Can You Use a Business Loan to Pay Business Taxes?

What funders usually allow

Most working capital and line of credit products do not restrict how you spend the money, so paying taxes is usually allowed. Some term loans specify a purpose.

Read the agreement for a use-of-funds clause. SBA loans have rules about eligible uses, and paying back taxes is often limited. Always confirm with the funder, and tell them the purpose if asked. Never misstate how you will use the money.

For the tax side, see are business loans tax deductible.

When borrowing to pay taxes can make sense

It can make sense when penalties and interest on unpaid taxes would exceed the cost of borrowing, or when a tax debt would put your operations at risk.

In an illustrative example, a $30,000 tax bill that would add $2,400 in penalties and interest over six months could be paid with funding that costs $1,800 over the same period. That saves money. But if the funding costs $4,000, it does not. Ask your accountant for the real penalty figures, which change with law and your situation.

Compare against IRS options first

The IRS offers payment arrangements for many taxpayers. Check them and compare cost before taking on outside funding.

Visit IRS.gov or ask your accountant about installment agreements and short-term extensions. These can carry interest and penalties, but sometimes at a lower overall cost than private funding. Payroll taxes are especially serious, so see payroll vs. income taxes and speak with a professional quickly.

Which funding products fit

A line of credit, working capital or a term loan can cover a tax bill. Choose by how fast you can repay.

• Line of credit: good for a bill you can repay in a few months.
• Working capital: fast, with repayment set against revenue.
• Term loan: fixed payments for a larger bill repaid over a longer period.

See business line of credit, working capital and term loans.

Plan ahead so it does not repeat

Set aside a percentage of revenue for taxes in a separate account and review it quarterly. Repeated borrowing to pay taxes is a warning sign.

Open a dedicated tax savings account and move a set share of every deposit into it. Your accountant can suggest a percentage. Keep clean books so estimates are accurate; see how to manage business taxes and tips for filing quarterly taxes.

Questions to ask your accountant first

Before you borrow, ask your accountant three questions and get the answers in writing.

1. What is the exact amount due, including penalties and interest to date?
2. What would an IRS payment plan cost in total?
3. Is there any way to lower the bill, such as an overlooked deduction or credit?

Sometimes the bill shrinks after a review. Borrowing for a number that later falls wastes money. If you borrow, keep the receipt showing the funds were used for taxes, and set up a savings habit so the next filing does not need a loan.

Keep records of the purchase

Document how borrowed money was used, so your books and your accountant can trace it.

Record the loan as a liability, not income, and keep the payment confirmation from the tax authority. Note the interest and fees separately, since they may be deductible. Clean records make the next tax season easier and show future funders you manage money carefully. Ask your accountant how to categorize each item before you file.

Getting a quote before a deadline

If you decide to borrow, start early. Same-day funding is possible on approved, complete files, but gathering documents takes time.

ROI Funder can fund the same business day on approved, complete files, meaning the application plus three months of business bank statements. It considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue. We show true cost and payback before you sign, so you can compare it with IRS options. Apply in a few minutes with a soft credit pull.