Back Taxes and Bank Loans

Neither conventional lenders or SBA want to have a conversation about a loan to pay back taxes, especially back taxes for multiple years. This is an issue with any business in any industry but financial advisors who get into this situation get a little extra scrutiny from a lender even when I remind them of the differences of financial planning advice and small business owner operating skillset. It's probably not a shocker that most banks have internal policies making a delinquent tax debt an ineligible loan purpose.

The SBA SOP clearly states that loan proceeds must not be used to pay past-due Federal, state, or local payroll taxes, sales taxes, or similar taxes that the applicant is required to collect and hold in trust on behalf of a Federal, state, or local government entity.

However, the SBA does permit payment of delinquent business income taxes if the applicant has an approved payment arrangement with the IRS and is current on the payments in the arrangement.

Back Taxes and Bank Loans
When applying for a loan, it is imperative to understand how back taxes can affect your ability to secure financing. Banks require applicants to provide the most recent three years of tax returns, and while filing an extension is permissible, it introduces additional scrutiny. If your tax filing extends beyond April 15th, financial institutions want to see that you have either prepaid your estimated taxes or possess sufficient funds to settle the full tax amount due. For instance, if it's the summer and you are on extension until October, banks will insist on evidence that your estimated taxes have been paid or monies set aside. It is not a thing for an advisor to not to have filed the previous year's tax return and get a business loan (SBA or conventional) to pay it off.

SBA Loans Allowed for IRS Payment Plans
The SBA does permit payment of delinquent business income taxes if the applicant has an approved payment arrangement with the IRS and is current on the payments in the arrangement. Any payments made to payoff a delinquent tax payment plan is made directly to the IRS. By the time you get to a payment plan you have already incurred a bunch of penalties and then the penalties and interest continue to accrue until your balance is paid in full.

Having a Tax Lien and Seller Opportunity Event
Sometimes an advisor in this scenario will have an acquisition that falls in their lap during the time they are on an IRS payment plan. They may be cash flowing strong enough now to qualify for a bank loan to acquire. Most conventional lenders will tell you "pay off that tax lien and then we can talk". SBA loans however make it possible to wrap the IRS payment plan payoff amount with the acquisition amount and now the advisor has both debts combined into one ten year term loan.

It can be a sensitive discussion topic for some advisors who are in tax lien scenarios but I promise you, actually I can guaranty you are not the only advisor who has found themselves in this situation, even this year. Back taxes can be caused for a host of reasons and every human advisor has their own personal story, situation and scenario. I've seen causes like divorce, termination, illness, bad investment, alcoholism, and a partnership split gone bad as contributing factors to getting behind on taxes. Sometimes you can make a wrong decision and you just have to deal with the consequences and try not to repeat and sometimes when you made the right decisions, life still happened. My point is reach out and see if we can help if you need it.