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The Tax Responsibilities That Come with Shutting Down a Business

By November 3, 2021No Comments

Closing a business, no matter the reason, is always a complicated endeavor. There’s inventory to sell off, office leases to cancel or pay off, employees to let go, and more. Many people don’t realize just how detailed you need to be in order to get everything done properly, including taking care of those tax responsibilities. Leaving taxes unpaid can lead to monetary punishments, such as fees, interest, and even tax liens placed on your personal and remaining business property, depending on how the business is incorporated of course.

Worried about getting all of those tax responsibilities correct? Here’s what you need to know.

Filing the Required Forms

There are a number of different tax forms required when closing a business. Depending on the type of business, you could end up having to file a Form 1040, a Form 1065, or any number of other tax forms. Which ones are required? It all depends on how your business is incorporated:

  • Sole Proprietorships – These are businesses that are often owned by one person, and their taxes are filed under the owner’s social security number on their personal income tax form. When you’re closing a sole proprietorship, you’ll need to file either a Form 1040 or Form 1040-SR, paying close attention to schedule C, where you’ll need to report the profit or loss from the business. In addition, Form 4797 is necessary if you sold the property owned by your business, as is Form 8594 if you sold, rather than closed, your business. Plus, you’ll have to file a schedule SE Form 1040 if you made more than $400 in profit from your business while it was still operational.
  • Partnerships – A partnership is exactly what it sounds like. This type of business is owned by one or more people, all of whom must report any income gained from the business, as well as ensure to report any losses. When closing a partnership, the first tax form to file is a Form 1065, in which you report the income earned by the partnership. Other forms include the Schedule D of Form 1065, where the gains and losses are listed (make sure to check the “final return” box on this form), and the Schedule K-1, where each individual partner lists their share of the income, credits, and deductions. The “final return” box on this form must be checked as well. In addition, partnerships need to file Form 4797 is they sell any of the business’ property, and Form 8594 is the business is sold to another party.
  • Corporations – Closing a corporation is a bit more complicated than the other two types of businesses because there might be stocks and shareholders to deal with. There are also two different types of corporations, both of which require different tax returns. Starting with stocks, if you are going to liquidate or dissolve any of the stocks or shares in the business, then you’ll need to include that information on Form 996. Other forms that must be filed, no matter the type of corporation, are Form 4797, where you report any money made by selling the property owned by the business, as well as Form 8594, if you sell the business outright to someone else. Now, if you’re closing a C-Corporation, you need to Form 1120, which is the business’ tax return, as well as Schedule D of that form, where any losses or gains are reported. For an S-Corporation, Form 1120-S, officially known as the income tax form for an S-Corporation, must be filed. Once again, Schedule D of the Form 1120-S is where you list any gains or losses. Finally, when you file Schedule K-1, which includes information on the individual shareholder’s shares of the business’ losses and gains, you need to ensure that the “final return” box is checked.

Paying Your Employees

Not only do you need to report the business’ income and losses on the appropriate tax returns, but you also need to file the correct forms for your employees’ final wages. Legally, your employees are entitled to any funds owed to them for working the final days that your company is in business. Make sure that they receive their paychecks and that your company files the correct forms for their employment taxes. In addition, you need to pay the final portion of their employment taxes, including Medicare and Social Security, or else you may have to pay a Trust Fund Recovery Penalty.

Also, you need to submit the correct forms by the end of the final quarter in which you were in business. These include Form 941, the quarterly tax return for an employer, as well as Form 940, the unemployment tax return for the business. Make sure to check the box on both forms to indicate that these are your final reports. Plus, Form W3, which is sent to the Social Security Administration, must be submitted as well.

The W-2s that you traditionally give your employees at the end of the tax year are due at the same time that your final Form 940 and Form 941 are due, so make sure to supply them on time, regardless of when in the calendar year you are closing your business. If your employees work in an industry where they receive tips, such as the restaurant industry, then you must file Form 8027, which reports their final tips as income earned.

Taking Care of Any Contact Workers

Filing the required forms for your employees is one thing, but taking care of your contract workers is another. These employees are responsible for paying their own employment and social security taxes, among other things, and receive a 1099 form at the end of the calendar year.

However, when your business is closing, you need to take care to ensure that your contract workers are handled appropriately. Pay them what they are owed for any remaining time that they worked for your now-closed business. For any contractors that were paid more than $600, you must report their income to the IRS using Form 1096. Then, those workers need to receive their 1099 forms on the same schedule as your standard employees – by the end of the last quarter in which your company was open.

Paying Your Final Taxes

Not only do you need to submit all of your business’ final tax returns and other reporting documents, but you also to make sure that you pay any taxes owed. If not, you will face penalties, interest, and fees from the IRS, and they may even be able to place a tax lien on the former business owner’s property, depending on the way that the business was incorporated.

There are many different ways to pay those taxes, from sending the IRS a check, to paying online through your business’ bank account using either the direct bank account information or a debit or credit card. The IRS makes it easy to pay them, allowing for these multiple methods in order to ensure that they received the money that’s owed to them.

Closing Up Your Business

Finally, once all of your tax returns are done and filed, your employees and contract workers are paid, and your business is closed, it’s time to make it official on paper. You’ll need to send a letter to the IRS requesting to cancel your EIN, or Employer Identification Number. The letter needs to state that you want to close your business’ account with the IRS as well. This letter includes the name of your business, your business’ EIN, the business’ address, and why you want to close out the business account and EIN. Just remember that the IRS cannot officially close out the account until you’ve filed and paid all of your taxes.

Holding On to Your Records

You’d think that once your business is closed, you no longer need all of the financial records. But this isn’t the case at all. The IRS can go back and choose to audit those records up to seven years after you’ve shut the doors. It’s important to hold onto your financial records (in all forms, both physical and digital) for this period of time. Also, your employment records need to be kept for up to four years, including information on payroll and records of all of the employment tax forms and payments that you submitted. In addition, your property records need to be kept for the period of limitations. Once you are no longer allowed to edit or amend your tax return for the year that your business closed or can no longer be assessed additional tax fees from the IRS for that year, you are allowed to dispose of those property records.

Contact Us Today

If you are closing up your business and are unsure of which forms to file or have questions about the process, then please reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.

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