Pros and Cons of Filing a Tax Extension

If you are considering getting an extension to file your taxes, it isn’t complicated, and for some small business owners, it makes sense. However, there are downsides to this arrangement, so it’s best to make this decision as thoughtfully as possible.

Here is some information on filing for a tax extension which may be helpful to you as you decide whether or not to file.

What is a Tax Extension?

A tax extension, or extension of time to file, is a formal request to the IRS for more time to file your tax return. In 2019, Tax Day is April 15 (though if you live in Massachusetts or Maine, you can file before April 17). Extensions are an option for anyone, and you don’t have to explain your reasoning to file. Those who request these are automatically given six more months to file their returns. For S-corporations and partnerships, the deadline is September 16, and for C-corporations, it is October 15.

Be aware that an extension of time to file does not grant you extra time to pay your taxes. For most taxpayers, April 15 is the deadline to avoid penalty or interest charges.

Pros of Filing an Extension

  • Avoid a late-filing penalty. Filing your taxes late comes with a penalty, which is equal to 5% per month on any taxes due, plus a late payment penalty of 0.5% a month. Keep in mind that if you file late but are owed a refund, you don’t face late filing penalties.
  • Avoid a failure to file penalty. If you file more than 60 days after your due date, the minimum penalty is either $135 or 100% of the unpaid tax (whichever is smaller). If you demonstrated a reasonable cause for not filing or paying on time, you don’t have to pay a late filing penalty.
  • Filing for an extension is a good alternative if you don’t have sufficient time to put into your return. Rushing naturally leads to more mistakes, and with an extra six months to collect and organize all the required tax documents may be a smart move for many.
  • If you have a complicated return, then filing for an extension gives your accountant time to ensure that you have every tax credit and deduction you are entitled to accounted for.
  • Filing an extension can give self-employed people more time to fund their retirement plan. Individual 401(k) and SIMPLE plans must have been set up during the tax year for which you are filing, but it’s possible to fund the plan as late as the extended due date for your prior year tax return. SEP IRA plans may be opened and funded for the previous year by the extended deadline as long as an extension has been filed.
  • Filing an extension preserves your ability to receive a tax refund when you file past the extension due date. Filers have three years from the date of the original due date (e.g., April 15, 2019) to claim a tax refund. However, if you file an extension you’ll have an additional six months to claim your refund. In other words, the statute of limitations for refunds is also extended.

Cons of Filing an Extension

  • If you expect a refund, then you will have to wait longer for it than if you had filed on time.
  • You don’t receive extra time to pay your taxes if you file for an extension. You have to pay at least 98% of the tax due now if you want to avoid late-payment penalties. If you are unable to pay your taxes, you have options, such as installment plans. If you’re interested in pursuing this option, contact us and we can help.
  • When you request an extension, you need to estimate what you will owe based on the information you have then. If you don’t, your extension may be denied.
  • You still have to deal with your tax return, and it doesn’t get simpler with time. Filing for an extension is just delaying the inevitable for many.

If you feel that filing an extension is the best move for you, you may benefit from meeting with an experienced tax professional. Small business accounting can be complicated. While you’re busy running your business, it’s hard to give the time and attention to your taxes that you need. If you need a small business accountant in Gilbert, we would be happy to help. Contact us to schedule an appointment today.

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