Under specific circumstances, SBA laws allow for the utilization of SBA loans to pay taxes. Indeed, reimbursement of delinquent business income taxes might be allowed if the business has a certified payment plan with the IRS and is up to date on the installments in the agreement, according to the SBA’s standard operating procedures for CDC/504 and 7(a) loan programs (SOP 50 10 6).
Conversely, the SBA asserts that loan money received cannot be used to pay back delinquent taxes or to substitute cash utilized or loaned for that intention. Loan funds collected should not be utilized to reimburse past-due federal, state, or local payroll taxes, sales taxes, or equivalent taxes.
An SBA exception allowed borrowers to utilize temporary COVID economic injury disaster loans (EIDL) to settle federal business tax debt.
Conventional EIDL funds, on the other hand, cannot be employed for this intent because cash from non-COVID-related EIDLs is intended to pay for operational expenses. It should also be noted that SBA loans cannot be employed to reimburse personal taxes.
What Are the Benefits and Drawbacks of Using Loans to Pay Taxes?
Although it is feasible to fund your tax payments with a loan, should you? There are advantages and disadvantages.
- If the loan allows you to pay your tax obligations on time, you could indeed bypass late fees.
- You can prevent paying interest on delayed tax bills — or, if your tax payments have become late, you could indeed keep the interest from accruing even further.
- Other sanctions for delayed payment, including such tax liens, can be avoided.
- Tax payment with a loan keeps business funds available for other reasons.
- You could indeed prevent issues with your credit rating that can arise as a result of tax evasion.
The above advantages make a great argument for utilizing a loan to cover your taxes in certain instances.
On the other hand, there may be some disadvantages to utilizing loans to cover taxes:
- In certain instances, IRS or lender limitations might prevent you from using your loan to pay taxes.
- The interest on certain loans might be higher than the rates on taxes.
- If your minimum loan sum is greater than what you owe in taxes, your loan might eventually cost you more after interest than paying your tax bill late.
Before utilizing a loan to cover taxes, the above disadvantages ought to be discussed with an eligible expert, like a tax attorney.
When Should You Take Out a Loan to Pay Your Taxes?
If your terms of the loan permit it, utilizing a loan to cover tax payments makes perfect sense if the following criteria are met:
- Utilizing your loan to cover your tax bills will save you more money in interest than deferring your tax obligations will cost you in late payments, interest, as well as fines.
- You don’t see another less expensive method of covering your tax payments.
- The provisions of your loan permit you to utilize it for taxation purposes.
Whenever these criteria are met, a loan would be the most cost-effective way for you to satisfy your tax bills.
What Are Some Options available for Borrowing Money to Pay Taxes?
- Taking out a loan to meet other liabilities allows you to utilize the money set aside for such expenditures to pay for your taxes. (This may come in handy if your lending institution does not permit you to utilize your line of credit to pay taxes.)
- Utilizing various forms of business financing to pay those taxes, including business credit cards
- Attempting to sell company assets to stump up taxes
- Utilizing individual financial resources to pay tax bills, including savings
- Making preparations with the IRS for installment
In certain cases, utilizing a loan to cover taxes might be a feasible tax strategy. Nevertheless, limitations placed by the SBA or your lending institution might constrain you from utilizing certain loans for tax purposes.
Using a loan to cover your taxes might assist you in avoiding late payments, interest, as well as fines if your borrowing stipulations permit it. Whether that’s the right approach for you varies depending on your other options for funding as well as the amount of money you’d pay in interest payments, especially in comparison to the amount you’d cough up for delayed taxes.
If you have any further queries regarding whether you would use your SBA loan to pay for your taxes, speak with your local SBA office, lending institution, tax consultant, or lawyer.