Tax debt can feel overwhelming for your business. When you owe the Internal Revenue Service (IRS) or Washington State Department of Revenue, the pressure mounts quickly. You might wonder if bankruptcy offers a solution. The answer depends on the legal structure of your business and the specific type of tax debt it carries.
What types of tax debt can bankruptcy address?
Bankruptcy can potentially discharge qualifying federal income tax debts. For Washington businesses, state excise taxes like the business and occupation (B&O) tax may also qualify for discharge under strict circumstances. These follow different rules under federal bankruptcy law. Generally, the tax debt must meet specific criteria:
- The tax debt is at least three years old from the original due date
- The tax return was filed at least two years before filing for bankruptcy
- The tax assessment is at least 240 days old
Federal bankruptcy law sets the rules for tax discharge. However, Washington State laws determine which state tax debts qualify as “trust fund liabilities” that cannot be discharged. Sales taxes your business collected also fall into this category and must be paid.
Which type of bankruptcy works for tax debt?
Different bankruptcy chapters offer different solutions for tax debt. The appropriate choice depends on your business’s legal structure. This includes:
- Chapter 7: This chapter does not wipe out tax debt for coporations or limited liability companies (LLC). Instead, a Chapter 7 filing simply closes the business doors and hands all assets over to a court trustee to sell off. Tax debt is only completely discharged under this chapter if the business operates as a sole proprietorship. The process usually takes four to six months.
- Chapter 11: This enables businesses to restructure their tax obligations into a manageable repayment plan. It allows the business to keep operating while addressing debt over time. The process can provide more time to make payments. Nevertheless, priority tax debts must be paid in full throughout the duration of the plan.
Chapter 7 works well when you have limited assets and qualifying tax debt. Alternatively, Chapter 11 allows you to manage operational challenges and tax obligations at the same time. You may benefit from talking to a legal professional to determine which chapter suits your situation.
Understanding bankruptcy options for tax debt relief
Bankruptcy offers potential relief for businesses struggling with tax debt. While not every tax obligation qualifies for discharge, many businesses find meaningful solutions through Chapter 7 or Chapter 11. The key is understanding your options and the specific requirements that apply to your circumstances.