Despite improvements in various economic sectors this year, rising living costs and other economic factors have led many businesses to close. If you’re facing this situation, we can assist you with managing the various tax responsibilities involved.
Filing the Final Tax Return
When closing a business, you must file a final federal income tax return and related forms for the year your business ceases operations. The type of return depends on your business structure:
- Sole Proprietors: File the usual Schedule C, “Profit or Loss from Business,” with your individual tax return for the year your business closes. You may also need to report self-employment tax.
- Partnerships: File Form 1065, “U.S. Return of Partnership Income,” and report capital gains and losses on Schedule D. Indicate it’s the final return on both Form 1065 and Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
- Corporations: All corporations must file Form 966, “Corporate Dissolution or Liquidation,” if they adopt a resolution to dissolve or liquidate stock.
- C Corporations: File Form 1120, “U.S. Corporate Income Tax Return,” and report capital gains and losses on Schedule D. Indicate it’s the final return.
- S Corporations: File Form 1120-S, “U.S. Income Tax Return for an S Corporation,” and report capital gains and losses on Schedule D. Check the “final return” box on Schedule K-1.
- All Businesses: May need to file additional tax forms to report sales of business property and asset acquisitions if they sell the business.
Tying Up Loose Ends with Workers
If you have employees, you must 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 full personal liability under the Trust Fund Recovery Penalty.
If you paid contractors at least $600 during the calendar year your business closes, report those payments on Form 1099-NEC, “Nonemployee Compensation.”
Additional Obligations
If your business has a retirement plan for employees, you generally need to terminate the plan and distribute benefits. This process includes meeting detailed notice, funding, timing, and filing requirements. You must also address any 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, using net operating losses, freeing up passive activity losses, depreciation recapture, and potential bankruptcy issues.
Administrative Tasks
You must cancel your Employer Identification Number (EIN) and close your IRS business account. Additionally, you need to retain business records for a specified period.
If your business cannot pay all the taxes it owes, our tax professionals can explain the available payment options. Contact us at 203-925-9600 or email [email protected] to discuss these responsibilities and get answers to any questions.
