Small Business Tax Debt

Chapter 7 Bankruptcy – Small Business Tax Debt

Being a sole proprietor of your business means that your business taxes most likely will not be discharged in a Chapter 7 bankruptcy.  You are personally responsible for all the business debts including unpaid taxes.  A Chapter 7 bankruptcy wipes out or discharges most debts, however unpaid taxes are different.  Certain types of taxes can or cannot be discharged in a Chapter 7 bankruptcy.

Tax Debt is a Priority

All tax debts that accrued or became due within the last three years before the Chapter 7 bankruptcy are given priority in the bankruptcy proceedings.  These taxes have to be fully paid before the bankruptcy trustee begins making payment to other creditors. However, there are some payments made before taxes are paid like professionals who were hired to carry out the liquidation and fees to the trustee.  

Assets May Cover Some Small Business Tax Debt

The bankruptcy trustee liquidates nonexempt assets to pay creditors in a Chapter 7 bankruptcy.  The trustee will prioritize payment of your taxes first.  If the value of your liquidated assets is adequate to cover your unpaid taxes  then you will come out of the bankruptcy with your tax debt paid in full.

Assets May Not Cover All Tax Debt

Tax debts that are regarded as priority tax debts cannot be discharged in a Chapter 7 bankruptcy.  Although some tax debts can be discharged during bankruptcy,  priority tax debts can never be discharged.  If the liquidated assets cannot cover the tax debt in full,  you will still owe these debts after the bankruptcy.  The tax authority may force the sale of your property and the proceeds used to pay the tax debt even if you have received discharge during the bankruptcy proceedings.

Small Business Tax Debt That Cannot be Discharged During Bankruptcy

Unpaid taxes that are known as trust fund taxes cannot be discharged in the bankruptcy proceedings.  These taxes are actually not being paid by the business.  These taxes are being paid by someone else and the responsibility of the business is to collect these funds and pay them to the relevant authority.  These taxes include employee withholding and sales tax.

Small Business Tax Debt that Can be Discharged During Bankruptcy

Certain unpaid taxes can be wiped out during bankruptcy if certain criteria are met :

  • The tax debt is more than 3 years old
  • The debt was assessed at 240 days before the bankruptcy filing
  • The tax return was filed at least 2 years before the bankruptcy filing
  • You have not committed tax fraud or have been found guilty of tax evasion

Tax Liens After Bankruptcy

After bankruptcy proceedings are over, tax liens remain even after your personal obligation for the unpaid tax debt is discharged.  The tax authority may be able to force the sale of your property after you receive a discharge.  If you decide to sell your property, you have to pay the outstanding tax debt to the relevant authority from the proceeds of the sale.

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