Wednesday, August 15, 2007

Yeah, I'm the Taxman

George Harrison of The Beatles had it right…

Let me tell you how it will be
there’s one for you, nineteen for me'
Cause I'm the taxman, yeah, I'm the taxman.

Every business has to worry about the taxman – especially the impact the taxman can have on the ability of a business to obtain a loan.

As a condition of providing a business loan, a lender will typically require a first priority lien on the assets of a business. In the event of a default, the lender wants be paid first from the proceeds resulting from a foreclosure on the accounts receivable, inventory, equipment, real estate and any other assets associated with the business. Without this assurance, few if any lenders will extend a business loan.

What happens if a business doesn’t pay taxes on time or at all? Its lender may lose its first priority lien and may reject a loan request or withdraw from any further new financing for a business.

Ouch! Lack of access to financing may immediately put some businesses out of business.

I recently spoke to Peter Stephan of Stephan & Stein, Certified Public Accountants located in Woodland Hills, CA, about the implications of past due taxes on a financing. Peter has over 20 years of experience in the arena of tax resolution with both federal and state taxing authorities. Here’s what I learned….

When asset based lending is involved (such as accounts receivable or other revolving type financing), 45 days after the IRS records a notice of Federal tax lien, it will have a first priority lien on accounts receivable, inventory and equipment. While some lenders will terminate funding immediately, some may continue to extend additional funding until the lien becomes effective after the 45 days elapses. After the lien becomes effective, a business is likely to be cut-off by all lenders from new financing unless a payment plan and subordination agreement is signed between the business and the taxing agency.

A sale of a business with outstanding tax liens creates a similar challenge to a buyer which needs a business loan to conclude the acquisition. Successor liability means the tax lien transfers to the buyer even if the seller has agreed to indemnify the buyer for the risk.

With an executed installment agreement and the proper incentives, the IRS or other taxing authority might agree to subordinate its lien so a lender can obtain a first priority lien position. It could take two or three months to prepare the materials and conclude a subordination agreement. A business that needs a loan quickly to keep its doors open may not be able to wait three months.

So what’s a business to do if it owes back taxes and needs financing?

As soon as you get behind in tax payments, hire a good professional with experience in tax resolution. Be careful who you choose as this is a very specialized area. This expert can potentially negotiate reductions in the tax liability, obtain improvements to a payment plan, defer the formal filing of a lien or assist in concluding a subordination agreement.

Need help finding the right lender or telling your story the right way? Read "Matchmaking for Business Loans" and give me a call!

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