Spring is here! Birds are nesting, flowers are starting to bloom, and Uncle Sam is warming up his calculator. For the majority of Americans, springtime marks the beginning of tax season and the time crunch in which to file federal tax returns by the April deadline. But, for those who invest in commercial real estate, it is a well know fact that the April deadline is not the date for filing tax returns but the date for filing an extension.
This extension of the filing period is not some regulation in the tax code which is only granted to big businesses or investors. The IRS will grant an extension to anyone whether it be an individual or a large business entity.
There are many reasons for filing an extension. Most importantly, it gives you more time. The IRS estimates that over 5.5 million businesses file extensions each year. Why? Because it affords the owners and their staff the time necessary to go over the many details from a years worth of profit and loss documents (P&L’s). This extra time is meant to ensure you are reporting accurately and completely. The additional six months also gives you the benefit of researching new tax codes which may have been either added or re-worded since the last tax season. Deductions which are geared toward commercial real estate investors are added, changed, and removed each year, so an extra six months will give you time to read through the complexities of the tax code and ensure that you are working with the IRS rather than fighting them.
Another important reason for filing an extension is that an extension can reduce your chances of being audited. Although no one outside of the IRS can state what triggers the audit process, it is known that there is an audit quota given at the beginning of each tax season. This quota is filled toward the traditional tax deadline due to errors made by the vast majority as they rush to submit returns before April. Therefore, filing an extension for the October deadline will reduce your chance of an audit by around 50%. That being said, the IRS’s systems will continue to check for any major errors. An extension will not replace the need for accurate filings.
Now, before you take advantage of the extension process, there is a very important point of clarification regarding filing an extension. The six-month extension is only an extension to file your return. It is not an extension to pay any tax owed. Before the April deadline, you will need to have a good estimate for what you will owe, if you owe, and ensure that this is paid on or before the April deadline. The fees assessed for late payments are estimated at .5%-1% of the unpaid tax bill which is applied each month after the missed due date.
The federal income tax process can be difficult, especially when filing for the income generated by a commercial real estate asset, which is why we strongly recommend choosing a tax professional with commercial real estate experience. The guidelines for these filings and the wording of deductions can cause mistakes which can generate heavy fines and penalties making the expense of a tax professional a wise one to take on.
Remember, you want to work with the IRS, not against them, so take that gift of an additional six months and use it, but make sure you do so wisely.