Tax season is finally upon us and while you might be scrambling to get everything turned on time, the good news is that you can file for an extension if you don't think you can make the deadline. There are pros and cons to requesting an extension and delaying your tax filing deadline. So whether you should get an extension is entirely dependent on your businesses situation and timeline. What makes the most sense to you? To help you answer that question, let's look at some reasons for filing an extension and some disadvantages
What is a tax extension?
A tax extension gives you an extra six months (roughly) to file your tax return, which is quite generous. However, it does not give you an additional six months to pay whatever you may owe. So to be clear, an extension will only give you extra time to show your work and submit important documents but you will still have to pay taxes on time to avoid late penalties.
Reminder: The deadline to file taxes this year is April, 18 2022
Reasons to File an Extension
1. You need more time
If you can't file your return by the April 18 deadline, apply for a tax extension. There's many different reasons you would need to file an extension whether you can't find certain documents or something personal. Don't beat yourself up trying to figure out how to return before time runs out. Take advantage of the extension.
There may come a time when your CPA falls behind, the forms you needed to gather all of your information weren't available on time, or the books for your business have fallen so far behind that you're not even comfortable with the information.
Filing a false return is a less serious crime than tax evasion, but it's probably not something you want to mess with or think about. Making amends in the future can also be difficult.
3. Avoiding tax season mistakes
For CPAs, tax season can be a long season with long days and nights. They're also human, so mistakes are bound to happen.
An extension can give your company more time to consider your tax strategy.
CPAs routinely raise their prices during tax season to both discourage people from waiting until the last minute and capitalize on those who do. If you file an extension, your fees may be reduced after the filing deadline.
1. Delayed refund
If you expect a refund this year, you might wanna reconsider requesting a tax extension. The longer you wait to file your tax return, the longer you will have to wait for your refund. If you need money right away, file as soon as possible.
You can also expedite your refund by filing your tax return electronically and electing to have your refund deposited directly into your bank account. The IRS can handle electronic returns much faster than it can handle paper returns and checks
2. You still have to pay on time
We touched on this earlier but the extension is only for filing your tax return; it does not extend the deadline for paying any taxes your business might owe. People often put off filing in order to delay payment but this is a huge misconception. You must still estimate the amount of tax you owe (if any) and pay it by April 18. If you don't, the IRS will charge you interest on the unpaid balance and will most likely add on additional penalties for paying late.
While filing an extension can be beneficial, it can also extend the amount of stress that comes with filing taxes. Now, not only are you worrying about filing taxes for a good chunk of the year but you're also trying to run a business. And then before you know it, it's almost the end of the year and it's almost time to file taxes AGAIN. This can be a toxic cycle so it's best to only file an extension if you absolutely need it.
How to Avoid Filing an Extension
1. Hire a bookkeeper
A bookkeeper will update your books on a regular basis, which could be weekly or once a month. The frequency with which a business's books must be updated varies by company.
With another party managing day-to-day transactions and ensuring that your businesses' financials are up to date, you're able to focus more on running your business.
2. Don't procrastinate
It's far too late to put together a tax strategy if you wait until tax season. Consult with a CPA well in advance to figure out your businesses' tax strategy for the coming year. The sooner you have that conversation, the more likely it is that they will be able to assist you in putting together a plan that will take advantage of cost savings.
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