As we enter the new year, tax season is upon us. This means many small business owners like yourself may be feeling the pressure to ensure the books are organized for taxes. You might even start to feel the overwhelm and you’ve already decided filing an extension is the right move for you.
But is it really? How do you know if filing an extension is the right move?
While the April deadline might seem far away, filing for an extension can offer several advantages for certain small businesses. Let’s explore whether filing an extension is suitable for you:
1. Complexity of Tax Situation
2. Gathering Necessary Documentation
3. Avoiding Mistakes
4. Strategic Tax Planning
5. Reducing Stress
1. Complexity of Your Tax Situation
If your company’s financial situation or tax preparation is more complex, filing an extension could provide much-needed time to ensure everything is accurate and advantageous. Let’s explore whether this option might be suitable for your business by diving into some of the key benefits:
For small business owners with intricate tax situations—such as those with multiple revenue streams, partnerships, or multiple deductions—rushing to file by April can lead to costly errors. Extensions give businesses more time to sort through complicated scenarios, such as changes in tax laws, new deductions, or investment considerations.
- Multiple Revenue Streams: If your business earns income from different sources—whether through freelance gigs, product sales, or partnerships—sorting out taxable income can be time-consuming.
- Tax Law Changes: Changes in tax laws can affect everything from deductions to depreciation schedules. By filing for an extension, you can ensure you have the most current information when filing.
- Consulting with Tax Professionals: Complex situations often require professional assistance, and getting an appointment with a busy accountant before the April deadline may be tough. An extension allows for thorough consultation with tax experts.
Filing an extension provides the breathing room to analyze these complexities, ensuring that you maximize deductions and avoid errors that could lead to an audit or penalties.
2. Gathering Necessary Documentation
Running a small business means managing a variety of receipts, invoices, and documents that prove your deductions and income. Whether you’re claiming deductions for vehicle expenses, home office use, or charitable donations, the paperwork can pile up. Gathering all necessary documents for filing can take time—particularly if you need to request copies of missing records or receipts.
- Invoices and Receipts: Accurate documentation of expenses is key to maximizing deductions. An extension allows time to collect and organize this paperwork thoroughly.
- Employee Payroll Records: For businesses with employees, payroll records, tax withholdings, and benefits must be accurately calculated and reported.
- Business Equipment and Depreciation: If your business has invested in equipment, an extension gives you more time to calculate depreciation and claim eligible deductions.
Rather than rushing through the documentation process, taking additional time can help ensure that nothing is missed and all records are fully accurate, potentially saving you significant amounts on your taxes.
3. Avoiding Mistakes
Mistakes on your tax return—such as underreporting income, claiming incorrect deductions, or neglecting new tax credits—can lead to penalties, audits, or lost tax savings. Filing for an extension gives you extra time to double-check calculations, verify information, and avoid common errors that could cause problems down the road.
- Data Entry Errors: Simple errors, such as mistyped figures, can lead to larger discrepancies. Slowing down the process with an extension can help catch mistakes before they become an issue.
- Correct Deduction Claims: Certain deductions, such as those for business travel, home offices, or equipment depreciation, require detailed reporting. An extension allows time for careful calculation to ensure compliance with IRS rules.
- Avoiding Audit Red Flags: Inaccuracies in tax filings can increase the likelihood of an IRS audit. An extension gives your accountant or tax preparer time to ensure everything is properly documented and reported to minimize risk.
The extra time gained from an extension allows you to file a more accurate and complete return, potentially reducing your audit risk and preventing errors that could lead to IRS scrutiny.
4. Strategic Tax Planning
Filing for an extension isn’t just about buying time—it can also provide a strategic advantage when it comes to tax planning. By extending your filing deadline, you can take time to make informed decisions that might impact your tax liability, such as contributing to a retirement plan or adjusting income reporting.
- Contributing to Retirement Plans: Filing an extension allows you to maximize contributions to your SEP IRA or Solo 401(k), which can significantly reduce your taxable income. You have until the extended deadline to make these contributions.
- Income Smoothing: In certain cases, you might want to adjust how income is reported or deferred to another tax year to optimize your tax liability. An extension gives you the time to coordinate these strategies with your tax advisor.
- Evaluating Tax Credits: If you qualify for small business tax credits—like those for energy efficiency, research and development, or health care—you’ll have additional time to ensure you meet the requirements and maximize your credits.
Strategic planning can help you reduce your tax liability, and an extension provides a larger window of time to take advantage of these strategies. In many cases, these planning efforts can lead to significant savings.
5. Reducing Stress
The stress of balancing daily business operations with tax filing deadlines can be overwhelming. An extension offers you the flexibility to breathe easier and focus on other pressing business matters, such as client work, cash flow management, or employee concerns.
- Less Pressure to File: Rushing through your tax return increases the likelihood of mistakes, which can lead to audits or financial penalties. With an extension, you can file at your own pace, knowing you have additional time to get everything right.
- Improved Accuracy: Many small business owners juggle multiple tasks. With the pressure lifted by an extension, you can concentrate on completing your return with greater accuracy.
- Avoid Penalties: The IRS imposes penalties for both late filing and late payment of taxes. However, by filing for an extension, you avoid the late filing penalty, giving you more time to complete your return without being penalized for submitting late.
While filing for an extension does not delay your payment deadline (you must still pay an estimated tax amount by April 15), the extra time to prepare your return can relieve significant stress and help you avoid unnecessary errors.
6. Bonus information
After reading all this, you might that filing an extension is the right thing for you and your business. However, keep in mind that an extension is only for TIME TO FILE and not time to pay. This means your tax payment is due April 15 no matter what!
Yes. You read that right. Taxes are due April 15!
An extension is only available for time to file and not time to pay. Make a payment with your extension filing if you think you’ll owe taxes. You can always get a refund when you file the return.
Final thoughts
If you’re a small business owner facing a complex tax situation, gathering significant documentation, or planning for long-term tax savings, filing an extension might be a smart move.
The additional time allows for better tax planning, reduces the likelihood of mistakes, and can ultimately lead to a more strategic, stress-free filing process. However, remember that an extension only gives you more time to file, not to pay your taxes—so make sure you still make any required payments by the original April deadline.