Is your small business’s annual tax-season game of Beat the Clock becoming too much of a nail-biter?
As rules have become more complex in recent years, the stigma of seeking a tax-filing extension has lessened, with more than 11 million U.S. taxpayers filing for one each year. The need to have extra time to file a return has grown as the complexity of the tax system has increased. “You have to look at the rules to believe it. Life has become so much more complicated,” says Abraham Schneier, senior technical manager for taxation at the American Institute of CPAs and a certified financial planner. The IRS requires you to pay your taxes or make your estimates on time, but as for requesting an extension, “The IRS doesn’t make much of a fuss these days, as long as you’re paying them on time.”
The deadline for filing for an extension for corporations and partnerships is Tuesday, March 15—use Form 7004. For individuals and sole proprietorships, the due date for Form 4868 is Monday, April 18. (Tax Day is bumped back from the traditional April 15 this year because of Emancipation Day in Washington, D.C.) Both forms can be filed electronically. Once filed, you have six months to get your return to the IRS, making your new deadlines September 15 and October 18, respectively. (What about the higher threat of an audit if you file an extension? Accountants today dub that an old wives’ tale.)
But being late with your return doesn’t mean you don’t have to pay on time. Uncle Sam expects a good-faith estimate of the amount due and a check for what you think you owe on your due date. If you underestimate, expect to be charged interest and penalties on the amount due until the date your return is filed. If you overestimate, don’t expect a refund until the IRS gets your return.
One idea to protect yourself from penalties if you do underestimate comes from Judith Flaxman, an assistant professor of accounting at Temple University's Fox School of Business in Philadelphia, who is also a CPA with 24 years of experience preparing taxes for small businesses. Add the amount of next year’s first-quarter estimated payment to your check for this year’s estimated balance due. When you complete the extended return, indicate that all overpayment be applied to next year’s taxes. That way if you were a few dollars short in your original estimate of tax due for the filing year, it just leaves you short on your first estimated payment and you can add more to your next estimate to make up the difference. (One other reminder: Make sure you let your state tax authority know, too, and file for an extension with them as well.)
Talking to some longtime CPAs and tax preparers, here are a few good reasons that their clients have needed to buy some extra time over the years:
Reason 1: You don't have all of your documents
For small businesses, there’s a mountain of paperwork when it comes to tax time—from receipts to depreciation calculations to employee expenses. The bane of many accountants’ existence is the notoriously late Form 1065, also known as Schedule K-1, which reports the income, losses, and deductions of partnerships. Because so much of the information required to put the form together depends on getting information from others, accountants say it can create an elaborate holding pattern, waiting for one party to come up with a number to permit the others to complete their final figures—a standoff that can even drag into the summer months. “CPAs are unable to give out incomplete information,” Schneier says.
Reason 2: Something happens to you, your business, or your accountant
In the aftermath of Hurricane Katrina in the late summer of 2005, the IRS extended several key deadlines for quarterly tax estimates until early 2006. Millions of individuals and businesses filed for extensions for the full year in the scramble to produce documents and calculate losses. Schneier described the nightmare one accountant faced after early-spring flooding took out her office in the middle of tax season—her clients’ documents somehow survived the rising waters, but the disruption to the business made for extensive delays in tax preparation.
Reason 3: You need more time to make some decisions or find more resources
For 2010 and 2011, Congress authorized taxpayers with traditional IRAs to roll over to a Roth IRA to take advantage of a one-time option to spread the tax from the conversion across 2011 and 2012. However, some may be hedging their bets on what tax rates will be—and will take the six-month IRS filing extension to determine if the conversion was the right decision, thereby retaining the option to switch back to the traditional IRA.
The same goes for small businesses that need to account for profit sharing but don’t have the cash on hand to make the contribution. The profit-sharing contribution must be made by the due date of the return, so extending the return gives the business extra time to accumulate the required cash.
Reason 4: You’re still adapting to tax-law changes for 2010
The dawn of tax year 2010 brought with it many rules that some small businesses and entrepreneurs are still struggling to address. New laws that expanded deductions for startups—now up to $10,000 for the initial year—and revised calculations for depreciation of equipment and real-estate property are just the start. There are also employer health-care credits for employees that make less than $50,000, which require careful new computations, and a change in how health-care coverage for sole proprietorships affects calculation of self-employment taxes.
It’s enough to make even seasoned accountants take a step back and widen the scope of what deductions may be in play. For small businesses, “a prudent owner will say ‘There are a lot more things here for us to look at,’ ” says Temple’s Flaxman. “Let’s explore all the options provided by the tax laws and make sure we’ve taken greatest advantage of them.”