Small and medium-sized businesses have been particularly hard hit during the COVID-19 outbreak. Even in areas that have been deregulated, many are struggling to survive. According to a recent Federal Reserve Bank report, approximately 30 percent of U.S. small businesses will close permanently if they do not receive additional government support. The decision of business closure is never easy, but there are tax obligations that must be met before the business can close.
Tax obligations when closing a business
Closing a business is often difficult. Fortunately, the tax authorities provide free resources on their “Closing a Business” website to help you through the process. Below is a brief description of the tax obligations discussed on this page.
1. Filing the final tax return and related tax documents
In the year you close your business, you must file a final tax return. The type of return and associated forms depend on your business structure.
Self-employed
File Schedule C (Form 1040 or Form 1040-SR), Business Profits or Losses, along with your personal tax return.
The following documents may also be required.
- Form 4797, Sale of Business Property, for each year in which you sold or traded property used in your business. You must also submit this form if the closing of your business reduces the operational use of Section 179 qualified assets to 50% or less.
- If the business is sold, submit Form 8594, Statement of Acquisition of Assets.
- If the net income of the business is $400 or more, file the SE Tax Return (Form 1040), Self-Employment.
Partnership
In the year you leave the business, you must file Form 1065, Return of Partnership Income in the United States.
Be sure to indicate this when submitting.
- Record the capital gains and losses on Schedule D (Form 1065).
- Check the “Final Return” box (at the top of the front page).
- Check the same box on Schedule K-1 “Share of Partner’s Income, Deductions, Credits, etc.”.
You may also need to send in these other forms with Form 1065.
- Form 4797, Sale of Business Property, for each year in which your partnership sold or exchanged business property. You must also submit this form if the use of the Section 179-qualified property is reduced to 50% or less due to the closure of the business.
- If the business is sold, submit Form 8594, Statement of Asset Acquisition.
Corporations
If you have decided or plan to dissolve your business or liquidate its shares, you must file Form 966, Dissolution or Liquidation of a Corporation.
You must also file a corporate tax return; be sure to check the “Closing Statement” box at the top of page 1.
For C corporations, you need to.
- File Form 1120, U.S. Corporate Income Tax Return, for the year in which you ceased operations.
- File Schedule D (Form 1120) for capital gains and losses.
Required for S corporations.
- File Form 1120-S, S Corporation U.S. Income Tax Return for the year in which the corporation closed.
- Report capital gains and losses on Schedule D (Form 1120-S).
- Check the “Final Return” box on Schedule K-1, shareholder’s share of income, deductions, credits, etc.
Regardless of the type of corporation, you may also need to provide these forms when filing Form 1120 or Form 1120-S.
- Form 4797, Sale of Commercial Real Estate, must be filed for each year in which real estate used in the corporation is sold or exchanged. The form must also be filed when the closing of the business results in less than 50% of Section 179 real property being used in the business.
- If you are selling your business, submit form 8594 “Declaration of Acquisition of Assets”.
2. Take care of your employees
All employees must be paid their final salary and wages. In addition, you must also pay final federal taxes and report employment taxes.
The following forms may be needed for payroll tax reporting.
- Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return, for the quarter in which you made the last payroll. Be sure to check the box that notifies the taxing authority of the termination of the business and indicate the date of the last wage payment. Also, attach a note indicating the name and contact information of the person responsible for payroll accounting.
- Submit Form 940, Annual Employer’s Federal Unemployment Tax Return (FUTA), for the calendar year in which the last wages were paid. You must check box “d” to indicate that this is the final form.
Remember to give each worker a Wage and Tax Certification (Form W-2) for the calendar year in which the last wages were paid. If you receive tips, you must also provide Form 8027 (Employer’s Annual Information Report on Income from Tips and Distributed Tips).
3. Pay taxes.
It is your responsibility to pay your taxes. If you are unable to pay the full amount, you may be able to make monthly payments by choosing a payment plan. Depending on your financial situation, you may be eligible for a workout, ongoing non-collection, or other tax relief.
4. Reporting Payments to Contractors
If you paid $600 or more to contractors during the calendar year you ceased operations, you must report these payments to the IRS using Form 1099-NEC, Nonemployee Compensation; Form 1096, Annual Recap and Transmittal of U.S. Information Returns, to send in all paper 1099 forms.
5. Delete the EIN.
When you stop doing business, your final tax obligation is to delete your Employer Identification Number (EIN) and close your business account with the IRS. Sending a letter to the IRS with the following details will enable you to do this.
- The official name of your business
- Your business EIN
- The location of your business premises
- The reason for closing the account
Be sure to include a copy of the notification you received when you applied for your EIN if you have one. Please send the termination and the original EIN notice to.
Internal Revenue Service, Cincinnati, Ohio 45999.
Please note that the IRS will not close your business account until you file all required tax returns and pay your taxes.
6. Retain tax records.
You must retain records of all business assets until the statute of limitations expires in the year in which you disposed of the assets. The statute of limitations is the period during which you can amend your tax return and claim deductions or refunds, or during which the taxing authority can levy additional taxes.
Keep payroll tax records for at least four years.
About Author
Villie Walters Ramirez is a 32-year-old tax assistant at a tax firm who enjoys bookkeeping and Staten Island accounting services. She has a post-graduate degree in accounting, and she has a severe phobia of cats. She enjoys traveling a lot.
