How to Pay Your Business Taxes—Even If You Don't Have the Money
Some Help for Business Tax Payments
You have a huge business tax bill to pay. What do you do?
Unfortunately, this happens often. After you have calmed down and collected your thoughts, begin to discuss the possibilities with your CPA. You could ask the IRS for an extension of time to pay. But filing an application for an extension on your taxes won’t help, because you still must pay some tax by the original due date, even if you are filing an extension.
1. Ask the IRS About Alternatives
You might be able to get help from the IRS in the form of an installment agreement. If you owe $25,000 or less, you may be able to apply online. If you owe more than $25,000, there are other ways to file for an installment agreement.
Here are some other ways to work with the IRS to pay your business tax bill:
- You can request a temporary delay in the collection of your tax debt. The IRS makes the determination that you are eligible for this delay, based on your financial status. The delay doesn't make the tax bill go away. It also requires a great deal of negotiating so you will probably need a tax specialist.
- You may be able to pay in installments. Of course, there are fees attached, and you must have filed your tax return.
- You may also be eligible for an offer in compromise, settling your tax debt for less than the full amount owed. This will typically not be considered until after an installment plan, partial installment plan, and levy of certain assets has been discussed.
Check this IRS web page for more details on these tax payment alternatives.
2. Borrow the Money From Your Bank
You might ask your bank for additional working capital (basically, a line of credit) to cover this tax bill. It will cost you, but you will avoid any penalties associated with extensions or other alternatives.
Keep in mind installment plans charge interest and penalties, so you will want to compare the rates on an installment plan to the rate you can obtain for a loan.
(See also Debt and Equity Financing for some analysis on the tradeoffs with debt)
3. Borrow the Money From Yourself
Be careful here. If you have some cash value in a whole life policy or potentially other employee or insurance plans, you might want to use that. If you have money in an IRA and you are over 59 ½ or you are willing to take the penalty, you could cash it in. You can either loan money to your business or invest in your business. Whether the funds are a loan or investment is a decision based on your particular circumstances. Keep in mind here as well the rates on the various plans and factor in any penalties when looking for options.
This is not the best situation, because there may be “strings” attached. Alternatives include asking someone to co-sign on a loan for your business. Some other considerations for borrowing from family might be the credit score of the family member. A similar alternative might be peer-to-peer lending.
Peer-to-peer lending allows you to borrow from online lending platforms with the funding from multiple investors. Some of these online lending platforms even have terms for structuring investment from friends and family which can help with some of the conflicts that arise.
5. Use Credit Cards
Using credit cards to finance various types of business financing needs is also sometimes helpful. Credit cards offer a revolving line of credit which gives you an open credit line similar to a more complex subscription line you might get for your business through a bank.
Credit cards can sometimes be easier and faster to obtain, especially for business, so this could be a good option for you. You may even qualify for a 0% introductory rate, which is basically the best comparable rate available.
After You Have Paid the Tax Bill
After you figure out what you will do, here are some questions you need to ask, so you won’t have to go through this again:
- If you had a CPA do your taxes, how did you not know that the business would owe this much? If you were looking at the quarterly statements, you should have seen this coming. For many business structures, quarterly estimated payments are also required or there will be a penalty so you should discuss that with your CPA.
- If you did your own business taxes, who will you be using as a CPA next year?
- In both of the above cases, how will you keep track personally, to make sure you don’t have to pay a large unexpected tax bill? Your CPA should help you with tax installment accounting if your business prepares quarterly and annual financial statements.
Making Estimated Payments
If it looks like you will have a large tax bill every year, you will need to start planning to pay it off using estimated payments, to avoid fines and penalties for underpayment next year. Starting now, make a general calculation of your business tax bill for the current year, and start making estimated tax payments. Estimated payments for the year are generally due April 15, July 15, and October 15, then January 15 of the following year. Incorporate this annual schedule into your business planning to avoid problems.