Businesses shut down for many reasons, including owner’s retirement, lease expiration, staffing shortages, partner conflicts and increased supply costs. Regardless of the reason, if you have decided to close your business, you face various tax obligations.
Tax return and forms
A final income tax return and related forms must be filed for the year of closing. The correct return to file depends on the type of business.
Here is a rundown of the requirements:
- Sole proprietorships. You must file the usual Schedule C, “Profit or Loss from Business” form with your individual return for the year of closing. You may also need to report self-employment tax.
- A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year of closing and report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, etc.”
- All corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.
- C corporations. File Form 1120, “S. Corporate Income Tax Return,” for the year of closing. Report capital gains and losses on Schedule D. Indicate this is the final return.
- S corporations. File Form 1120-S, “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 Schedule K-1.
- All businesses. If you sell your business, other forms may need to be filed to report the sales.
Worker-related duties
Businesses with employees must pay the final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit all employment taxes due can result in severe penalties.
Generally, payments of $600 or more to contractors during the calendar year of closure must be reported on Form 1099-NEC, “Nonemployee Compensation.”
More tax issues to consider
The list of tax issues related to closing a business is long and often complex, and you may need to be guided through the steps. For example, a business that has an employee retirement plan will need to terminate the plan and distribute the benefits to participants. Flexible Spending Accounts and Health Savings Accounts must also be terminated.
There may be debt cancellation issues to wrestle with. Other possibilities include dealing with net operating losses, passive activity losses, depreciation recapture and possible bankruptcy issues.
You need to be aware of how long to retain business records. And finally, you may need to know how to navigate payment options if your business is unable to pay the remaining taxes owed.
This column is for information only and should not be considered advice. Closing a business typically brings up a lot of tax and other issues. To navigate them successfully, consider working with knowledgeable legal and tax professionals.
Norm Grill, CPA, (N.Grill@GRILL1.com) is managing partner of Grill & Partners, LLC (www.GRILL1.com), certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 203 254-3880.
