As a small business owner, it’s never too early in the year to think about your tax strategy. If your strategy includes filing a tax return extension for this year’s taxes – or if you did for the last filing year and haven’t submitted your returns yet – it’s important to know how this decision could impact your application for a small business loan.
In this overview, you’ll learn why a tax return extension could be detrimental if you need financing, even though it’s a legal and legitimate option. You’ll also find tips to help you make informed decisions that will have a positive impact on your business.
What is a tax return extension?
A tax return extension is a formal request to the Internal Revenue Service (IRS) to extend your deadline to file your personal and/or business taxes rather than filing your returns by the regular IRS deadline, usually April 15. This extension typically gives you an additional six months to prepare and file your tax returns. This means, if your deadline is April 15, an extension will allow you to file your tax return through October 15.
However, an extended filing timeframe doesn’t give you an extra six months to pay what you owe. The IRS has strict guidelines regarding tax payments. If you owe taxes above a certain amount (or percentage) of your overall tax liability, you could get significant financial penalties for outstanding balances.
That’s one of the key reasons why you should review the decision with your accountant or tax preparer before filing a tax return extension. If you don’t, you could underestimate what you owe and be hit with steep fines.
Why would you choose to file a tax return extension?
There are many reasons why you may choose to request an extension for filing your tax return, including:
- Limited time: Sometimes, you simply need extra time to pull together all your information. Having extra time to do so ensures that all your income and expenses are reflected accurately, and your tax returns are correct.
- Level of complexity: If, you’ve gone through a major life change that makes filing taxes a bit more complex, including a marriage, a divorce, or the death of a spouse, more time can help you sort through what’s now required in your current situation.
Whatever the reason may be, the IRS gives you additional time to file, if needed. In fact, you don’t have to offer any specific reason to the IRS – it’s a simple request that can be filled out online by you, your accountant, or your tax preparer.
How filing an extension could impact your small business loan application
While an extension is a perfectly legal, legitimate, and sometimes necessary option, it’s important for you to understand that getting one may impact your ability to be approved for a business loan.
Here’s why: Lenders need to see accurate income and expense figures when making credit decisions, and the most accurate figures usually come from your tax returns, as opposed to interim financials. Without your previous year’s tax return included in your loan application, many lenders won’t be able to approve your small business loan.
In addition, your tax returns provide proof that you have no outstanding tax liabilities with the IRS or state tax agencies.
When you own a small business, there are many ways that you or your business will incur tax liabilities, including taxes on profits, sales tax from goods or services sold, and more. Not only do you have to manage your business finances and taxes, you also have the responsibility to ensure that your personal taxes are paid.
If you have outstanding tax liabilities, your lender may question your ability to responsibly manage and pay new debt. Since a new loan requires repayment, lenders will need some assurance that the unpaid tax liability is an outlier – a one-time mistake – and not a sign of habitual issues repaying debt. The best way to show that your business is prepared to take on new debt is to either pay off the existing liability or show that you are going to be responsible and pay the tax liability off over time.
Lenders need to ensure that your business has the cash flow to support the additional monthly payments that you’ll receive when you take out a small business loan. While interim financials are helpful in making that decision, your lender would feel more confident in making credit decisions based on your previous year’s tax return. This is because it’s a document that’s reported to the IRS and you’d risk significant penalties for misrepresenting your businesses on your tax returns.
What if you already filed a tax return extension?
If you filed an extension for last year and didn’t realize the potential impact on your business loan application for this year – don’t panic. There are steps you can take that can help you get the funds you need from a reputable lender.
Delayed tax returns won’t disqualify you for long. If you meet your lender’s other approval criteria, then it’s really more of a “no for now” situation until you finish your filings.
Meet with your accountant or tax preparer to get your taxes completed as soon as possible. If you reach out to them at a time of year that’s slower for many of them, they may be able to turn your tax returns around quickly for you. If you delayed filing your taxes because you wanted additional time, be prepared to pay what you owe and any additional penalties or fees before you can move forward with your loan application.
Plan now for next year’s tax filings
If you don’t need financing yet but anticipate that you will next year, talk to your accountant or tax preparer about your business plans and goals. Then, be sure to get all the information together to file this year’s returns on time so that your ability to apply isn’t delayed by a tax return extension.
While it’s possible that your lender could approve your small business loan without last year’s tax filings, having the most current and accurate filings available can only help your chances of approval.
Can a small business loan be used to pay outstanding taxes?
In short, not usually. Although many small business loans can be used by a wide range of business types and industries and have a variety of allowable uses of funds, many types of loans, including SBA options, typically won’t fund pay for your past-due taxes.
Additionally, it’s important to know that many “lenders” who offer loans to help you pay back-taxes may be predatory lenders or untrustworthy. They pay to have their businesses rank highly in particular search results so that small business owners searching for things like “loan to pay taxes” or similar phrasing will see these ads. Often, these companies offer extreme rates (interest rates of 30-40% and more) and/or repayment terms that are difficult for business owners to meet, such as daily payments (instead of monthly).
If you’re delaying filing your taxes because you don’t have the funds you owe, talk to your accountant or tax preparer, or contact the IRS – there are payment options available that can help you.
Then, work with your accountant or other financial or business professional to help you identify strategies to increase profitability, reduce expenses, and keep up with your taxes. Once you’re regularly and responsibly managing your owed debt and building a more profitable business, you’ll have a better chance of finding a small business loan that will benefit you.
Pursuit can help
Pursuit offers financing and resources to ensure all business owners have a path to success. We’ve helped thousands of small business owners to get the financing needed to launch, grow, and thrive. We offer a range of financing options for small businesses in New York, New Jersey, Connecticut, Pennsylvania, Illinois, Nevada, and Washington. We help you get the financing you need, including more than 15 loans and a line of credit, and we offer insightful information and resources, and business advisory services for small business owners.
Take a look, then contact us today to learn more about ways we can help.
