Business debt restructuring: How to do it with money saved on taxes

It’s common practice for businesses to take on debt, but unforeseen occurrences like a recession or a pandemic might make it more challenging to make payments on time. There are many small business owners who are, at the moment, having difficulty paying back their corporate debt. There are other options than falling behind on payments. There are three things a small business owner may do to increase cash flow and make it simpler to make payments on time if they are having trouble repaying a loan or a line of credit; they are as follows,

  • Refinancing – This process involves taking out a new loan that pays off the debt of the previous one.
  • Debt Consolidation– Business debt consolidation involves combining many loans into a single loan to make debt repayment easier.
  • Debt restructuring – This process involves reviewing the debt and getting better repayment terms from the creditors.

Asking the lender to temporarily lower the interest rate or coordinating with a vendor to change the due dates are two examples of debt restructuring. Changing the payment terms, for instance, from 30 to 60 days, would give the debtor more time to earn. Debt restructuring is generally done in two cases, general business debts and troubled business debts.

Differences between restructuring of troubled business debts and general business debts

Some companies choose to restructure their debt for non-financial reasons, such as an event in their corporate life cycle. Restructuring a business can be done to get it ready for selling or transferring it to family members, merger, sale, or employee buyout.

So, for this reason, there are two types of business debt restructuring. The first is a general debt restructuring, in which the creditor suffers no losses as a result of the restructuring procedure. This kind of restructuring is possible when the creditor reduces the interest rate or extends the loan term, which enables the debtor to temporarily stabilize their finances before paying off their debts.

The second kind of business debt restructuring is the restructuring of distressed business debt. In this case, a portion of the creditor’s initial investment is indeed lost. Of course, creditors prefer to stay as far away from this situation as they can.

How business debts can be restructured

Depending on the circumstances, the debt restructuring process for businesses takes on different appearances. One might discover creditors more accommodating to adjusting payment terms and interest rates if it’s a regular business restructure—i.e., not an emergency. An owner should consult with an expert to negotiate on their behalf in a difficult business debt restructuring situation or think about refinancing or consolidation. Here are the general processes for reorganizing a business debt

1. Finding out where the problem lies

Determining the problem that’s keeping a business from doing well is important because not all debts require restructuring. Does a loan have a high rate of interest? Is a supplier demanding immediate payment? Determining the areas of restructuring that will be most impactful is crucial. Additionally, one should be ready to justify to the creditor why the company is unable to adhere to the loan’s current conditions.

2. Determining how much can be paid

The next stage is to calculate how much a business can contribute to these debts each month. The business owners can handle the restructuring themselves if the payment percentage is 8% or higher. But if it’s less than 8%, professional help should be sought. Saving money on taxes could be an excellent solution in this regard. It will provide business owners with money that they can use to make payments. The different ways a business can save money in taxes are discussed below.

3. Preparing a hardship letter

A hardship letter explains the necessity of debt restructuring for the company. The case will be supported by data and financial figures. It’s critical to ask for this in an honest and transparent manner.

4. Negotiations

Working with the debtors to create a better payment plan is in the creditors’ best interest. They can’t recover their initial investment otherwise. A business owner should seek assistance from a seasoned debt restructuring company that can walk them through the procedure if they are confused about how to negotiate with a creditor.

How to save money on taxes for debt restructuring

A business owner would require money to complete the debt restructuring process successfully. Saving money on taxes is one of the best ways to accomplish this. These methods are especially beneficial if a business is facing a hard time in general. Here’s how you can do it

How to save money on business taxes

1. Taking advantage of the Qualified Business Income tax deduction

Suppose a company is a pass-through entity—a sole proprietorship, an S corporation, or a partnership—passing its income and deductions down to its shareholders, partners, or owners to report on their personal returns. In that case, the business owner can get a 20% deduction from their qualifying business income. This deduction can be made in addition to any typical business expenditure deductions. If the business owner’s taxable income is below a specific threshold, they should be eligible.

2. Funding a retirement plan

The owners can save money on taxes by setting up and supporting a retirement plan for themselves or their staff. To benefit from those tax benefits, it should be made sure that the plan is qualified. For taxes on earnings to be postponed until they are withdrawn, the plan must be accepted by the IRS. IRAs and contribution plans like 401(k)s and 403(b)s fall under this category.

3. Taking advantage of tax credits

Tax credits are used as a tool by the federal government to motivate organizations and people to take actions—or not take actions—that affect the greater good. Since the majority of them are a part of the General Business Credit, which is rather extensive, it is likely that a company may be eligible under some of its conditions. A business owner should check which terms they qualify under with their accountant.

4. Buying tools and vehicles for depreciation deductions

Businesses can deduct the cost of buying automobiles, machinery, office supplies, and sometimes even real estate from their taxes. Sometimes, the first year that they are acquired and used, is the time to take these write-offs. Bonus depreciation and section 179 deductions are the two most typical instances of this accelerated depreciation. If an owner has made any significant asset purchases, they should inquire about their eligibility with their tax preparer.

5. Deduction of costs of gifts

Gifts given to clients and merchants may be deducted up to $25 per person. There is an exemption for gifts that have the company name and cost less than $4.

6. Timing the business income and expenses

Timing the business income and expenses actually means moving the income from one year to another. An owner must first decide which year they anticipate paying the most in taxes. Before the end of each year, current expenses should be reviewed, and if the owners desire to lower their income for the current year, part of those costs may be prepaid. By making purchases, such as stocking up on supplies at the end of the year to cover them for the first quarter of the next, they can also raise their costs and lower their income.

Conclusion

Businesses of various sizes restructure their debt, but it’s not their only option. There are always options, including refinancing, consolidation, and SBA business loans. A business owner may also consider acquiring a line of credit for their company if it is financially stable but is only going through a difficult period. Business owners can also pay off their debts with the money they save on taxes. For more ideas to help your cash flow, consult a Certified Tax Planner to help discover every potential way to save on your taxes.

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