As long as your earnings are above a certain threshold, every time you or your business makes money, you owe taxes. Where you can get into trouble is when you have outstanding tax liabilities that aren’t resolved. This can affect your business in many ways, especially when you need to apply for a business loan.
If you need financing for your business, tax liabilities can cause your application to be delayed or even denied. The good news is that resolving outstanding tax liabilities isn’t difficult to do and can get you back on track to be in good standing with tax-collection agencies, such as the Internal Revenue Service (IRS) and potential lenders.
What are tax liabilities?
Tax liabilities are what you and/or your business owes to local, state, or federal agencies. You’re expected to pay your tax liabilities by the deadline set by the relevant agency, otherwise you need to file for an extension if possible. If you don’t meet the deadline or file for an extension, that’s when you’ll face issues.
When do tax liabilities occur?
You’ll typically get tax liabilities when you earn money from a job or the sale of an asset, such as a home or stock. When you have a job, your employer commonly deducts income tax and other taxes (including Social Security) from your paycheck before you receive your net earnings.
When you own a small business, there are many reasons for gaining tax liabilities, including taxes on profits, sales tax from goods or services sold, and more. Not only do you have a responsibility for managing your business finances and taxes, you also need to ensure that your personal taxes are paid.
That’s why, when you first launch your business, it’s important to meet with an accountant who understands small business finances, including the different types of tax liabilities that you’re responsible for as a business owner.
The IRS and state and local agencies give individuals and small business owners a period of time – usually, a few months – where you calculate and pay taxes owed for the previous quarter or year.
For example, if you had a job before you launched your business, at the end of the calendar year, you’d receive a W2 form that shows how much your employer withheld for your state and federal taxes, as well as for things like Social Security and Medicare. If you underpaid your taxes, any outstanding taxes would then be due by April 15 of the following year. If you overpaid, you’d get a refund.
As a business owner, it becomes your responsibility to ensure that all the different types of taxes you owe are filed and paid on time. If these payments are missed, this outstanding tax liability can become very expensive.
How can outstanding tax liabilities impact loan approvals?
There are two primary ways outstanding tax liabilities can impact your ability to be approved for a small business loan:
- If you have outstanding tax liabilities, your lender will question your ability to responsibly manage and pay new debt. An unpaid tax liability becomes a “red flag” to lenders that suggests you may not be able to pay a new debt obligation.
Since a new loan requires repayment, lenders will need some assurance that your unpaid tax liability is a one-time mistake, and not a sign of regular issues repaying debt. For this reason alone, a lender would likely delay or deny your loan, even if you show strong credit and business financials. Also, it’s important to know that if you have an outstanding tax liability for long, it will eventually show on your credit report.
The best strategy to demonstrate that your business is prepared to take on new debt is to either pay off the existing liability or show that you’re going to pay the tax liability off over time. - If you’re applying for an SBA loan, outstanding and unresolved tax liabilities and liens owed to the IRS can make you ineligible for SBA products.
Sometimes, outstanding tax liabilities aren’t discovered until you’re in the loan-application process. In that case, your lender may give you time to resolve your tax liabilities before moving forward. In any case, it’s important to know that outstanding tax liabilities can be resolved to help your loan applications move toward approval.
How to resolve tax liability issues for loan approval
Taking positive action as soon as you learn about any outstanding tax liabilities will help satisfy potential lenders.
Work with your accountant to:
- Review all your personal tax filings and taxes owed, including estimated income and self-employment taxes.
- Review all business-related taxes, including taxes on profits, taxes related to your employees, and sales tax.
- If you discover an outstanding tax liability, you can either pay it off in full or set up a payment plan. The IRS has payment-plan options for federal tax liabilities and most state tax departments will work with you to set up a payment plan. For IRS payment plans, there are generally two options:
- Call the IRS directly and work with an IRS Taxpayer Advocate to receive a formal letter from the IRS stating the terms of a repayment plan.
- Sign up for a repayment plan through the IRS website.
If your tax liability is with your state, contact your state’s tax department for guidance and to learn about your payment plan options.
What to do after resolving your tax liabilities
Once you’ve taken action, you’re in a better position to get approved for a business loan. A lender will likely require documentation that proves that you’re either making payments as promised or that you’ve paid off any outstanding tax liability in full.
Your lender will let you know exactly what they require. For a payoff, you’ll most likely use the letter that confirms that the liability is paid in full and as agreed. For a payment plan, the lender may need a hard copy of the letter you receive from the IRS stating the terms and conditions of your payment plan. Some lenders may also accept printouts from the IRS website specifying the terms of your payment plan – this is typically quicker and leads to a faster loan closing.
Unpaid tax liabilities are serious, but they can be resolved
Unpaid tax liabilities can significantly impact your ability to do business. Every year, businesses across the U.S. are forced to close because of unresolved tax liabilities.
As you’ve learned from this overview, it’s simple to get back on the right track, so if you find yourself faced with unpaid tax liabilities, do your best to resolve the issues right away. Doing so will put you in a much better position for day-to-day business operations and for financing that can help your business today and in the long run.
Talk with your lender and Pursuit if you need assistance
When your finances are in order and you’re ready to apply for a loan, learn more about financing for small businesses through Pursuit. Check out our business loans and line of credit that can help you reach your business goals.
Contact us to learn more about how we can help your business grow and thrive.
