Despite improvements in various aspects of the economy this year, the rising cost of living and other economic factors have led many businesses to close. If you find yourself in this situation, we can help you manage your tax obligations.
First, a business must file a final federal income tax return and other necessary forms for the year it ceases operations. The specific return required depends on the type of business. For example:
- Sole Proprietors will need to file the usual Schedule C, “Profit or Loss from Business,” with their individual returns for the year they close their businesses. They may also need to report self-employment tax.
- Partnerships must file Form 1065, “U.S. Return of Partnership Income,” for the year they close. They also must report capital gains and losses on Schedule D. They 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 need to file Form 966, “Corporate Dissolution or Liquidation,” if they adopt a resolution or plan to dissolve an entity or liquidate any of its stock.
- C Corporations must file Form 1120, “U.S. Corporate Income Tax Return,” for the year they close. They report capital gains and losses on Schedule D and indicate this is the final return.
- S Corporations need to file Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the year of closing. They report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.
- All Businesses may need to file other tax forms to report sales of business property and asset acquisitions if they sell the business.
Tying up loose ends with workers
If you have employees, you must pay them the 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 closed your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”
You may face more obligations
If your business has a retirement plan for employees, you’ll generally need to terminate the plan and distribute benefits to participants. Detailed notice, funding, timing, and filing requirements must be met when terminating a plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for 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.
You also must cancel your Employer Identification Number (EIN) and close your IRS business account. In addition, you need to keep business records for a certain amount of time.
If your business cannot pay all the taxes it owes, we can explain the available payment options. Contact an Axley & Rode advisor to discuss these responsibilities and get answers to any questions.
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