How Tax Liens Impact Small Businesses

Tax liens can have significant financial impacts on a small business and even your personal finances. If the Internal Revenue Service (IRS) has put a lien on your business property, it’s important to understand what this means and how it will impact your operations.

What is a Business Tax Lien?

Tax liens stem from a business’ failure to pay its taxes in full and on time. Each year, the IRS issues about 1 million tax liens. A Notice of Federal Tax Lien is the official document the IRS will send to your business if it places a tax lien on your property.

A lien means that the government has first claim to your legal property, which it may seize and sell to pay off your taxes.

If your business is an LLC or a corporation, the government can only file a lien on business property, which might include:

  • Inventory
  • Equipment
  • Buildings
  • Intellectual property, such as copyrights, patents and trademarks

But if you operate as a sole proprietor or a partner, the government can put a lien on your personal property to satisfy your tax debt. Personal property can include your home, your car, your investments and any other property you acquire while the lien is in place.

The Good and Bad News

If a lien is put on your business, it may seem like there is no light at the end of the tunnel. But there is some good news.

Because it takes a lot of time, money and effort to seize your property, inventory it, evaluate it and auction it, the IRS would rather resolve the debt with a direct payment. The IRS is usually receptive to working out some sort of payment plan.

If you’re able to pay your owed taxes in full, the government can remove the lien with 30 days.

The bad news? The lien can make it difficult or impossible to get a business loan and will likely hurt your business’ credit score.

What are Your Options?

If your business owes less than $25,000, the IRS might agree to enter into an installment agreement.

The lien may also be discharged if the IRS did not file it properly.

Some business owners opt for subordination. This won’t remove the lien, but it will allow other lenders and creditors to move ahead of the line to be paid. That can make it easier to get a loan.

The IRS may also agree to discharge the lien on a certain piece of property as long as they have a lien on other property that will satisfy the tax debt. By removing the lien from one piece of property, it may be easier to get a loan.

Enrolling in a payment plan is the best way to resolve your tax issue. The IRS should send you a Notice and Demand for Payment from the IRS. This notice means that the government is just steps away from putting a tax lien on your property. Enrolling in a payment plan can prevent them from issuing the lien and allow you to pay your debt over time.