Small Business Tax Filing Extensions and How to Use Them
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Filing federal tax returns and paying business taxes is an important part of running a small business. But it’s one of those things that some business owners seem to forget about until it’s almost too late, then it’s a mad scramble to get everything submitted in time.
Well, there’s good news.
If you need more time to file your return, you can file an extension. Keep reading to learn more about the tax filing deadlines and when and how to properly request an extension.
Tax filing deadlines
According to the Internal Revenue Service (IRS), in 2022 the tax filing deadline for most was April 18th. The date was after April 15th because of recognition of the Emancipation Day holiday in the District of Columbia. Most years, the filing deadline for U.S. businesses is the first business day on or after the 15th day of the fourth month of the year. However, the actual filing deadline and required tax forms for businesses depend on the way the entity is legally structured.
A sole proprietorship is a business run by one individual where business and personal assets are tied together. It may describe people who are self-employed, as well as independent contractors. Sole proprietors do not take any actions to legally form their business because business activities will automatically designate sole proprietorship. The business activities are not taxed separately from the individual and are reported on a Schedule C and Form 1040.
The tax filing deadline for sole proprietorships is April 15th, although the IRS made that deadline April 18th in 2022.
Partnerships describe a small business structure where two or more people agree to do trade or business together. Each partner shares in the profits and losses of the business. General partnerships file an informational tax return and issue K-1 statements to partners. The partners then file taxable income or losses with their personal income tax returns.
The tax filing deadline for partnerships is the 15th day of the third month following the end of the tax year. In 2022 the partnership deadline was March 15th.
Limited Liability Companies
A limited liability company (LLC) is a cross between a corporation and a partnership. LLCs may be owned by a limited number of shareholders or function as single member LLCs. The IRS does not recognize an LLC as a separate tax entity, so income is passed through to the members. LLCs must file income tax returns as a corporation, partnership, or sole proprietorship.
The tax filing deadline for an LLC depends on whether the entity files as a corporation or a sole proprietorship.
S corporations (S corp) comply with corporate obligations, like passive income tax and built-in gains tax, but avoid double taxation by electing to be treated as an S corp. The business owners pay taxes on their portion of the income through their personal tax return.
The tax filing deadline for S corporations is the 15th day of the third month following the end of the tax year. In 2022 the partnership deadline was March 15th.
A general corporation, or C corp, is treated as a separate entity from its owners in terms of profit and legal liability. C corporations pay and file business taxes on their profits and then each shareholder pays taxes on the dividends they’ve received.
The tax filing deadline for C corporations is the 15th day of the fourth month.
What is a business tax extension?
So, what if you can’t complete your small business’s income tax return on time?
A business tax extension will give you an additional six months to gather the required documents and complete the return without penalty. Individuals and businesses can file one extension for each tax year. Approval is generally automatic, and extensions are rarely rejected if filed correctly and on time. In addition to the federal tax extension, businesses also need to file an application with the state taxing authority.
If the income tax due date is April 15th for business types including, Sole proprietors and C Corporations, the extended deadline would be October 15th.
If the business, partnership or multi-member LLC, has a tax deadline of March 15th, filing an extension will make the new deadline September 15th.
Making estimated income tax payments
Filing an extension doesn’t make a business exempt from owing tax. Any outstanding tax liability is still due by the return deadline and business owners are subject to penalties and interest charges if not paid. Since applying for an extension indicates that the business income return has not been completed, taxpayers must pay an estimated tax by the due date by mail or online using EFTPS.
To calculate the amount of tax you should pay, you can use a worksheet provided by the IRS. Small business owners that aren’t sure about the amount of tax owed, should err on the side of caution and overpay. If the estimated tax paid exceeds the calculated tax liability on the filed return, the taxpayer will be entitled to a tax refund.
If cash flow becomes a concern, consider business financing options to pay the estimated tax on time. Small business owners can often qualify for a secured or unsecured line of credit, like the owner of a property management company who qualified for an unsecured business line of credit with Biz2Credit. There are also options to set up a payment plan with the IRS.
Reasons to file an extension
The IRS penalizes individuals and business owners that underestimate their tax liability, file an income tax return after the deadline without a formal extension request, or fail to provide necessary documents and information relating to income. However, there is no penalty for filing an extension.
When to request an extension
If you are concerned that you will be unable to complete an income tax return by the deadline because of any of the following reasons, it is a smart decision to file an extension.
You have missing documents
To effectively file an income tax return, there is a list of information and documents that may be required by the IRS, tax professional, bookkeeping firm, or tax software. If you are lacking any of the following documents, an extension will allow time to gather the information. Missing necessary documents may also impact your eligibility for tax deductions and tax credits.
- Financial statements
- Schedule K-1s
- Form 1098 for mortgage interest and property taxes
- Capital asset activity
- Expense receipts
You’re enrolled in a SEP IRA
A self-employed pension (SEP) IRA is a popular retirement contribution choice for small business owners, sole proprietors, and freelancers because it allows them to make large, tax-deductible contributions. Filing a tax extension allows more time for contributions to the plan. Once an extension is requested, additional contributions up until the extended deadline will count as funding the account for the previous calendar year.
You’re experiencing extraordinary circumstances
You are not required to provide the IRS with an explanation on why you are requesting a tax-filing extension. Experiencing a family emergency, unexpected travel, an interruption in business, a change in finance personnel, or any other reason qualifies an individual or business to receive more time to complete their income tax return.
When not to request an extension
While there is no penalty for requesting an extension, there are circumstances when filing for an extension is not necessary.
In the following tax situations, an individual or business is granted an automatic extension, so filing the required paperwork for more time is unnecessary.
- S. citizens living and working in a different country
- Residence in a part of the U.S. affected by a severe natural disaster
- Members of the military serving abroad
- Employment (for self or spouse) in a combat zone for the U.S. Armed Forces
Extending the deadline for business income tax returns is delaying the inevitable. If there is not a significant reason for extending the due date, like missing documents, it may make more sense to file the return then go through the process of filling for an extension. For some individuals, including sole proprietors and single-person operations, completing a tax return may be more efficient than filing an extension.
How to file a small business tax extension
The process to request a small business tax extension isn’t too difficult, and in most cases, it can be done entirely online.
Gather required information
You will need some of the same basic information about your business to file an extension as you would to complete an income tax return. Gathering identifying information and documents ahead of time will speed up your application for an extension and help you prepare to file an income tax return.
- Identification and residency information
- Taxpayer identification number (TIN)
- Bank statements
- Year-end financial statements
Select the correct form
Form 4868 is an Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. The form is most used by individuals that file a Form 1040 to report income. Form 4868 also applies to small business taxes when the income tax liability is passed through to the owners, including the following:
- Sole proprietors
- Single-member LLCs
- Partnership owners
- Multiple-member LLC owners
- S corporation owners
Form 7004 is the Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. It is a similar form to Form 4868 but is not applicable for personal income tax returns. Form 7004 is best for the business tax returns of:
- C corporations
- S corporations
- Multiple-member LLCs
This is the Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback form. This extension request is used for corporations expecting a net operating loss (NOL) in the current tax year. Filing form 1138 gives the corporation more time to pay the taxes owed from the immediately preceding tax year.
Form 1138 is best for:
- Any business structured as a corporation
IRS Form 8868, the Application for Extension of Time To File an Exempt Organization Return, is used by tax exempt charities or nonprofit entities to receive an automatic 6 month filing to file Form 990, the informational return required by tax exempt businesses.
This form is best suited for:
- Nonprofit organizations
- Other entities exempt from paying federal income tax
These other extension forms may benefit business owners in extra time for preparing documents and paying employment taxes:
- Form 5558 – Application for Extension of Time to File Certain Employee Plan Returns
- Form 8809 – Application for Extension of Time to File Information Returns
Complete the request
Most tax extension forms can be completed via e-file, but you can also print the form from the IRS website, fill out, and mail. Remember to submit the application before the tax return deadline. Once you have applied for extension, you can check with your state to see if you are required to file a separate extension form and begin tax preparation to file your federal and state returns by the extended deadlines.
The due dates and required forms for income tax returns and extension requests depend on the business structure of your company. Filing a request for an income tax extension does not give your business more time to pay taxes, but it will give you a six-month extension to complete the return. Receiving an extension is a simple process that begins by downloading the proper form on the IRS website.