Explainer: Filing a Tax Extension for Cannabis Businesses
Filing a tax extension for cannabis businesses is something that can be incredibly helpful for business owners and operators. Filing a tax extension gives individuals, owners, operators, partners, and investors the ability to file their taxes after the April tax deadline ––– giving you more time to get your taxes and paperwork in order.
In this article, we are going to discuss what tax extensions are, the benefits of filing tax extensions for cannabis businesses, and what you need to know to get started with filing your next tax extension.
Benefits: Filing a Tax Extension for Cannabis Businesses
6 Additional Months to File Your Taxes
Filing a tax extension for your cannabis business gives business owners, partners, and investors a substantial extension on the time you have to file your tax return. Tax extensions provide businesses and individuals with an additional 6 months, after the April tax deadline, to get their paperwork and taxes in order. This will push back your business or individual filing date until mid-October.
Protect Your Business from Penalties and Interest
In addition to giving you more time to prepare your taxes, tax extensions also protect you and your business from paying additional penalties and interest for filing your taxes after the deadline.
As long as you pay your tax liability or approximated liability by the deadline, filing an extension will protect you from incurring additional penalties.
More Time to Retrieve and Organize Your Forms and Documents
Filing an extension is also incredibly helpful for investors and partners in cannabis businesses. Schedule K-1 (Form 1065) is a necessary tax form that reports each cannabis business’ partner or investor’s income ––– gain or loss –– in the business. Unfortunately, the K-1 has a reputation around the country for arriving late.
Whereas other tax forms tend to be delivered in January and February, the K-1 is required to be received by either March 15th or by the 15th day of the 3rd month after the business’s tax year ends.
There are a few reasons why the K-1 is often the last form that individuals receive when preparing their taxes, and ultimately hold them back form finishing their taxes until a later date:
- It’s a lot of paperwork: Each individual partner and investor in the business needs a K-1 prepared.
- The K-1 can require multiple entries on a taxpayer’s federal return: Schedule A, B, D, and in some cases form 678.
For these reasons, it’s common that you won’t receive your K-1 paperwork on time, or sometimes, even before the tax deadline. Filing an extension gives you more time to gather your K-1 and any other delayed documentation so you can file your taxes accurately.
The Biggest Misconception About Tax Extensions
The biggest misconception about tax extensions is that filing an extension gives individuals and/or businesses an extension on when they have to pay their total tax liability.
That’s not the case.
Filing an extension purely gives you an extension on when you have to file your taxes.
Businesses and individuals alike still need to pay their tax liability by the April deadline, to avoid incurring penalties and interest on their taxes owed.
Therefore, if you file a tax extension but do not pay your state or federal taxes until sometime after the April tax deadline ––– you will incur penalties and interest on your delayed tax payments.
For example, if you file an extension, but don’t file and pay your taxes until September. You will owe 100% of your tax liabilities, plus interest for the six months you did not pay your taxes. You are going to pay prime rates that compound weekly, which can start to get really expensive.
“What if you aren’t sure how much you owe or haven’t had time to calculate your total tax liability?”
Our accountants at GreenGrowth CPAs provide a tax computation service (“tax comp”) for our clients. This gives us the ability to use all of the information and documentation we have in regard to our clients’ current and previous tax year, to approximate what they will owe in state and federal taxes.
As a standard practice at GreenGrowth CPAs, our accountants automatically file extensions for all of our clients to give them as much time as possible to file their taxes correctly. Our tax computation services help us ensure our clients get their state and federal payments submitted by the April deadline.
Things to Keep in Mind When Filing a Tax Extension for Cannabis Businesses
Keep in mind that you cannot retroactively file an extension, after the tax deadline. Even if it is only a day or two after the tax deadline, state governments and the IRS do not allow individuals and businesses to file tax extensions after the April deadline. Your extension must be filled out correctly and submitted before the original deadline, to be valid.
When Should Cannabis Businesses File a Tax Extension?
The earliest you can file an extension is in January. For example, for 2021 taxes, you could file an extension as early as January of 2022, and as late as the last day of the April deadline. There are no apparent benefits in filing an extension as early as possible versus at the last possible minute.
Helpful Recommendations: Filing a Tax Extension for Cannabis Businesses
Always Pay Your Taxes on Time
The top recommendation from our cannabis accountants is that you always pay your taxes by the April deadline. Regardless of whether you have the ballpark numbers or exact figures of your state or federal tax liability ––– avoid the interest and penalties by getting your payments in before the deadline.
Calculate Your Approximate Tax Liability
Even if you haven’t finished your taxes or don’t have all of the documentation, forms, or paperwork to complete your taxes and calculate your liability before the deadline, it’s generally always better to take an educated guess and pay on time, than to be late.
We know a lot can change in the industry and in your business from tax year to tax year. If you need help approximating your tax liability so you can get your payments in on time, here are some helpful percentages that can guide your tax comp:
- Take 90% of your current year tax liability
- Or simply use and pay 100% of your prior year’ tax liability.
Keep in mind, these above figures represent 90-100% of your TOTAL tax liability ––– state and federal. We strongly advise working with our cannabis CPAs at GreenGrowth to help you put together the most accurate tax computation for you or your business.
Remember: Most CPAs Don’t Specialize in Cannabis Accounting
Accounting is an aging profession ––– there are a lot of great CPAs on the market, but there are few who specialize in and understand the nuances of the cannabis industry.
Using your hometown CPA for your personal taxes may be suitable for now, but for your cannabis business, we highly recommend you consult and work with accountants who specialize in the industry.
Is Filing a Tax Extension a Bad Thing?
This is another common misconception that we can really debunk. Conversely, filing extensions are a common practice for mainstream industries. In fact, many businesses and individuals file for tax extensions every year to give themselves plenty of time to prepare and file their taxes correctly.
Taxes and regulations constantly fluctuate in the cannabis industry. Which is why in many cases, it’s actually better for cannabis operators to file extensions and wait to prepare their taxes until the extension date. This is especially true if you are aware that state or federal tax regulations will change sometime between the tax deadline and the extension date.
Approximate Cost of Filing a Tax Extension
Another advantage of tax extension is that the paperwork costs nothing to file, and can be filed digitally with the state or the IRS. Your accountant may charge a nominal service fee to file the extension for you and/or for your tax computation, if that is a service that either you or your business needs.
Filing a tax extension for cannabis businesses is a common practice, and something that we often recommend to our clients in the industry. If you need assistance with tax preparation, tax planning, or tax computation services, contact us at https://greengrowthcpas.com/ today.