with Diane Kennedy, CPA, Author of Smart Business, Stupid Business
It's April. Raise your hand if you've filed your taxes. Anyone who raised their hand, you get a gold star, two if you estimated and paid throughout the year. Everyone else, read on.
At this point, you're probably tempted to load those receipts and log books into a wheel-barrow and tote it all down to your local One-Stop Tax Prep Store.
Don't -- for three reasons.
The first is that the wheel-barrow probably isn't tax deductible. The second is that those guys might charge you their higher rates because of the amount of work they're going to have to do -- so you have to get organized. Third is that if you file in a hurry you're more likely to miss a deduction that you are entitled to. But if you're not ready to file now, what you do first is....
E-File IRS Form 7004. It's the filing extension paperwork for LLCs and Partnerships. If you're an S-Corp, contact your Internal Revenue Service office, because the deadline for filing extension paperwork for you expired on St. Patrick's Day. If you're filing personal taxes, look for Form 4868.
Why are you e-filing? Because you get a confirmation number, and just like any other big organization's mailroom, the IRS mailroom is not a steel trap. Sometimes they misplace or lose things. Sometimes it ends up on the wrong person's desk. The e-confirmation proves that the IRS did, in fact, receive your request for a filing extension. And the courts will back you up if you have it and the IRS are claiming you never filed your extension.
"An extension to file does not get you off the hook for paying on time. Even if you extend your filing deadline, you have to pay your estimated taxes." Says Diane Kennedy, author of Smart Business, Stupid Business. I know -- you still have a wheel-barrow, overflowing with receipts. So if you need to guess how much estimated taxes to pay, then guess. But pay something as close to realistic as you can figure.
An extension can be useful in other ways, too -- since the tax code seems to change with the weather, which is to say sometimes unpredictably and often confusingly, waiting for those changes to take effect can help shape your company's approach to taxes for the next year. Also,"there's some evidence that businesses which file extensions and file later are less likely to be audited." Said Kennedy.
Kennedy advocates using a good bookkeeping system through the year, "Something like Quickbooks is easy to learn, and as an off-the-shelf bookkeeping solution, it's reliable and accurate."
So here are your take-aways:
1. Use a bookkeeping system to track your business spending and income though the year.
2. If you're going to have to file in a hurry, don't -- file an extension and file before the extended due date. That means October 15th for Individual and Partnership Returns and September 15th for S Corporations.
3. Pay your estimated taxes.
When you've got your extension filed, take a breath and diligently set about doing your taxes to the new deadline.
Some things you should know:
1. If you have a mortgage workout plan for your real estate, or if you have had a debt write-down, the amount of forgiven debt might show up as income on your taxes.
2. If you can afford a bookkeeper or CPA to look after your money, it's money well spent.
3. Filing after the return is due isn't ideal, but it's much better than not filing at all, which is a felony.
Unless you're amazingly lucky, your estimated taxes are going to be wrong, but pay them anyway. You'll probably have a penalty for paying the incorrect amount of tax, but it should be single-digit percentages of what you owe.
If you fail to pay your taxes, and bring a fraud investigation on yourself, then you could be facing penalties and fines of up to $500,000 and five years in jail for each offence you're found guilty of. And before you decide that you're not afraid of bookkeepers investigating you, remember that it was tax evasion that they finally used to arrest and incarcerate Al Capone.
The absolute worst thing you can do is to fail to pay payroll taxes. Not only can your business be levied to death, if the IRS finds that you knew about it, your own personal assets are at risk.
It's still April, you still haven't filed, but guess what? You've decided that you're going to file an extension, pay your estimated taxes, and then make sure that you're getting all the deductions you're entitled to by taking the time that you need to accurately prepare your taxes.
Now you get a gold star.
COMPANY.com Taxes for Entrepreneurs Series
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