Back Taxes and Bank Loans: What Small Business Owners Need to Know
Back Taxes and Bank Loans: What Small Business Owners Need to Know
As a small business owner, understanding how back taxes can impact your ability to secure financing is crucial. Neither conventional lenders nor the SBA are eager to discuss loans aimed at paying back taxes, especially those owed for multiple years. This challenge affects businesses across all industries, and it's important to recognize that financial advisors facing this situation often encounter additional scrutiny from lenders. Even when we clarify the differences between financial planning advice and the operational skill set of a small business owner, it’s no surprise that most banks have internal policies deeming a delinquent tax debt an ineligible loan purpose.
The SBA's Standard Operating Procedure (SOP) is clear: loan proceeds cannot be used to pay past-due federal, state, or local payroll taxes, sales taxes, or similar taxes that you are required to collect and hold in trust for government entities. However, there is a silver lining—the SBA does allow for the payment of delinquent business income taxes if you have an approved payment arrangement with the IRS and are current on those payments.
When applying for a loan, it's essential to understand how back taxes can affect your financing options. Banks generally require applicants to provide the most recent three years of tax returns. While filing an extension is acceptable, it brings additional scrutiny into the equation. If your tax filing extends beyond April 15th, financial institutions will want to see that you have either prepaid your estimated taxes or have enough funds to cover the total tax amount due. For example, if you're on extension until October, banks will insist on proof that your estimated taxes are paid or that you have set aside sufficient funds.
It's worth noting that it's quite challenging for an advisor to secure a business loan (whether SBA or conventional) if they haven't filed the previous year's tax return.
SBA Loans for IRS Payment Plans
If you have an approved payment plan with the IRS and are up-to-date on your payments, the SBA does allow for payments toward delinquent business income taxes. Payments made to settle a delinquent tax payment plan are directed straight to the IRS, and by the time you reach a payment plan, you've likely accumulated a significant amount of penalties. These penalties and interest will continue to grow until your balance is fully paid.
Navigating Tax Liens and Acquisition Opportunities
Sometimes, business owners find themselves presented with acquisition opportunities while they are on an IRS payment plan. If your business is generating enough cash flow, you may qualify for a bank loan to facilitate the acquisition. Conventional lenders might say, "Pay off that tax lien, and then we can talk." However, SBA loans can provide a pathway to combine the IRS payment plan payoff with the acquisition amount, allowing you to consolidate both debts into a single ten-year term loan.
Discussing tax liens can be sensitive for many business owners, but rest assured, you are not alone in this situation. Back taxes arise from various circumstances, and every business owner has their unique story. Factors like divorce, job loss, illness, bad investments, or partnership disputes can contribute to falling behind on taxes. Whether due to a misstep or an unexpected life event, many have faced similar challenges. If you find yourself in need of assistance, don’t hesitate to reach out—we're here to help.
This article is authored by Darin Manis, founder of LoanBox.