Business

<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Friday, March 7, 2008 Why you should consider a tax extension By Joyce Rosenberg Here's a small-business stereotype: a wild-eyed company owner, frantically filing for an extension of the income tax filing deadline. Sure, there are many owners panicking as April 15 approaches, but there's another, calmer group out there -- owners who routinely and methodically file for extensions as part of their year-round financial planning. Many of these owners use extensions to give themselves more time to fund their employee retirement plans. "Most of the extensions we see are for that very reason," said Gordon Spoor, a certified public accountant in St. Petersburg, Fla. "It's a cash flow consideration." An extension allows taxpayers -- including company owners who file business returns along with their 1040s -- an extra six months until Oct. 15 to file their returns. Under the tax law, the owner doesn't have to make a prior-year contribution to a retirement plan until the due date, including an extension, of his or her return. And so many owners this year will take advantage of that extra time to determine how much money they can contribute for 2007. And the size of the contribution, in turn, can affect an owner's tax bill. Extensions also come in handy for members of a partnership. Often it can take a while for a partnership to complete its return, and the individual partners obtain extensions so they have more time to prepare their personal returns. And tax professionals tend to get extensions for themselves -- Spoor said he's so busy doing other people's returns, that he wants to be able to do his own at a less frenetic pace. Still, there is the tax-preparers' mantra: An extension in time to file your return is not an extension in time to pay. The government requires taxpayers to estimate their tax liability and pay it when they file for an extension. If they don't pay their tax bill by April 15, the government starts levying some hefty penalties, 0.5 percent per month, and interest, at an annual percentage rate of 6 percent. "That's like a 12 percent loan," said Spoor, who noted that it might be cheaper than many credit cards, but still adds up. If you don't have the money to pay right now, file for an extension anyway; if you don't file either your return or get an extension, the government will exact a huge late filing penalty. According to the IRS Web site, www.irs.gov, "the total late filing penalty is usually 4.5 percent of the tax owed for each month, or a part of a month, that your return is late up to five months." The fact is, many owners who find themselves paying those kinds of fees to the government are often ones with organizational problems -- they're so overloaded or chaotic, they can't get any of the paperwork done, or their records are so haphazard they just don't know where they stand. It's probably best that these owners do go ahead and file for an extension, but they also need to find a better way to get their taxes done in the future. "An extension should not be used because 'I couldn't get my act together,'" Spoor said. "You should have a good idea of what your taxes are." It's fairly easy to file for an extension. Owners who file paper returns need to get Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. It requires very little information: name, address, Social Security number, estimated tax liability and the amount being paid. The government doesn't ask for an explanation of why a taxpayer is seeking an extension. You can download a copy of the form from the IRS Web site. You'll need to enclose a check with the form to pay your tax and have it postmarked by midnight on April 15. A tax professional can also easily file for an extension (expect this added chore to make his or her fee higher), but owners who do their own returns using tax prep software should find Form 4868 in the program and be able to file it electronically. A tax bill can be paid with a credit card, either by phone or online; the instructions for Form 4868 explain how to do this. Joyce Rosenberg writes about small business issues for the Associated Press.

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