Every business has dreams and aspirations of making it and succeeding. Unfortunately, the other reality of starting your own business is there may come a day where you must shut it down or sell it to a buyer.
Businesses operate on the same lifespan as human beings, where nothing is immortal. What happens to debt when a business closes?
It is a very important question worth considering, as business debt does not magically disappear the moment you decide to cease operations. So, how much do you still owe, and is there financial relief available?
Continue reading the article to learn more about closing a business and what you need to prepare for resolving unpaid debts.
The Process of Closing a Small Business
Small businesses generally have one of two options when it comes time to close. Either the company can try to sell to a new buyer or must file bankruptcy or liquidate. In this article, we will assume that the small business is filing for bankruptcy or undergoing liquidation.
There are a few steps every small business should take when they shut their doors for the final time:
- Reach a closure agreement with your partners (if applicable).
- File dissolution documents to cease business tax and filing requirements.
- Cancel registrations, licenses, permits, and business names.
- Comply with employment and labor laws to make sure the remaining payments get distributed to workers.
- Maintain records and other files for a minimum of seven years after closure.
Following these steps is a solid foundation for making sure you remain in compliance and terminate agreements with your business in a civil manner.
What Happens to Debt When a Business Closes?
Whenever a small business takes a forced exit like bankruptcy or liquidation, it has implications for your employees, assets, and tax obligations.
When a small business declares bankruptcy, it may reduce or eliminate debts owed to creditors. However, it does not eliminate back taxes owed to the Internal Revenue Service (IRS).
The IRS still considers taxes owed even if the company declares bankruptcy. The good news is that there is some relief for you and your business.
Small Business Closure Tax Relief
Though it is not applicable in every situation, some business owners receive tax forgiveness in a few critical areas after declaring bankruptcy:
- Tax Penalties: Let’s say that your business is behind on taxes. There are always IRS penalties associated with late payments, outstanding debt, etc. The good news is the IRS may waive penalties associated with the debt. Unfortunately, this rarely, if ever, also means forgiveness when it comes to accrued interest.
- Back Taxes: Though it is not a black and white rule, some small business owners receive forgiveness on back taxes, which date back more than three years for a business that is closing. However, it involves filing a complicated application with the IRS seeking tax relief, so it is best left in the hands of a professional.
- Filing Bankruptcy: Small business owners need to wait a minimum of two years after their last business tax return to file for bankruptcy. However, in doing so, you set up the framework for bankruptcy and potential tax relief. Once again, speaking to an experienced lawyer or tax professional is essential.
Filing for bankruptcy is a last resort, yet it often feels like the only viable option for suffering small businesses. The problem is that a tax lien on closed business can put a sizable burden on your hopes of having taxes dismissed.
When the IRS files a tax lien against your business (and before you declare bankruptcy), it has the power to remove or maintain the tax lien. If the IRS refuses to remove the lien, even bankruptcy does not prevent the IRS from seizing business assets to satisfy back taxes.
Considering Filing Bankruptcy
Let’s face it: no one wants to admit they failed. Unfortunately, small businesses have a tremendous number of hurdles to leap over to become successful, and even then, it takes a little luck.
Once you reach a point where you can no longer keep up with your debts, small business owners get faced with the harsh reality of bankruptcy. While it is always considered a last resort option, often, you have little choice if the business is struggling financially.
If the business has struggled to pay taxes for several years, bankruptcy is truly the only way to get out of demanding IRS tax fees and penalties. Furthermore, it may keep the IRS from coming after your assets, at least in the short-term.
However, it is not a hard and fast rule. The IRS still has the power to file a tax lien on closed businesses to recoup the debt. Therefore, you need a skilled tax professional on your side who can help represent you and help you avoid losing property or assets to the IRS.
Tax Relief with a Reputation
Levy & Associates has helped small business owners navigate the trying, frustrating period of liquidating assets or declaring for bankruptcy. While no one wants to see their business come to an end, often, these steps are the only way to get you out of substantial debt.
However, you need to be extra careful about what the IRS can still attempt to do, like file a tax lien on your business property and assets. Speak with a caring, understanding tax professional today at Levy & Associates. We are available by calling 800-TAX-LEVY or visiting www.levytaxhelp.com.