TABLE OF CONTENTS
- Can You Use a Loan to Pay Taxes?
- What Are the Pros and Cons of Financing Tax Payments With Loans?
- When Should You Use a Loan to Pay Taxes?
- What Are Some Alternatives to Using a Loan to Pay IRS Taxes?
- Pay Your Taxes Using the Method That’s Right for You
Can you get a loan to pay taxes for your business? And is it a good idea? Learn all about using a business loan to pay taxes.
First, we’ll look at whether you can use a loan to pay taxes, including how this applies to business loans, Small Business Administration (SBA) loans and personal loans. Then we’ll consider the pros and cons of using loans for taxes to the Internal Revenue Service (IRS) and when it makes sense to finance tax payments with loans. Finally, we’ll look at how to pay back taxes using alternatives to loans.
Can You Use a Loan to Pay Taxes?
Yes, in general, you can use a loan to pay taxes. However, some lenders may impose restrictions on the use of those funds. You should check with 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. In general, guidelines for use of SBA loan proceeds allow SBA loans to be used to refinance certain business debts. However, SBA loans may not be used to pay for delinquent IRS withholding taxes, sales taxes or similar funds which are held in trust. Nor may SBA loans be used to pay for personal taxes.
There are some exceptions to general SBA rules for paying taxes with loans. For example, regulations for SBA economic injury disaster loans (EIDL loans) exclude using EIDL funds to repay federal debt, but make an exception for IRS obligations. However, delinquent federal debt obligations require special approval. EIDL loans for relief from the effects of the COVID-19 pandemic may be used to pay for federal debt and to pay or prepay nonfederal debt, according to an update that went into effect Sept. 8, 2021.
These exceptions make use of SBA loans to pay for taxes a complex subject. If you aren’t sure whether your SBA loan may be used to pay for taxes, consult the SBA, your lender, your tax adviser or your attorney.
Can You Use a Personal Loan to Pay Off IRS Debt?
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 Financing Tax Payments With Loans?
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 for Taxes With Loan Funds
There are several major advantages to paying for taxes with loan funds:
- If your loan enables you to pay your taxes on time, you can avoid late fees
- 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 frees up funds you can use for other purposes
- You can avoid problems with your credit score which can result from tax delinquency
In some cases where it can save you money or help you avoid legal hassles, these benefits can make a good case for using a loan to pay your taxes.
Cons of Paying for Taxes With Loan Funds
On the other hand, there also can be potential drawbacks to using loans to pay for 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 interest is factored in
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:
- You don’t have another source of financing to cover your tax obligations which would cost you less in interest than a loan
- 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
- 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 IRS Taxes?
Before deciding to use a loan to pay for your taxes, you may wish to consider other alternatives. These include:
- Using a loan to cover other expenses, enabling you to use the funds that would have been 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 for your taxes.
- Using personal financial resources such as savings to pay for 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.
Pay Your Taxes Using the Method That’s Right for You
Using a loan to pay your taxes is possible and 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 end up paying 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 see your loan options.