Should Business Owners file for a tax extension in 2023 tax season?

Posted March 22, 2023

As a small business owner, or startup founder, should you file for an extension this 2023 tax season? Recently a Forbes tax news reporter Kelly Philips Erb wrote an article about this topic saying it isn’t an act of desperation to file an extension or is it a smart tax planning strategy. Mrs Erb stated “It’s true that some taxpayers who file extensions do so because they waited until the last minute. But increasingly, taxpayers are using extensions as an opportunity to step back and review their finances before filing.” A Turbo Tax article points out that not only will you extend the filing deadline until October 15, but you’ll also relieve the stress that often accompanies trying to pull everything together by tax time. More time and less stress mean you’ll be able to thoroughly review your return and ensure you’re taking advantage of all the tax benefits available to you.

Recently the IRS reported that more than 18 million US taxpayers filed for extensions in 2022, and that number could be even higher for this year’s tax season.

Some of the benefits for business owners to file for a tax extension in 2023

Avoid Penalties: Filing for an extension will give you more time to gather all the necessary documents and information needed to file your taxes accurately. This reduces the risk of making errors or submitting incomplete returns, which could lead to penalties and fines which can add up to 25% of the tax due.
Reduce Stress: Tax preparation can be stressful, especially if you are running a business. Filing for an extension can alleviate some of that stress by giving you more time to organize your finances and get your paperwork in order.
Increased Flexibility: By extending the deadline for filing your taxes, you gain more flexibility in terms of when you file and pay your taxes. This can be particularly beneficial if you are experiencing cash flow issues or are waiting for important financial information before filing your return.
More Time for Tax Planning: An extension can give you more time to review your financial situation and take advantage of tax-saving opportunities. This could include exploring deductions and credits that you may have missed during the initial tax filing period.
Reduced Risk of Audits: Filing your taxes accurately and on time is important to avoid audits. By taking advantage of an extension, you reduce the risk of making errors that could trigger an audit.
Retroactive Tax amendments: An extension will allow you to take advantage of retroactive changes to the tax law that might be made after the filing deadline, without the added time and expense of filing an amendment. It is important to note that while an extension can provide many benefits, it is not a waiver of any taxes owed. Any taxes owed are still due by the original deadline, and failure to pay on time may result in penalties and interest charges.

Filing For An Extension Can Help Give You More Time to Get Your Forms

Can give you more time to make sure you have all your forms. Normally employers are supposed to give their workers their w-2 forms by January 23, each year. But other tax forms such as 1042-S, 1095-C, and some Forms 5498 come after that date. Mrs. Erb points out a few other reasons that could delay you getting all your forms such as if you are the:

the beneficiary of a trust or estate or a shareholder or partner in a pass-through entity which means that Schedules K-1 associated with those returns aren’t yet available
Or, you might be funding an IRA and need to include that information on your form 1040

You can make contributions to your IRA retirement up until April 15th, tax day, Making that contribution can not only help you put away money for retirement but may result in a tax break.

Some years your tax return filing may be more complicated than others

Did you include all your cryptocurrency transactions? Did you sell real estate property and are not sure about the cost basis? Did you inherit a retirement IRA? Taking a little more time to figure all your possible taxable income and assets and help to avoid audits and penalties.

And what happens if you need to talk to your accountant, but didn’t get around to that before April? Mrs. Erb also states “Taking time after Tax Day to review returns for completeness and ask questions about any items you may not understand can pay off down the line.”

And what happens if you are just not ready to file come tax day? Maybe you had a major life event, someone passed away you moved your kid is about to go to college etc. Whatever your reason for not being ready to file is private and you don’t have to explain it to the IRS. It’s a no-questions-asked form, and the extension is granted automatically if you follow the rules.

Myth: Filing for an extension is not necessarily an audit trigger

Another benefit is that it tends to result in faster processing times than filing now and fixing any issues later. While taxpayers can now file amended returns electronically, the processing is still done manually, resulting in lengthy delays. Filing for an extension and filing a complete, accurate tax return later tends to be a more efficient option. The Turbo Tax article makes the argument that some tax professionals theorize that filing an extension will decrease your odds of being audited since IRS auditors must meet quotas and try to do so early in the year. While the IRS does not disclose its process for selecting returns for audit, the earlier a return is filed, the longer it is in the system and thus subject to a review.

How To File For An Extension

To file for an extension, you can:

File for an extension online for free using FreeFile on IRS.gov (you can use FreeFile to e-file an extension for free even if you don’t otherwise qualify to use the software);
Ask your tax preparer to file an extension for you;
File using tax prep software; or
Complete and mail Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.

You May Need To Still Need to Make a Payment

Remember that an extension is an extension of the time to file and not an extension of time to pay. If you expect to owe at tax time and you’re filing for an extension, you should make a payment with your extension request to avoid interest and penalty later. The interest rate is the federal short-term rate plus 3%, compounded daily, and the late-payment penalty is usually 0.5% per month.

Automatic Extensions

Some taxpayers get an automatic extension of time to file without having to file for it. Those include:

If you’re a U.S. citizen or resident and you live outside of the U.S. or Puerto Rico, and your main place of business or post of duty is outside of the U.S. or Puerto Rico or if you are active duty military and live outside of the U.S., you qualify for a two-month extension without having to file form 4868. That moves your due date to Jun. 15 to file and pay. However, interest is still due on any tax payment made after Apr. 18.
Taxpayers affected by natural disasters may have extra time. That currently includes recent extensions for taxpayers in most of California and parts of Alabama and Georgia. For more details or to see if you’re eligible, check the disaster page on the IRS website.

Conclusion

Taxes can be stressful for people, and many people may want to just have to the relief of filing and getting them done by Tax day, but its not that big of deal if you do not.

And in some instances especially if you have a more complicated filing scenario, it can be a good strategy. It’s always better to file a complete, correct return on extension than trying to rush the return by Tax Day. If you have any questions feel free to reach to Huckabee CPA for a free consultation.