To extend or not to extend, that is the question many business owners and individuals face each year. There are important reasons for considering each option. We've listed common situations to think about that will help you to make the best decision for you and your business.
Top Reasons for Filing on Time:
You Owe Taxes: If you expect to owe taxes to the IRS, extending your return will not give you extra time to pay. Interest will accrue and fees may be charged. Currently, IRS interest rates are at 8% annually, and the Failure to Pay penalty is an additional .5% of the total tax due per month. There may also be an Underpayment Fee charged depending on the situation. Paying estimated taxes before the due date will reduce this risk if you do extend.
To Receive Your Refund Faster: If you expect a refund, filing on time will allow you to get your refund more quickly.
You Need Copies of Tax Returns: There are many reasons people need a copy of their tax returns from financial aid to bank loans. If you anticipate needing a copy of your prior year tax return, it is a good reason to file early.
Top Reasons to Consider Extension:
Fund a Self-Employed Retirement Plan: For self-employed individuals, an extension allows extra time to contribute to retirement accounts like a solo 401(k) or SEP IRA. The employee contribution still must be made before the end of the tax year.
Take Extra Time to Make Elections: Extensions provide additional time to consider and make informed decisions regarding tax elections or strategies.
Waiting for K1: When you are waiting for a K1 or other documents needed for filing taxes, you may need to extend for a period of time.
Earning a high return: If you are earning a high that is well above the interest and penalty you will owe to the IRS, you may elect to extend your return and make later payments.
Bookkeeping isn't complete: If your financial records aren't up to date, you may need to extend. You may want to consider a professional bookkeeper that can save you money on IRS interest and fees.
Improve the Accuracy of Your Return: If you’re expecting a refund, filing an extension ensures you have more time to prepare documents, and carefully complete your return to minimize mistakes and claim any eligible deductions. Rushing to meet the original deadline can lead to errors.
Audit: By filing your taxes 3-6 months after the deadline, some tax experts believe it may delay or reduce your chances of being audited. However, there are no statistics available from the IRS, so the impact hasn't been quantified.
Other things to keep in mind:
Marital Filing Status Cannot Change: Once the original deadline passes, you cannot switch from married filing jointly to separately, whether on the original form or on the extension request.
Funding an IRA: Filing an extension gives you more time to file but it does not extend the deadline for funding a traditional or Roth IRA.
Do something by the tax due date:
If you expect to pay taxes, letting the original tax due date pass without filing at least an extension results in a Failure to File penalty is 5% of the tax due per month your return is overdue, up to 25% of the total tax bill. This is on top of the interest accruing at 8% annually (for 2024), the Failure to Pay penalty of an additional .5% per month, and the possible Underpayment Fee, if applicable.
If you expect a refund and don't file a return, you have just 3 years from the original due date to file. If you do not, your refund will be gone forever. If you extended but didn't file your return, you would have an extra 6 months, i.e. three years from the extension due date.
Remember that an extension provides additional time to file, but it does not grant extra time to pay any taxes owed. Consider your situation carefully and decide whether an extension aligns with your needs and circumstances.