The extension is for one year, according to a league source. Jackson, 33, is the NFL's oldest running back.
"Usually when guys get to be my age they're just about ready to kind of shut it down and not come out here and get beat up like we do at training camp, but I wake up every day and I love it," Jackson said Wednesday.
Jackson said he would like to play "three or four" more years in the NFL.
"I was telling [my agent] I haven't felt this good in a long time," he said. "So, hopefully I can continue to feel like that and get into this season and make some plays for our team, that way it's all worth it, them giving me this extension."
C.J. Spiller, who led the Bills in rushing last season, is scheduled to become a free agent after this season.
Since joining the Bills in 2007, Jackson has racked up 5,121 rushing yards -- good enough for third on the Bills' all-time rushing list. He is just the second running back in Bills history to put up 4,000 career rushing yards and 2,000 receiving yards.
Jackson is coming off a season in which he posted a career-high nine rushing touchdowns and led the team with 10 total scores. Jackson's 1,277 all-purpose yards last season was the third highest single-season total of his career. He also had a single-season career-best 47 receptions.