There are many steps to closing your business. After completing projects, selling assets, and paying debts, you'll need to make sure that the final tax filings for your small business are complete, accurate, and filed on time. Failing to file your final tax filings can result in personal liability for some tax debts, even if your business is an LLC or corporation.
Which tax returns and forms do I need to file to close my business?
There are several categories of tax forms that you may need to complete. These include:
Federal and State Income Tax Returns
When you close your business, you'll need to complete federal and state income tax returns through the year in which you close your business. The forms and schedules you'll use depend on the type of business entity you're closing and state laws regarding business tax returns. Here's a brief overview of what you may be required to complete:
- If you are a sole proprietor, you should report income from your business on your personal income tax return. Plan to report final income and expenses on Schedule C of Form 1040 by April 15 of the year following your business's closing. You may also need to file a Schedule SE (Self-Employment Tax form).
- If your business is structured as a C corporation, you should report income on Form 1120 (U.S. Corporation Income Tax Return) and check the box to indicate that this is the final return for the corporation. You'll also need to file Form 966 (Corporate Dissolution or Liquidation).
- If your business is structured as an S Corporation, you should file Form 1120S (U.S. Corporation Income Tax Return for an S Corporation) and check the box to indicate that you are submitting your final return. You'll also need to file Form 966 (Corporate Dissolution or Liquidation).
- If your business is structured as a limited liability company (LLC) or partnership, you'll need to file Form 1065 (U.S. Partnership Return of Income) and check the box indicating that this is your final return. You must also file schedules to report the share of income and losses for your business's partners and members.
Most corporate, LLC, and partnership tax returns include multiple forms and schedules. With this in mind, consider working with a tax professional who can ensure that you include every required schedule and form with your final return and make sure you understand the state and local tax requirements you need to fulfill.
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Federal and State Employment Tax Returns
If you have employees or contractors who perform work for your business, you'll also need to file your final employment tax returns and other final forms. This is important because business owners can be held personally liable for unpaid payroll taxes, even if their company is incorporated.
Before filing the final employment tax returns, be sure to deposit all withholding taxes, including federal taxes, state taxes, Medicare, and Social Security, as well as the employer matching amounts for Medicare and Social Security.
Regardless of the type of business entity you've operated, specific tax returns must be filed if you had employees or paid contractors. These include:
- Withholding Statements. Withholding statements report the final wage and withholding information for your employees. Be sure to complete and send W-2 statements to each employee and report the information to the IRS on Form W-3. If your employees earned income from tips, your business must also file Form 8027.
- Contractor Statements. If you've paid independent contractors to perform work for your business, you'll need to send a Form 1099-MISC to the contractors. Information from the 1099-MISC forms should be reported to the IRS on Form 1096.
- Employer Returns. Wage and withholding reports must be filed and marked as final employer returns. File Form 941 (the quarterly employer tax return), Form 944 (the annual employer tax return), and Form 940 (the final unemployment tax return).
Sales Tax Returns
Because sales tax is paid to state taxing authorities, you'll need to obtain the final filing requirements from the states in which you've conducted business, even if your company doesn't owe any sales tax for the current tax year.
Contact your state taxing authority to determine how to file a final sales tax return and close your account.
Reporting Asset Sales
It's important to report the gain or loss you've realized from the liquation of business property when your business closes. Form 4797 (Sales of Business Property) is used to calculate the gain or loss from selling business assets.
If you are a sole proprietor, you should report the gain or loss on your personal income tax return. If you own any other form of business entity, you should report the gain or loss on your final tax filings for your business.
Pension plans must be handled very carefully. The steps you take to close and distribute funds will depend on the type of pension plan you offered to your employees. In most cases, employees become 100 percent vested in all benefits, including matching and profit-sharing benefits, when the plan terminates, regardless of the vesting schedule.
Working with your plan administrator is the best way to ensure you take all steps necessary to distribute the funds to employees and file the necessary tax forms and statements. It's also a great idea to speak with an attorney to ensure you understand the legal requirements governing the closure of a pension plan.
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Closing Federal, State, & Local Accounts
You can deactivate your Employer Identification Number (EIN) by notifying the IRS that you're closing your business, requesting EIN deactivation and account closure, and filing your final tax returns.
To close state and local tax accounts, you must contact your state and local taxing authorities. Some states may require you to submit a letter or a specific form to deactivate your state EIN and close your business account. As with your federal account, most states won't close business accounts or deactivate an EIN until you pay all taxes and file all final tax returns.
Are there options for negotiating taxes?
It's not uncommon for a business to owe more taxes than it can pay. If you're facing a similar situation, you may have two options to handle your company's tax debts:
- One way to navigate hefty tax obligations is by asking for an installment plan. You can request an installment contract by filing Form 433-D.
- When the amount of taxes your company owes is too large to pay, even with a payment plan, consider making an Offer in Compromise. An Offer in Compromise allows you to settle your company's tax debt for less than you owe, but the process is incredibly complex. Speak with a tax attorney before proceeding with this option.
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|Never ignore the tax debt. You could be personally liable for tax obligations, even when your business entity owes the debt. |
It's best to work with the IRS to settle the tax debt when you close the business instead of having the IRS file a tax lien against your personal assets later.
How can a tax attorney help me?
A tax attorney understands which tax forms are necessary to close a business and how to complete them.
While the final tax filings for a small business may only be a couple of pages, the statements, forms, and schedules required to be filed with the final tax returns are often complicated and lengthy. Tax attorneys are well-versed in the requirements and can prepare a complete return for you quickly.
Tax attorneys can also help you with an audit or review. If the IRS contacts you about a review or audit of your company, you may choose to work with a tax attorney who can advise you about your rights and represent you in court if it becomes necessary.
Businesses that owe taxes they cannot pay often need a tax attorney for advice, guidance, and assistance. A tax attorney can review your company's tax returns and figures to verify how much you owe. In some cases, you may owe less than you believe.
Once your tax obligation has been determined, your tax attorney can work with the IRS to settle the tax debt. An Offer in Compromise is one of the tools the tax attorney might use. However, there could also be additional options to pay taxes, depending on the facts in your case.
Who can help me file my taxes?
Work with your preferred accountant to complete this task, even if you've done it on your own in years past. Business closings can be especially complicated, and a professional who is experienced in the requirements can be well worth the investment.
If you'd like help finding an accountant, click the Connect button below. We'll help you find several accountants in your area who can help you with your final tax filing.
After completing your final tax filings for your small business, you will need to close your bank accounts, distribute the assets that remain, and create a recordkeeping system that will prepare you for future audits or claims. We can help you with each of these requirements. Log into your owner's portal for articles and advice you can use to navigate the close of your business.