Overextension tax is a "luxury tax" or "financial fair play tax" -- a 50% tax for running at a significant weekly deficit of profitability. It's based on a sliding scale of your net profitability (income minus expenses), but you receive a credit for training players (or purchasing them right before their salaries recalculate higher) within this calculation -- so if you have $500k in player salaries but the players only totaled $200k in salaries when you purchased/drafted them, you could be running at an average weekly deficit of $300k before you'd suffer overextension tax.
There's _also_ interest paid on having a negative bank balance as of two consecutive economic updates, a 5% weekly interest charge on the loan the bank is extending you to keep your team running. If you have a negative balance in excess of -$500,000 after an economic update, then you'll trigger a bankruptcy warning and have 2 weeks to get back above -$500,000 or you'll be fired (your team will reset).