What is a Business Tax Extension and How Do I Get One?

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As the name implies, a tax extension allows you to postpone the filing of your annual tax return (but does not waive the payment due!). Requesting a tax extension may be a wise move when you have incomplete tax documentation and want to avoid late fee penalties and other troubles.

Business Tax Extension 2019-2020: The Basics

This year, the IRS decided to extend the deadline for filing both personal and business taxes for the year of 2019 until July, 15th 2020. So you have some extra time already during this year’s tax season!

But if you feel like you may need some extra time beyond that, you can still file for a tax extension online. If your request is granted, you’ll be able to file your returns by October, 15th, 2020 latest as a sole proprietor. This extension is automatic, meaning that you do not have to do anything extra apart from actually filing for it on time.

However, there are several important caveats to be aware of.

Tax Extension is not a Payment Extension

Even though the extension allows you not to submit your completed tax return just yet, you are still expected to make a tax payment by the deadline.

In other words, you must calculate all the income and self-employment taxes due for the fiscal year and pay at least 90% of them. Failure to do so can result in penalties for underpayment and late tax payment. Clearly, you’ll want to avoid that!

OK, but how do I determine my dues if I’m not filling the tax return? Rely on the estimated tax calculation. It’s a simple one.

  1. First, you’ll need to calculate your gross income for the year and then subtract all the tax deductions and business expenses. That’s how you get your adjusted gross income (your taxable income) figure.
  2. Next, use the current tax brackets to calculate your business taxes and self-employment taxes.

Then you’ll have to make respective payments as you request your extension.

How to File a Tax Extension Online

Most online tax tools let you request a filing extension. If you are not using one just yet, here’s the alternative route explaining all the nits and bits.

Figure Out Which Forms You Need

If you run a small business, most likely you fall into the category of “pass-through” businesses and, respectively, tax treatments. In other words, you are not subject to double taxation – paying separate taxes for your business income and then again an extra tax on your personal income.

A pass-through business is someone who:

  • Operates as a sole proprietor or a single-member LLC and file a Schedule C when reporting your business income.
  • Runs a partnership or multi-member LLC business or S corporation, and file your share of business income on Schedule K-1.

If either of the above is true, you’ll have to file a Form 4868 to apply for your tax extension.

However, if your company operates as a corporation or an LLC that has chosen to be taxed as a corporation so that you could receive dividend income, you’ll have to file a separate personal tax return and a business tax return, and request tax extensions for each separately. To request an extension for your business tax return, use Form 7004.

Lastly, if you live and work abroad, you can also ask for a special tax extension. To receive it, you’ll have to file a Form 2350 extension application for U.S. citizens and aliens abroad.

Extend Your Tax Return

If you are a pass-through business, getting an extension is dead simple. If you are already paying for your estimated income tax (1040-ES) electronically, the IRS will auto-extend time to file once you pay a part of this payment.

Alternatively, you can get a tax extension by paying all or part of your income tax via the IRS Direct Pay system, EFTPS, or your credit/debit card. In this case, you’ll need to indicate that the payment is for an extension.

Lastly, you can physically mail the Form 4868 to get your extension.

Now, if you need to separately extend your business tax return for a corporation, you can use the IRS Modernized e-File (MeF) platform to file Form 7004 online or mail it.

Note: File for State Income Tax Extension Separately

Don’t forget that individual states may have different rules for extending your state return. Some may follow the IRS extension. Others may ask you to meet some additional criteria. So be sure to always double-check with your state tax authorities for any caveats!

Can the IRS Deny a Tax Extension Request?

As mentioned already, most tax extensions are granted automatically within minutes if you apply online. So the denial rate is very low.

However, you can get your application request denied if:

  • You file your request after the due date of the tax return
  • You forgot to sign your paper form
  • Or you did not mention anywhere on your Form 2350 that you live and/or work abroad

To Conclude

Filing for a tax extension isn’t that hard if you are a sole proprietor. However, you do have to forward your request on time and make at least an estimated tax payment! And, as always, if you are struggling to understand your dues, seek qualified advice from a tax professional!

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