Complex tax codes make filing for bankruptcy something no business should ever attempt to do without the services of a very seasoned tax resolution attorney. From determining which type of bankruptcy to file, to understanding the tax implications are just the beginning of a long and complicated process.
Two types of bankruptcy exist for businesses that find themselves in financial distress and are unable to pay their debts. Chapter 11 Bankruptcy is also known as “reorganization.” Very often the business continues to function with Chapter 11 Bankruptcy. Chapter 7 Bankruptcy for a business requires liquidation of all assets. A court appointed trustee is assigned to oversee the sale of the assets and to oversee the entire bankruptcy process.
Before You File for Business Bankruptcy.
Before filing bankruptcy, you must prove that your business filed its tax returns for the previous 4 year. A copy of the most recent tax return must be submitted to the bankruptcy court as well as to any creditors who request a copy. In addition, there must be no criminal or fraudulent activity associated with your business, no fraudulent tax forms filed, and no efforts at tax evasion.
Tax Implications of Bankruptcy for Partnerships and Corporations
When a partnership or corporation is in the bankruptcy process, the tax filing requirements do not change. The court-appointed trustee is responsible for filing the regular income tax returns for the business on the appropriate forms. There is one exception. If the business is a corporation, the trustee may apply for an exemption from filing taxes. However, to qualify for exemption, the corporation must no longer be in operation and may not have either assets or income for the tax year.
Priority Claim of Taxes Due
Tax debts, along with other debt claims of the business, are paid and assigned according to a specified priority and include:
Income taxes in certain cases, withholding taxes (on income taxes withheld from employees
Taxes incurred during the trustee's administration
Employee portions of employment taxes on the first $10,950 of wages that they earned during the 180-day period before the date of your bankruptcy filing or the cessation of your business (whichever occurs first)
The employment taxes on these wages
In general, if a debt is canceled in bankruptcy, it is subject to taxation. An experienced tax resolution attorney is your best resource should you find yourself wondering whether or not your business should file for bankruptcy. Filing the correct paperwork with the correct forms at the correct time, determining whether there are secured debts or unsecured debts, looking for any fraudulent behavior or any that could appear to be fraudulent to the IRS, determining the type of bankruptcy and helping businesses understand the complex tax implications of bankruptcy are decisions that a reputable tax attorney can guide you through during treacherous financial times.
Whether you are an independent contractor or a major corporation, in a partnership or LLC, the determination to file for bankruptcy is often a difficult one. Work with an attorney you trust will do everything possible to at least salvage your integrity if there is no hope for your business.