Updated March 19, 2018
Filing your income tax can be one of the most arduous tasks that any small business owner can face. It’s easy to put it off because 1) it isn’t fun and 2) 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.”
The 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. However, 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 busy small business owners.
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.
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.
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. 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 $205 or 100 percent of the taxes owed. For more information on paying estimated taxes, check out what the IRS has to say.
While it is true that you will most likely be given the tax extension, as 97 percent of 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.
If you’d like to file for a tax extension, fill out Form 4868 for individuals or, for many types of corporations, fill out Form 7004. (In some cases, corporations can fill out Form 1138 and obtain an extension to pay, but this is uncommon.) You can also use a service like FileLater for a small fee. Then let this extra time get to work for you!
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.