Accounting Advice

Embracing Extensions: A Small Business Tax Guide to Stress-Free Filing

Embracing Extensions: A Small Business Tax Guide to Stress-Free Filing

As an outsourced accounting firm that includes a small business tax team, we see tax season stress cycles every year.  The deadline for filing taxes approaches, and the questions flood in. At the top of these emails, we typically address two major queries; can you file both my business and personal taxes, and won’t going on an extension be a bad thing?  Our answers are typically; yes, and no.  Here’s why:

The option of obtaining a tax extension can be a valuable tool, especially for those who require additional time to gather necessary documents or navigate complex financial situations.

In this article, we’ll explore why you should not fear a tax extension and how it can contribute to a more methodical and accurate tax return–for this year and those that follow. Pro Tip: Read up on how to set yourself up for a more proactive tax strategy in our Tax Guide.

What is an Extension?

A tax extension allows individuals or businesses to request additional time beyond the original tax filing deadline to submit their personal and business income tax returns. This extension offers taxpayers more time to gather all of the necessary documents, address complex financial situations, and ensure a thorough and accurate completion of their tax returns. 

Common Reasons Extensions Are Filed

Businesses may request extensions when filing their taxes for various reasons, often due to circumstances that prevent them from gathering the necessary information or completing their returns by the deadline. Here's a list of common scenarios:

  • Incomplete Records: If a business has not been able to compile all necessary financial documents and records by the tax deadline, it may need more time to ensure accuracy.
  • Complex Transactions: Businesses involved in complex transactions may require additional time to properly account for these activities and determine their tax implications.
  • Changes in Accounting Staff or CPAs: Turnover in key financial positions or changes in external accounting firms can delay tax preparation processes.
  • Awaiting Information from Third Parties: Sometimes, businesses need to wait for essential information from partners, investors, or contractors to complete their tax filings.
  • Recent Legislation Changes: Tax laws can change, and if such changes occur close to the filing deadline, businesses may need extra time to understand the implications and comply properly.
  • Natural Disasters or Emergencies: Unforeseen circumstances such as natural disasters, pandemics, or other emergencies can disrupt operations and lead to delays in tax preparation.
  • Strategic Financial Planning: Businesses may seek extensions to make strategic decisions based on their tax situations, such as maximizing deductions or credits.
  • Audits or Legal Issues: Ongoing audits or unresolved legal matters can delay the tax filing process as businesses may need to resolve these issues first.
  • Multi-State or International Operations: Companies operating across multiple states or countries face complex tax regulations and may require additional time to file accurately.
  • Cash Flow Considerations: If paying taxes by the deadline could negatively impact a business’s cash flow, it might seek an extension while arranging the necessary funds.

Extensions can provide businesses with the necessary time to ensure their tax filings are accurate and complete, thus avoiding errors and potential penalties.

Important tax pro disclaimer: a tax extension grants extra time for filing federal and state returns but does not extend the deadline for paying any taxes owed.  It is important to understand your tax liability ahead of time for this reason.

When working with an accounting or tax firm, it is important to embrace their initial recommendation of filing an extension.  It will allow them enough time to dig into your specific tax situation and understand how to maximize outcomes for your business.

Now that you have a better understanding of the tax extension, let’s explore the reasons it can be a good thing.

It Does Not Increase Audit Risk

We’ll start with addressing the burning question we feel through each email, Google Meet, and phone call we have with new tax clients: does this mean I will be more likely to be audited?

The answer–quite simply–is no.  Statistically, you are less likely to be audited when filing an extension.  Many of the reasons for this, coincidentally, are the following reasons you need not fear an extension.  Not only is time on your side, but accuracy.  Should you be one of the unlucky ones to be audited, that extra time you’ve allowed to get it done properly will likely make the process less painful.  Having all the details of your federal income tax (and others) correctly filed makes a huge difference when it comes to audits and their outcomes.

It Reduces the Likelihood of Hasty Mistakes

We get it.  If you are a small business owner, you are likely busy focusing your efforts on a million things at once.  It may have been pretty straightforward when you were in the sole proprietor stage to do most of the filing yourself.  Now that you are growing and/or have more complexities in the mix, rushing through the tax filing process is an even worse idea than it was before.  Simply inputting deductions until your tax software shows a more palatable “taxes owed” number is not going to cut it.  It can lead to errors and oversights that may result in penalties or missed opportunities. Grant yourself and your tax team the time needed to review your financial information thoroughly.  Embrace the extension.  This will give you peace of mind, knowing you are minimizing mistakes and ensuring a more accurate return.

It Supports Those With Complex Business Scenarios

Accountfully has a wide array of entrepreneurial clients.  Many of them are Individuals with intricate financial portfolios and/or are involved in partnerships.  These scenarios can mean challenges in gathering all the necessary tax form details wrangled for their tax return in a short amount of time. Having the extension offers us more flexibility to smoothly navigate any complexities.  The outcome is that your tax return reflects your financial situation accurately and next year’s return will be that much better. 

It Allows a Longer Time Frame to Consult With Your Tax Pro Team

Not to toot our own horn or anything, but when you hire a professional tax team, like Accountfully, you can significantly enhance the quality of your tax return. With a tax extension, you can enjoy conversations and updates from your team without the pressure of an imminent deadline.  This allows for more comprehensive discussions and strategic planning to optimize your financial position.  Who knows, we may even catch something we can plan for next year and get your business on a new journey toward better tax outcomes.

It Allows Time For Unexpected Life Changes to Be Included

A good majority of our clients who are filing both personal and business returns with us may encounter unexpected, tax-affecting life events.  Things like marriage, divorce, or the birth of a child, can impact your tax situation. We want to ensure that the proper tax credit is given to those who need it.  That tax extension gives your tax team the time to assess these changes and adjust your financial strategy accordingly. Again–potential savings, better outcomes, and accuracy when it is important to have it.

It Reduces Stress and Anxiety

We don’t claim to be the cure-all for your business tax-related anxiety, but if there was ever a way to reduce some of it, Accountfully is a great first step.  Taxes for small business owners can be complex and time-consuming, and a tax extension can alleviate the stress associated with meeting tight deadlines. This added time fosters a more zen-like approach, allowing your team a clearer understanding of every corner of your financial situation.  Having an extended timeline to file is a great way to ensure more calm and less stress.  

Closing Thoughts

This year, consider viewing a tax extension as a means of adopting a more relaxed and precise approach to filing taxes. Rather than perceiving it as a warning of an audit, it should be seen as a valuable resource. Embracing the chance to extend the deadline for tax filing can lead to more accurate and well-rounded tax returns. By making use of this option, small business owners can navigate complex financial situations, obtain professional advice in a less last-minute manner, and ultimately approach tax season with confidence and clarity. The added bonus of this proactive approach may just set your business on a new and advantageous path for future tax years.

• • •

Accountfully offers a wide range of tax services that support small businesses in their need for filing federal, state, and local tax returns.  We also offer important tax advisory services for those seeking guidance surrounding how to best position themselves for positive tax outcomes; now and in the future.  

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