With September ending and October approaching, the season for extended tax filing is coming to an end. If you requested an extension on your 2015 taxes, the six-month extension period will end on October 17th. As a small business owner, you may assume the IRS doesn’t have your tax liability at the top of their list. However, this assumption couldn’t be further from the truth. In fact, reports suggest that the IRS has increasingly targeted small businesses for audits in recent years. Although the tax extension deadline is nearly here, you still have time to file. And if you don’t have the funds needed to make payments, don’t stress, there are alternative sources of capital if you’re declined a bank loan.
Penalties
While the government may not be interested in your business before it turns a profit, it’s important to pay attention to your tax responsibilities in its early stages of formation in order to prevent liability issues moving forward. Business owners who fail to submit at least 90% of the taxes they owe may be subject to penalties, so perform your due diligence to ensure you’re in the clear. If you don’t file your corporate tax return before the extension deadline, the IRS will assess a late filing penalty on the unpaid tax amount. The penalty starts from the day the tax return was originally due. The penalty and interest amounts are imposed each month until you file the tax return.
If you file your federal tax return late and owe tax with the return, two penalties may apply:
- As of this year, the IRS charges a 5% late filing penalty for each month or part of a month you file later than the extended deadline, up to a maximum of 25%. There is a minimum penalty of $135 or your balance owed if you file your return more than 60 days after the due date.
- The failure-to-pay penalty is generally 0.5% for each month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.
Those who both file late and fail to pay for the taxes they owe are charged a maximum penalty of 5 percent of their unpaid taxes for every month the bill is late. So, while paying interest and penalties may be inconvenient, late filing penalties can add up much quicker.
Consequences of Not Paying Uncle Sam
The consequences for ignoring an IRS bill can be a lot harsher than warning letters. After sending multiple correspondences regarding an unpaid tax bill, the IRS will send a representative to your residence or business to collect payment, typically if you owe $25,000 or more. Continuing to avoid this responsibility can result in automatic wage garnishments, asset seizures like your car and may even lead to arrest and jail time for tax evasion.
Alternative to Bank Loans
According to the SBA, the average owner of a sole proprietorship face a 13.3% tax rate and the average owners of small S corporations face a 26.9% rate. Depending on where they are at in their cash flow cycle, many small businesses can struggle to find that kind of capital to give to the IRS for taxes. So what do they do? Many will seek out small business or personal loans from a bank, which is typically a mistake. Applying for a common business or personal loan can take up a lot of your valuable time. What’s the point of going through excessive paperwork, a lengthy approval process, making fixed monthly payments, and having restrictions on how you use the money if your request is just going to get denied, which it certainly will if your company is struggling to cover taxes.
A better alternative? Three words: working capital loan.
A working capital loan is a specialized loan that is given to businesses and designed to meet the everyday financial needs of running a business. Unlike traditional business loans, your business is not required to submit the loan’s purpose to the lender during the application process. They will approve the loan regardless to what it’s being used for within the business, so you can use the capital for paying off your taxes. And they’re quick! Typically these loans allow borrowers to access money almost immediately, usually within a week after the application is accepted.
At the end of the day, your job as a small business owner is to file and pay your taxes on time to avoid interest accruing penalties, or worse a tax lien on your small business. Although your business may be in dire straits, not having the capital it needs to pay those taxes, there is always the option of a working capital loan, which will give your business the funds it needs quickly and easily. Don’t waste the time you have left to apply for this type of loan!