Should You File for Tax Extensions? - See the Benefits and Drawbacks for Next Year

When you get down to the wire on your tax deadlines, even the calmest small business owner can start to sweat. No one wants to pay unnecessary fees and penalties or risk submitting errors or wrong information that could potentially lead to an audit. When time becomes tight during tax time, many business owners consider filing for an extension.

Although this can give you more time to get all your paperwork and numbers right, tax extensions are not without their drawbacks. Plus, if you’re doing your tax planning correctly throughout the year, you shouldn’t even have to worry about an extension.

The Pros of a Tax Extension

The obvious benefit of a tax extension is that you get more time. In some cases, the IRS will grant you up to six extra months to file the required paperwork. This extra time may allow you or your accountant to dig deeper into your financials, ensure everything is correct, and even find additional deductions that may have been overlooked before.

If you know that you are going to file past your deadline, then an extension can help you avoid paying fees for late filing. However, as we’ll mention below, you might not be completely off the hook for all penalties.

Drawbacks of Filing for a Tax Extension

There are several drawbacks and misunderstandings surrounding tax extensions.

·?Extensions don’t delay your tax payment – According to the IRS, even if you file for an extension, you still have to estimate what you owe and pay at least 90% of that amount. If you fail to do this, then you will still be subject to late fees that accrue as interest on what you owe them. You may also be charged additional penalties.

·?Your schedule may be disrupted – By taking extra time to file your taxes, other business matters may get delayed in order for you to focus on ensuring your tax paperwork is all completed by your extended deadline. Important activities, targets, and initiatives concerning new customers, products, or processes might be thrown off schedule.

·?You might have to wait to receive a loan – Businesses of all sizes often require loans to purchase new inventory, build new facilities, or maintain temporary cashflow. The problem is that many lenders require a copy of an up-to-date tax return as proof of the business’s revenue. If you file for a tax extension, then you won’t have a current tax return as quickly, which means you may have to hold off on receiving your loan, to the detriment of other areas of your business.

What’s the Alternative to Tax Extensions?

Filing for an extension comes with serious drawbacks. The best way to avoid those drawbacks is to be ready to file your taxes when your deadline comes around. To do that, you have to conduct tax planning throughout the entire year.

What does that mean for your business?

·?Keep tight records of your finances using a digital software

·?Use credit cards over cash for business expenses

·?Ensure your personal and business expenses stay separate

·?Properly manage your accounts receivable and accounts payable

·?Correctly classify your business type

·?Claim all of your income reported to the IRS

·?Keep track of your deductions throughout the year

If you’d like to give tax planning a try, avoid filing for extensions and potentially paying fees, and leave the stress and anxiety behind, then contact our team and we can get started. We have a lot of experience helping small businesses solve their tax problems and save money. No matter how much of a mess you believe your finances are, we can help.

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