Tax Obligations to Consider When Closing Your Business
- Learn about specific tax obligations related to closing many different types of businesses.
- Discover your obligations to employees and independent contractors when you close your business.
- Learn about other issues associated with closing your business.
Sadly, many businesses have been forced to shut down recently due to the pandemic and the economy. If you are closing your business, Fiducial can assist you. This includes taking care of the various tax responsibilities that must be met.
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 you must file depends on the type of business you have. Here’s a rundown of the basic requirements to consider when closing your business.
What kind of business are you closing?
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. Depending on your final capital account situation, you also may need to report capital gains and losses on Schedule D; reach out to a Fiducial advisor for tax planning support. You must check the “final return” box on Schedule K-1 and page 1 of the return.
All corporations
You must file Form 966, “Corporate Dissolution or Liquidation,” 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. You must check the “final return” box on page 1 of the 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. You must check the “final return” box on Schedule K-1 and page 1 of the return. Depending on your final stock basis situation, you also may need to report capital gains and losses on Schedule D, reach out to your Fiducial advisor for tax planning.
All businesses
Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.
Tax obligations to employees and contract 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 when closing your business 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 associated with closing your business
If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, 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.
Fiducial 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 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, Fiducial can explain the available payment options to you. Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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