A business failure does not have to be the end of the story. Almost always overlooked by accountants and financial planners, there is a tax payback benefit provided by the IRS to business owners who have experienced a failed business venture. Past Due Payroll Tax Audit Section 1244 of the Internal Revenue Code allows failed business owners to turn owed payroll tax around to become an ordinary loss, offsetting income for a set period of time following the business loss.
At Thinking Outside The Box, Inc., we have the tax law understanding to find solutions like this that can be used to turn an otherwise disappointing situation around to the benefit of our clients. Located in Naperville, Illinois, our law firm represents clients throughout the Chicago metropolitan area. Contact ustoday.
Developing A Plan To Make The IRS Pay You For Your Business Failure
Often struggling businesses do not pay their payroll tax withholding and instead use the payroll taxes to pay other bills. Technically, this money belongs to the employees and it is a serious offense when these taxes are not paid.
Under these circumstances, it is often advantageous for the company to shut down and reconstitute as a new company the next day. When this happens, the past-due payroll taxes must be paid. However, once the old company is closed the employer’s portion of the tax goes away; this reduces the total tax liability by approximately 25 percent.
Then Section 1244 of the Tax Code allows payment of the unpaid payroll taxes for the closed company. Each dollar paid to satisfy the payroll taxes then generates a dollar of ordinary losses.
The payroll tax is assessed to the owner of the company. This means that every time the owner pays on that tax debt personally, an ordinary loss is created under Section 1244. This offsets any type of dividends, interest or wages of the owner or his family. The owner can use the ordinary loss to reduce his taxes for the next few years until it is used up.
Basically, the IRS gives you a significant tax deduction (ordinary loss) for paying your taxes after the business is closed.