Should You File a Tax Extension?

There was the short answer. What happens a lot of times with small businesses is that the tax extension is filed consistently year-over-year.

Not only can this be more expensive than paying a tax bill outright and on time, but there can also be flags raised by potential investors or buyers of the business.

In this post, we'll go through thecost of a tax extension, some of the reasons why you're filing for one, and how you can make sure you never have to file one again.

The True Cost of a Tax Extension

Let's get one thing straight: tax extensions can cost your business money. And increase the amount of stress and headache when you have to extend.

Even though the process is quite simple, and you have longer to file, why isn't everyone doing this?!

1. Penalties and Interest

Filing a tax extension doesn't change the date on which you have to pay. Tax extensions are strictly for the deadline for your business to file. 

The IRS requires that S Corporations and Partnerships file their taxes by March 15th. And for other types of businesses like sole proprietorships, the deadline is still April 15th. There are different filing days for different types of businesses, so confirm with your CPA that you know the right one.

The common misperception that filing an extension will actually give you extra time to pay is false. There is no penalty for extending the filing of a business's taxes, but there are penalties for paying late if the business ends up owing.

The inability to pay taxes can be stressful and even a little scary. It's also one of the worst reasons to get an extension, because of the penalties and interest that now come along with something that was difficult to pay.

Even if a company is filing for an extension, for whatever reason, if they are expecting to owe money to the IRS, then they should be paying the estimated bill when they file for the extension.

2. Emotional Strain

There are a lot of things to worry about in a business. Making payroll, making new sales, planning and executing, and much more.

Taxes, as well as the tax bill, have probably been looming over your head for 3-4 months by the time the filing date rolls around. Extending the date can only increase the amount of stress and anxiety associated with taxes, and can cause even more strain on yourself or your business.

3. One Season, Then Already the Next

Filing an extension can just delay the inevitable. And if your business waits to file until the October deadline, by the time your business files, it's practically tax season again.

This is where businesses can run into difficulties with penalties that come with a late tax payment. 

They finally came up with the amount that they owe in October, but in a couple of months, they're going to have to pay a similar amount.

Coming up with that amount of cash in such a short time can be pretty difficult for a small business.

4. CPAs Charge Premiums

Most CPA firms are extremely busy during tax season. Any additional work that they pick up is going to cause additional strain on the firm and they're generally going to charge a hefty premium for any work they have to do outside of their normal load.

A lot of times during tax season, CPAs won't even do some of the work that would be necessary to file, like catching up on the books. 

5. Better Advice

As mentioned before, CPA firms are generally booked all the way through tax season.

When a company needs to get better tax advice or have questions about their financials, most CPAs are going to take weeks to respond.

So the amount of time even your own CPA is going to be able to dedicate to your firm is going to be minimal.

Reasons to File an Extension

1. You're Sweating the Deadline

You fell ill, there was a car accident on filing day, or you had to fire your CPA.

Either way, don't sweat the deadline. If it's causing serious stress, or there are other things that simply got in the way, all these things are decent reasons why you should file.

If it's just a week that you need, the penalties would be really small. Just try not to make a habit of this every season.

2. Accuracy

There may be a time when your CPA falls behind, the forms you needed in order to get all your information together weren't there on time, or the books for your business fell behind so far that you're not even comfortable with the data.

Filing a false return is a less serious crime than tax evasion, but isn't something that you probably even want to mess with, or think about. And making amends in the future can be painful as well.

3. Avoiding Hectic Tax Season Mistakes

Tax season can be a long season for CPAs that involve long days and nights. And they're human, so mistakes are going to happen.

An extension can give your business a little bit longer to look into your tax strategy.

CPAs regularly increase prices during tax season to both minimalize people waiting to the last minute, as well as capitalize on the ones that do. If you file an extension, a lot of times those fees go down after the filing deadline.

Never File an Extension Again

There are some reasons to file an extension, but most of these reasons are ones that a business should only let happen once, and correct for the following years. Implementing several things can help companies be ready to file by January 1st.

Here's how:

1. Get a Bookkeeper

A bookkeeper will regularly update your books, anywhere from weekly to once a month. How often a business needs to have its books updated differs from company to company.

With another party managing the day-to-day transactions and making sure that your business's financials are up-to-date,  it gives management the ability to focus their time and effort towards other things as well.

With updated books, the financial statements are in order, so even tax decisions made for the business are better, and the business isn't trying to function blindly. 

2. Regularly Reconcile

Reconciliation helps keep the books in check. And if there are regular reconciliations being done to the account, adjustments can be made on a regular basis. Any issues with the books can be corrected throughout the year, so when tax season comes along, there's not a lot of additional work to be done.

3. Prepare

If you're waiting until tax season to put together a tax strategy, it's certainly way too late.

Talk with a CPA well in advance to understand what your company's tax strategy will be for the following year. The sooner that conversation happens, the more likely they'll be able to help you put together a plan that can take advantage of cost savings.

It also allows your company time to adjust the company's structure if need be.

Tax extensions can be valuable for a few reasons, but for the most part, it's best to file on the regular deadline.