When approaching Chapter 11 bankruptcy, it is very important to consider the tax implications. Fortunately, the Internal Revenue Service (IRS) knows the challenges that businesses face, and it offers direct advice regarding this process.
Below are a few common questions and answers:
Can a company discharge taxes in bankruptcy?
Per the IRS, companies may be able to discharges "some taxes." Not all can be eliminated and many remain after bankruptcy, but it is not strictly impossible. When looking at federal tax debt, the IRS says that each case is decided individually by considering the "unique facts and circumstances" of that case.
Can you get a tax refund during a bankruptcy case?
Yes, you can. Refunds are still granted. That said, it is important to consider existing tax debt. The refund may be kept and put toward that debt, or it may be delayed.
Does reorganization deal with taxes?
After a fashion, it does. The goal of Chapter 11 reorganization is to make sure that the company can deal with any and all financial obligations in the future. Taxes are one of these obligations. The reorganization plan will consider whether or not payroll taxes and federal income taxes can be paid moving forward. This is not the main focus, but it is a significant part of the overall financial picture, especially when a portion of the existing debt is due to tax obligations.
The bankruptcy process is complex, and it is very important for business owners to understand all of the rights and legal obligations that they have as they work through it for a fresh financial start.
Source: IRS, "Chapter 11 Bankruptcy - Reorganization," accessed April 20, 2018