it’s up to you. If you’d prefer to have more time, file the extension, otherwise file and pay your taxes and move on with the rest of your year.
If your answer is no—file the extension, without hesitation.
If your answer if maybe—file the extension. Remember, there’s no penalty for electing the 6-month extension and filing on time. That would be pretty silly.
If you have any doubt that you’ll be able to prepare and file your taxes on time, the extension is the perfect option. Save yourself the stress of scurrying and, instead, build a plan for how to spend your extra six months—not procrastinating!