If you’ve decided to close a business, it’s important to take care of your Federal tax obligations.
In this article, we’ll outline the requirements of closing a business as well as the information that your accounting team will need to help you through the process.
Final Income Tax Return – Closing a Business
A business must file a final income tax return and some other related forms for the year it closes.
The type of return to be filed—and the required related forms—will depend on the type of business you have: C Corporation, S Corporation, Partnership, Sole Proprietorship, etc. An LLC may be classified for federal income tax purposes as a partnership, a corporation, or an entity disregarded as separate from its owner.
Employment Tax Filing
- If you have any employees, pay all 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.
Your accountant will also need to file a number of forms, such as quarterly tax returns, unemployment tax returns, and W-2 forms for each employee.
Contract Worker Income Reporting
If you have paid any contractors at least $600 for services (including parts and materials) during the calendar year in which you close your business, you must file 1099 forms.
Closing Business Retirement and Benefit Plans
- If your business has a retirement plan for employees, terminate the plan and distribute benefits to participants.
- Meet detailed notice, funding, timing and filing requirements for plan termination.
- Complete any requirements related to flexible spending accounts, Health Savings Accounts, and other similar programs for your employees. You’ll most likely need guidance on these complex requirements.
The length of time you need to keep your business records depends on what’s recorded in each document.
Generally, keep records relating to property until the period of time expires during which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax for the year in which you dispose of the property. Ask your accountant for more details.
Keep all records of employment taxes for at least four years.
Canceling EIN Number, IRS Account
- You also must cancel your Employer Identification Number (EIN) and close your IRS business account. This is done by sending a letter to IRS that includes the complete legal name of the business, its EIN and address, and the reason for closing the account.
- If you kept the notice from when the IRS assigned your EIN, a copy should be enclosed with the cancellation letter.
- The IRS cannot close your business account until all necessary returns have been filed and all taxes owed are paid.
- If your business is unable to pay all the taxes it may owe, our team can explain the available payment options to you.
Other Tax Issues with Closing a Business
Other areas with tax issues related to closing your business, include:
- Paycheck Protection Program (PPP) loans
- COVID-19 employee retention tax credit
- Employment tax deferral
- Debt cancellation
- Use of net operating losses
- Freeing up any remaining passive activity losses
- Depreciation recapture
- Possible bankruptcy issues
The IRS has also provided helpful guidance on closing a business.
It’s good to know that many special tax rules are contained in pandemic-related legislation, and there may be additional retroactive changes in future legislation that could affect your situation. Ask our team if there have been any new developments that might be applicable to you.
If you’re going through this process of closing a business, it can be a lot to manage. Our team is here to help you.