Would your small business thrive if you could just get rid of, or at least get better payment terms on, your overdue taxes?
The October 15 extended deadline to file 2013 tax returns has come and gone, but if you owe a lot of back taxes and are operating a business your tax worries have not gone away.
You may have filed your tax return(s), owe more taxes, and are worried about hearing from the IRS and maybe the state about how you are going to pay the amount you owe. The current tax owed may be on top of a prior year or two of back taxes, and you might even be behind on quarterly employee withholding taxes. You might not even have filed a prior tax return or two on the hope and prayer that this might buy you some time before the IRS and/or state start chasing you.
Your business is turning a profit, and has promise, if you only weren’t always behind the tax eight ball. That plus probably the pressures of some other creditors. You’ve invested so much of your time and energy and life into your business that you really want to make it work.
But once you fall behind on taxes it’s simply very hard to catch up. You just don’t have the money to simultaneously pay both your current and past tax obligations. Plus the penalties and interest that just keep on accruing.
You wish there was a way to keep it moving forward while getting a break on your tax debt and other creditors.
The Chapter 7 Limitations
If you are operating a business, especially as a sole proprietor, Chapter 7 “straight bankruptcy” may provide limited help, but often not enough if you owe recent taxes, and can cause special problems for your business.
You would likely be able to “discharge” (legally and permanently write off) many of your debts, and maybe even some of your older income tax debts. You might even be able to discharge so much of your other debts and maybe some older taxes that you ARE able to pay the remaining taxes through a manageable payment plan with the IRS/state.
But if you owe significant income taxes of the last three tax years or so, and/or any withholding taxes, those would not be discharged. You’d be on your own in dealing with them, perhaps leaving you in many ways not much better off than you are now.
Furthermore, running a business can be at the very least awkward and sometimes even hugely problematic when you file a Chapter 7 case. Chapter 7 is a liquidation form of bankruptcy. That is usually not a problem in a consumer case because usually all of the individual’s assets are “exempt,” protected from the bankruptcy trustee’s liquidating power.
But if you are operating an ongoing business, especially as a sole proprietorship, there is much more of a likelihood that parts of your business are not protected, either some of its assets or some of its income. In a sole proprietorship, your business is your personal asset, and thus during your bankruptcy case the business is for many purposes subject to the jurisdiction and control of your Chapter 7 trustee. He or she would likely have the power to take over your business and suck out its receivables and other forms of income, or to shut it down to prevent it from incurring any ongoing risks (for which the trustee could potentially be held liable).
The Chapter 13 Solutions
These Chapter 7 limitations and lack of protection for your business can often be solved through a Chapter 13 “adjustment of debts.” Unlike Chapter 7 which is oriented towards liquidation, Chapter 13 is oriented towards financial rehabilitation, including your sole proprietorship business.
Chapter 13 particularly provides a huge amount of help with taxes, both those that can be discharged as well as those that can’t and have to be paid. It helps with both income and withholding taxes. And it avoids the serious risk of losing control of your business.
Specifically, in a Chapter 13 case:
- some of the taxes and/or penalties may be permanently discharged, often without paying anything or only a modest amount on them;
- payments on the remaining tax debts can be stretched out over a long period, usually without any ongoing interest and penalties, which together reduce the amount you would need to pay each month;
- the taxes can often be paid after other kinds of pressing debts, such as child/spousal support arrearage, vehicle loan and home mortgage arrearage, without much say by the IRS/state;
- recorded tax liens are released at the end of your case, either without paying any extra or else less than would usually need to be;
- throughout the 3 to 5 year period of a Chapter 13 case, you are protected from the collection efforts of the IRS/state, as is your sole proprietorship business, your income and that of your business, and your assets and that of your business; and
- at the end of your Chapter 13 case you will be tax debt free, and usually altogether debt free.