Everything You Need to Know About Tax Extensions
You may be unable to complete and submit your business tax return by the normal filing deadline. The filing deadline for businesses varies based on entity type.
- C-Corporations operating on a calendar year have a filing deadline of April 15th. Fiscal year filers must file by the 15th day of the 4th month after year end. For fiscal years that end in June, a return is due by the 15th day of the 3rd month.
- S-Corporation and Partnership returns are due March 15th. Returns filed for fiscal years are due the 15th day of the 3rd month after year end.
What do you do if you are unable to complete your business or personal tax return by the filing deadline? You file an extension!
What is an extension?
An extension is a request with the IRS (or state) to extend the due date of the tax return. Filing an extension grants additional time to file the return, not to pay any tax liabilities owed. You are responsible for estimating your overall tax liability for the year, calculating any withholdings and payments that have been made, and then submitting the difference with your extension request. Payments can be submitted electronically, or a check may be mailed in with the extension request form.
The extension grants an additional six months to file. Calendar year C-Corporations and Individuals would have an extended due date of October 15th and Partnerships and S-Corps would have a due date of September 15th. An extension only grants extra time to file. It does not provide extra time to pay any taxes.
Who should file an extension?
Any business or individual that is going to be unable to meet the original filing deadline for their business or personal tax return will want to file an extension with the IRS, as well as with the state where they live or operate.
How do you file the extension?
Businesses will use Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. Individuals will use Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Forms must be postmarked (if submitting by mail) or transmitted electronically by the original due date.
There are three ways to make an extension request with the IRS:
- You can file the applicable form electronically, either through a free file partner, an approved tax preparation software, or a tax professional who uses e-filing
- You can fill out and mail in the applicable paper form. Remember that it must be postmarked by the original due date.
- You can pay all or part of your estimated income tax due and indicate that the payment is for an extension. Make a payment using Direct Pay, EFTPS, or online through the IRS website with a debit or credit card.
The IRS will grant an extension automatically if the proper form is submitted by the original deadline. You do not need to provide an explanation for why you are unable to meet the deadline. Filing the form is free, except for the cost of a postage stamp if you decide to send the document via mail. The IRS partners with many companies to provide free electronic extension filing options for individuals and businesses. Information about the Free File Program can be found on the IRS website.
What are the potential tax penalties?
You submit an extension request to have additional time to file your business and/or personal tax return. If you do not file an extension and you owe taxes, you may incur penalties with the IRS and the State. The IRS will impose penalties for failing to file on time and failing to pay any tax owed. A failure-to-file penalty is charged on any return filed after the due date or extension date. The failure-to-file penalty is 5% of the unpaid taxes. It is charged for each month or part of a month that a tax return is late. The penalty will not exceed 25% of the unpaid taxes.
Even if you submit an extension request you are still required to pay any balance due by the original filing date to avoid a failure-to-pay penalty. Failure-to-pay penalties may be in addition to the failure-to-file penalty. The late payment penalty is 0.5% of the amount of tax owed after the due date. It will be charged each month or part of a month that the tax remains unpaid, up to 25% of the tax owed. If both the failure-to-file and the failure-to-pay penalties are applicable in the same month, the combined penalty is 5%.
In addition to the penalties, the IRS will charge interest on any unpaid balance. Interest will compound daily from the due date of the return. The interest rate for all taxpayers, other than corporations, is the current federal short-term rate plus 3%. For corporations, the interest rate varies depending on company size and is the current federal short-term rate plus anywhere from 2-5%.
Filing an extension with the IRS provides you with six additional months to prepare and submit your business and/or personal tax return. This extra time can eliminate stress and ensure you have time to verify the accuracy of the return that is being submitted. It also ensures that you will at least avoid a failure-to-file penalty. And, if you send in a payment with your extension, you may also avoid a failure-to-pay penalty and any interest. Submitting an extension request is relatively simple and there is no fee associated with the form.
If you are concerned about being able to file your business or personal tax return with the IRS, or the State where you live and operate, by the original filing deadline, please reach out to your Formations team. We can estimate your overall tax liability, calculate any payments and withholdings, and determine what amount you should submit with the request. Give us a call today. We are here to help.
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