April 1, 2022

I’ve Filed a Tax Extension. What Now?

Tax day has come and gone and you didn’t have time to file your taxes. As long as you filed a tax extension, you have an extra six months to get your tax return to the Internal Revenue Service (IRS).

The IRS will allow you to file an extension for any reason, as long as you file form 4868 by the original tax deadline or they will automatically grant you an extension if you have paid your taxes by the original deadline.

But what happens after you’ve filed a tax extension? We’ll help guide you through the process.

Check the status of your extension.

The first thing you need to do after you’ve filed a tax extension is make sure that it is approved. Although the IRS is good about granting tax extensions, you’ll want to double-check that yours has been approved. If you used an accountant to file your taxes, check back with them to see if it’s been approved. If you used a tax preparation service, you can check there to see your approval. Finally, if you mailed your extension form in, you’ll have to call the IRS customer service line to follow up on it.

Once you’ve verified that your tax extension was approved, you have six months to finish your taxes and submit them.

If your tax extension was rejected, it is most likely due to a clerical error. You may have misspelled something, or your last name doesn’t match the IRS’s records. If this is the case, you have 5 days to correct it and resubmit it.

Pay any taxes due.

Filing a tax extension does not extend the deadline for paying your taxes. If you owe any taxes, you need to pay them as soon as possible.

The IRS charges interest for any taxes not paid by the original due date. After that date, unpaid taxes are charged a .5% interest rate for every month, or partial month, that the balance is not paid. The maximum penalty is 25% interest.

If you can prove that you had a reasonable cause for not paying your taxes by the deadline, then the IRS might waive the interest fees.

File your tax return.

The final step with a tax extension is to file your taxes. The IRS allows you to file a tax return up to 6 months past the original filing date. You can file your return any time before that date as well.

If you fail to file your tax return by the extended date, you can face more penalties. The IRS charges a 5% penalty for any month, or partial month, that your tax return is late. Again, the maximum penalty is 25%. You can avoid the penalty if you have a reasonable explanation as to why your return was late. The IRS suggests you attach your reasoning to your tax return in order for it to be considered.

If you have questions about your extension or business tax return, reach out to our team at Vyde. We would love to help answer your questions!

FAQs for Filing a Tax Extension

1. How do I confirm if my tax extension has been approved? After filing, verify approval status. Contact your tax preparer, service, or IRS customer service if you submitted it by mail to ensure it was accepted.

2. What should I do if my tax extension is rejected? A rejection could be due to errors. Correct any inaccuracies within 5 days, such as misspelling or discrepancies in personal data, and resubmit.

3. Is paying taxes postponed by filing an extension? No, the tax extension only extends the filing deadline, not the payment. Clear any owed taxes by the original due date to avoid interest charges.

4. When should I file my tax return after getting an extension? Utilize the granted six-month extension period to file your taxes. Submit your return within this timeframe to avoid late-filing penalties.

5. What penalties might I face if I fail to file by the extended deadline? Late filing incurs a 5% penalty per month on the unpaid tax amount. Attach a reasonable explanation if your return is late to avoid this penalty.

What Your Financial Reports Really Tell You

Financial reports can be an incredibly helpful tool for small businesses. They can help you determine how much money you can pay yourself each month. Or they can help you decide if it’s time to expand your business. As helpful as financial reports are, they can only help you if you understand how to read them.

Luckily, Ben Sutton, Vyde’s co-founder and CPA, took the time to explain how an income statement and balance sheet work. It’s not the same as getting a 5-year accounting degree, but it’s going to give you the knowledge to make smart business decisions. Watch the video below for a great in-depth example of how financial reports work or keep reading to learn more.

Financial Reports Start with a Bank Statement

One of the things we ask our clients to send us each month is his or her business’ bank statement. This is so that we can begin to build your profit and loss, or income statement, and balance sheet. We’ll go through the bank statement to look for expenses and income. Expenses can come from a variety of places such as:

Marketing costs
Supplies
Food & entertainment
Business equipment
Auto expenses
Loan payments
Owner distributions

Income is simply what money your business generates. Customer payments are the most common form of income.

Keep in mind that as we move on these expenses will be split between the profit and loss statement and balance sheet. This is where the accounting rules come in. An accountant can determine what pieces of information belong on a profit and loss statement and what belongs on a balance sheet.

What Does My Profit & Loss Statement Tell Me?

A profit and loss statement (P&L) shows the revenues, costs, and expenses for a certain time period. We like to provide our clients with a monthly or quarterly P&L statement.

The P&L is only going to show the exact income and expenses that your business had that month. Accounting rules tell us which expenses belong on the P&L and what belongs on the balance sheet.

First, you will count any income your business had. Customer payments, as we said before, count as income. One confusing point would be any loans that you have taken out during the month. It may seem like income because money is coming into your account, but it isn’t. A loan is a liability and doesn’t belong on a P&L

Before we move on to regular expenses, we’ll want to look for the cost of goods sold. Cost of goods sold is what you spend on items that are required to produce your business’ services or products. This isn’t a required section on a P&L, but it’s useful for management to see what they’re spending directly on their services.

Next, are the monthly business expenses. Expenses are any other purchases that you make for your business. These include food, entertainment costs, auto expenses, and marketing costs. Some of the other expenses we listed in the first section aren’t part of the P&L. For example, business equipment and owner’s distributions aren’t part of the P&L. They are part of the balance sheet.

Once you have determined the income, the cost of goods sold, and the expenses, you total that to determine if you have a net loss or a net gain for the month. The P&L isn’t going to tell you how much money you have left in the bank. It’s simply telling you if you spent more than you brought in that month.

What Can I Learn From a Balance Sheet?

A balance sheet gives a company a quick glimpse at its assets, liabilities, and equity. The balance sheet will be broken down into those three categories: assets, liabilities, and equity.

The assets section starts with how much cash your business has on hand. Then you list your physical assets. If you bought equipment for your business during the month, like a computer or other purchases generally over $2,500, they go in the fixed assets category. To determine your total assets, you add your cash with your fixed assets.

Next, we’re going to go through our liabilities. Liabilities refer to money that we owe and include business loans, credit cards, auto loans, and more. After we’ve determined your business’ liabilities, we can move onto equity.

Equity is usually the most complicated part of the balance sheet. In the equity section, you’ll enter your owner’s distribution, or what you paid yourself that month. You’ll also see your retained earnings. The retained earnings are calculated by either adding the month’s net income or subtracting the month’s net losses from the last month’s total retained earnings.

Finally, you’ll add your liabilities and equity together. If you’ve done everything correctly, it should add to the same amount as your assets. That’s why it’s called a balance sheet. Because your assets should always equal your liability and equity.

Why Do I Need to Understand My Financial Reports?

Before we address the conclusions you can draw from your financial reports, we want you to understand how the P&L differs from the balance sheets. The P&L shows a period of time. Whereas, the balance sheet shows a point in time. So, the P&L can show you what you made, or lost, in your business in one month, and the balance sheet shows you overall where your business is at the end of the month.

Lesson 1: Don’t Manage Your Business Off of the Cash Balance. Manage it Off of the P&L.

Without looking at both the P&L and the balance sheet, you can’t make smart business decisions. If you just look at the balance sheet, you may see that your business still has money, so you may try to pay yourself more, or make a big purchase. However, if you see that your P&L shows a net loss for the month, you might hold off on those decisions. The two go hand in hand when it comes to making a decision. You have to look at both to get an idea of where your business is truly at.

Lesson 2: Don’t Estimate Your Tax Liability on Your Owner’s Distribution

Your financial reports are also going to give you an idea of what you owe in taxes. The biggest misconception small business owners have is that they are taxed on whatever money they pull out of the business, the owner’s distribution we’ve talked about. However, this isn’t true. The Internal Revenue Service (IRS) actually taxes you on your business’ net income. The IRS isn’t going to tax you unless you’ve made a profit on your business. In order to determine your net income, you’ll want to look at those income statements (the P&L) and determine if you had a net profit or loss. Once you know that, you can determine your tax liability.

I know the process can seem overwhelming at times, but analyzing both your P&L and balance sheet regularly can help you better manage and grow your business. If you are struggling to stay on top of your accounting and finances, reach out to our team at Vyde to see how we can help!

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Day: April 1, 2022