Business Taxes: Are They Dischargeable in Bankruptcy?

If you own your own organization, your worst nightmare is the scenario when your home business fails. To add further salt to the wound, not only did your organization fail, but you recognize you nonetheless owe the taxing authorities for sales taxes and payroll taxes, and you are still personally responsible for those, even if you are no longer in home business. Filing for bankruptcy may well aid, depending on your situation. There are various categories of taxes, and they are treated differently in bankruptcy, based on what category they are in.

Private Income

Private income taxes that you personally owe are dischargeable if they are even more than three years old, filed additional than two years ago, assessed alot more than 240 days ago, not filed fraudulently, and the taxpayer is not guilty of willful tax evasion are dischargeable in a Chapter 7 or Chapter 13 bankruptcy. If they do fall below this category (meaning the taxes are less than three years old, or filed much less than two years ago, or assessed less than 240 days ago, was filed fraudulently, or the taxpayer was identified to be guilty of willful evasion), are deemed "priority taxes" which are not dischargeable in bankruptcy. Any debt that is regarded as non-dischargeable in bankruptcy signifies that you are nonetheless responsible for paying this debt regardless of whether you file for bankruptcy or not. If you have any non-dischargeable debt, see Non-Dischargeable Taxes: What Happens if I Can't Afford to Pay My Tax Liability?

Sales

If you owe the state sales tax, no matter whether or not they are dischargeable will depend on no matter whether the sales taxes are regarded as an "excise tax" or "trust fund tax." How the sales taxes are categorized depends on your state. Sales tax is regarded a trust fund tax if the tax is assessed on the client at the time of the sale and the responsibility to collect the tax is on the small business owner. The enterprise owner is supposed to collect the tax to turn more than to the taxing authority. Trust fund taxes are not dischargeable in bankruptcy.

Sales tax that is the responsibility of the owner for the privilege of performing small business in the state is considered an excise tax. California is an "excise tax" state, so that signifies that the business owners are responsible for the sales tax, not the consumer. It could be a little confusing, given that just about all the business owners pass on the sales tax to their clients, but the ultimate liability of the sales tax is nonetheless on the company owner. Excise taxes are dischargeable in bankruptcy, so that is excellent news for failed business owners in the state of California.

Payroll

Payroll taxes are broken out into two parts: those taxes that are taken out of an employee's paycheck, and those taxes that are paid by the employer. The taxes that are taken out of an employee's paycheck (such as federal income tax, state income tax, social security, and medicare) are considered "trust fund taxes." It is the enterprise owner's responsibility to turn over those funds taken out of the employee's paycheck to their taxing authority. The funds taken out of the employee's paychecks are "held in trust" by the business owner to be turned over to the taxing authority. If the company failed (or even if the business is still continuing), and the funds were employed to pay off other debt or expenditures other than to turn more than to the taxing authority, the taxing authority will not be sympathetic. They only care that the small business owner withheld these funds, but used it for other purposes than which it was held for. As with the sales taxes that are regarded to be "trust fund taxes" payroll taxes withheld from an employee's paycheck are regarded as non-dischargeable in bankruptcy.

The payroll taxes that are paid by the employer are "non-trust fund taxes." These taxes are dischargeable in bankruptcy depending upon how your state classifies the taxes.