How do Extensions Work?

An extension gives you additional time to prepare and file your tax return.  You might need additional time because you haven't received everything or don't have enough time to gather everything for your tax preparer.  The most important thing to understand is that an extension DOES NOT give you additional time to pay what you owe.

Follow our frequently asked questions & answers, plus our form specific questions and answers below.  Don't see what you're looking for?  Contact us and we'll be more than happy to assist.

How do I pay if I don't know what I owe?

The answer is estimates and educated guesses.

For example, let’s say you own 20% of a rental property that doesn’t file their tax return until later in the year.  Even though you don’t know the final tax numbers for the property, you probably have a good idea of what the net income is.  Your CPA can use that information to estimate your share of the taxable income or loss.

What if I didn't make a payment with the extension?

If you had no tax due with the final tax return you should be good to go!  However if you end up owing you'll be assessed penalties and interest from when the return was originally due.  The good news is that you are typically charged rates that are lower than most commercially available loans... meaning, you just borrowed money from the United States government without having to fill out a pesky loan application.

How do quarterly estimated tax payments play into the extension?

If you expect to pay quarterly estimated taxes we recommend increasing your extension payment by what you would have made for your first quarter estimate.  This way the overpayment on your tax return is automatically applied towards your estimated taxes.

Don't forget about states.

While this article focuses on federal income tax returns, do not forget about your state and/or local returns too.  For example if you do business in Florida you might need to file a Florida extension if you are a C-Corporation or a Partnership with a non-individual partner (in Florida specifically S-Corporations, Trusts and Individuals typically do not need to file an extension).

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Specifics by Tax Return Type


Partnerships (Form 1065)

Partnerships typically will not have a federal tax liability, so there is no payment requirement.  However, if the business is filing a state tax return the state might impose certain taxes or fees that should be paid with the extension.  The return can be extended by filing Form 7004.

S-Corporations (Form 1120S)

S-Corporations typically will not have a federal tax liability, so there is no payment requirement.  However, if the business is filing a state tax return the state might impose certain taxes or fees that should be paid with the extension.  The return can be extended by filing Form 7004.

   

Trusts (FORM 1041)

Trusts may or may not have a federal tax liability.  If a trust has non-capital gain income and distributed it all, then the trust may not have a federal tax liability.  However if the trust had capital gain income or did not distribute all non-capital gain income then the trust will more than likely have a federal income tax liability.  Trusts are highly complex, we recommend having a qualified CPA with trust experience extend your trust return.  The return can be extended by filing Form 7004.

Corporations (FORM 1120)

Corporations are required to make estimated quarterly tax payments, typically any payment made by extension time is the result of year-end adjustments or last minute changes that those who calculated the estimate were unaware of.  If quarterly estimated tax payments were not made, we recommend an adequate extension payment is made (that includes a Q1 amount too - see above for details).  In limited circumstances a Corporation might have income in a year, though they won't have a tax liability - this usually happens when the corporation has losses carrying forward from a prior year.  The return can be extended by filing Form 7004.

   

Individuals (FORM 1040)

Most individuals that do not own a business will not have a federal tax liability as they have enough tax withheld from their paycheck to cover the amount of tax they owe (realistically they usually have too much taken out which generates a refund).  However, if you are a business owner or investor in partnerships and S-Corporations chances are you will have a federal tax liability.  We recommend that you make a payment with your extension unless you were making quarterly estimated tax payments during the year.  Even if you were making estimated tax payments during the year, instead of making a Q1 estimated tax payment, make an extension payment instead - see above for details.  The return can be extended by filing Form 4868.

 

 

 

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