If you’re only now starting to work on your company’s tax return, maybe you shouldn’t try to finish it by April 18, the deadline to file returns this year. You might be better off getting a six-month extension of the deadline.
To borrow from the old saying, “haste makes waste,” trying to do a rush job on your taxes is likely to lead to mistakes that will cost you time and money. If you forget to claim all the deductions you’re entitled to, you’ll pay more than you should to the government. And if the IRS finds an error that’s in the government favor, you could owe interest on tax you didn’t pay. If you have to go back and amend your return, there’s more time out the window.
Accountants and tax attorneys advise small business owners at this point in filing season to get an extension. If you showed up at a tax preparer’s office now hoping to get your return done, chances are they’d say no — and get an extension for you.
THERE’S NOTHING TO FEAR FROM EXTENSIONS
There is no shame or harm in getting an extension. Millions of taxpayers get them, and some business owners do it as a matter of course. Members of a partnership often can’t make the filing deadline because they can’t complete their personal returns until the business return is done. (By the way, the deadline is April 18 this year because the 15th is a holiday in the nation’s capital.)
There was once a time when it was feared that an extension made a return more likely to be audited. Tax preparers say there’s no evidence that’s the case. For one thing, the IRS doesn’t have enough employees to audit everyone who gets an extension. Tax preparers do say that rushing to get your taxes done and making mistakes in the process can make your return more likely to be scrutinized if you make mistakes.
Many small business owners use the six-month extension to give them more time to fund retirement plans. Contributions for many types of plans don’t have to be made until the due date of an employer’s return, and that includes an extension. So you can have until Oct. 17 to make your contribution for 2010.
HERE’S THE CATCH
This is from the IRS website: “An extension of time to file is NOT an extension of time to pay.” That means you must give the government an estimate of how much tax you owe and pay it by April 18. So you can’t use an extension to avoid paying your taxes.
But the government also recognizes that some taxpayers don’t have the money right now. You still need to make an estimate of what you owe when you get an extension.
Under no circumstances should you use lack of money as a reason not to get an extension. The late penalty for filing your return — which an extension helps you avoid — is 5 percent of the tax you owe for each month or part of a month that your return is late. There’s a maximum of 25 percent, but if you owe $5,000 in taxes, that’s another $1,250.
The penalty for late payment is milder, 0.5 percent of your unpaid taxes per month or part of month. So it’s better to get the extension if you can’t pay. And if you can show what the IRS calls reasonable cause for not paying on time, you may not be charged.
THE MECHANICS OF GETTING AN EXTENSION
You can download IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, from the agency’s website, www.irs.gov . You can send the form in by mail (but be sure you send it by certified mail and get a return receipt). You can also file it electronically. Form 4868 has instructions for doing that. You can either file the form from your own PC or ask a preparer to do it for you.
The form is fairly simple. Aside from your name, address and Social Security Number, you need to do little more than estimate your taxes. If you’re unable to pay now, note that the instructions for Form 4868 tell you not to include your explanation when you file for an extension. Your explanation should be attached to your return when you file.
You might also need to file for an extension in your state. You should check with your state tax agency to see what forms you might need to file.
SIX MONTHS AND A YEAR FROM NOW
If you’re chronically running late in getting your tax return done, you should take a look at how you’re running your business and see how you can do it better. If your records are disorganized or just don’t seem to have the time, you should think about getting help. That could mean a bookkeeper to keep your records current year-round. And a preparer to get your return done quickly and accurately.
If six months from now you’re in the same predicament as you are now, that’s really a sign that you need to make some changes.
Source: The Associated Press.