Tax and Business Alert – April 2024
480 words
Businesses
shut down for many reasons. Here are just a few:
·
An
owner’s retirement,
·
A
lease expiration,
·
Staffing
shortages,
·
Partner
conflicts, and
·
Increased
supply costs.
If
you’ve decided to close your business, you might need assistance with some
steps in the process, including handling various tax obligations. For example,
a final income tax return and related forms must be filed for the year of closing.
The correct return to file depends on the type of business. Here’s a rundown of
the requirements.
Sole proprietorships. You must file the
usual Schedule C, “Profit or Loss from Business,” with your individual return
for the year of closing. You may also need to report self-employment tax.
Partnerships. A partnership
must file Form 1065, “U.S. Return of Partnership Income,” for the year of closing
and report capital gains and losses on Schedule D. Indicate that this is the
final return and do the same on Schedules K-1, “Partner’s Share of Income,
Deductions, Credits, etc.”
All corporations. Form 966,
“Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution
or plan to dissolve a corporation or liquidate any of its stock.
C corporations. File Form 1120,
“U.S. Corporate Income Tax Return,” for the year of closing. Report capital
gains and losses on Schedule D. Indicate this is the final return.
S corporations. File Form 1120-S,
“U.S. Income Tax Return for an S Corporation” for the year of closing. Report
capital gains and losses on Schedule D. The “final return” box must be checked
on Schedule K-1.
All businesses. If you sell your business, other forms may
need to be filed to report the sales.
Worker-related
duties
Businesses
with employees must pay the final wages and compensation owed, make final
federal tax deposits and report employment taxes. Failure to withhold or
deposit all employment taxes due can result in severe penalties.
Generally,
payments of $600 or more to contractors during the calendar year of closure must
be reported on Form 1099-NEC, “Nonemployee Compensation.”
More tax
issues to consider
The
list of tax issues related to closing a business is long and often complex, but
we’re available to guide you through the steps. For example, a business that
has an employee retirement plan will need to terminate the plan and distribute
the benefits to participants. Flexible Spending Accounts and Health Savings
Accounts must also be terminated.
There
may be debt cancellation issues to wrestle with. Other possibilities include
dealing with net operating losses, passive activity losses, depreciation
recapture and possible bankruptcy issues.
You
need to be aware of how long to retain business records. And finally, you may
need to know how to navigate payment options if your business is unable to pay
the remaining taxes owed.
We can help
Closing
a business typically brings up a lot of questions. Contact us for the answers.
© 2024