Unfortunately, the COVID-19 pandemic has forced many businesses to shut down permanently. Legally closing your business can require several steps to wrap up the company’s financial affairs and notify the government and tax authorities. If this is your situation, we’re here to assist you in any way we can, including taking care of the various tax compliance obligations 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. The type of return to be filed depends on the type of business you have.
Here’s a summary of the basic requirements.
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. Depending on if your Schedule C will show a profit or loss will determine if you may also need to report self-employment tax. Surprisingly, there is not a “Final” check box on the Schedule C.
Partnerships and multi-member LLCs. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains/losses on Schedule D and ordinary gains/losses on Form 4797. Indicate that this is the “FINAL” tax return and do the same on the member/partners’ Schedule K-1, “Partner’s Share of Income, Deductions, Credits, Etc.” It’s extremely helpful to also provide each owner a Partner Basis Worksheet.
All Corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed after you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock. Normally this requires you to have already filed the appropriate dissolution/liquidation paperwork with the Secretary of State where the corporation was organized.
C Corporations. File Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the “FINAL” corporate tax return. May require Filing Form 1099-DIV to also report any cash and non-cash liquidating distributions paid to shareholders.
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. The “FINAL Return” box must be checked on the 1120S page 1 and on the Schedule K-1 provided to shareholders. Provide each shareholder a Shareholder Basis Worksheet.
All Businesses. Other tax forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.
Reporting for Employees and contract 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 to the owners and officers for what’s known as the Trust Fund Recovery Penalty. In addition, Form W-2 forms must be provided to employees after calendar year-end. Work with your payroll company to ensure that all payroll compliance is taken care. In many cases, for payroll reporting compliance the last payroll tax forms must be checked as “FINAL”.
If you’ve paid any contractors or service providers at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation” (this is a NEW information reporting form starting in 2020).
Other tax issues
If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. Not to be dealt with lightly, these are important steps including detailed plan notices, funding issues, timing and plan filing requirements that must be met by a terminating retirement plan. There are also complex requirements related to other benefit accounts including: flexible spending accounts, Health Savings Accounts, and other employee fringe benefit programs.
We can assist you with many other complicated tax issues related to closing your business including: assistance with forgiveness of Paycheck Protection Plan (PPP) loans, calculating the COVID-19 employee retention tax credit, payroll employment tax deferral, debt cancellation, utilization of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.
We can also advise you on the length of time you need to keep business records. Remember the IRS still has up to 6 years to audit your tax returns. You must also surrender state sellers permits and close your IRS business account.
If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. We also want to caution you that there are fixed due dates and deadlines when the tax returns must be filed or else you may face burdensome late filing penalties. We are here to help so please contact us to discuss these issues and get answers to all your questions and concerns.