Can you get a loan to pay taxes for your business? (Yes!) And is it a good idea? (Maybe.)
Learn all about using a personal or business loan to pay your tax obligations, including if you can use a Small Business Administration (SBA) loan.
Explore the pros and cons of using loans for federal taxes, and find out when it makes sense to finance tax payments with loan funds.
Plus, discover how to pay back taxes using alternative financing options.
Can You Use a Loan to Pay Taxes?
Yes, in general, you can use a loan to pay taxes.
The IRS itself states the following tax payment option under Topic No. 202 on the agency website:
“You should consider financing the full payment of your tax liability through loans, such as a home equity loan from a financial institution or a credit card. The interest rate and any applicable fees charged by a bank or credit card company may be lower than the combination of interest and penalties set by the Internal Revenue Code.”
Keep in mind, however, some lenders may impose restrictions on the use of those funds. Check your lender’s policy before borrowing money to pay tax obligations.
Can You Use a Business Loan to Pay Taxes?
Yes, you can use a business loan to pay taxes. If you do, be sure to account for your loan on your balance sheet. The cash from your loan counts as an asset, while the amount you owe counts as a liability.
Can You Use an SBA Loan to Pay Taxes?
SBA regulations only permit use of SBA loans for paying taxes under certain conditions. Specifically, the SBA’s standard operating procedure for CDC/504 and 7(a) loan programs (SOP 50 10 6) states, “Payment of delinquent business income taxes may be permitted if the applicant has an approved payment arrangement with the IRS and the applicant is current on the payments in the arrangement.”
Otherwise, however, the SBA states loan proceeds cannot be used for the payment of delinquent taxes or for the replacement of funds used or borrowed for that purpose. The agency notes, “Loan proceeds must not be used to pay past-due federal, state or local payroll taxes, sales taxes or similar taxes that are required to be collected by the applicant and held in trust on behalf of a federal, state or local government entity.”
Additionally, an SBA exception did allow borrowers to use the temporary COVID economic injury disaster loans (EIDL) to pay federal business tax debt. However, traditional EIDL funds cannot be used for the same purpose, as funds from non-COVID-related EIDLs are specifically meant to cover operating expenses.
It’s also important to note that SBA loans cannot be used to pay personal taxes.
If you have additional questions about whether your SBA loan may be used to pay for taxes, consult your local SBA office, lender, tax adviser or attorney.
Related: What Can SBA Loans Be Used for in Your Business?
Can You Use a Personal Loan to Pay Taxes?
Yes, you can use a personal loan to pay taxes, subject to any restrictions imposed by your lender.
What Are the Pros and Cons of Using Loans to Pay Taxes?
While it’s possible to use a loan to finance your tax payments, should you do it? There are pros and cons.
Pros of Paying Taxes With Loan Funds
There are several major advantages to paying for taxes with loan funds:
- You can avoid late fees if your loan enables you to pay your taxes on time.
- You can avoid interest fees charged for late tax payments — or, if your taxes are already late, you can keep interest fees from accumulating further.
- You can avoid other penalties for late payments, such as tax liens.
- Paying taxes with a loan avoids tying up business funds you could use for other purposes.
- You can avoid problems with your credit score, which can result from tax delinquency.
In some cases where it could save you money or help you avoid legal hassles, these benefits make a good case for using a loan to pay your taxes.
Cons of Paying Taxes With Loan Funds
On the other hand, there also can be potential drawbacks to using loans to pay taxes:
- IRS or lender restrictions may not allow you to use your loan for taxes in some cases.
- For some loans, your interest may be more than what you’d pay for interest on taxes.
- If your minimum loan amount is larger than what you owe for taxes, your loan may end up costing you more than paying your taxes late after accounting for interest.
These drawbacks should be considered in consultation with a qualified professional, such as a tax attorney, before using a loan to pay taxes.
When Should You Use a Loan to Pay Taxes?
If your loan terms allow it, using a loan to pay for taxes makes sense when a few conditions hold:
- Using your loan to pay for taxes would cost you less in interest than the amount that delaying your tax payments would cost you in late fees, interest and penalties.
- You don’t have another less costly source of financing to cover your tax obligations.
- Your lenders’ terms allow you to use your loan for tax purposes.
When these conditions apply, a loan may be your most cost-efficient way to meet your tax obligations.
What Are Some Alternatives to Using a Loan to Pay Taxes?
Before deciding to use a loan to pay taxes you owe the IRS, consider alternatives. These include:
- Using a loan to cover other expenses enables you to use funds allocated to those expenses to cover your taxes (This may be useful if your lender doesn’t allow you to use your loan for taxes.)
- Using other sources of business financing, such as business credit cards, to pay for taxes
- Selling business assets to pay your taxes
- Using personal financial resources, such as savings, to pay taxes
- Making payment arrangements with the IRS
Consider all your options before deciding if using a loan is the best way to pay your taxes.
Related: How to Defer Tax Payments
Pay Your Taxes Using the Method That’s Right for You
Using a loan to pay taxes may be a viable tax strategy in some situations. However, restrictions by the SBA or your lender may limit your ability to use some loans for taxes, so you’ll need to check the specifics of your loan.
If your lending conditions allow it, using a loan to pay for taxes may help you avoid late fees, interest and penalties. Whether this represents your best option depends on what other sources of financing you have available and how much you would pay in loan interest compared to what you’d pay for late taxes.
Fast Capital 360 helps match small business owners with sources of financing. If you’re looking to finance your taxes or other business expenses, take a few minutes to fill out our free, no-obligation prequalifying form and compare your loan options.