Why Smart Entrepreneurs Skip the April Tax Deadline
Color Easter eggs with your children rather than collect tax papers? Prepare the soup for the Passover Seder instead of looking for business expense receipts? Write that "Dear John" e-mail to your soon-to-be-ex boyfriend and send your sister to pick up all your tax records from his house after things cool down?
Will any of these reasons for filing your tax return after the April 15 deadline win approval from the IRS? That's really a question from out of the past, because if you're a sole proprietor--even one with employees--you no longer need a reason to send your 2005 tax return to the government as late as October 15, 2006.
To get the OK on the October deadline, simply file IRS Form 4868 by April 17. (Because April 15 falls on a weekend this year, the IRS has extended the deadline by two days.) At the IRS website, you may choose one of several ways to file Form 4868. Or to directly download the form and instructions, go to http://www.irs.gov/pub/irs-pdf/f4868.pdf. (When it comes to filing your state taxes, be sure to check on your own state's extension requirements since each state has different requirements.)
So now that you know you can file your federal taxes after April 15, let's look at why you should.
Benefits of Filing Late
Some less-informed folks think that filing an extension triggers IRS computer screens to flash "Audit this return!" But that's just an old wives' tale: Wise entrepreneurs know that it's often in their best interest to file a tax return well after the April 15 deadline.
For starters, think about it this way: It's not that you didn't have time to collect all your information by April; it's that an extension gives you more time not only to collect but to review all your material. Even if you have your return completed by the end of March, it's smart to let it age for a while. Here's why:
Taxpayers think there's only one way to prepare a tax return. But tax pros know that income and deductions can be treated in a variety of ways. If your tax preparer really understands the intricacies of self-employed life, when preparing your return, she'll make the choices that are to your best tax advantage. Many of her choices for 2005 may depend on your income and expenses in 2006. And the later into 2006 you file, the more you'll know about what's going on in 2006.
For instance, an income substantially higher in 2006 than in 2005 may warrant a fuller deduction in 2006 for equipment purchased in 2005. Or, if your 2005 income was astronomical, you may want to make a giant-sized contribution to your self-employed pension. If you don't have that kind of money now to put into your pension plan, an extension gives you until October 2006 to come up with your 2005 pension contribution. Also, a 2006 decision to sell a residence or a car used in business, or to refinance or make a major purchase may also change the treatment choice of deductions in 2005.
So file an extension. Then take your time and talk with your tax professional about creating a favorable tax scenario by looking at your business situation for both last year and this year.
It's important to remember that while an extension gives you more time to file your return, it doesn't give you more time to pay your taxes. To complete the extension, estimate your total tax liability for 2005 using tax returns from previous years as a guide. For instance, if you made 25 percent more in 2005 than you did in 2004, pay at least 25 percent more in taxes. If you made less, pay less. It's best to overestimate the tax you'll owe.
Then pay the balance due or as much of it as you can. If you can't pay the balance due when filing your extension, or if you underestimate your tax liability, you'll be charged penalty and interest on the amount owed.
Always file an extension, even if you can't pay the full balance due. And come return filing time, if you still don't have the money, don't file your return late. If you do, in addition to any late payment penalties and interest, you could also be hit with a late filing penalty. So file on time--you can pay your taxes later.
My final word of advice is this: Some anxious people rush to pay their income taxes by taking cash advances on their credit cards. But that's just foolish: MasterCard and Visa finance charges are higher than Uncle Sam's.