If You Owe Uncle Sam Money, You Might Have to Think Twice About Getting a Business Loan

Sarita Harbour

Sarita Harbour

Sarita Harbour is a Small Business & Entrepreneurship Columnist at Fundera and a freelance writer and entrepreneur specializing in business and personal finance. A former financial advisor, Sarita has over a decade of experience in banking. Her work appears online at sites such as Forbes, Investopedia, Yahoo!, Capital One Spark Business IQ, and Business News Daily. Connect with Sarita on Twitter @saritawrites.
Sarita Harbour

If you’re banking on getting a small business loan but owe the federal government taxes, you could be in for an unpleasant surprise. Not paying your taxes and owing Uncle Sam money is a big no-no in the business world. Even worse, this could lead to the government slapping a tax lien on your business, meaning you might have a tough time getting that business loan.

What’s a Tax Lien?

A tax lien gives the government first rights to your business property. In other words, they can seize it and sell it to pay off the taxes you owe. Tax liens cover all aspects of your business, including the following:

Physical Assets

All of the tangible items of your business.

  • Buildings
  • Inventory
  • Equipment

Intellectual Property Assets

  • Copyrights
  • Trademarks
  • Patents

Financial Assets

  • Business accounts
  • General accounts
  • Accounts receivable
  • Stocks

Why a Tax Lien?

Tax liens are issued to taxpayers who haven’t paid outstanding personal or business taxes in full and on time. Once a lien is in place, the government could sell off your property to make money in order to pay the taxes owing. However, taxpayers are given the opportunity to pay what they owe before the government registers a federal tax lien on their property.

Notice & Demand for Payment

First, the Internal Revenue Service (IRS) will evaluate how much you owe in taxes, then send you a formal bill explaining your outstanding taxes and other charges—known as a Notice & Demand for Payment.  

You then have 10 days from the date of receipt of the notice to pay off the taxes in full, plus any additional fees, interest, and penalties. You might be able to set up alternative payment arrangements with the IRS.

What a Tax Lien Means for Your Business (and Personal) Credit

Once a tax lien has been placed on your property, the IRS files a public document called a Notice of Federal Tax Lien.

Take note the word “public.” This means that everyone, including creditors, lenders, customers, suppliers, and credit reporting agencies, can see that you owe taxes to the government.

4 Reasons Tax Liens Are Bad For Business

In a nutshell, tax liens are bad for business, for at least four reasons.

  1. They damage your business credit rating. This affects more than your business credit score: it affects your credibility with creditors, which could lead to cash flow difficulties with suppliers.
  1. Tax liens also affect your reputation with customers, who might feel uneasy in dealing with a business that can’t or won’t pay its taxes, and wonder how much longer you’ll be able to stay in business.
  1. Lenders often prefer to avoid businesses that have tax liens because their rights to recover any potential losses if you don’t make your payments are subordinated to the government placing the lien. Basically, you’ll have a much more difficult time getting a new business loan or line of credit, or refinancing an existing one.
  1. Trying to sell anything with a tax lien on it becomes very difficult. If your business owns real estate, selling or refinancing with an IRS Lien on the property is subject to strict limitations. You’ll also face restrictions on attempts to sell or transfer the business itself, or assets of the business, like equipment and inventory.

Can I Get a Business Loan With a Tax Lien?

It’s tough. To get a business loan, you’ll either have to find a lender who’s willing to work with you anyway, or pay off the tax lien. The lien will be released 30 days after you pay off the debt in full. Alternatively, you can wait until the 10-year statute of limitation on tax collection expires.

As the government isn’t too fond of selling off business chattel, they’d prefer to help you find a way to pay off the tax lien, like through an installment payment plan. Either you or your tax accountant should contact the appropriate government agency—the one that sent you the Notices—to discuss your situation.

What To Do If You Can’t Pay Off The Tax Lien

If you can’t pay off the tax lien but want to snag a business loan, you have three other options.

  1. Discharge of Property: This removes the lien from specific property.
  2. Subordination: This lets other creditors move in front of the government to get paid if you default on their loan. This might help your cause if you’re looking for a business loan in the form of a mortgage, for example.
  3. Withdrawal: The good news about a Lien Notice Withdrawal is that it removes the public Notice of Federal Tax Lien and means the government isn’t in competition with other creditors for your property. The bad news?  You’ll still have to pay your business taxes.

The bottom line? If you owe Uncle Sam money, the government can slap a lien on your business property. This makes lenders much less likely to want to take a risk on lending you money. So make paying your taxes on time and in full the top item in your budget. If you do fall behind and receive a Notice & Demand for payment regarding business taxes, make arrangements to pay them off as quickly as possible.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Sarita Harbour

Sarita Harbour

Sarita Harbour is a Small Business & Entrepreneurship Columnist at Fundera and a freelance writer and entrepreneur specializing in business and personal finance. A former financial advisor, Sarita has over a decade of experience in banking. Her work appears online at sites such as Forbes, Investopedia, Yahoo!, Capital One Spark Business IQ, and Business News Daily. Connect with Sarita on Twitter @saritawrites.
Sarita Harbour

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