Preparing Tax Extensions for Businesses and Nonprofits

If a business or nonprofit needs extra time to file its taxes, it can file for an extension. This is also true for individuals (more on individual extensions) but the deadlines, rules, and forms are different.

Regardless of the kind of extension that needs to be filed, individual or business, it is important to keep in mind that an extension only moves the due date for the tax return. It does not move the date which taxes are due. Extensions do not give you more time to pay your taxes. You are still expected to pay in a timely manner, even if you cannot complete your return on time.

You will need to estimate what your taxes may be in order to pay them on time. When it comes time to file your tax return, if the taxes that are owed are not what was estimated and subsequently paid, the IRS will either require you to pay the difference or they can provide you with a refund. Paying the full amount that you owe on time and filing an extension, will help you to avoid interest and penalties normally assessed to a late taxpayer.

Extensions for Businesses

The IRS allows a five- or six-month extension, depending on the type of business. Businesses can start this process by filing a Form 7004, which is used to request the extension. Occasionally small businesses, especially sole proprietorships, should not use this form because the business’s activities are reported on a personal tax return. In such situations, the business owner should file a personal tax extension (because there is sometime confusion on this, we have expanded on this topic below).

An extension is considered "automatic" in that you do not have to explain why the business needs an extension just simply request it. The IRS will typically only contact a taxpayer if their is a problem with the extension. To avoid this, try to ensure that the form is completed accurately. If you are unsure how to accurately complete this form you may consider retaining a professional tax preparer using the link above.

Extensions for Nonprofits

There are two types of extensions available for nonprofits. First, an automatic three-month extension is available by filing Form 8868. Like extensions for businesses, the first three-month extension is automatic, so you do not have to explain why it is needed.

Nonprofits can request an additional three-month extension (for a total of six months) by filling out Part II of Form 8868. Nonprofits can only request the second extension if the first three-month extension has already been granted. That is, you cannot request both extensions at the same time.

A second extension requires the nonprofit to explain why it needs additional time. The IRS requires “reasonable cause” for this request. Reasons such as assembling documents or that you are waiting on the results of an independent audit, are usually acceptable reasons.

Does my small business need to file a business or personal extension?

Small business can be taxed differently, depending upon the type of business. Likewise, they may be required to file differently. This includes not just the form used for a tax return but also the form used if an extension is filed. The decision on which to use is essentially determined by if the taxpayer normally files their business income on their individual tax return or on a business return.

If you are a sole proprietor and your business taxes are paired with your personal taxes, the only addition to your individual return is that you will also need to complete a Schedule C and include it with your Form 1040. In this instance, no business return is necessary, the Schedule C enables a taxpayer to list income, cost of goods sold, and various expenses. It also lists some of the most common expenses for small businesses (although you can claim additional expenses not listed with an attached separate expense list). If an extension is needed, sole proprietors should file for this using a Form 4868 by the due date of their individual return, usually April 15.

Partnerships, which use a Form 1065 to report income, and are typically filed with an individual returns form via Form K-1 would also use this to file for an individual extension.

Now, if a small business or LLC is treated as a corporation for tax purposes, and typically files a Form 1120 (tax return for corporations) then the business will need to file a 7004 to extend a due date for it's return. Corporate tax returns are due (in most years) on the 15th day of the third month following the close of the tax year. For those that use a calendar year tax year, returns are due March 15.

If you have additional questions as to if you need to file an extension as an individual or business you may contact a tax professional, here.