Many businesses shut down due to the pandemic and the economy. However, when going out of business, tax obligations need to be met. First, a business must file a final income tax return and 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. Corporation 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 their 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. A terminating plan must meet detailed notice, funding, timing, and filing requirements. 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. In addition, you must cancel your Employer Identification Number (EIN) and close your business account. We can also advise you on how long you need to keep business records.
If your business cannot 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.