Tax Checklist for Closing Your Business

If you’ve decided to close a business, it’s important to take care of your Federal tax obligations. Company owners can mistakenly think that because the business is being dissolved, they can walk away. The truth is that you’ll need to also to complete your obligations with the IRS, employees, retirement plans, and more.

Closing a business is a significant decision that requires careful planning and attention to detail, especially when it comes to fulfilling tax obligations. Whether you’re a sole proprietorship, partnership, or corporation, there are specific tax forms and procedures you must follow to ensure a smooth and compliant closure. 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 also needs to file the necessary 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 to report their income.

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 professional guidance on these complex tasks.

Records Retention

The length of time you need to keep your business records is based on the content in each document.

• Generally, keep records relating to property until the period for tax amendments or IRS assessments expires. The Small Business Administration (SBA) and many state agencies recommend that you keep most of your business records for at least seven years after closing.
• 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 the 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, your accounting 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:

• Employment tax deferral: Businesses that deferred employment taxes under specific legislation, such as the CARES Act, must ensure they meet the repayment deadlines to avoid penalties.
• Debt cancellation: When business debt is forgiven, the canceled amount is typically considered taxable income, unless specific exclusions apply under the IRS rules.
• Use of net operating losses: Businesses can carry forward net operating losses (NOLs) to offset taxable income in future years, reducing their tax liability.
• Freeing up any remaining passive activity losses: Upon the sale or closure of a business, passive activity losses that were previously suspended can be deducted in full against other income.
• Depreciation recapture: When a business asset is sold, any depreciation claimed on the asset may need to be recaptured and reported as ordinary income.
• Possible bankruptcy issues: If a business files for bankruptcy, it must manage complex tax implications, including the potential discharge of debts and the treatment of tax attributes.

2024 Considerations: Stay Informed about Tax Rules from Legislation

In 2024, several pandemic-related tax relief measures and legislative updates may impact businesses closing this year:

• Employee Retention Credit (ERC): Businesses that took advantage of the ERC under the CARES Act need to ensure all claims are properly filed by the updated deadlines​.
• Debt Cancellation: Forgiven PPP loans and other pandemic relief loans may have specific tax treatments that need to be considered, especially any recent changes in legislation​ (Tax Foundation)​.
• Net Operating Losses (NOLs): Changes in the carryback and carryforward rules for NOLs introduced during the pandemic may still apply, affecting how businesses can utilize these losses​ (Tax Foundation)​.

Ensuring a Smooth and Compliant Business Closure

Closing a business involves numerous tax-related responsibilities, and it’s crucial to handle each step meticulously to avoid complications. From filing final tax returns to terminating retirement plans and canceling your EIN, the process can be overwhelming. However, you don’t have to manage it alone. If you encounter obstacles, seeking professional help can make a significant difference. We’re here for you if you need help.

More Information: The IRS provides helpful guidance on closing a business.