Any taxpayer looking to file a business tax extension should get to know the basic process to avoid costly delays and penalties.
How to File Business Tax Extension in 4 Steps
Step 1: Check Your Records
Filing an extension for business taxes starts with keeping good records. Today, a taxpayer can easily maintain accurate and secure records with accounting providers like Turbo Tax and HR Block. Even taxpayers who prefer the traditional notebook-and-pen system will not have difficulty, as the internet offers a lot of templates any small business owner can use.
What kind of documentation can help a taxpayer?
- Any document showing earnings. Earnings refer to both revenue and profits, at least for tax documentation purposes.
- A document recording expenses. While there are expenses categorized as tax deductible, other expenses may not be reportable and can slow down the business tax extension process due to clarifications.
These documents can help convince the IRS that the taxpayer has good faith. While these documents are not necessarily attached to the forms used for requesting a tax extension, the IRS may ask for a summarized report and proof.
Examples of useful documents to record and keep are:
- Receipts of sales
- Inventory costs
- Travel expenses
- Accounting books
- Cash records
Of course, this is not an exhaustive list. Other documents include payroll and payslips, as well as bank transfers.
For the taxpayer who is looking for solutions to state business tax extension and other tax actions, they are better off reading more about IRS tax forms by state first.
IMPORTANT: filing for a business tax extension extends the filing and partial payment.
For taxpayers, that means they still have to pay the smaller amount between:
- 90% of the total tax amount that they expect to merit during the reportable tax year, or
- 100% of the total tax amount shown on the previous tax return. Provided, however, that the previous tax report shows 12 months.
The main purpose of a business tax extension is to avoid the failure to file penalty, which levies a 5% penalty on the unfiled amount. Not addressing these penalties can lead to harsher IRS tax collection methods, like an IRS levy.
Step 2: Know Your Type of Business Structure Before Requesting for an IRS Tax Extension
The forms that facilitate the process depend on what the business ownership structure is. There are generally five business structures:
- Sole proprietorship, wherein a single individual owns the business. Sole proprietors do not only encompass business owners but also freelancers.
- For taxpayers in a partnership, the profits and losses go directly to the individuals depending on their agreement or shares. Most of the tax forms for both the sole proprietor and the partnership are the same.
- A Limited Liability Corporation or LLC is composed of any individual or group of individuals who have successfully registered to receive limited liability. For the IRS, the LLC technically does not exist and does not pay taxes, so taxes are shouldered by the members, but some states do tax an LLC as if it exists as a separate entity.
- C class corporations, which is what most of the public think corporations are. Interestingly, the profits in this business ownership setup go through two taxes; first when the corporation itself gets a corporate tax, and then when the shareholders report the dividends as income.
- Lastly, an S class corporation is basically a C class corporation without going through the double taxation. To register as an S class corporation, stringent requirements must be met, like no foreign shareholders and members should not exceed 100.
With these five business structures, a taxpayer may now figure out which form to use to 1) file taxes and 2) extend the tax deadline.
Step 3: Get the Proper IRS Forms for Filing Taxes and Filing Extension for Taxes
Taxpayers need to know two things: 1), what tax forms to use to file for taxes; and 2), consequently, what forms to use to apply for a tax extension.
Filing the incorrect tax form may postpone or even cancel the tax extension process. Knowing what tax form to use for filing the tax return is immensely important.
The important tax forms specific for a business ownership structure are:
- Sole proprietors and individuals in a single-member LLC use Schedule C form, or Schedule C-EZ, depending on if they use the usual annual structure or estimated taxes, to report their income for the tax year. However, these individuals should also use Form 1040 to report taxes.
- Partnerships and LLCs with more than one member use Form 1065 to inform profit and loss to the IRS.
- C class Corporations file Form 1120. On the other hand, an S class corporation files Form 1120-S to give out information, unlike Form 1120 which functions as both a reporting form as well as a tax payment voucher for the corporation.
Of course, the individuals receiving income from a C class corporation have to file their individual 1040 form for dividend income. Members of an S class corporation still need to report income through Form 1040, but the S class corporation does not pay additional federal taxes.
Regarding the forms for filing business tax extensions:
- Sole proprietors should send the IRS Form 4868 to start the business tax extension process. Individuals can get an automatic six-month extension.
- For C and S class corporations, individuals in a partnership or even a limited liability corporation should use Form 7004. Remember Part 1 of Form 7004 gives an extension of five months while Part 2 gives six, so make sure to read where the business falls under.
To clarify, partnerships and LLCs receive a tax extension of five months. Corporations are eligible for six months.
IMPORTANT: Form 4868 simply grants the extension of tax reporting, not the extension of payment.
Form 4868 requires:
- Taxpayer’s name and spouse’s name,
- The tax amount owed,
- How much was sent as payment,
- The number of payments already made for the current tax,
- The estimated amount for the total tax amount for the reportable year, and
- Personal identifiable information like the residence and Social Security numbers.
Step 4: Understand the Important Due Dates, Deadlines, and Form Delivery Methods
There are two main ways to send the necessary tax forms
- The most convenient and fastest way lies with the e-file option by the IRS. Here, the taxpayer can just send the forms digitally, along with their payments.
- Some taxpayers prefer to mail the forms, and the address can be found on the form.
Regarding due dates and deadlines:
- Partnerships and the usual LLCs should file their tax return by April 15. The business tax extension is 5 months, which can push the deadline to September 15.
- S class corporations all have a uniform December 31 tax due date and the window for filing is on March 15. The tax extension goes until September 15.
- C class corporations have their own tax deadlines depending on the end of the fiscal year. For example, if the C class corporation fiscal year ends on January 15, and the window for filing is on April 15, the tax extension pushes the deadline to October 15.
- Sole proprietors, single-member LLCs, and most individual taxpayers observe the April 15 deadline. A tax extension gives them until October 15.
IMPORTANT: If the taxpayer plans to mail the check together with the form, like in the case of a C class corporation, he or she may find it best if the check is made out to the United States Treasury rather than just the IRS. Simply stating “IRS” can easily lead to alterations by unscrupulous criminals.
Getting a business tax extension can help a taxpayer make sure that all taxes are properly filed and paid, especially for busy individuals.
Do you have any questions about the business tax extension process? Have you gone through one before? Share your thoughts and opinions in the comments section below!
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.