As we get closer to the tax deadline, you might be wondering if filing an extension on your business taxes is the way to go.
The truth is, it depends.
After all, there are pros and cons to filing a tax extension.
The main draw of an extension is that it gives you six more months of breathing room. And the best part? It’s free! There’s no cost to filing, and the process is relatively simple.
All you have to do is fill out Form 4868 (for single-member LLCs and sole proprietors) or Form 7004 (for partnerships, multi-member LLCs, C-Corporations and S-Corporations). Then, mail the form to the IRS or file electronically.
Just make sure you get the extension filed in time. The deadline for sole proprietors, LLCs, and C-Corporations is normally April 15. This year, however, the IRS extended the individual tax deadline to May 17. So if you file with Form 1040, you're off the hook until then!
Meanwhile, the deadline is March 15 for partnerships and S-Corporations.
Now that you know how to file an extension, it’s time to dig deeper into the question we asked earlier: Is it worth it?
Advantages to Filing a Tax Extension
The biggest bonus, as we mentioned earlier, is the six extra months you can take to file your tax return. This gives you more time to gather together all the documents you need as well as look over your return more carefully to make sure there are no mistakes.
Getting an extension can also help you avoid a failure-to-file fee if you already know you’ll turn in your tax return late. The penalty for a late tax return is usually 5% of the taxes you owe for every month your return is late. That penalty continues to increase each month until it hits 25%.
Needing to file late isn’t always because you lost track of time or simply forgot your tax responsibilities. Sometimes there are situations beyond your control.
One of those includes traveling out of town during tax season. Some business owners have to travel a lot to keep their company afloat—even for months at a time. If you know you’ll be out of pocket the entire tax season, consider filing an extension.
The last benefit to filing a tax extension is that it gives you extra time to fund your retirement plans if you’re self-employed. If you have a Simplified Employee Pension IRA (SEP-IRA), you can deposit funds into your account right up until the exact filing due date. You can save quite a bit more with those six extra months!
Disadvantages to Filing an Extension
There’s one important thing you should understanding about filing a tax extension. An extension gives you extra time to file your return. It does not give you extra time to pay the taxes you owe. (The only exception is if you’ve already paid 90% of the taxes you owe. See the IRS’ explanation for more details.)
Ultimately, not having the money to pay your taxes is not a good reason to file for an extension. Failure to pay your taxes on time can result in a penalty of 0.5% of the taxes you owe. That number starts accruing the day after the filing due date.
The second disadvantage of an extension is that you don’t get the satisfaction of getting your tax return filed and done. Don’t underestimate the peace of mind that comes with ticking your return off your to-do list.
The final, and probably most important, disadvantage is that you delay your refund. If you’re expecting money back from the government, you won’t get it until you file your taxes.
What other pros and cons can you think of to filing for an extension on your taxes? Let us know in the comments below!