If you own a small business and have not filed taxes before, here is some…
Benefits and Downfalls of Filing for a Tax Extension
Were you aware that you can file a tax extension to request additional time to file your taxes? Many people don’t know that this is an option. Tax extensions are not just for people who are running late in filing their taxes. Filing an extension is easy and provides you up to six months to complete your taxes. There are several reasons why you might file for a tax extension:
- If you need more time to prepare your tax return
- If you don’t have all the information you need to prepare your taxes, such as a Schedule K-1 or Form 1099
- If you wait too long to do your taxes or bring them to a tax preparer too close to the tax deadline for them to complete your return on time
- If you are out of the country for an extended period
- If you have had a significant life event such as a death in the family
Asking for an extension can have many benefits, but is it best for your situation? That largely depends on your circumstances. At C.E. Thorn, CPA, PLLC, we are experienced in filing for tax extensions and can answer any of your questions. In this article, we cover the benefits and downfalls of filing for a tax extension.
Benefits of Filing for a Tax Extension
As with most things, there are both benefits and downfalls when you file a tax extension. Below are some of the benefits.
Allows Extra Time to Track Down Missing Forms and Receipts
You can’t have an accurate tax return if you are waiting for all the information you need for filing your taxes. Some things take a longer amount of time to be issued, such as K-1s. A Schedule K-1 is a federal tax document used to report the income, losses, and dividends for a business’s or financial entity’s partners or an S-Corporation’s shareholders. The K-1 form is also used to report income distributions from trusts and estates to beneficiaries.
If you are missing your W-2, contact your employer or log in to your payroll account to access your W-2. If the business is now closed or you can't locate your W-2 for whatever reason, contact the IRS for a substitute copy. As a last resort, use Form 4852, Substitute for Form W-2, Wage and Tax Statement, and estimate your wages and tax withheld. If you get a copy of the missing W-2 after you have filed, you can amend your tax return.
A tax extension will take care of the scramble and stress and allow you the time to thoroughly review your return.
Avoids Failure-to-File Penalties
When you file a tax extension, you avoid the penalties incurred when you fail to file on time. These penalties can add up to 25% of the tax due. However, if you file a tax extension and miss the extended deadline, you are subject to the penalty fee. Bear in mind that filing an extension when you owe taxes gives you more time to file, but payment is still due at the tax filing deadline.
Allows You to Take Advantage of Retroactive Changes to the Tax Law
The decision to file a tax extension allows you to take advantage of tax laws. If there are retroactive changes to the tax law made after the filing deadline, you are able to take advantage of those without the added time and expense of filing an amendment.
Easy to Request a Tax Extension
You can download and fill out Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return to request an extension. Then, you mail it to the IRS by the tax filing date, which is typically April 15th. This gives you until October 15 to file your tax return. The request for a tax extension must be filed before the current year's tax filing due date. If you are self-employed or filing small business taxes, you must make your first quarter estimated tax payment by April 15.
Downfalls of Filing for a Tax Extension
Some perceived cons, or downfalls, for filing for an extension are as follows:
More Time Can Be Good or Bad
Having more time to file your taxes can give you more time to worry about them. Pushing your tax return off until October gives you six more months to think about it. Simply put, if you don’t need more time, you don’t need to take it.
Delaying a Refund
If you are expecting a tax refund, filing for an extension will put the refund out for more than six months. If you need the money now, you should file as soon as possible.
Required to Pay Your Taxes Now
When you file a tax extension, you are still required to pay your taxes by the filing deadline. The extension applies to filing your tax return only. You still have to estimate the amount of tax you owe and pay that amount by the filing deadline. If you can’t pay the taxes you owe, pay what you can and then check out the various IRS payment options for the remainder.
Needing a Completed Tax Return for Other Things
If you are applying for a mortgage, another loan, or certain government benefits, you will need to submit a tax return. If delaying your tax return means you have to wait to apply for these, then it may be best to file your return by the filing deadline.
3 Ways to File a Tax Extension
As we stated earlier in this post, it is easy to file for a tax extension. There are several ways to do so:
Submit Form 4868 to the IRS either electronically or via mail by the April tax filing deadline. If you are using tax software, most support Form 4868 for tax extensions. Simply follow the program’s instructions to see how to file a tax extension electronically. You will receive an electronic acknowledgment from the IRS.
- Tax Preparer
Your tax preparer can file for your extension. While there is usually a fee associated with this, you can let your accountant do the majority of the work for you.
- E-File Your Extension Form
Use IRS Free File to electronically request an automatic tax-filing extension. This form gives you until October 15 to file your tax return. If you choose to file an extension yourself, be sure to avoid common tax mistakes.
Is It Bad to File a Tax Extension?
It is not “bad” to file an extension on taxes. Filing for an extension on your taxes does not have negative consequences or signal any red flags with the IRS. It is a widely used method. Just note the importance of paying your estimated tax by the filing deadline; otherwise, you will incur penalties and interest on the tax that is due. Your taxes don’t affect your credit scores in any way. However, taking out a loan or credit card to pay your taxes can impact your credit scores. And, missing your tax payments could hurt your creditworthiness.
Deadline to File an Extension
The deadline to file for a tax extension is the same as the tax filing deadline, April 15.
Contact C.E. Thorn, CPA, PLLC for Small Business Tax Preparation
If you’re a small business owner in the Raleigh area who needs to file a tax extension, contact C.E. Thorn, CPA, PLLC at 919-420-0092 or fill out the form below to see how we can help. We have been preparing small business taxes for business owners in Raleigh and beyond for over 30 years.
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