Although there have been improvements in various sectors of the economy over the past year, challenges like the rising cost of living continue to force some businesses to shut down. If you're facing the possibility of closing your business, we can assist with navigating the complex tax implications involved.
To start with, a business needs to file a final federal income tax return along with any other relevant forms for the year it ceases operations.. The type of return that must be filed depends on the type of business you have. For example:
- Sole Proprietors will need to file the usual Schedule C, “Profit or Loss from Business,” with their individual returns for the year they close their businesses. They may also need to report self-employment tax.
- Partnerships must file Form 1065, “U.S. Return of Partnership Income,” for the year they close. They also must report capital gains and losses on Schedule D. They indicate that this is the final return and do the same on Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
- All Corporations need to file Form 966, “Corporate Dissolution or Liquidation,” if they adopt a resolution or plan to dissolve an entity or liquidate any of its stock.
- C Corporations must file Form 1120, “U.S. Corporate Income Tax Return,” for the year they close. They report capital gains and losses on Schedule D and indicate this is the final return.
- S Corporations need to file Form 1120-S, “U.S. Income Tax Return for an S Corporation,” for the year of closing. They report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.
- All Businesses may need to be filed other 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 them 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.
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.”
You may face more obligations
If your business has a retirement plan for employees, you’ll generally need to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met when terminating a plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for employees.
We 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.
You also must cancel your Employer Identification Number (EIN) and close your IRS business account. In addition, you need to keep business records for a certain amount of time.
If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact your Rudler, PSC advisor at 859-331-1717 to discuss these responsibilities and get answers to any questions.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Erin Mauch, Senior Client Accounting Specialist and Jane Frances, CPA.
If you would like to discuss your particular situation, contact Erin or Jane at 859-331-1717.
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