How to Maximize Your Business Tax Extension Filing
This story has some similarities to being in college, when you are writing an essay you may come across a time when your mind is blocked from ideas, also referred to as writer’s block. While some teachers may graciously give you an extension, most will be sticklers for timely well-written essay papers. When it comes to filing your business taxes, even the most notoriously fanatical disciplinarians, the IRS, realize that excellence can take time(that is why they allow this extension).
Most Hollywood movies portray IRS agents as being cold, unemotional and by the book, so by them offering a no strings attached six-month tax filing extension might seem a little too good to be true.
This may have you thinking ….
But don’t worry, this not a trap. In actuality, the extension is a major blessing for businesses, especially small ones, who don’t have the time or company resources to prepare and file taxes between the end of one year and the first quarter of the next one.
This is the one scenario where time doesn’t actually equal money
Once it is filed, the tax extension gives businesses a full six months after their original tax due date to file their taxes for the year. This means that if your original due date is March 15 (the 2017 due date for Partnership and S Corporation 2016 returns), your extended due date is now October 15.
And there is no fee to file an extension
Yes you just read this correctly, it does not cost your company anything to extend your tax filing due date – but don’t forget to pay your tax liability up front. And, yes, this is probably one of the only times you will hear someone tell you that extra time does equal extra money. In fact, taking the extension gives your company more time to make sure your corporate tax returns get prepared perfectly so you can actually keep more money in your pocket and not Uncle Sam’s. Which leads me to my next point..
Yes, you have more time, but it must be used wisely!
Like any stretched deadline, this tax extension should be used as an excuse to procrastinate. Businesses should be using these extra months to get every little thing that their accounting firm, would possibly need for maximum tax filing efficiency.
Here is how we recommend spending your extra 6 months from your business tax extension:
First things first, make sure your books are closed!
This should be done right away. The sooner your books are closed for the year, the sooner you will have accurate financial statements to use to while your taxes are getting prepared. This will mean that both your cash flow statement and balance sheet need to be in order to properly determine your liabilities, stakeholder equity, and your company’s net income. All of which are useful things to consider for tax purposes.
You will be able to use your profit & loss (also referred to as an income statement) to organize your revenue and expenses for the year, determine your bottom line/taxable income, and uncover any useful opportunities for tax deductions and credits.
Now, for administrative purposes, if you fail to properly close your books at the end of the year, you may be opening up your business to making a mistake, such as recording a transaction in the wrong year. If this was to occur, it could easily ripple into serious tax related problems in the future.
Next, it’s recommended that you go through your year with your CPA:
If you don’t already have a year-round accountant who also prepares your company’s taxes, make sure you sit down with a CPA and go through all of your spending and activities. CPA and tax professionals are extremely knowledgeable about current tax code changes, and also privy to what other businesses in your industry are experiencing.
Once you get their full attention, listening to your company’s story, while firing on all cylinders; they should be able to recall from prior experience and apply a wealth of knowledge & wisdom to your unique business situation. You can think of it as having your own helpful guide along the way who knows how to get the most savings out of your business’s tax return.
Identify your filing responsibilities and get familiar with the right forms:
Your company’s filing responsibilities will come down to how you do business. Essential factors that will influence business tax duties include entity type, location, industry, equity landscape… just to name a few. Going forward, there are rules for the best ways to proceed with your filing and all the necessary forms. You will want to start to organize your company’s basic information such as:
- Basic company information
- States of incorporation
- Entity & incorporation details
- Stock & ownership information
- Payroll & 1099 information
- Tax credits
- Foreign filing
You can also start learning about filing taxes in states where businesses have a tax nexus. Thus, along with the Federal filing, you may have income taxes, sales taxes, franchise taxes and gross receipts tax obligations in that state. If you are an eCommerce or online retailer this is especially important.
If your company is a startup that has any foreign accounts, partners/shareholders, investors, check out this IRS article on filing obligations for companies with international financial activities.
This brings up another important point to address: There are some states that will recognize the extension if you file it on a federal level (with the IRS) and some that will not. There are some states that don’t even have income taxes(Delaware being one).
Because the state (California) does have state taxes, you will be required to file an additional extension. Here is an IRS list of all the states and associated forms.
We recommend that you look for retroactive tax-saving strategies: this will depend on the nature of your business (entity type, accounting method used), but you may still have time to take advantage of certain accounting method changes & tax saving strategies.
Make sure you remember to discuss your options for employee bonuses and retirement planning with your CPA.
As we mentioned in the beginning of this article, the IRS is strict and this is especially true when it comes to collecting. Even if you decide to take advantage of this generous tax filing extension, profitable companies still have to pay the liability on their taxable income as scheduled for the original March/April due date. To determine the amount you owe before you end up filing, you can reference and estimate using the IRS’s guidelines & forms:
- Sole proprietors, partners, and S corporation shareholders can use Form 4868 to estimate their tax liability as individuals involved with pass-through entities.
- C corporations use Form 7004 to estimate their tax liability when filing as independent business entities
Failure in doing so can start to rack up pretty quickly in regards to penalties, (as penalties start accumulating the day after the due date. From the beginning, your company will typically be on the hook for ½ of 1% of your unpaid taxes, per month along with federal interest plus an additional 3% compounding daily interest on the taxes you owe. Furthermore, if you miss your filing due date and fail to file for the extension the penalty is usually 5% of the unpaid taxes for each month or part of a month that a tax return is late.
When it comes to embracing the business tax extension, while you balance running your business, most CEOs would agree that any option that gives them more time will usually be taken with both hands. The first step is filing Form 7004 with the IRS to request the automatic extension for your business (more in-depth instructions from the IRS are listed here). Remember as you are filing, be sure to keep an eye out for errors and completeness. The Internal Revenue Service will only grant your company the extension if you complete Form 7004 in full and pay any tax you owe at the time.
Thomas Huckabee CPA helps San Diego businesses with comprehensive tax strategy, filing, implementation and year-round proactive accounting support. We help entrepreneurs and founders to get a grip on the complex world of taxes. Contact us for a free consultation today.