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The Tax Responsibilities That Come With Closing a Business

Small business owners were especially hit hard during the COVID-19 outbreak. Even in areas where restrictions have loosened up, many are still struggling to survive. A recent report from the Federal Reserve Bank estimates that nearly 30% of U.S. small businesses will shut their doors for good if they don’t receive additional assistance from the government. Although it is never an easy decision to permanently close a business, certain tax responsibilities must be met before you can call it quits.

Tax Responsibilities When Closing a Business

Closing a business is often challenging. Thankfully, the IRS provides free resources to help you navigate the process on their “Closing a Business” webpage. The following is a brief overview of the federal tax responsibilities discussed on that page.

The year that you close your business, you must file a final tax return. The type of return and related forms will vary depending on your business structure.

Sole Proprietor – File Schedule C (Form 1040 or Form 1040-SR), Profit or Loss From Business, with your individual tax return.

You may also need to file the following forms:

Partnership – You must file Form 1065, U.S. Return of Partnership Income, for the year you close your business.

When you file, you must:

You may also need to file these other forms with your Form 1065:

Corporation – You must file Form 966, Corporate Dissolution or Liquidation, if you adopt a resolution or plan to dissolve the corporation or liquidate any of its stock.

You must also file your corporation’s final income tax return. Be sure to check the “final return” box, which is near the top of the front page.

For a C corporation you must:

For an S corporation you must:

Regardless of the type of corporation, you may also need to file these forms when you file your Form 1120 or 1120-S:

2. Take Care of Employees

You must pay all employees their final wages and any compensation owed. Additionally, you’ll need to make your final federal tax deposit and report employment taxes.

To report employment taxes, the following forms may be required:

Don’t forget to provide a Form W-2, Wage and Tax Statement, to every employee for the calendar year in which you pay them their final wages. If they receive tips, you’ll also need to file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.

3. Pay Your Taxes

You’ll be responsible for paying any taxes owed. If you are unable to pay in full, you may be able to make monthly installments by applying for a payment plan. Depending on your financial situation, you may also be eligible for an Offer in Compromise, Currently Not Collectible status, or other tax relief.

4. Report Contractor Payments

If you paid any contractor $600 or more during the calendar year in which you shutter your business, you must report those payments using Form 1099-NEC, Nonemployee Compensation. You can use Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to send paper copies of all Forms 1099 to the IRS.

5. Cancel Your EIN

One of the final tax responsibilities when closing a business is to cancel your employer identification number (EIN) and close your IRS business account. You can do this by sending a letter to the IRS with the following information:

  • The legal name of the business
  • Business EIN
  • Your business address
  • The reason for closing your account

If you have a copy of the notice sent to you when you were assigned your EIN, be sure to include it, as well. Your cancelation letter and original EIN notice should be mailed to:

Internal Revenue Service, Cincinnati, OH 45999

Please note that the IRS will not close your business account until you have filed all required tax returns and paid all taxes owed.

6. Keep Your Tax Records

You should keep all business property records until the period of limitations expires for the year in which you dispose of the property. The period of limitations is the time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.

For employment tax records, be sure to hang on to those for a minimum of four (4) years.

Need Help?

Although the IRS provides ample guidance for dealing with your federal tax responsibilities when closing a business, you’ll also need to deal with your final state tax returns, as well. All of this can get a bit overwhelming for most people, so we strongly recommend seeking assistance from an experienced tax professional to ensure everything is done correctly and on time. To schedule a free consultation with Tax Defense Network, simply call 855-476-6920 today!