Chapter 7 Bankruptcy for Small Business Tax Debts
Are you a sole proprietor of a small business and have to file for a Chapter 7 bankruptcy? If so, you are accountable to take care of your small business tax debt. But unlike most business debts, tax debts are not likely to be discharged through a Chapter 7 bankruptcy.
Tax debts are a very high priority, especially if a bankruptcy occurred within three years. Before a trustee handles your other debts, like credit card debts, the aforementioned tax debts must be paid in full. Moreover, some tax debts have priority treatment. Others don’t. The latter tax debts can be discharged. Those with priority cannot.
One method to cover some or all your tax debt is to liquidate your business assets through a trustee. If that cannot cover some of your priority tax debt, you will still have to owe the remaining amount even after the bankruptcy is over.
“Trust fund” taxes are a type of priority tax debt. These taxes are those that are not being paid by the business, but by someone else. The business is just responsible to use a taxing authority to deposit these taxes. Employee withholding and sales taxes are trust funds. These type of taxes cannot be discharged.
Small business tax debt could be discharged if it is at least three years old, if no tax evasion or fraud was committed, and if tax return was filed at least two years before the bankruptcy. Another exigent criteria for this is if the tax debt was assessed more than 239 days before the bankruptcy filing, although this time frame can be affected by offers of compromise, and may be difficult to determine when audits are done or amended returns are filed.
Tax liens are constant throughout the bankruptcy, even when tax debt is discharged. A taxing authority can sell the property after a discharge. Some or all the tax debt will be paid off if you yourself sell the property.