Tax day looms large for many. Even though we know it comes on the same date every single year, it can still be difficult to pull all the necessary paperwork together for a multitude of reasons. Fortunately, there is always the option to file a tax extension. This gives you an additional five or six months to complete your tax paperwork. Before you choose to file an extension, it’s helpful to understand the pros and cons of such a decision.
For some business owners, it’s difficult to get your business tax return complete before your April 15 personal tax deadline. Here’s an example: Mutual funds send out their distributions reports to shareholders on form 1099-DIV, which doesn’t have to be postmarked until January 31. A complete 1099 earnings report can’t be accurately prepared without this mutual fund earnings report. Factor in any type of amendment, and you aren’t getting the nuts and bolts needed for a personal tax return until mid-March. That late in the game it may be difficult to find a tax preparer who has space on his or her calendar to meet your need.
If you’re feeling rushed, it can be easy to miss details or make math errors.
When you file on April 15, any tax law currently in place must be adhered to. If you file for a tax extension, any changes to tax law or tax code between April 15 and your actual filing date will be applied. Occasionally, this postponement can be to your benefit.
A tax extension could potentially save you thousands of dollars on your personal taxes. This also gives you additional time to gather documents and manage cash flow if you would like to contribute to your SEP IRA through your tax extension deadline.
Filing a tax extension is a simple process, but you must file this extension with the IRS on or before your due date. When you choose to file a tax extension, it’s important to note that you still pay your taxes on the initial due date, not when you file your paperwork. A tax extension simply gives you up to six months to complete your paperwork. According to the IRS, a good rule to follow is to pay 90% of your total expected tax for the year or 100% of the total tax shown on last year’s return, whichever is the lower amount. Any amount not paid on the due date will be charged a monthly penalty. (Over the course of the 5 or 6-month extension [extension lengths vary depending on your business type], interest can add a significant penalty.)
• Personal Taxes. For personal taxes, use Form 4868. This form must be filed by April 15. (If you live outside the U.S. or your place of business is outside the U.S., you have until June 15 to file your extension.) You will have until October 15 to file your tax return.
• S Corps. Taxes are generally due by March 15. Your extension due date is September 15. Use Form 7004.
• Corporations. Taxes are generally due by April 15. Your extension gives you 5 months, making your due date October 15. Use Form 7004.
• Partnerships, or Multiple-Member Limited Liability Companies filings as partnerships. Taxes are typically due March 15. The tax extension gives you 6 months, making your new due date September 15. Use Form 7004.
• Sole Proprietorships and Single-member LLCs filing on Form 1040. Use Form 4868. (This is the same form used for personal taxes but includes information from your Schedule C-Sole Proprietorship income.)
Let us know if you need help navigating your tax extension. There are many benefits, but they vary depending on your goals and your specific tax situation. We’d love to talk, and it’s easier for everyone when we are able to make decisions before it’s crunch time.