Small business guide
If you’re like millions of other small business owners across the country, your business has practically fallen off a cliff in the past few months.
For some owners, there’s even more bad news. A decline in business means that revenue you were relying on to fund a payment to the Internal Revenue Service on April 15 won’t be there when you need it.
The good news is that if you find yourself in that nail-biting situation, you may have at least six ways to free up money to pay the IRS.
“You can ask the IRS for a payment plan,” explains Buz Aaron, CPA, senior tax manager at Braver PC in Newton, Mass., “and the government will allow you to apply for, in effect, a loan from it.”
There is, of course, a downside to borrowing from the IRS. “Interest rates on IRS installment loans range from 7 to 12 percent,” says Michael T. Hanley, CPA, managing partner at Merl & Hanley LLP in Smithtown, N.Y. “It varies based on the prime rate.” You’ll also have to pay a “user fee” that ranges from $43 to $105 depending on your financial condition.
There’s also a process you must follow. “A lot of people say, ‘I can’t pay what I owe, so I’m not going to file my tax return,'” Hanley explains. “But the best option is to let the IRS know you can’t pay. If you do that, the IRS will make a lot of concessions. A lot of times they’ll stop assessing penalties from the day you’ve filed for the payment plan. Or maybe they’ll fix the interest rate. So the best course is to be up front and work with the IRS.”
If you owe $25,000 or less, you can request a payment plan online at IRS.gov through Form 9464, called an Online Payment Agreement. If you owe more than $25,000, you must print, complete and mail forms 9465 and 433-F.
“Because of tight credit, there are going to be a lot more business owners who’ll be taking advantage of IRS payment plans than in the past,” Aaron says. “It’s easy credit because you don’t have go through a credit check. You simply have to fill out a form.”
- ‘Borrow’ from the government
- Tap home equity
- Borrow against savings
- Take a cash advance from a credit card
- Charge it
- Sell your receivables
In the past decade, thousands of business owners have refinanced their homes or taken out home equity lines of credit (HELOCs) to pay for business operations. That’s harder to accomplish today. “These days, getting your hands on cash isn’t what it used to be, especially with the mortgage crisis,” Aaron says. “That source of credit doesn’t exist for many people anymore.”
But if you’re one of the lucky Americans who has equity in your home and a good credit rating, it’s worth considering. “Mortgage interest rates have never been lower,” Hanley says. “However, refinancing your home mortgage isn’t necessarily a good option if the only problem you’re looking to solve is paying your tax bill. Closing costs will almost always outweigh the benefit of an interest rate lower than the rate on an IRS payment plan. But it may be a good idea if you have other high-interest-rate loans to consolidate, you’re in a variable-rate mortgage that may reset in the next year, or your existing fixed mortgage rate is 6.5 percent or higher.”
“An inexpensive way to fund a tax payment is to borrow against your personal savings, certificates of deposit or life insurance,” says Fred Brewitt, principal at Brewitt & Domke in Marlborough, Mass. “If you have a five-year CD that will mature in four years, you can probably borrow all the way up to the full amount because the bank already has your money. Those loans are usually at low interest rates, and you don’t have to fill out any applications.”
Though borrowing against your savings sounds counterintuitive — if you have the money, why borrow it? — it can be smart. Let’s say yours is a summer operation, and you need that cash to buy next summer’s inventory. By borrowing against your savings, Brewitt explains, you ensure that you aren’t forced to apply for an unsecured loan — which, in this economic climate, could be denied — to fund your most profitable season.
“If you know you’ll be able to pay off the balance within the promotional period,” Hanley says, “using a cash advance or ‘convenience’ check from your personal or business credit card at a low promotional rate is another good option. Just be sure to factor in that most credit card companies charge a flat 3 percent fee on top of the interest rate when you use one of the checks.”
If you’d prefer not to use a cash advance check, you can use your personal or business credit card the old-fashioned way — by charging your tax payment. “In recent years, it has become popular to pay your tax bill with a credit card,” Hanley says. “That has its pluses and minuses.”
Pluses include convenience and cash-back rewards or earned points or miles. In addition, if this economic crisis eventually forces you into bankruptcy, credit card debt is dischargeable in bankruptcy. IRS debt isn’t.
Minuses include fees the tax-payment processing companies and your credit card company charge, along with a potentially high interest rate. “If you have bad credit, you’ll pay up to 30 percent interest on credit card debt, so that’s probably not where you want to borrow,” Brewitt says. “If you have good credit, your interest rate may be 7 percent to 8 percent, which isn’t a bad rate for a business.”
“Free up some of your working capital that’s sitting in your receivables,” recommends Joe LaPaglia, owner of Cash Flow & Funding of Virginia in Richmond, Va. For example, if you have $10,000 in outstanding invoices, you can sell those for immediate cash at a discount to a third party, called a factoring company, which specializes in buying receivables. Typically, you’ll give up 1 percent to 5 percent of the invoice amount in exchange for the immediate cash, depending on your clients’ creditworthiness and payment history.
You have many options for freeing up funds to pay the IRS. But remember that one of them isn’t drawing from your payroll trust fund. “Be very careful with your payroll trust fund,” says Jackie Perlman, CPA, senior tax research analyst for The Tax Institute at H&R Block in Kansas City, Mo. “Unfortunately, that’s how many small businesses find cash. They take the withholding from employees’ paychecks and use it pay operating expenses. To say it’s against the law is an understatement. Don’t go there.”
Whatever option you plan to use to pay the IRS, begin planning now so that you’re not caught flat-footed in a few months. “The thing I hate most about April is the surprise factor,” Aaron says. “Take stock and run a tax projection now to see where you are so you can plan for April. You don’t have to get to April 15 and feel trapped because you can’t write that one check.”