It’s that time of year again…tax season. For many small business owners, taxes top the list of business-related concerns. In fact, the National Federation Of Independent Business (“NFIB”) Small Business Economic Trends survey, released earlier this year, revealed that 20% of businesses cite taxes as their biggest problem.
With April 15th fast approaching, more and more small business owners are tossing around the idea of filing for a much-needed tax extension. While filing for an extension might seem like the way to go during the hustle and bustle of tax season, there are a few things small business owners should consider before deciding to file for a six-month extension:
Extra time to file doesn’t mean extra time to pay.
An extension will change the tax filing deadline from April 15 to October 15, but you still have to pay the tax you owe by the April 15th deadline.
If you don’t, you’ll have to pay interest on the unpaid amount plus an extra 0.5% in penalties for every month you’re late. However, the penalties for not filing on time are much higher than the penalties for not paying on time; 5% for each month or part of a month you’re late, up to 25%.
That being the case, if you need extra time to finish up your tax return, don’t hesitate to file for an extension. In an effort to avoid needing to file an extension, implement a payroll system you can rely on to automate tax filings and maintain compliance in accordance with ever-changing state and federal regulations.
You can’t be sure exactly how much you owe without first completing your tax return.
And, while filing for an extension gives you an additional six months to finish your tax return, you still have to pay the amount owed by April 15th; meaning you’ll have to do some heavy estimating.
If you miscalculate the amount of tax owed, you’ll have to pay the necessary penalties and fees. If you paid less than 90% of the tax you owed, you’ll end up owing a penalty of 0.5% of the unpaid amount every month until you pay the balance.
To avoid unnecessary penalties, the IRS has a Form 1040-ES that includes a worksheet you can use to calculate your estimated tax payments but given the complexities of the tax law and ever-changing rules, it is best to seek a professional tax advisor to ensure the accurate calculation of taxes owed.
It will make acquiring a new loan difficult.
If you think you might need a loan sometime in the near future, you might want to think twice before filing for an extension. For starters, a recently filed tax return is usually a required financial document when seeking a loan or other forms of credit from a bank.
Banks use recent tax returns to gauge compliance. While filing for a tax extension doesn’t necessarily raise any red flags, not having your tax return in hand does little for your cause.
Your potential refund will take longer.
As a small business or startup, you might be due a tax refund from the IRS; that is once you file your taxes. Filing for a tax extension also means having to wait awhile longer to claim your tax refund. If you wait to file your taxes until October, you won’t see that money until the fall.
Extending the filing of your tax return extends the period of time that the IRS can select your tax return for audit.
Generally the IRS has up to three years after the filing deadline of your tax return to select it for examination or audit. So if you timely file your 2014 tax return by April 15, 2015, the IRS will have until April 15, 2018 to audit your 2014 tax return. However, if you file an extension of your 2014 tax return, the IRS will now have until October 15, 2018 to audit your 2014 tax return.
Filing an extension where your prior years’ tax returns are currently under examination.
Since the IRS has a three-year window to audit tax returns, if your 2012 or 2013 tax returns are currently under examination, it is probably a good idea to file an extension for 2014. This way, the scope of the audit is not expanded to the 2014 tax year as you now would have until October 15, 2015 to file your 2014 tax return. The IRS cannot force you to file a tax return before its filing deadline so if your audit is completed before October 15th, you may delay or even avoid 2014 being examined by IRS.
Filing an extension where you are currently on a payment plan with the IRS.
A condition of any payment plan established with the IRS for your back tax liabilities is that you do not create any new liabilities. If you expect to owe for 2014 and you file your tax return no later April 15th with an unpaid balance, the IRS computers will automatically default your payment plan putting you back to square one. But if you file an extension for 2014, you could possible delay this action by IRS for at least another six months which may be enough time for you to put away extra funds so that when you file 2014 you can include full payment of the balance due and avoid default.
If seeking a payment plan or Offer In Compromise for your back taxes, don’t file an extension and file no later than April 15th.
Where you owe back taxes to the IRS, it’s usually a good idea to include all tax years in your proposal which could be a payment plan or Offer In Compromise. Only existing liabilities from filed tax returns may be wrapped into any proposal. A liability from a 2014 tax return that has yet to be filed will not be included in your proposal and when it now comes time to file, you will need to include full payment. Otherwise, you now defaulted what was previously set up.
And if you have foreign bank accounts ….
Filing for an extension on your income tax return does not extend the June 30th deadline to file your Report Of Foreign Bank Accounts (“FBAR”) using FinCEN Form 114 with the U.S. Department Of Treasury.