Many small businesses have experienced cash flow challenges at one time or another. It's bad enough to have expenses that can't be met. Then there's the matter of an increase in taxes due, when cash flow improves.
Here are a few scenarios where small-business entrepreneurs may be blindsided by tax problems and not know where to turn for help.
Forgiveness of Debt
Problems can sneak up on taxpayers when a debt is forgiven. Taxpayers are often shocked to find out that they owe taxes because they have suffered a financial setback. Under the cancellation of debt rules, a problem that ended in the loss of an asset through abandonment, foreclosure or repossession can result in a tax liability. The amount of debt that is canceled or forgiven in these situations is treated as taxable income by the IRS. (Note that there are exceptions to this rule that apply in bankruptcy and insolvency. Further, there is an exception that may apply if the forgiveness is related to a personal residence.) Taxpayers who find themselves facing a forgiveness of dept problem should secure professional help to assure that they do not incur a tax debt needlessly.
Financial Incompetence or Poor Judgment
For many years, would-be entrepreneurs have shown poor financial judgment in launching undercapitalized businesses and business failure rates support this contention. But it's not all their fault. Supposed business gurus pitch the dream that everyone can own and run a successful business. From there, loose lending policies and low interest rates make it too easy for the inexperienced to jump in without solid knowledge of their industry, sufficient expenses and the cash reserves needed to survive unexpected events.
Another indicator of financial irresponsibility is the number of taxpayers filing bankruptcy: Some 767,000 filings are expected in 2017. This is a slight decline in the number of filings, but debt restructuring is more than picking up the slack. Spending beyond the business's means, buying on credit and poor planning may leave a business unable to pay bills. Obviously, not all bankruptcy filings are a result of financial irresponsibility, and many business owners strive to avoid bankruptcy at all costs. But unfortunately many bankruptcies are traceable to poor financial management.
Business owners with cash flow difficulty may make an ill-advised decision to pay employees their net payroll but fail to remit the corresponding payroll taxes. Generally, they view this failure as temporary, believing they should first preserve precious cash to pay net payroll, suppliers and operating expenses.
The temporary IRS loan can rapidly get out of control. In part, this is because the IRS may not detect the situation quickly, which leads to "borrowing" even more — also known as pyramiding — perhaps in the belief that the IRS may not notice the delinquency.
Failure to pay the IRS results in large penalties, making the problem even worse. By the time the IRS begins collection, the business may never be able to recover, because the IRS will pursue collection against the business and against the owner personally.
The first step to recovery is to become compliant with payroll tax filing. A great way to do this is to enlist the services of a quality payroll service provider.
You can see from the situations I've described here that most entrepreneurs with tax problems did not set out to evade their tax filing obligations. Instead, the tax problem is a byproduct of some other event, not a sign of poor character or bad intent.
Once again, the good news is that every tax problem has a solution. Members of the American Society of Tax Problem Solvers are uniquely qualified to determine and help implement the most beneficial solutions for troubled taxpayers. If you face such tax issues, you can seek help at email@example.com.
Find related articles by Larry Lawler on his contributor page.
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