Cannot extend photos on iPhone after restarting

I'm not sure what you mean by "extending this photo." Can you tell us more, or could you include a screenshot?

Did you try a forced restart?

Force restart iPhone - Apple Support

This is different from a simple Power Off. For me, the logo appears  5 or 10 seconds past the "slide to power off" message. Wait for the logo; don't do the slide thing. 

This most likely is a server side issue. Apple did say there would be limitations and it's expected to have a fee associated with some features. Apple also stated the Apple One subscribers would get some services included with their subscription. Not sure if this is related, but if it was, I'd expect a different notification message.

"Daily limits may vary by feature, request complexity, system demand, system policies, and other factors. Expanded access to such features will be available for a fee in the future. Use of these features is subject to the Apple Intelligence Terms and Conditions. Learn more at apple.com/apple-intelligence."

Clean up, extend, and reframe photos on iPhone – Apple Support