Learn which forms to file for your specific business type.
Discover your responsibilities to your employees and contractor workers when closing your business.
Find out other tax issues you may need to consider when you close your business.
Has the COVID-19 pandemic forced the closing of your business? If this is your situation, Fiducial will assist you in any way we can, including taking care of the many tax obligations that must be met.
Of course, a business must file a final income tax return and other related forms for the year it closes. The type of return you file depends on the type of business you have. Here’s Fiducial’s rundown of the basic requirements of closing your business.
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. You may also need to report self-employment tax.
Partnerships
A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must 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, “U.S. Corporate Income Tax Return,” for the year you close your business. Also, report capital gains and losses on Schedule D. Don’t forget to indicate that this is the final return.
S Corporations
File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. You must also report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.
All Businesses
You made need to file other forms to report sales of business property and asset acquisitions if you sell your business.
Don’t forget employees and contract workers when closing your business
If you have employees, you must pay them final wages and compensation owed. You must also make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security, and Medicare taxes when closing your business can result in full personal liability for what’s known as the Trust Fund Recovery Penalty. You do not want to deal with this, so make sure you take care of those taxes.
If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”
Other tax issues
If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing, and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.
Fiducial can assist you with many other complicated tax issues related to closing your business, including Paycheck Protection Plan (PPP) loans, the COVID-19 employee retention tax credit, employment tax deferral, debt cancellation, use 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. And don’t forget to cancel your Employer Identification Number (EIN) and close your IRS business account! If your business is unable to pay all the taxes it owes, we can explain payment options to you.
Want to discuss these issues and get answers to your questions? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!
For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.