Tax season can be a demanding time for everyone. As a small business owner, pulling together all the necessary tax documents, reports and receipts on time can be a very stressful task. Sometimes, it’s just easier to file for a tax extension. But what do you do next?
We spoke to some accounting experts about what to do after a tax extension, so you can get on top of your financial records and avoid any penalties in the future. Here’s what you can do during your tax extension time period.
How to Know If Your Tax Extension Is Accepted
Filed for a tax extension and feeling guilty over it? Don't. You're certainly not alone, with an average of 1 in 10 taxpayers filing for an extension in any given year, according to the IRS. If your request for a federal tax extension is accepted and granted, you usually have until October 15 to file your tax return. This means that the tax extension time period is effectively six months from the normal deadline, which is April 15 (April 18 in 2022, due to the 15th landing on Good Friday).
However, before you breathe a sigh of relief, you’ll want to make sure that your extension was, in fact, granted. “If you filed by U.S. Mail, contact IRS customer service directly. With a tax filing service, they should send the confirmation directly to you, but always check,” recommends Armine Alajian, founder of the Alajian Group. While extensions are generally granted before the deadline, it’s always a good idea to have some sort of confirmation before you go ahead and take the extra time to finalize your documents.
Pay Your Tax By the Right Deadline
Half of taxpayers pay nearly 97 percent of all federal income taxes. An important thing to remember about tax extensions is that while it gives you more time to file your return, it doesn’t give you more time to pay what you owe.
Simply put, it’s not a payment extension. To avoid any sort of penalty, “calculate an estimate of what you might owe and pay that by the deadline,” says Alajian. Any interest and penalties will be added after the April 18 deadline, so it’s ideal to at least calculate if you owe anything first.
Even if things are a little tight, it’s better to still pay something rather than nothing. “Don’t ignore it if you can’t pay it all immediately; pay what you can to lessen your penalty and interest,” Alajian recommends.
Get Your Records and Receipts Organized
One of the first things you should do once you have been granted an extension is to get all your receipts and records organized. This will make it much easier for you later down the track when it comes to filing your return. Elena Jones from FinanceJar offers this advice: “Use a personal tax checklist to keep track,” and write everything down. “These notes and checklists will aid you in times when the IRS has any queries about your return,” she says.
While a tax extension technically gives you an additional six months, you should buckle down and organize the documents you need to file your taxes as soon as possible. “Gather…any documents that back your claims for certain deductions or tax credits,” says Alajian. Having all of this information organized and neatly compiled will only help you later on in the event of an audit.
Some of the documents you might want to pull together include:
Previous year’s tax return
Virtual currency transactions
1099 income earnings
Receipts of business-related purchases
Consult an Accounting Expert If Needed
While it may seem overwhelming, there are always experts and accountants to consult. Courtney Barbee from The Bookkeeper recommends that “for anything beyond a single-member LLC’s Schedule C Filing, a tax professional should be consulted.” This can put all your worries at ease and help you file your tax return correctly, especially if you’re behind already.
There are a few advantages of investing in some professional tax guidance. “Professionals know what questions to ask and are familiar with the current guidance," Alagian explains. "It is worth consulting with an experienced tax professional to ensure you maximize your refund.” And you wouldn’t be alone, either. Roughly 50 percent of individual tax returns were filed by paid preparers and private practitioners in 2020, according to the IRS data. Many people are seeing the benefit of consulting a professional to help them file taxes.
Make a Proactive Plan for the Future
So, you might have filed for an extension this year, but you can always start to look ahead to be more proactive in the future. “Most importantly, after filing a tax extension, you should prepare a plan for the following year,” says Barbee. You can see it as a chance to get on top of your financial records and develop a system for keeping your receipts and documents tidy and organized.
There are several tools that can help small business owners prepare for tax time. “File storage tools such as Dropbox, Google Drive and Accountants Portal are all great tools to aggregate all supporting documents in one place. For businesses, QuickBooks is a great tool to keep financial records and produce a balance sheet and a profit and loss statement,” Alajian says. You can take the extra six months to find a system that works well for you, so you can be ahead of the game the following year.
Beyond the Extension
While filing for a tax extension can feel overwhelmingly stressful as an individual or small business, the extra six months can give you enough time to get organized. Once you’ve confirmed that your extension was granted before the deadline, you should then make any payments that you need to first before spending some time gathering all your documents for filing.
Remember to ask for help or consult with a professional if needed. Incfile offers a complete business Accounting and Bookkeeping service — as well as a free tax consultation — to help get you through tax season with ease.
Jenna Scatena is a writer and content strategist with a love for stories that have never been told before. More than a decade of working with prominent magazines and brands informs her approach to impactful storytelling. Her stories have reached more than 30 million readers, won multiple awards and been anthologized in books. Jenna's work has appeared in Conde Nast Traveler, Vogue, Marie Claire, The San Francisco, BBC and The Atlantic. She's the founder of the editorial consultancy, Lede Studio.