September 15 marks the tax extension deadline for businesses. By filing for an extension, you can buy yourself some time to review and prepare the necessary paperwork. But it's important to remember that you're still required to pay the taxes you owe by the original deadline. If you don't, you may face significant penalties.
In fact, if you do get an extension and fail to meet the extension deadline, "the IRS can sock you with a late-filing penalty of 5% of the amount due for every month or partial month your return is late," according to NerdWallet.
Why Businesses File for an Extension
According to Tom Landers, a certified public accountant (CPA) with the Bonadio Group, there are numerous reasons why businesses opt to file an extension on their taxes:
- Tax time can fall during a hectic period, when owners may feel it's more important to focus on sales and operations than to attend to tax filing.
- Businesses may be waiting to receive a K-1 form from other entities in which the business is part owner.
- Businesses with a qualified retirement plan can use the extended time to further fund their retirement contributions.
- If a business experiences an operating loss in the current year, it can either carry this loss backward or forward; waiting until the September 15 deadline enables the business to make a more informed decision.
Benefits and Risks
A tax extension offers you additional advantages beyond giving you more time to prepare your return. For one thing, you'll likely have a better chance of finding the right CPA for your business after the chaos of April 15 (which is the busiest time of year for tax accountants). The extra time may enable you to uncover additional deductions or credits. And, in many cases, being granted a federal tax extension also entitles you to a state tax extension. Be sure to check with a CPA to see whether this scenario applies to your business.
But there are risks, too. If your business is going through bank financing or bonding, you need a completed tax return for the paperwork, and a tax extension can delay the process of obtaining the necessary capital. If simple procrastination is the reason behind your request for a tax extension in the first place, you'd be wise not to procrastinate any longer to make sure you meet the new September 15 deadline.
Enlist the Services of a CPA
Requesting a tax extension deadline by completing IRS extension Form 7004 is fairly simple and painless. But unless you're an expert in this area, it's a good idea to enlist the services of a CPA. This individual can advise you on how to compile the right materials and how to stay on schedule with specific deadlines.
"As long as you do a competent job of estimating your taxes, there's no real problem associated with filing for an extension," Landers notes. "Depending on the size of your business, this may be a cost-effective alternative to trying to get a bank loan to cover your taxes."
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