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Attention Business Owners: A Brief Overview of Tax Filing Extensions

by | Feb 21, 2024 | Tax, Tax Preparation

It’s tax time.

For many of our business clients, who are organized as S-Corps, partnerships, or entities that file these returns (such as LLCs or LLPs), taxes are due on March 15th but for many an extension will be filed.

Common Misunderstandings about Filing an Extension

Some people think “extension” is a dirty word; a bad thing to be avoided at all costs. Many have a misunderstanding that filing an extension increases the risk of being audited. Others think filing an extension gives you more time to pay taxes.

Three Things to Know about Filing an Extension

  1. They are not a bad thing.
  2. An extension does not increase your risk of being audited.
  3. You are required to pay what you owe when taxes are due. You do not get an extended time period to pay.

Three Primary Reasons Why Filing an Extension May Make Sense for a Business

  1. Time. Extensions enable you, your team, and your accountants to have more time to complete filing your taxes. Additional time may be needed to get information needed organized; or your company’s books may not be in good order, and you need more time; of you were late in getting the required information to your accountant so they need more time to complete preparing your taxes. For example, you may be waiting on Schedule K-1s from other entities, or you may be waiting on an annual R&D credit study to be completed. For any of these reasons, filing an extension relieves the pressure to get the taxes completed while preparing an estimate of taxes owed so the liability is paid on time.

    For many of our business clients with taxes due on March 15th, we file an extension, but it is a ‘short’ extension and taxes are filed by April 15th, with the owner’s personal returns. In Massachusetts however, the $456 minimum excise tax for corporations is still due on March 15.
  2. Financial statement Audits and Reviews. If your business is having a Financial Statement Audit or Review performed, we often prefer filing an extension so we can finalize the returns after the A&A engagement is completed.
  3. Time for Funding a SEP (Simplified Employee Pension) or Employer-side profit sharing contribution. An extension gives the business owner additional time to fund employer side retirement accounts – whether they be a SEP IRA, or a profit sharing contribution. For this purpose, an extension can assist with budgeting to fully fund their retirement savings vehicles.

It is especially important to understand that an extension does not defer tax liability payments. Underpayment of taxes incurs penalties by the IRS and interest is charged on the unpaid or underpaid amount. Learn more here.

If March 15th is coming up too quickly to complete your businesses’ tax filing, an extension may be the right course of action.

To learn more about how LCW CPAs helps our business clients protect their hard-earned money, click here.