The tax filing process can be stressful, even for the most savvy business owner. No matter how many times you’ve done it, maximizing your returns and avoiding penalties can feel like an extreme obstacle course. 

Chances are, if you had to file an extension for your tax return, you already feel behind. You didn’t meet the initial deadline this year; how can you possibly make this process work for you?

If you are one of those people who filed an extension for either your 2021 business tax return that was due on March 1 or your personal return that was due on April 18th, not to worry! It isn’t too late. There are still several tax savings opportunities you can take advantage of, even though 2021 is long gone. 

Here are some ways that you can actually benefit from NOT meeting the initial tax filing deadline.

Strategies for Saving

The first few reasons are straightforward: more time equals a more accurate return. If you aren’t rushed, you will have time to gather all necessary information, and ultimately be able to deduct more. It also allows you time to research more tax saving opportunities, like a few that will be presented here. 

Filing an extension also extends the statute for making changes later. In the future, if you discover that you need to amend your previously filed return, you have three years from the time the return is filed, or two years from the time the tax is paid (whichever is later). Finally, your tax preparer won’t be as rushed during the ‘off season.’ They can ask more questions and wait for you to find the answers that ultimately lead to a better tax filing result.  

Another tax saving tool that can be utilized on the 2021 tax return (even though the tax year has already ended) is retirement savings. You can make contributions (with 2022 cash) to a Simplified Employee Pension (SEP) IRA up until the extended tax deadline. As an employer, you can contribute up to $58,000 per employee, (a maximum of 25% of either W2 wages as an employee or Self Employment Income if you own your own business). If you are 50 years old or older, that maximum is $64,500. These plans are best suited for a small employer group with 1-5 employees. Keep in mind that you will be required to use the same contribution percentage for each employee, i.e. - 25% of everyone's W2 should be deposited to their individual SEP. Also, these funds vest immediately.  

If you goofed and contributed more to your 2021 IRA (any type) than you were supposed to, you have until the extension deadline to withdraw those funds (or have them count toward 2022 contributions) and avoid the penalty. Thanks to the SECURE Act, which went into law in 2019, you can now make employer contributions to a Solo 401(k) for 2021 up until your extended tax filing deadline. 

The train already left the station to establish a new plan and also to obtain a deduction for the employee deferral portion, but an employer profit sharing contribution is still available. It is similar to a SEP-IRA in that you can make a contribution of 25% of W2 wages as a maximum employer contribution, but with this type of plan you can also set up a vesting schedule.  This adds the flexibility of not having all employees receive the same percentage of pay for their employer contribution. 

If a larger deduction is the goal ($100,000+), then a Cash Balance/Defined Benefit Plan can be a great option. It is best for slightly larger businesses (10 employees or more) that need to have either a fairly large disparity in the owner’s W2 compared to other employees and/or age difference for the owner(s). This plan will allow you to receive 80% of the contribution in your account. 

What If I Owe Taxes?

If you do owe taxes and you were not able to pay by April 18, the extension does NOT give you more time to pay. If you know that you owe taxes, you can make payments immediately and count them on your 2021 tax return. Want to estimate the amount of tax you think you will owe? The IRS tax estimation tool can help you reduce penalties.

There are several penalties for unpaid taxes. The first is a Late Filing Penalty. This is 0.5% per month, up to 25%. The months are marked on the 15th day of the month, so if you pay after the 15th, you will be assessed another whole month. The second is the Underpayment Penalty, which is assessed on a daily basis for not making quarterly estimates if you are self-employed. The calculation happens when you file your return and report your estimated tax payments. It is 0.5% of the underpayment amount and is capped at 25%. 

If you fail to file the tax return by the extended due date, you will be assessed the Failure to File Penalty, which is 5% per month up to 25%. If both the Failure to Pay and Failure to File Penalties are applied in the same month, the Failure to File Penalty will be reduced by the amount of the Failure to Pay Penalty (4.5%). If your return is over 60 days late, the minimum Failure to File Penalty is $435 (for 2020-2022) or 100% of the tax required to be shown on the return-- whichever is less. 

I would strongly recommend filing a return by the deadline so that you are not assessed the Failure to File Penalty. Even if you have to amend the return later, at least you will be able to avoid a very steep penalty. The IRS also charges interest on both your tax and the penalties they assess. That rate changes quarterly and is the Federal short-term rate plus 3 percentage points (currently 6% for Q2 of 2022), and is compounded daily.

The final deadline this year is September 15th for business tax returns, and October 17th for personal tax returns. If you still cannot pay the tax you owe, there are payment plan options. Being on an approved payment plan also reduces by half your Failure to Pay Penalty to 0.25% per month (or partial month). If you’re interested in a payment plan, you can apply online with the IRS. 

If you have any questions about filing extensions, savings strategies, penalties, and negotiating payment plans with the IRS, you should seek the advice of a tax professional such as myself. We have the experience to help you navigate these waters and can even advocate for you, negotiating better payment terms with the IRS! Having a tax partner can make a significant impact on your outcomes, so if you don’t yet have someone you love and trust, please don’t hesitate to reach out to me with any and all questions!