2015 taxes: All about filing an income tax extension

Late for that important date?

As you might remember from your childhood, in “Alice in Wonderland” the white rabbit was in a panic because he was “late for a very important date.” As the income tax filing deadline approaches each year, some business owners are also in a frenzy because they don’t quite have all their ducks in a row to file their taxes on time. Two words: tax extension.

If you’re running behind and won’t have all your information in order by the filing deadline, take a deep breath and relax a little. The IRS grants automatic deadline extensions (when properly requested), so you will have additional time to file your information and can more easily avoid penalties.

You can find information about extensions on the IRS website. To provide additional insight, I’ve tapped the expertise of Linda Dawson, CPA and owner of Dawson & Associates, for this post.

How much time will a tax extension give you?

If you’re a sole proprietor or single member LLC (disregarded entity), a tax extension will extend your filing deadline from April 15 to October 15 — a six-month extension. As Linda explains:

“These business owners would use Form 4868, the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return; it is used by individuals. Sole proprietorships and single member LLCs (disregarded entities) file Schedule C on the individual income tax return. So when the individual extends their tax return the Schedule C is extended along with it. This form is due by April 15.”

Corporations, S corporations, partnerships, and LLCs (those filing as partnerships) use Form 7004, the Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns. This form is due March 15 for corporations and S corporations and due April 15 for partnerships and LLCs that are filing as partnerships.

“Form 7004 extends the filing date six months for corporations and S corporations — from March 15 to September 15,” explains Linda. “It gives a five-month extension — from April 15 to September 15 — for partnerships and LLCs that are filing as partnerships.”

Note that the dates above apply to the 2015 tax year; some filing deadlines will change next year (for the 2016 tax year).

How soon should you request a tax extension?

Linda says her company files extensions for its clients who are corporations and S corporations from March 1 to March 15 and from April 1 to April 15 for clients who are individuals, partnerships, or LLCs that are filing as partnerships. She adds:

“You can file your extension as soon as you know you will not be filing your tax return by your due date. IIf using the United States Post Office to mail your extension, send it by certified mail. The government considers an extension filed on the mailing date, but you must have proof of mailing.”

If you get an extension on filing your taxes, do you have more time to pay any additional tax due?

You might not want to hear this, but even with an extension, you must pay your tax liability by the original due date. If you don’t, you will be hit with penalties and interest.

Even with an extension, you must pay your tax liability by the original due date.

 

This prompts the question, “If you haven’t done your paperwork, how do you know how much tax you might owe?”

“This can be complicated,” Linda shares. “We generally prepare a tax projection to determine a business owner’s tax liability. If a tax professional is not available, the business owner can compute the tax rate from the previous year and then apply it to the current year. That will give an approximation of his/her tax liability.”

What are the penalties if you don’t pay your tax liability in time?

Here’s a breakdown of how penalties and interest are applied for different types of business entities:

Individuals, Sole Proprietors, and Single Member LLCs (disregarded entities)

Those individuals and businesses using Form 4868 to file an extension pay interest of approximately 3 percent per year on all tax liabilities paid after the April 15 deadline. That interest is in addition to any penalties you may owe.

“If you request an extension of time to file by April 15 and you pay at least 90 percent of your actual tax liability by April 15, you will not have a failure-to-pay penalty if your tax return is filed and the remaining balance is paid by October 15,” explains Linda. “Note that you will still owe interest on any taxes you pay after the April 15 due date.”

The penalties you may owe will depend on how long you wait to file and pay your tax liability:

If you file and pay your tax for your individual tax return after April 15 but before October 15: A failure-to-pay penalty of one-half of 1 percent of the amount due for each month or part of a month from April 15 to the date that you file and pay will be due. The maximum penalty is 25 percent, plus interest.

If you file and pay your tax for your individual tax return after October 15 but before December 15 (60 days after the extended due date): There will be a failure-to-file penalty of 5 percent of the amount due for each month or part of the month after October 15 to the date that you file and pay. You will also be subject to the failure-to-pay penalty of one-half of 1 percent for the period from April 15 to October 15. The maximum penalty is 25 percent, plus interest.

If you file and pay your tax for your individual tax return after December 15 (60 days after the extended due date): The minimum penalty is 100 percent of the unpaid tax, plus interest.

Corporations

Those businesses using Form 7004 to file an extension pay interest of approximately 3 percent per year on all tax liabilities paid after the March 15 deadline. That interest is in addition to any penalties you might owe.

“As with individuals, sole proprietors and single member LLCs, corporations that request an extension by March 15 and pay at least 90 percent of their actual tax liability by March 15 will not be subject to a failure-to-pay penalty if their tax return is filed and the remaining balance is paid by September 15,” Linda says. “Remember, however, that interest is still applicable on any taxes paid after the March 15 due date.”

The penalties you may owe will depend on how long you wait to file and pay your tax liability:

If you file and pay your tax for your corporate tax return after March 15 but before September 15: You will be subject to a failure-to-pay penalty of one-half of 1 percent of the amount due for each month or part of a month from March 15 to the date that you file and pay. The maximum penalty is 25 percent, plus interest.

If you file and pay your tax for your corporate tax return after September 15 but before November 15 (60 days after the extended due date): There will be a failure-to-file penalty of 5 percent of the amount due for each month or part of the month after September 15 to the date that you file and pay. You will also be subject to a failure-to-pay penalty of one-half of 1 percent for the period from March 15 to September 15. The maximum penalty is 25 percent, plus interest.

If you file and pay your tax for your corporate tax return after November 15 (60 days after the extended due date): The minimum penalty is 100 percent of the unpaid tax, plus interest.

S Corporations, Partnerships and LLCs Filing as Partnerships

“S corporations, partnerships, and LLCs filing as partnerships are not subject to federal income tax. They are flow-through entities and the tax is paid at the individual level,” Linda says. “Note that there could, however, be state taxes due on these types of businesses.”

If you file your tax return after September 15, you’ll incur a penalty of $195 for each month or part of a month multiplied by the number of shareholders, partners or members that you have. The maximum penalty is 12 months.

How can you avoid issues when requesting a tax extension?

Make sure you have documented evidence that you’ve mailed your extension request form on or before the date it is due. If there’s any question about whether or not you’ve requested an extension, you’ll need to have proof that you submitted your form on time.

“And don’t underpay your tax liability,” recommends Linda. “If you overpay, you can apply it to the following year and minimize underpayment of estimated tax penalties — which is a whole other problem.”

If for some reason you cannot pay your tax liability, you should still file your tax return before the extended due date. “While you’ll still need to pay the late payment penalty, you’ll at least avoid the failure-to-file penalty, which is much higher than the failure-to-pay penalty,” Linda explains.

Where do you go from here?

If you’re running late and need to request a tax extension, visit the IRS website for details and forms. To ensure you’re meeting all requirements, consider consulting a tax/accounting professional for guidance.

The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Image by: rvr via Visualhunt / CC BY-SA