How To File a Business Tax Extension: Everything You Need to Know

Even the most organized companies may find themselves running behind as the tax filing deadline approaches. If tax information needed to complete a return is missing or you simply need more time for any reason, the IRS allows business taxpayers to buy some extra time by requesting an extension. Filing a business tax extension is relatively quick and painless. However, there are some things you should know.

Avoid Late-Filing Penalties

Check your filing due date so you can file on time or obtain a filing extension to avoid penalties. There's no penalty if there's a filing extension in place and the return is filed by the extended due date. The filing extension must be obtained by the due date of the return. The deadline for a business tax extension form depends on the type of business entity (assuming they all report on a calendar year and not on a fiscal year). For 2022 returns, the extension request deadline is:

• Partnerships (including limited liability companies with two or more members): March 15, 2023
• S corporations: March 15, 2023
• C corporations: April 18, 2023

Businesses located within federal disaster areas may not need to request an extension. They may enjoy an automatic extension—anywhere from 60 days up to one year as the IRS announces—to file the business return.

Sole proprietorships, self-employed individuals, and one-member limited liability companies can obtain an extension to report their business activities by getting an extension for their personal income tax returns. The due date for obtaining a self-employed tax extension is April 18, 2023.

Extensions for State Income Tax Returns

Most states impose their own taxes and have their own rules for filing returns and obtaining filing extensions. In some states, if you don't owe any federal income tax, a federal filing extension also extends the time for filing a state income tax return. Check with your state to find the deadline and procedure for obtaining a filing extension. You can find your state income information from the Federation of Tax Administrators.

Penalties

If you don't request a filing extension, filing a return after the original due date, even by the extended due date, triggers federal late-filing penalties—and they're stiff. For example, a 2022 Form 1065, U.S. Return of Partnership Income, that's due on March 15, 2023, but isn't filed on time for a calendar-year partnership results in a penalty of $220 multiplied by the number of partners who were in the partnership at any time during the year, multiplied by the number of months the return is late (up to 12 months). In other words, if the Form 1065 is three months late and there four partners, the penalty for this late filing amounts to $2,640 ($220 x 3 months x 4 partners).

Use the Correct Business Tax Extension Form

The IRS provides designated forms for filing a tax extension for federal income tax purposes.

Businesses—partnerships, multi-member limited liability companies, S corporations, and C corporations—must complete Form 7004, which allows for a six-month extension.

Sole Proprietorship or Self-Employed

Sole proprietors or self-employed individuals whose business income is reported on their individual tax form (1040 or 1040-SR), file Form 4868 to request an extension. One-member limited liability companies that haven't elected to be taxed as a corporation also file Form 4868 to request an extension. This form grants taxpayers an additional six months to file.

Filing the form is not necessary for individuals who pay their taxes online through the IRS payment portal. Through the option for "Bank Account (Direct Pay)," you will see the "reason for payment" listed as "extension."

No filing extension is needed in some situations because you get an automatic extension if:

• You live and work abroad. This gives you an additional two months to file your return. If you want more time, file Form 4868 to get another four months.
• You or your spouse works in a combat zone in support of the U.S. Armed Forces. The extension runs through the period in the combat zone, plus 180 days after the last day in the combat zone.
• You live in an area designated as a federal disaster area. This gives you anywhere from 60 days to one year as the IRS announces—to file your return.

Owners of Pass-Through Entities

Owners of pass-through entities—partnerships, multi-member limited liability companies, and S corporations—whose businesses have requested a filing extension should file for an extension for their personal returns on which they report their share of business income or loss. Again, individuals use Form 4868 to request a filing extension or make payment through the IRS payment portal (explained earlier in Sole Proprietorship or Self-Employed).

Estimate Tax Owed

Filing a business return extension does not give more time to pay taxes owed. As the IRS website states, "An extension of time to file is not an extension of time to pay." If taxes are not paid by the original due date of the return, there are late-payment penalties.

Are Federal Taxes Owed?

Businesses may or may not owe taxes. They may have already paid taxes via through estimated taxes throughout the year. For example, a calendar-year C corporation paid estimated taxes for 2022 in four installments on April 18, 2022, June 15, 2022, September 15, 2022, and December 15, 2022. If these payments equaled or exceeded the tax figured on the return, no additional tax needs to be paid.

Businesses that are pass-through entities usually do not pay taxes; owners pay taxes on their share of business income. However, S corporations may owe taxes in special situations and should make timely tax payments to avoid a late-payment penalty:

• Excess net passive income tax is owed if the corporation has passive investment income in excess of 25% of gross profits.
• LIFO recapture, payable in four equal installments, if the corporation had been a C corporation that used LIFO inventory pricing method for its last year as a C corporation or a C corporation transferred LIFO inventory to the S corporation in a nonrecognition transaction. The C corporation pays one fourth of the recapture tax in its last year; the S corporation pays the tax for the remaining installments.
• Built-in gains tax on appreciated assets held at the time a C corporation became an S corporation and sold within five years.

Are State Income Taxes Owed?

In addition to federal income tax, state income tax may be owed. Owners are subject to state income tax in all states other than Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, New Hampshire, and Wyoming.

Different tax rules apply to corporations when it comes to state income taxes. For example, Florida imposes a corporate tax even though sole proprietors have no state income tax on their business profits.

Companies that conduct business in more than one state may owe taxes in multiple locations. Apportionment rules, which vary by state, determine what portion of federal income is subject to state tax.

How Much Additional Tax Is Owed?

If a business expects to owe taxes, they must estimate the amount due to the best of their ability and pay as much as possible to minimize or avoid late-payment penalties. Even if tax forms are not complete, most businesses should be able to reasonably calculate annual income and figure the tax due. If required information is missing or needs to be corrected, a professional tax preparer can help with tax estimates or provide advice on what should be sent to the IRS.

Complete the Business Tax Extension Form

The business extension Form 7004 is relatively easy to complete. Include the correct code for the type of return to which the extension relates. For example, a C corporation filing Form 1120 enters code "12" in Part I the extension request form. The estimated amount of total tax expected to be owed when the return is completed and the amount of payments already made must also be listed to calculate the estimated balance due which will accompany the extension request.

No reason for requesting the extension is necessary. No signature is required on the form.

Send the Extension Request to the IRS

Can I file a business tax extension online? Extensions may be filed electronically. If using tax software, the current year's extension forms should be available for transmittal within the program. Alternatively, you can use a tax professional who can submit the extension request for you. More specifically:

• Filing Form 7004 electronically: the form must be filed through the Modernized e-file (MeF) platform that tax professionals can access.
• Filing Form 4868 electronically: access IRS e-file with your tax software or use a tax professional who can access e-file.

If the form is completed on paper, mail it to the address in the instructions to the form. Filing an extension request on paper does not preclude you from filing the tax return electronically. But watch the timing of your actions because a paper extension may be processed by the IRS later than the time when an electronic form is filed.

Make a Tax Payment

Corporations must make their tax payments electronically using EFTPS.gov. There's no cost for using this payment method, but you have to register with EFTPS in advance to obtain a PIN number for access. Those that do not want to use EFTPS.gov can arrange for tax payments through a tax professional, financial institution, or other trusted third party to make electronic deposits on their behalf.

Other businesses can choose to use EFTPS.gov. It is an easy and secure payment method.

Individuals can also pay online using EFTPS.gov as well as pay from their bank account using Direct Pay or by a credit or debit card. They can also pay by phone.

If funds are not paid electronically, send a check payable to the U.S. Treasury to cover estimated tax liability.

What's Next?

Hold onto confirmation that the extension was mailed or e-filed. The IRS does not inform filers that an extension is granted because the extension is automatic. When the complete tax information is available, all required forms should be filed and any additional tax remitted.

Again, remember that Form 7004 extension only applies to federal taxes. State and local tax extensions must be researched and requested separately.

Prepare To File Taxes in Full

A filing extension only postpones the inevitable task of filing a return for 2022. Be sure to understand the full process for filing your business return. Business should consider working with a tax professional to ensure their final return complies with tax rules and takes advantage of every tax-saving opportunity available.

Paychex offers tax services that can help your business navigate the complexities of filing taxes.