If your small business plans to join the estimated 10 million taxpayers that will request and receive an extension on filing federal taxes this year, there are some important things to consider over the coming months. Perhaps the most basic of these is to understand that getting an extension on filing your taxes is not an extension on paying your taxes. While most small business owners are savvy enough to recognize this distinction, every year a small minority forget to send in an estimated payment before the spring deadline and end up paying unnecessary penalties. The good news, though, is that even if you did forget to send the IRS an on time payment, getting an extension on filing means you kept the damage to a minimum (late filing penalties are ten times higher than late payment penalties). Also, remember that the IRS doesn't care as much about inaccuracy as it does inaction, so if you didn't pay on time don't wait six more months just so you can mail the exact amount get that good faith estimate in the mail as soon as possible.

Next, small business owners should think about why they needed the extension in the first place. "The main reasons small business owners file extensions is that they either don't have all their records ready or they just didn't have the time to file," notes Barbara Weltman, author of Small Business Taxes 2007. " Running their business just gets in the way."

REMEMBER:
Getting an extension, rather than filing late, saves money (IRS late FILING penalty: 5% per month of balance due)

BUT DON'T FORGET:
It's not an extension of time for paying your taxes (IRS' late PAYMENT penalty: 0.5% per month, plus interest, of balance due)

Weltman points out that the IRS only gives one six month extension, no matter what your reasons.
"For businesses that are seasonal, an extension can work out well since they might have the time to focus on filing their taxes in the fall rather than the spring," she says. However, year round small businesses might not have this luxury and so, overworked owners must make a concerted effort to set aside time for filing throughout the summer, or else he or she could end up in repeating the same mistakes six months later. "For some, it will still be crunch time in the fall," Weltman concedes.

To prevent this, small businesses might want to reconsider how they get their taxes done, particularly if they typically rely on a seasonal tax preparation service. "That tax prep store in the mall will be gone come May, that's something to think about," notes Weltman. "You might start thinking about using an accountant instead, someone who'll be an adviser to you and help you take advantages of the right deductions all year long."

There are other ways to take advantage of the six month extension. "For example, you have more time to put money into your retirement plan," Weltman says. "You have until the extended due date of your return to set and fund things like a SEP plan." In fact, she says that for most small businesses there are almost no downsides to filing for an extension. It might even be worth making it a part of your annual tax strategy. That is, of course, unless the IRS owes you. "It doesn't make a lot of sense to do this if you're getting money back," Weltman points out. "Because if you are, and your small business is still missing the first deadline, you are doing something wrong."

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