Navigating Tax Responsibilities When Closing a Business
Posted by Cheryl A. Jankowski on July 22, 2024
Join us in-person on October 1, 2024 at 8 AM at the Buffalo Club for a panel discussion on Minimizing Risks & Maximizing Value: Strategies for a Successful Ownership Transfer. Registration is required.
As the economy continues to evolve, many businesses are facing the difficult decision to close due to rising costs and other economic pressures. If you find yourself in this situation, it’s crucial to address various tax responsibilities to ensure a smooth transition.
Filing Final Tax Returns
When closing a business, you must file a final federal income tax return along with other necessary forms for the year of closure. The specific forms required depend on your business structure:
- Sole Proprietors: File the usual Schedule C, “Profit or Loss from Business,” with your individual tax return for the year of closure. Additionally, report any self-employment tax.
- Partnerships: Submit Form 1065, “U.S. Return of Partnership Income,” for the closing year. Report capital gains and losses on Schedule D, and indicate the final return on both Form 1065 and Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
- Corporations: File Form 966, “Corporate Dissolution or Liquidation,” if you adopt a resolution to dissolve or liquidate stock.
- C Corporations: File Form 1120, “U.S. Corporate Income Tax Return,” for the closing year, reporting capital gains and losses on Schedule D and marking it as the final return.
- S Corporations: File Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the closing year, reporting capital gains and losses on Schedule D and checking the “final return” box on Schedule K-1.
Additionally, all businesses may need to file other tax forms to report the sale of business property and asset acquisitions if the business is sold.
Finalizing Employee and Contractor Obligations
If you have employees, ensure you pay final wages and compensation, make final federal tax deposits, and report employment taxes. Failure to withhold or deposit employee income, Social Security, and Medicare taxes can result in personal liability under the Trust Fund Recovery Penalty.
For contractors paid at least $600 during the calendar year of closure, report these payments on Form 1099-NEC, “Nonemployee Compensation.”
Additional Obligations
If your business has an employee retirement plan, you must terminate the plan and distribute benefits to participants, adhering to detailed notice, funding, timing, and filing requirements. Similar requirements apply to flexible spending accounts, Health Savings Accounts, and other employee programs.
We can assist with other complex tax issues related to closing your business, such as debt cancellation, net operating losses, passive activity losses, depreciation recapture, and potential bankruptcy issues.
Closing Your IRS Business Account
You must cancel your Employer Identification Number (EIN) and close your IRS business account. Additionally, retain business records for the required period. If your business cannot pay all owed taxes, we can explain available payment options. Contact our office if you need any further adjustments or additional information.
To learn more about transferring your business whether through a sale, generational transition, or change in leadership, join us in-person on October 1, 2024 at 8 AM at the Buffalo Club for a panel discussion on Minimizing Risks & Maximizing Value: Strategies for a Successful Ownership Transfer. Registration is required.
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Cheryl has extensive experience working with business owners and individuals on minimizing taxes, with a focus on succession planning. With a thoughtful approach, Cheryl helps clients explore their long-term goals and plan accordingly. Leveraging Cheryl’s expertise in this area, the goal is to implement plans that achieve the wishes of the client and provide for tax-efficient transitions. Cheryl’s passion for working with corporations and individuals has allowed her to become a trusted business advisor. She has worked with clients not only in the Western New York region but also throughout the country. The breadth of this experience has allowed her to collaborate with other professional advisors to ensure that plans are flexible and innovative in the ever-changing world in which we live. Cheryl started her career with the Firm in 1991 and rejoined in 2019 adding additional strength to the tremendous talent of the Lumsden McCormick tax team.