If you’ve filed for a tax extension, you now have a six-month reprieve. It would be the dream to mark your calendar for Oct. 15, kick back and take a load off for a few months.
But if you can make the most of this opportunity by getting a tighter grip on your business finances, the rewards of doing so can be both emotional (who needs all of that last-minute scrambling?) and financial.
After filing an extension on your taxes, here are some basic steps you can take to make the most of this breathing room.
Figure Out What Happened
The first step you can take is to ask yourself why you had to file a tax extension. Perhaps you simply couldn’t pull all the documentation together or were concerned about your cash flow. Whatever the reason, it’s good to know so you can prevent filing for an extension next year and dealing with its potential consequences.
In filing an extension, you could discover that your tax liability is greater than you and your tax preparer had estimated. You may have to pay interest on top of the taxes you already paid, due to the underpayment.
If your bookkeeping and record keeping was, let’s just say, less than meticulous throughout 2017, you could have missed out on opportunities to have a lower tax bill as well.
Once you’ve gone through some financial soul-searching and reflected on the reasons for filing an extension on your taxes, initiate steps to improve your record-keeping processes. Then, wrap up the work of pulling together all the paperwork you’ll need to file your return by the extended deadline.
Take Full Advantage of This Time, and Start Now
The sooner you start on your taxes, the better. If you discover that you can’t find, for example, proper documentation for a business expense this year that you were planning to claim, you’ll have more time to get new receipts or prepare the documentation needed to show that you made those purchases. Remember, if you can’t substantiate claimed expenses and you’re audited, you could face penalties in addition to a higher tax bill.
To make the most of this time, here are three actions you can take between now and the tax extension deadline:
1. Start building a contingency fund in case you wind up having to pay more to cover your tax bill.
2. If you suspect that your tax liability will be larger than you estimated, make a payment toward that larger amount even before you file your return. That way, if your prediction was correct, you’ll lower the interest charge you’ll incur. And if you’re wrong, no big deal, that can just be applied toward your liability next year.
3. If you determine before the deadline that your liability will be higher (or lower) than your original estimate, decide whether you need to make adjustments to the quarterly estimated payments you’re making toward next year’s tax bill.
Begin Preparing for Next Year
Now’s the time to take the steps necessary to make it easier for you to lower your tax bill next year and grow your business. Use this time to upgrade your accounting and record-keeping systems to avoid having to file for a tax extension. Make sure your bookkeeping and record keeping is accurate throughout the upcoming year, and you’ll even have a chance to find expenses you can write off.
By tracking and documenting your revenue and expenses carefully, you’ll know whether, for example, you can afford to make an investment in your business that you may have been putting off. That would help your business, and lower your tax liability. You might decide you can afford to pay yourself or your employees more than you had assumed, which could be another smart investment in your business.
Filing a tax extension may not be at the top of your business goals checklist, but if you had to file one, there are ways to make the most of it. Don’t beat yourself up about it — what’s done is done — and now’s the time to take action.