Making the decision to close a business for good is never an easy thing to do. Unfortunately, the economic fallout from the COVID-19 pandemic has forced many business owners to shut their doors permanently. If this wasn’t a hard enough decision to weigh, the tax considerations can be an additional challenge.
Our team at Waters Hardy is here to assist you in navigating the various tax obligations that must be met before saying goodbye. We provide complete business accounting services, including ensuring tax compliance related to business closures. Suppose you decide to close your company permanently. In that case, our experts in accounting services for small business tax matters can provide a comprehensive and reliable plan that you can feel confident about.
Tax Obligations Before Closing Your Business
From a federal tax perspective, the IRS has outlined the requirements for business owners deciding to close once and for all. Basically, the IRS wants to be in the loop with all tax dealings related to business closures. Additionally, you will want to check your state’s required business responsibilities, as these may differ from federal tax regulations.
Here is a basic outline of items to consider before closing your doors.
1. File a Final Tax Return and Related Forms
Your business type will determine the type of return, and related forms, that you will file.
- Sole Proprietor (Schedule C): someone who owns an unincorporated business by themselves.
This is simple if you have no employees and are closing your business. You could essentially stop operations from one to another and not have to worry about any additional tax implications.
If you sell the business to someone else, you’ll include the transaction on your income tax return.
You may also need to report self-employment tax on Form 1040 Schedule SE if you have net earnings of $400 or more.
- Partnership (Form 1065): two or more people who put their resources together to form a business.
Report capital gains and losses on Schedule D.
- Corporation: a business structure that operates as a separate tax-paying entity that is owned by its shareholders and managed by a board of directors.
- C Corporations (Form 1120)
Report capital gains and losses on Schedule D.
- S Corporations (Form 1120-S)
Review and report capital gains and losses on Schedule D.
If the closing is because of a board resolution or other plan to liquidate its stock, you need to file Form 966.
The IRS requires all employers going out of business, regardless of the size of their payroll, to attach a statement to the final employment tax return indicating the name of the person who has the payroll records, and the address of where those records are being held.
2. Make Required Payments to Your Employees
- Employment Taxes
Whether you have one or one hundred employees, you are required to pay them any final wages and compensation owed. You must also make final federal tax deposits and report employment taxes. Failure to comply with this may lead to the IRS applying the Trust Fund Recovery Penalty.
- Benefits or Pension Plans
If your business has a retirement plan for employees, you’ll need to terminate the plans after distributing the benefits to participants. There is specific notice, funding, timing, and filing requirements that must be met before terminating a plan, so be sure to verify your responsibilities.
- SEP (Simplified Employee Pension)
This plan can be shut down at any time rather easily. Notify the participants of the change and let the managing financial institution know you won’t be making any more contributions.
- SIMPLE (Savings Incentive Match Plan)
This plan is a little more involved because it’s operated on a calendar year basis and can’t be terminated. Also, you must continue to fund the plan until the end of the year when your business shuts down.
3. Pay Any Past Due Taxes
You don’t quite get to throw your hands up and walk away. Any taxes owed can be due even after closing down your business.
4. Report Payments to Contract Workers
You must report contractor payments totaling more than $600 if they were paid during the calendar year you close your business. This includes payments for services, parts, and materials paid during the calendar year you go out of business.
5. Cancel Your EIN and Close Your IRS Business Account
You must formally cancel your IRS business account and your EIN (Employee Identification Number). The IRS outlines specific requirements for this, too. All necessary returns must be filed, and all taxes owed must be paid before the IRS closes your accounts.
6. Keep Business Records
It’s important to retain tax-related records after you close your business in case of an audit.
Keep property records until the period of limitations expires for the year in which you release your property. During this period, you can amend your federal tax return to claim a credit or refund or the IRS can assess additional tax.
- Employment Tax Records
Keep employment tax records for at least four years.
Trust Your Closing Business Taxes to Waters Hardy
Keep in mind that the tax requirements and consequences outlined above are federal tax implications. Every state may have its own tax requirements for closing businesses. It is your responsibility to plan and comply with all tax procedures before shutting down. Failing to manage your business’s tax obligations properly can result in fines and penalties.
If you find yourself in this situation and you’re looking for a lifeline when it comes to taxes, look no further. Waters Hardy specializes in tax planning and compliance for all your business needs. Our team is experienced in all business accounting services, including the tax implications of business closures. We are here to ensure you make the best of an already challenging business situation.
Contact us today.