The tax deadline is just a few weeks away, which poses a question for many businesses: Are you ready to file now (April 18), or do you need some more time to file? If you’re not ready to file now and you want to file an extension, here's what you need to know.
What is a Tax Extension?
We always recommend filing your taxes on time if you can, but we understand that's not always possible. In that case, you can extend your filing date by six months, so instead of filing on April 18, your new filing date is October 16 (it's typically October 15, but since it falls on a weekend, the due date is the next business day).
A tax extension gives you more time to file, not more time to pay. If you owe, you still need to estimate and settle your tax bill by April 18. You won't get a penalty if you file for an extension, but you can get a penalty if you fail to pay your tax bill.
If you fail to pay everything you owe, the IRS will charge you interest on the outstanding amount until you fully settle your bill. And if that is less than 90 percent of the total, you might also be hit with a late payment penalty.
How Do I Know If I Need to File a Tax Extension?
Typically, you file for an extension if you are missing tax documents, need extra time to complete your paperwork, or are looking to redeem some tax credits to reduce your tax bill. That said, there are several pros and cons to filing a tax extension:
- More time to collect documents and accurately prepare your return
- Reduce late-filing penalties
- Fund a self-employed retirement plan: SEP IRA, solo 401(k), SIMPLE IRA
- Preserve your tax refund
- Take extra time to make elections
- Reduce your tax preparation fees
- Still have to pay what you owe on the original deadline
- Not available in all states; it depends on the state you live in
- You won't gain extra time to fund a traditional or Roth IRA
- You can't switch your filing status
- The mark-to-market election for professional traders doesn't advance
How Do I File a Tax Extension?
If you want to file a tax extension, your extension request should be by the regular due date, April 18. Filing a tax extension is free and straightforward. There are several different ways you can file:
- IRS Free File: Individual tax filers, regardless of income, can use Free File to request an automatic tax-filing extension electronically.
- Tax software: If you're preparing and filing taxes with software like TurboTax, most support filing for tax extensions. Simply follow the program's instructions to file electronically. Once you file, the IRS will send you an electronic acknowledgment.
- Tax preparer: If you're working with a CPA, they can help you file an extension.
- By mail: You can apply for a tax extension by mailing the tax extension request form to the IRS. Send it by certified mail to get proof that you mailed it, and ensure it's postmarked on or before April 18.
To file, you need three pieces of information:
- IRS Form 4868 must be completed and filed electronically or by mail and postmarked by April 18.
- Identification information, including your name, address, Social Security number, and your spouse's Social Security number, if applicable.
- Individual income tax information, including an estimate of total tax liability for the year, total payments you've already made, the balance due, and the amount you are paying.
The good news is that virtually all tax extension requests are approved once filed. If you filed electronically, you should receive an email within 24 hours confirming that the IRS has received your request. However, if you submitted the form via mail, you won't receive a confirmation and will need to call the IRS to confirm it received your request.
The IRS typically will only contact you after filing a tax extension if there is an issue. The most common instance for a denied tax extension is if you're unrealistic with your tax liability estimate. If the IRS disagrees with your estimate, it can deny your extension request, and you could be penalized.
State Income Tax Extensions
Each state has its own tax extension requirements, which only apply if your state has an income tax. For example, while some states (Alabama, California, Wisconsin) offer automatic six-month extensions to all taxpayers, others require you to fill out a form on or before your return's original due date. If your state has an income tax, you can use tax preparation software, consult your CPA, or visit your state's tax authority's website to generate the correct state-specific form. On the other hand, if your state doesn't impose an income tax, you won't need to file a return or extension request.
Like with the federal return, the state tax extension only gives you more time to file your return, not to pay your taxes, so be sure to calculate what you owe and submit a payment by the due date to avoid penalties and interest.
Don't Forget About Tax Credits
Whether you're filing your taxes now or later, don't forget about your tax credits. TaxTaker can work with you and your CPA to get your startup the Employee Retention Credit and the R&D Tax Credit to lower your tax bill.