Bankruptcy and Taxes for Small Businesses

Anyone that opens a small business knows there are risks involved, and no matter how sound a plan may be, sometimes things simply don’t work out the way you want them to. Perhaps overhead has become too expensive, the competition too stiff, or perhaps the market for a good or service has simply dried up. When this happens, sometimes bankruptcy is the best choice for a fresh start. However, even trying for a fresh start may have its setbacks, and one of those may be tax consequences.

Let Bunch and Brock Help

If you are considering a small-business bankruptcy, let the attorneys at Bunch & Brock help. With 35 years of experience operating out of offices in Lexington, Kentucky, Bunch & Brock has the knowledge and resources you need to put the best possible plan together to give you the best chance of success. We can help you find your way through the legal maze of filings and paperwork and explain the options to help you get the results you are looking for. For answers to your questions or to set up a consultation, contact us online or call us at 859-353-6883 to discuss your best option.

Types of Bankruptcy

There are two basic types of bankruptcy that can be utilized for small business in Kentucky, and depending on which one you choose, the tax debts may be handled very differently.

  • Chapter 7: In this type of bankruptcy, the business attempts to use its assets to pay off as much debt as possible. The business itself is closed, and its property given to a trustee. The trustee then finds buyers for the materials, often through auctions or other means, and that money is used to first pay professionals who have assisted in your bankruptcy and then to pay off as many creditors as possible.
  • Chapter 11: This is essentially a restructuring. In Chapter 11 bankruptcy, a court gives a business a limited amount of time to reorganize the company and approves a plan in which the company may retool its operations. In this phase, the business may restructure debts under more favorable terms, downsize, or take other steps to ensure that when the company emerges from bankruptcy it will be viable and capable of continuing its work in some capacity.

Taxes After Filing Bankruptcy in Kentucky

After filing for bankruptcy in Kentucky, businesses are still responsible for taxes owed during the time the business was operating, in the case of Chapter 7, or while the company is restructuring, in the case of Chapter 11. However, there are rules that govern tax repayment that may in certain circumstances make repaying tax debts easier.  According to NOLO, a legal publisher, most business taxes in a Chapter 7 bankruptcy are not forgiven. Most tax debts from the previous three years take priority in the proceedings, and are generally paid first.

  • Taxes That Can Be Forgiven – Some federal income taxes may be removed during the bankruptcy, but they must meet the following criteria: taxes must be more than three years old; must have been assessed at least 240 days before filing; tax return filed two years before filing; person responsible for the taxes must not be guilty of tax fraud or evasion.
  • Liquidated Assets – After all property and assets are liquidated for cash in a Chapter 7 bankruptcy, the money is first used to pay professionals who assisted with the case, including the trustee. After that, generally taxes are paid. If enough money is raised from the assets, it is possible to emerge from the bankruptcy with no tax debt. However, any eligible debt that cannot be discharged will remain and must be repaid.
  • Tax Liens – Tax Liens, unless paid by funds raised by liquidating assets, will remain and must be repaid after bankruptcy.
  • Chapter 11 Taxes – Under a Chapter 11 bankruptcy, the business will still owe taxes. A judge may not approve a restructuring plan unless it appears the business owner or owners can keep up with income, payroll and excise taxes. If a tax refund is owed, it will automatically go toward those debts.

Legal Representation

Filing bankruptcy as an individual can be brutally complicated, and even more so for a small business. Different rules and regulations apply, depending on the nature and the structure of the business. In regard to taxes, based on different variables, exemptions may apply. It is vital to get the assistance of an attorney with experience for help and guidance. Without someone experienced in the system, you may not get the benefits you’ve earned.

Bunch & Brock, Attorneys at Law, have more than 35 years of experience serving our community and the entire state of Kentucky with their legal needs. Working from offices in Lexington, we have the knowledge, experience and resources to help. If you have legal questions or would like to set up an appointment contact us online or call us at 859.254.5522.