Abstract: Sadly, many businesses have been forced
to shut down recently due to the challenges of the economy, including the
supply chain. To close a business, various tax responsibilities must be met, preferably
with the help of a trusted tax advisor.
Sadly,
many businesses have been forced to shut down recently due to the challenges of
the economy, including the supply chain.
If this is your situation, we can help you meet the various tax
responsibilities that go with closing a business.
Of
course, a business must file a final income tax return and some other related
forms for the year it closes its doors. The type of return to be filed depends
on the type of business you have. Here’s a rundown of the basic requirements.
Sole
Proprietorships.
You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with
your individual return for the year you close the business. 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 it
closes. You also must report capital gains and losses on Schedule D. Indicate
that this is the final return and do the same on Schedule 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 you close.
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.
Other forms may need to be filed to report sales of business property and asset
acquisitions if you sell your business.
Employees
and contract workers
If
you have employees, you must pay them final wages and compensation owed, make
final federal tax deposits and report employment taxes. Failure to withhold or
deposit employee income, Social Security and Medicare taxes can result in full
personal liability for what’s known as the Trust Fund Recovery Penalty.
If
you’ve paid any contractors at least $600 during the calendar year in which you
close your business, you must report those payments on Form 1099-NEC,
“Nonemployee Compensation.”
Other tax
issues
If
your business has a retirement plan for employees, you’ll want to terminate the
plan and distribute benefits to participants. There are detailed notices,
funding, timing and filing requirements that must be
met by a terminating plan. There are also complex requirements related to
flexible spending accounts, Health Savings Accounts, and other programs for your
employees.
We
can assist you with many other complicated tax issues related to closing your
business, including debt cancellation, use of net operating losses, freeing up
any remaining passive activity losses, depreciation recapture, and possible
bankruptcy issues.
We
can also advise you on the length of time you need to keep business records.
You also must cancel your Employer Identification Number (EIN) and close your
IRS business account.
If
your business is unable to pay all the taxes it owes, we can explain the
available payment options to you. Contact us to discuss these issues and get
answers to any questions.
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