Did you know that both individuals and businesses are allowed to ask for a tax extension? There are several reasons you might want to file for a business tax extension, though not all requests to extend your filing deadline will be approved. Either way, it rarely hurts to at least request one, as taxes shouldn't hold entrepreneurs back from growing their business. If you need more time to file your business taxes, here are some details to consider.
What Is a Business Tax Extension?
A business tax extension is a formal approval granted by the Internal Revenue Service (IRS) to file your annual business income tax return six months later than the usual tax deadline. This extension solely regards your tax forms, not your tax due date. You must still pay your business quarterly taxes on time after filing an extension form or having your request approved.
What to Consider When Filling (or not) a Tax Extension
Pros
- You’ll have more time to prepare and explore deductions or credits.
- You’ll have an easier time finding a CPA or other tax professional after the deadline.
Cons
- Unfiled taxes can slow down the process when applying for a low-cost SBA loan or other types of business loans. Before you start the loan application process, try to meet your tax obligations.
- You’ll have more time to procrastinate if you’ve been simply putting off doing your taxes. To avoid additional stress, pay on time and get it out of the way.
What Are Some Reasons to File a Business Tax Extension?
Some reasons why a small business owner like yourself might want to request an extension include:
- More time to contribute to SEP IRAs. Let’s say you’re a self-employed person or sole proprietor with a SEP IRA. In that case, extending your tax filing deadline also pushes back the final day on which you can contribute to your SEP IRA for the tax year. For example, a six-month extension from April 15, 2022 to October 15, 2022 means you can contribute past December 31, 2021 to June 30, 2022. Note that this logic applies solely to SEP IRAs, not other retirement plans such as 401(k) accounts.
- More time to figure out your tax deductions. Every small business owner loves tax deductions. The thing is, figuring out which expenses you can use to lower your business income taxes can be complicated. With more time to sort through all your business expenses, you can save the most money possible.
- More accurate returns. A more robust set of deductions makes for a more accurate tax return. So too does pushing back your filing deadline to adequately calculate your employment taxes, FUTA liabilities, and more. If you’re filing for a state business tax extension, the extra time can be especially valuable when reckoning with the complexities of SUTA taxes.
Can you request a business tax extension due to COVID-19?
For tax year 2019, the IRS pushed the business tax deadline back from April 15, 2020 to July 15, 2020. For tax year 2020, the IRS pushed the deadline back from April 15, 2021 to May 17, 2021. That said, the IRS has yet to highlight pandemic business impacts as a valid reason for business tax extensions. Ultimately, the pandemic is unlikely to affect your chances of having your extension application approved or denied.
You Still Have to Pay
To avoid state and IRS fines and penalties, you need to estimate the amount and pay taxes by the due date.
The IRS rule is that you must pay at least 90% of income taxes along with self-employment taxes during the year.
For a way to get a general idea of what taxes are due, review this article from The Balance Small Business: How Do I Calculate Estimated Taxes for My Business?
How to File a Business Tax Extension
Filing for a business tax extension is typically a simple process. That said, it varies somewhat based on your type of business entity.
Sole proprietors and single-member LLCs must use IRS Form 4868 to apply for a business tax extension. Doing so is free via the IRS Free File tool if your business income is under $72,000. The most recent deadline to file for an extension was April 15, 2021.
Partnerships, multi-member LLCs, and S and C corporations must use IRS Form 7004 to file for an extension. You’ll need some basic information about your business structure and fiscal year before filing Form 7004. The most recent deadline for partnerships and S corporations to complete this form was March 15, 2021. C corporations had until April 15, 2021.
Federal Tax Extensions Applications
As explained above, i f you need to file a business tax or personal tax extension, there are two forms available.
- Form 4868 - For U.S. Individual Income Tax Return: A U.S. citizen or resident files this tax form to request an automatic extension of time to file a U.S. individual income tax return. Download a pdf copy of Form 4868 here.
- Form 7004 - For Corporate and Partnership Taxes: This form is an application for automatic extension to file certain business income tax, information and other returns. The Form 7004 does not extend the time for payment of tax. Generally, Form 7004 must be filed on or before the due date of the applicable tax return. Download a pdf of form 7004 here. Form 7004 can also be e-filed through the Modernized e-File (MeF) platform. For more information on filing electronically, visit the IRS website here.
How to File a Business Tax Extension Online
You can apply for a business tax extension online through the IRS website. As mentioned earlier, some sole proprietors can use the IRS Free File tool. Other sole proprietors – and all other types of business owners – should use the IRS eFile service instead.
Alternatively, you can file your business tax extension request through most major online tax filing software platforms. TurboTax, for example, is equipped with a tool that uses your answers to several simple questions to determine which form you must file. It then helps you file the form and notifies you if you’re approved.
Common Tax Deductions to Consider
If your business tax extension request is approved, you’ll have more time to sort through your expenses and figure out which ones qualify as deductions. Some expenses you and your accountant should look at to find deductions include:
- Business travel. In most cases, the money you and your employees spend getting from your home to a place of business travel is tax-deductible. This rule applies to air, bus, car, or train travel. It can also apply to baggage shipping costs or business car use during travel. It does not apply to daily commute or relocation expenses.
- Business meals and lodging. When you’re on business travel, you can deduct all your meal costs from your taxes. If your employees are the ones doing the travel and eating, you can reimburse them for these expenses and then file these reimbursements as your own deductions. The same holds true for any lodging costs that you or your employees incur during business travel.
- Business car use. If you use a car of any sort for business purposes (again, your daily commute doesn’t count), your car expenses are tax-deductible. However, if you use this car for both personal and business use, then you can only claim a partial deduction. For example, let’s say your car’s mileage comes 25% from business use and 75% for personal use. In that case, if your annual expenses are $20,000, you can only deduct 0.25 * $20,000 = $5,000.
- Office supplies and expenses. There exists a vast array of tax-deductible office supplies and expenses, ranging from computers to business software and even office cleaning supplies. Any office tool or software platform for which you don’t record use or take inventory is tax-deductible.
State Tax Extensions
State guidelines for filing extensions are varied. In some cases, unless you owe state taxes, your federal automatic extension can also extend your state returns as well. Refer to the tax form instructions or tax help for your state before you request a state extension.
Use this search tool from the Federation of Tax Administrators to locate your state tax agency's current website: State Tax Agencies.
Note that each state decides which tax payment option is offered to businesses. Some require businesses with larger tax liability to make electronic payments, some jurisdictions do not support electronic payments.
Tips for filing your business tax extension correctly
To make the best of your business tax extension, consider implementing the tips below:
- Strive for accuracy. One of the major benefits of having your extension request approved is that you have way more time to check your tax return for errors. Use that time wisely. Filing a tax return full of errors after your extension can make you appear negligent and even increase the chances that the IRS will audit you.
- Pay your taxes when they’re due. As mentioned earlier, a tax extension applies only to your forms, not to your usual quarterly tax payments. You must still file estimated quarterly taxes as you work toward your new tax return deadline. Not doing so can lead to IRS penalties.
- Know your filing deadlines. Finally, it’s time to get your calendar out. The IRS website offers an Online Tax Calendar that you can view or subscribe to containing due dates and actions for each month.
Learn More About Small Business Taxes
Filing your taxes properly is essential to any business, but small business owners that wear many hats may need a little extra knowledge on this subject matter. Here are some good SmartBiz Loans ® resources you can utilize as you make your tax plan for the year. Be sure to work with a tax professional if you need guidance or have questions.
- Small Business Tax Deductions: Read this article to learn about pass-through and Section 179 deductions, office rental deductions, and more.
- How to Find an Accountant for a Small Business: Learn how to decide that it’s time to hire an accountant and which credentials you should consider when comparing candidates for the job.
Information contained in this article is for educational purposes and not intended to be tax advice. Be sure to work with a tax professional if you need guidance or have questions.
