Can I borrow to pay my business tax bill?
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
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Dear Your Business Credit,
My freelance business grew a lot this year, and I failed to
pay the quarterly taxes for my LLC, so I'm going to have to pay the whole years'
worth of taxes all at once in April. Are there business loans for paying taxes?
Or can I pay them with a credit card? --
When taxpayers are facing a tax bill they can't pay, the Internal Revenue
Service recommends exploring options such as taking out a home equity loan
or using a credit card, which usually will cost you less than the interest and
penalties Uncle Sam charges for late payments.
You didn't mention owning a home, but if you do, I would try
to avoid using a home equity loan in situations like this -- unless you have no
other options. Many people got hurt by borrowing against their home equity
during the housing crunch. When housing values dropped, they ended up owing
more than their homes were worth. Although the economy has improved since then,
it's hard to predict what will happen in the future.
If you have a high credit score, you probably have enough
time to apply for a business credit card offering a 0 percent teaser rate. Paying your IRS debt with a
card such as this could help you devote as much money as possible to paying down
the balance on the tax charge, not interest.
Another possibility to consider is borrowing a small amount
from several family members. For instance, you can apply for a
short-term bridge loan through the peer-to-peer
lending site Prosper and friends and
family can participate in the loan. In creating the loan description on Prosper,
you must indicate why you are borrowing, and "taxes" is one of the options in
the pull-down menu.
Of course, the less money you borrow to pay your taxes, the
better. Loading up your credit cards can hurt your credit score. And it will be
harder to stay current on your 2014 taxes if you have to make big monthly
payments to pay down your debt for 2013.
Set aside a couple of hours this week to figure out ways to improve
your cash flow and maximize your deductions, to reduce the amount you need to
pay -- and borrow.
deductions. Even small deductions can add up, so work closely with your accountant
to find every possible item you can claim this year. The IRS publishes a business deductions guide that may give you some ideas for deductions
you hadn't considered. For instance, if you borrowed money for your business,
you can deduct the cost of interest.
There's a change this year, too. If you drove your car a lot
for your freelance work, you may be happy to know that you will get a bigger
deduction this year. The standard mileage rate rose to 56.5 cents per mile, up from
55.5 cents per mile in 2012.
Get paid faster. Finish
your current projects on time and invoice as soon as you have the client's
approval to do so -- ideally when each job is completed. Pitch new projects to
clients who have a history of paying you quickly, so you can get more money
flowing into your bank account. Haven't
kept track of who pays fastest? Your accounting software may have a feature
that lets you create a report on your clients based on "time to pay," with the
click of a button.
Also check on the status of any late invoices with clients. It
could be that some of them went astray. You'll be better off re-submitting them
now than later. If you dread collections, consider hiring a "virtual" personal
assistant -- an administrative assistant who works from his or her own office
-- for an hour or two a week to contact your slow-paying clients on your
behalf. Chances are, one of your peers knows and works with someone who is
A final note: If you have been spending money you should have
been putting aside for taxes, it's time for a fresh start. Not being able to
pay your taxes means you are living beyond your means, and you need to overhaul
your personal finances.
Freelancers who are transitioning from life as a W-2 employee
may need some help from a financial pro to learn how to manage money so
they can stay current on their taxes. Without having an employer deduct taxes
regularly from your paycheck, it's easy to fall behind on paying the IRS.
Some freelancers' and professional organizations offer
discounted access to a financial planner. Setting up a session with one can be
an excellent investment, making it possible to enjoy the freedoms the freelance
life offers -- without running into financial problems that keep you awake at
See related: Taxes, tuition can rack up rewards, for a fee, 1099-Ks: Small businesses face new tax paperwork, penalties, Getting tax information from a closed small-business account
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Published: January 27, 2014