While many new tax laws were designed to help small businesses, it’s still possible to end up with an unexpected bill that you’re not prepared to pay all at once. While you can certainly set up a payment plan directly with the IRS, it’s not always in your best interest.
Here are three benefits a working capital loan offers when used to pay your taxes.
Potentially Lower Interest Over Time
As with any small business loan product, you want to pay careful attention to interest rates when comparing your options. Don’t just look at the percentage; also consider how the interest will compound. IRS loans compound daily, which can be extremely costly.
Plus, rates for IRS loans or payment plans currently range between 6% and 8%. That number can change each quarter, making it difficult to plan your payments over an extended period of time.
Tax Deductions on Working Capital Loans
Another advantage of a working capital loan is that you can deduct the interest you pay as a business expense on your taxes. There are some rules and regulations to follow, such as having to borrow the funds from an established lender, not family and friends.
You also need to use the working capital funds for your business. Since the funds are used to pay your business taxes, the interest should qualify for a deduction. Talk to your tax advisor to see if there are any other considerations to take into account when using loan interest as a tax deduction.
Avoid Fees and Penalties
Finally, using a working capital loan for your taxes can help you avoid paying substantial fees and penalties associated with your tax return. The IRS charges a late payment fee each month you haven’t paid your taxes. If you wait too long to address this debt, you may even receive a tax lien from the IRS. This is serious; it can transfer ownership of your assets from you to the federal government.
The Bottom Line
If you’re ever unprepared for your business tax obligation, a fast working capital loan can solve this significant problem. No matter how large or small, it’s an issue that deserves your attention; but it’s also one that can give you quite a few benefits if you finance it the right way.