Generally, the business taxes of a small business owner cannot be discharged in Chapter 7 bankruptcy.  If the debtor operates a small business as a sole proprietor, s/he is personally responsible for all of his/her business debts.  However, in certain circumstances the Chapter 7 wipes out most of the business debts and business taxes.

In Chapter 7 bankruptcy proceedings, the majority of business taxes and debts that emerged credited as well as occurred within three years prior to the bankruptcy receive priority.  In other words, the business tax gets priority over unsecured debts.  The trustee must settle the tax amount in full immediately after the settlement of liquidation fees and other related administrative expenses.

In certain cases, there are sufficient amount of nonexempt assets to disburse the creditors.  Here, the bankruptcy trustee payoff all the outstanding taxes in full.  However, if there is insufficient amount of nonexempt assets, the bankruptcy trustee has no authority to wipe out the business taxes.  The debtor has obligation to settle such tax debts even if the bankruptcy proceedings are over.  In some situation, certain tax debts are not qualified for a priority and such debts are discharged when the bankruptcy case ends.

Certain types of tax debts such as trust fund taxes, and outstanding sales taxes are never discharged in Chapter 7 bankruptcy.  However, certain tax debts can be wiped out in Chapter 7 bankruptcy.  There are certain conditions that required in exempting a tax debt.  The conditions are as follows:

• The tax debt is more than three years aged
• The tax debt was assessed less than 240 days prior to the a bankruptcy proceeding
• The business must filed a tax return at least two years prior to bankruptcy
• There is no history of tax fraud or tax evasion

However, a tax lien survives the Chapter 7 bankruptcy.  Chapter 7 wipes out the personal liability of a tax debt, but remains the prior recorded tax liens.  So, the taxing authority can claim the lien of tax debt on real property if the business owner sells off that personal property.