Small Business Tax Tips - How to File an Extension For Your Income Tax Return

For all you procrastinators out there, here's a nuts 'n bolts guide on how to legally postpone the filing of your 2008 income tax returns. When it comes to putting things off, you can never plan too far ahead.

In many cases the IRS allows you to file a no-questions-asked extension form. Which particular form you file depends on what type of entity your business happens to be.

SOLE PROPRIETORSHIP:
You need to file Form 4868 to get an automatic 6-month extension to file your personal income tax return.

CORPORATIONS:
Whether you are a "C" Corporation or an "S" Corporation, you must file Form 7004 by March 15. Doing so grants you an automatic 6-month extension for filing Form 1120 ("C" Corp) or Form 1120S ("S" Corp).

PARTNERSHIPS:
You need to file Form 7004 by April 15. This obtains a 5-month extension to file Form 1065.

LIMITED LIABILITY COMPANIES (LLC):
LLC's can be taxed like a sole proprietorship, a corporation, or a partnership. So simply file the extension form for whichever entity you are being taxed like.

Now, before you start extending to your heart's content, please keep the following guidelines in mind.

EXTENSION TIP #1:

Never forget the mantra of all tax extension forms: The extension to file the return is NOT an extension to pay any tax due. It's only an extension for the filing of your tax return.

In other words, do not view the extension as an opportunity to legally postpone the payment of your tax.

So if you have a balance due on the return, then you must still pay the tax by the original tax return due date. If you file the extension but do not pay the balance due on time, then you will pay penalty and interest for late payment of tax. You will legally avoid the penalty for late filing, however.

So what's the point in filing an extension if you still have to pay the tax?

Three possible scenarios -- first, some folks get most of their tax data organized and are able to get enough of their return done to get the big picture: "Do I owe or am I getting a refund." You do the calculations, see where you stand, and if you owe, send in the extension form with a payment that's pretty close to the final figures.

You may have a few deductions that you need to research, one last shoebox to peruse. You need more time, that's all.

Second, you're running way behind on tax matters this year. Hey, it happens! There's no way you're going to get the return done on time, and you know you'll probably owe, so, be sure to file the extension, even if you don't know how much you may owe or even if you can't make a payment with the extension. The reason? Because there are penalties for late filing and penalties for late payment of tax. By filing the extension, at least you avoid the late filing penalties.

In short, by filing the extension, you can save yourself some money in late FILING charges, but not necessarily late PAYMENT charges. Be sure to understand the difference!

The third scenario is even more common -- you know you're getting a refund; you always get a refund. Maybe you're self-employed and your spouse has a W-2 job, and the spouse's tax withholdings are always enough to cover both of you. And you're in no hurry to get the refund.

Which brings me to:

EXTENSION TIP #2:

If you are getting a refund on your personal return, you have 3 years to file the return to claim the refund, without any fear of a late filing penalty.

That's right. As long as you file your return within 3 years of the original due date (for Year 2008 returns due April 15, 2009, that would be April 15, 2012), you'll get your refund and there is no penalty for filing late, even if you file after the extended due date of October 15.

Bottom line: if you think you may owe, if at all possible, do enough calculating to send in a payment with the extension. If you're getting a refund, still send in the extension (just to be safe), but relax, you've got plenty of time to get your money back, assuming you didn't need it yesterday.

Oh, one more thing:

EXTENSION TIP #3:

This article only deals with federal extension rules. State rules vary considerably, so be sure to check with your state's tax department or your local tax professional to get the scoop on the extension rules for your particular state.

Some states simply piggyback off the federal rules. Others don't. So be careful here or you could be penalized severely for assuming that your state's rules are the same as the feds.