At this point in the tax season, small business owners who aren't well along in the process might want to get an extension of the April 15 deadline to file their returns.
There are good reasons for getting an extra four months to file your return, especially if you're still waiting for some tax documents or if you're in a cash-flow crunch and don't have the money to make your 2004 retirement plan contribution.
Contrary to what some people fear, there's no stigma in getting an extension, and accountants say it's highly unlikely to increase your chances of being audited. Some business owners get extensions as a matter of course.
If you called a tax professional's office at this point in the season, chances are he or she wouldn't start working on your return.
"It's probably a little late," said Joseph P. Maloney, a certified public accountant with Maloney Reed Scarpitti & Co. LLP in Erie, Pa. "We'd try to get an idea of their income to file an extension."
The mechanics of getting an extension are fairly simple. It requires sending IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, to the tax agency. You can send it electronically with your own tax preparation software, or a tax preparer can do it for you. Or, you can send it by regular mail — but be sure it's postmarked by midnight, the end of the day, on April 15. And send it certified with a return receipt, so you have proof that you made the deadline.
You can download a copy of Form 4868 from www.irs.gov.
But remember the accountant's mantra: An extension of time to file is not an extension of time to pay your taxes.
Form 4868 requires taxpayers to estimate the amount of taxes they owe and to send the money in. You can pay using a credit card — phone numbers and Web sites are included on Form 4868 — or send a check with the paper form.
Even if you can't pay right now, you have to send in Form 4868, and you need to make a good-faith estimate of what you owe.
Form 4868 gets you an automatic four-month extension, until Aug. 15. At that point, if you're still not able to file your return, you would need to apply for a further extension, using Form 2688, Application for Additional Extension of Time To File U.S. Individual Income Tax Return. Form 2688 requires taxpayers to explain why they need more time. As the IRS puts it, taxpayers need to "have a good reason why the first four months were not enough."
Audit worries
Taking longer to do your taxes is really unlikely to raise suspicion at the IRS or put you in line for an audit. Look at it this way: The agency doesn't have the staff to start auditing everyone who gets an extension.
Maloney said you're more likely to trigger an audit "if you have unusual deductions for your level of business, or high number of itemized deductions compared to your income."
Many small business owners use an extension as a cash flow management tool, because it gives them more time to make their prior-year retirement fund contributions. For retirement plans like SEPs, or Simplified Employee Pensions, the contribution doesn't have to be made until the due date of the return, including extensions.
Maloney said an extension also gives a small business owner time to do a more careful job of compiling a return.
"They can look at their expenses a little more closely. ... Now they're moving quickly and don't have time to sit down and discuss the situation thoroughly" with a professional, he said.
Another reason why a small business might need an extension is because needed tax documents aren't ready in time. For example, a business that has income from a partnership can't compile a return until the partnership's Schedule K-1 is completed, and K-1s are known for being late.
One caveat about extensions is that they can be symptomatic of a chaotic business with disorganized finances. In that case, go ahead and get the extension, but also start getting your books in better shape.
Maloney noted that some procrastinators don't work on their taxes in the months between April 15 and August 15, and then find themselves in the same bind as the next deadline approaches.
"That doesn't help at all," he said.