Small business owners who find themselves with a big tax bill and not enough money to pay for it must play it straight with the Internal Revenue Service, tax advisers say.
True, you'll have to figure out how to pay, but don't give in to the temptation to file your return late. It will probably cost you 5 percent of the amount of tax you owe per month or part month that your tax goes unpaid, the Associated Press reported.
"It's important to come clean and acknowledge your debt with the IRS, declaring the tax you owe even if you don't pay," said Robert Pesce, a partner with Marcum & Kliegman LLP, a New York-based accounting firm. That way, "all you get stuck with is the late payment fees, which are not outrageous."
One option is to get an extension, or even two, which would move the filing deadline back to Oct. 15. It's possible, given the extra time, to straighten out the problems in your business and come up with the money to pay.
Small business owners should work with an accountant to figure out why there's a cash flow problem.
"You're overspending or overleveraged," said accountant Jeffrey Berdahl of the firm Beard Miller Co. in Allentown, Pa. "You have to stop the bleeding."
Some business owners tap into their home equity line of credit, obtain a loan from a family member, or take money from their retirement accounts to pay the IRS. All options have their down sides, particularly if you take money from a 401(k).
You can ask the IRS for an installment plan, but the IRS itself would tell you that a bank or even a credit card company would offer a better deal on interest. Attach Form 9465, Installment Agreement Request, to the front of your return if you want to go that route. The IRS may ask to see financial information, Berdahl said.
If your business is on the verge of collapse, business owners can seek an offer-in-compromise, which can be used when âthe taxpayer must not be able to pay the taxes in full either by liquidating assets or through current installment agreement guidelines.â Use Form 656, Offer in Compromise.
Pesce said business owners should use their year-end tax consultations to prepare for April 15 and beyond. An accountant can tell them if it looks like they'll be looking at a big bill in April. Money should be set aside on a regular basis to avoid costly surprises in the future.