Published on: March 10, 2020

Are Tax Extensions Available to S Corps?

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    Data from the IRS shows that S Corps make up 13 percent of small businesses in the US, and bring in 18 percent of revenues.

    Further statistics show that there are over 4.6 million S corps in America, which is more than double the number of C corporations. 

    Why are S corps so popular? 

    One reason is that S corps garner unique tax benefits. However, if an S corp is late with its tax return, it will get penalized just like any other business entity. 

    Which begs the question: can you get an S corp extension?

    If you know you aren’t going to make your filing deadline as an S corp, then you need to know whether or not you are eligible for an S corp extension, and how to get one. 

    If you want to find this out, keep reading. We are about to share with you all the ins and outs of s corp tax extensions, including what common mistakes to avoid. 

    tax challenges

    S Corp Definition

    An S corporation is a closely held corporation. Unlike other corporations, S corps are pass-through entities. Instead of the corporation being taxed in its profits, these are passed through to the shareholders.

    Shareholders then file for and pay taxes on their share of the S corporation’s profits on Schedule K-1. 

    S corps are a popular type of business entity, as they offer relief from corporate tax, while at the same time providing shareholders with limited liability.

    Late Filing Penalties for S Corps

    Although S corps do not directly pay taxes on their profits (as these are passed through to the shareholders) they are required to file a tax return each year on IRS Form 1120S. S corps are also required to attach Schedule K-1 to report the profits and losses for shareholders. 

    If an S corp fails to file its return on time, this can impact the ability of shareholders to report the income or loss applicable to them from the S corp. What’s more, the IRS imposes a penalty for the late filing of S corporation tax returns. 

    What Are the Penalties?

    The penalties for late filing of S corp returns depends on the number of shareholders of the S corp in questions, as well as how many months the return is in arrears. 

    The penalty for not filing by the due date is $195 per full or partial month that the return is late. This amount is also multiplied by the number of shareholders in the S corp. 

    As the maximum number of shareholders for an S corp is 100, the penalty can become quite large. 

    For example, if an S corp with 75 shareholders filed its return less than 1 month after the due date, this would result in a penalty of $14,625. If the S corp were to file its return 3 months after the due date, the penalty would be $43,875. 

    As you can see, depending on how late the return is, and how many S corp shareholders there are, late filing penalties can be large. To avoid late filing penalties, the first thing to nail down is the S corp return filing deadline. 

    irs form 940

    The S Corp Return Deadlines

    The annual S corporation filing deadline for IRS Form 1120S is the 15th day of the third month following the end of the corporation’s tax year. For S corps whose financial year runs with the calendar year, the filing deadline is March 15th. If the 15th of March falls on a weekend or public holiday, the filing deadline goes to the first Monday after the 15th of March. 

    S corps whose financial year does no follow the calendar year have three months and 15 days after the end of their financial year in which to file returns. 

    Can You Get an S Corp Extension?

    There are times when it is not possible to file S corp returns within the three and a half month timeframe. To cater to these situations, the IRS provides S corps with the option to apply for an extension for filing. 

    S corp extensions are valid for six months. This usually provides more than enough time for corporations to successfully file their returns. 

    How to File an S Corp Extension

    S corps who need to apply for a filing extension can do so by filling out and filing IRS Form 7004.

    This can be done in one of two ways. You can either choose to submit the form via the IRS’s e-file system by using a software program or profesional tax services. Most major tax software applications allow you to file extensions using Form 7004 (for businesses) or Form 4868 (for individuals). 

    Tax professionals will also be able to file S corp extensions by utilizing tax applications.

    Lastly, you can also choose to file an S corp tax extension by printing out Form 7004, filling it in, and posting it to the IRS. Be aware, however, that this method can be very slow.

    If your letter is held up in the post, this can cause delays in the IRS granting your S corp extension. If they receive your application after the filing deadline, they may reject it, and penalties will come into play. 

    What is more, with regular mail the IRS’s response to your application will also take longer, and it can be difficult to gain confirmation of receipt of your application. 

    Does the IRS Ever Deny Extensions to S Corps?

    Yes, they do. 

    Filing extensions for S corps are, like for individuals, considered automatic. However, the IRS might still turn down an automatic extension for a couple of specific reasons.

    If the extension application is filed after the tax return deadline, the IRS is likely to refuse the extension. Another reason for the IRS to turn down a paper filed extension application is if it is not signed. 

    However, in most cases, if the extension application is filed on time, and is correctly signed, the IRS is not likely to turn down extensions. 

    Common S Corp Tax Extension Mistakes

    Besides filing after the tax return due date, and not signing paper copies of Form 7004, there are also a couple of other S corp tax extension mistakes to avoid. 

    These include the following. 

    Filing for an S Corp Extension Before S Corp Status Has Been Approved

    The first of these concerns S corp status. S corps are corporations which have made an “S election” with the IRS. This is done by filling out and filing IRS Form 2553. This is termed an Election by a Small Business Corporation to pass through its profits/losses to its shareholders. 

    Before Form 2553 is filed and processed by the IRS, corporations cannot file taxes as S corporations. In many cases, it’s not uncommon for taxpayers to be under the impression that the IRS has already recognized their corporation as an S corp, even if this process has not been completed. 

    In some cases, the application Form 2553 has not been sent yet. In others, the IRS is still busy approving the S-Corp election.

    If Form 7004 is filed, requesting an S corp extension, when the company in question is not yet an S corporation, the IRS will turn down the application on the grounds of an incorrect entity type. 

    If this happens, taxpayers can take this up by phoning the IRS and enquiring about the S corp status, or consulting their tax professional. If S corp status has not yet be instated, then taxpayers should file an extension application for a C corporation instead. After the extension has been granted, taxpayers can then focus on finalizing their approval for S corp status. 

    As luck would have it, corporate extensions are often filed very close to the return deadline. If you have filed within the last few days before the return deadline, and a complication like an error in S corp status crops up—there might not be enough time to file a C corporation extension application before penalties are charged. 

    This brings us to the next common pitfall to steer clear of. 

    Filing Too Close to the Deadline

    Another common and costly mistake to avoid with 1120S extensions is filing them too close to the tax return deadline. In some instances, this might work out, but in many cases, leaving the application to the last minute can cause detrimental delays. 

    If it appears that an S corp’s taxes will not be filed with time to spare before the tax deadline, it is always best to apply for an S corp extension as soon as possible. This will help to ensure that any delays won’t result in penalties. 

    Shareholders Not Filing Extensions

    When S corps apply for an S corporation tax extension, it’s often overlooked that the shareholders of the corporation will also need to file extensions for their personal taxes. 

    The reason for this is that a tax extension on the part of the S corporation will inevitably delay the issuing of Schedule K-1. This means that the shareholders will not be able to file their personal taxes until the S corp has filed its taxes return and they have received their Schedule K-1.

    For this reason, any time an S corp applies for an 1120S extension all shareholders should also apply for extensions on their personal tax filing deadline. 

    To do so they will need to fill out and file IRS Form 4868. This extension will grant taxpayers an additional 6 months in which to file their personal times, which will allow for any delay on the part of the S corp.

    Like S corp extensions, extensions for individual taxpayers are also automatic and are very rarely declined. Reasons for the IRS declining an application are similar to those for S corps. If an application is sent after the personal income tax return filing deadline or is not signed (when sent in hard copy), this could cause the IRS to deny the extension.

    tax deadline

    Take Note That Filing Deadline Extensions Do Not Affect Payment Deadlines

    Another important thing to be aware of when applying for an S corp extension is that extensions do not affect payment deadlines. Extensions merely allow more time for an entity or individual to file taxes. In the meantime, it is still required to make estimated tax payments.

    In the cases of S corps, it is very rare that an S corp will owe any taxes on its return, as these are passed through to the shareholders. This means that any shareholders of an S corp that have applied for an extension will still need to pay taxes that are due on time. 

    As the shareholders will not be able to use their return to see what they owe, they will need to calculate their taxes themselves or have a tax professional do this for them. Once that is done, shareholders can then make estimated payments to the IRS.  

    Do Not Forget About State Tax Deadlines

    Lastly, when it comes to extensions, do not forget about state tax deadlines. Some states that impose income tax go along with the IRS extension. However, there are other states, such as New York, which require corporations and individuals to file separate applications for extensions. 

    Do You Need an S Corp Extension?

    If your S corp is running late on filing its return the best thing to do is apply for an extension as soon as possible. 

    The next crucial thing is to get all the applicable documents prepared for filing that tax return. If this process is proving complex, it is a good idea to seek out the assistance of a tax expert. 

    If you need help with preparing to file for an S corp tax return or an S corp extension, we offer tax consulting, assistance for unfiled returns, and emergency tax services

    If you have any questions about what we do and how we can help you, contact us and we will be happy to answer your queries. The best part? We are available 24 hours a day, 7 days a week, so take advantage of this to get your tax trouble sorted out asap. 

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