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The Pros and Cons of Filing for a Tax Extension

April 15th (or March 15th for corporation owners) looms large in our minds as “Tax Day.” It’s the “be all and the end all,” the doomsday where the world will end if we don’t have our paperwork together and our forms securely filed with the IRS.

Or is it?

Believe it or not, the IRS actually understands how difficult tax time can be for us all and will approve a six-month tax extension for approximately 97% of the people who file. For corporations, this means you have until September 15th to file. Individuals have until October 15th.

Is filing for a tax extension right for you? Check out the pros and cons before you decide.

The Pros of Filing For a Tax Extension

Extra time to get paperwork together – This is the big one. As a busy business owner with lots of moving financial parts, you simply may not have had time for important tax preparation tasks like:

  • Tracking and reconciling all income and expenses – A mistake here could mean overpaying or underpaying Uncle Sam
  • Making important tax time decisions – Do you want to depreciate your equipment? Can certain costs be characterized as startup costs? Filing a tax extension gives you time to answer these not-so-simple questions
  • Funding your retirement fund – Ensure you’ve maxed out to the best of your abilities an existing retirement plan or start and fund a SEP-IRA. Be warned that this doesn’t apply to all retirement plans, so check with your provider.

Avoid tax penalties – If you fail to file your tax returns on time but also don’t file for an extension, your financial troubles are just beginning. The penalty for failing to file online is 5% per month for up to 5 months, and if your tax payment is more than 60 days late you’ll be subject to a $135 minimum penalty.

Time to find the right tax pro – If you waited until January to start looking for the right tax pro for your business, you’ve likely waited too late. Most accountants and other tax professionals are slammed with existing client work from January to April every year and may not even be taking on new clients. If they are, they may have raised their rates commensurate with increased demand. Filing a tax return can give you some breathing room to find the right CPA and make sure she understands your business and your needs.

Get a state tax extension, too – Most states will automatically grant a tax extension when you file your federal tax extension. Of course, you should always double check this before assuming that your state has agreed to give you an extension.

Alleviate financial stress – Never underestimate the power of stress to undermine a busy business owner! A National Federation of Independent Businesses (NFIB) study of over 10,000 small business owners found that taxes top their list of concerns. Extra time will give you the breathing room you need to meet your tax obligations at your own pace.

The Cons of Filing for a Tax Extension

Extra time to file doesn’t mean extra time to pay – This is the doozy. Just because you have six extra months to file your paperwork doesn’t mean you have six extra months to pay your taxes due. Even if you file for a tax extension, you’ll still have to calculate how much you owe and make sure you get that amount into the government.

Of course, you’re likely filing a tax extension because you aren’t sure how much you owe. Your option here is to estimate how much you owe, but you risk two bad outcomes:

  • You pay too little and receive late payment and interest penalties on the remainder
  • You pay too much and the government holds on to funds that you could have been using to grow your business

If you file a tax extension and don’t pay, you’ll still owe a penalty of .5% of the amount due per month, up to 25% of your total tax due.

You could be turned down – Be careful before you take a tax extension for granted. While 97% of tax extensions are approved, there are exceptions. The IRS can reject your extension and doesn’t even have to give you a reason. So be sure to file in plenty of time if you think there’s the slightest chance you’ll need a tax extension. (There are no consequences if you file an extension but end up filing and paying on time.)

Are you ready to go the tax extension route? Fill out IRS form 4868 for individuals or, for most types of corporations, form 7004, to make tax time just a little less taxing.



Jennifer Dunn

Jennifer Dunn

Contributor at Fundera
Jennifer Dunn is a small business contributor for Fundera and owner of Social Street Media. She is also the community manager at GoDaddy Online Bookkeeping, and her long-standing life goal is to learn something new every day.
Jennifer Dunn