A Complete Guide to Business Tax Extension

For small business owners tax filing for 2023 may seem overwhelming, but a business tax extension can give you valuable extra time to gather everything you need. This "pause button" helps you avoid penalties if the deadline feels tight. We offer virtual tax filing services, so you can conveniently file your return from anywhere.

And if you're feeling swamped or just need a bit more time, our BookkeeperLive team is here to help you out.

What is a business tax extension?

A business tax extension is a formal request granted by the Internal Revenue Service (IRS) that allows you to delay filing your federal tax return. It's essential to extra time to gather your tax documents, complete your return, and submit it to the IRS without facing penalties for late filing.

Here's a breakdown of key points about business tax extensions:

Purpose: Provides additional time to file your return if you can't meet the original due date.
Who can benefit: This is particularly helpful for small businesses that need more time to organize their finances, gather records, or consult with a tax professional.
Duration: A typical business tax extension grants an additional six months to file your return.

Important to remember

Not an extension to pay: While a filing extension gives you more time to file, it does not delay the deadline for any taxes you owe. Interest and penalties will still accrue on any unpaid taxes after the original due date.
Estimated tax payment: Even when filing an extension, you may still be required to pay an estimated amount of taxes owed. This helps ensure you're not hit with a large tax bill come filing time.
Filing process: There are specific forms you need to file with the IRS to request a business tax extension. The most common form used is Form 7004, Application for Automatic Extension of Time to File Certain Business Tax, Information, and Payment Returns.

Filing process & eligibility

How to file for a business tax extension?

The tax filing season can present significant challenges for small businesses with limited resources. Fortunately, the option to file for a business tax extension can provide valuable additional time to ensure an accurate and complete tax return.

Here's the key part: filing for an extension is quite straightforward. Let's break it down:

Use Form: The most common form used for business tax extensions is Form 7004,
Where to Find It: You can easily download Form 7004 directly from the IRS website
Filling it Out: The good news is the form itself is pretty simple. You'll just need to fill in basic information like your business name, tax ID number, and the specific tax return you're requesting an extension for.
Filing Options: You have two options for submitting Form 7004:
Electronically: This is the fastest and easiest way. You can e-file the form directly through the IRS website or use a trusted tax software program.
By Mail: You can also mail a completed paper copy of Form 7004 to the IRS address listed on the forms instructions.

Remember: The most crucial part is to file your extension by the original tax deadline. That way, you avoid any late filing penalties.

Bonus Tip: While filing an extension gives you more time to submit your return, it doesn't extend the deadline for any taxes you owe. It's a good idea to estimate what you owe and make a payment to the IRS by the original due date to avoid interest and penalties on unpaid taxes.

How does a tax extension work?

While a tax extension gives you more breathing room to complete your return, it doesn't extend the deadline for any taxes you owe. The original due date for your tax payment still stands. Failing to pay on time can result in penalties from the IRS, such as:

Failure-to-file penalty: This penalty kicks in if you miss the deadline to file your return, even with an extension.
Failure-to-pay penalty: This penalty applies if you don't pay the taxes you owe by the original due date, regardless of whether you filed an extension.

Refunds and extensions

If you're expecting a tax refund, filing late generally won't result in a penalty. However, the IRS won't send you your refund until you actually file your return. They'll hold onto it for up to three years. But if you still haven't filed after that timeframe, the IRS keeps your refund.

IRA contributions and extensions

Tax extensions typically don't allow you to contribute extra funds to traditional or Roth IRAs beyond the original tax deadline. The one exception is for SEP-IRAs (Simplified Employee Pension IRAs). If you file an extension, you can contribute to your SEP-IRA until the extended tax deadline (usually October 15th).

Who qualifies for a business tax extension?

Anyone who needs more time: The most straightforward reason is simply needing more time to gather your records, complete your return, or consult with a tax professional. This is especially common for new businesses or those with complex financial situations.
Missing records or documentation: If you're waiting on crucial documents like K-1s from partners or receipts from vendors, an extension gives you breathing room to track them down without facing late-filing penalties.
Unexpected events: Sometimes life throws curveballs. If you've been dealing with an illness, natural disaster, or other unforeseen circumstances that prevent timely filing, an extension can be a lifesaver.

In essence, any business owner who can't meet the original tax deadline for a legitimate reason can qualify for an extension.

Here are some groups that typically don't need a formal extension:

Businesses already granted an automatic extension: If you received a two-month extension for being a U.S. citizen or resident abroad on the due date, you don't need to file another extension.
Businesses owing no tax: If your business doesn't owe any taxes for the year, you generally don't need to file a return at all. However, it's always best to consult with a tax professional for specific advice.

Extension deadlines & consequences

What are the deadlines for business tax extensions?

C Corporations
- Original due date: Typically the 15th day of the fourth month following the tax year-end. (Exception: For corporations with a fiscal year ending on June 30th, the due date is the 15th day of the third month.) This translates to April 15th for calendar year-end corporations and September 15th for fiscal year-end corporations ending June 30th.
- Extension deadline: Same as the original due date (April 15th for calendar year-end, September 15th for June 30th fiscal year-end). You can obtain an automatic six-month extension by filing Form 7004.
S Corporations and Partnerships (including multi-member LLCs):
- Original due date: Typically the 15th day of the third month following the tax year-end. This translates to March 15th for calendar year-end S corporations and partnerships.
- Extension deadline: Same as the original due date (March 15th for calendar year-end). You can obtain an automatic six-month extension by filing Form 7004.

What are the late filing penalties for business taxes?

The IRS hits businesses with a penalty for failing to file their tax return by the original due date (or extended deadline). This penalty is a percentage of the total tax owed, increasing the longer the return remains unfiled. Here's the breakdown:

First five months: A steep 5% penalty is applied each month during the first five months the return is late. This penalty maxes out at 25% of the total tax owed.
After five months: The penalty increases to 1% per month (up to a maximum of 5% per month) for each additional month the return remains unfiled. There's still a maximum penalty, but it's applied to the total tax owed, not just the unpaid portion.

Example: Let's say your business owes $10,000 in taxes and files your return 6 months late. Here's the penalty breakdown:

Months 1-5: 5% x $10,000/month x 5 months = $2,500 (capped at 25% of total tax = $2,500)
Month 6: 1% x $10,000 = $100

Total Penalty: $2,600 (not $1,500 as in the previous example)

Important points

This penalty applies to the total tax owed, even if some of it has been paid.
If you owe no tax, there's typically no late filing penalty, but you should still file on time to avoid other issues.
Interest on Unpaid Taxes: On top of the penalty, you'll be charged interest on any unpaid taxes from the due date until the date they're settled.
Reasonable Cause Exception: The IRS may waive the penalty if you can demonstrate a legitimate reason for filing late. This could include emergencies or errors by your tax professional, but you'll need strong documentation to prove it.

FAQs

1. What happens if I miss the deadline to file for a business tax extension?

If you miss the deadline, you may still be able to file for an extension, but you'll need to demonstrate reasonable cause for the delay.

2. Are there any penalties for filing a late business tax extension?

There is no penalty for filing the extension form itself, but penalties apply for late filing of the actual tax return.

3. What are the state filing requirements for business tax extensions?

Some states may have separate filing requirements for state tax extensions. Check with your state's Department of Revenue for details.

4. What happens if I owe taxes when I file for an extension?

Even if you file for an extension, you should estimate and pay any taxes owed by the original due date to avoid penalties and interest.

5. How much extra time does a business tax extension give me?

A business tax extension typically grants an additional six months to file your return.

6. How to file an extension?

To file a business tax extension, you can submit Form 7004 electronically through the IRS website.