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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.
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:
All of the tangible items of your business.
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.
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.
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.
In a nutshell, tax liens are bad for business, for at least four reasons.
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.
If you can’t pay off the tax lien but want to snag a business loan, you have three other options.
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.