Tax Responsibilities when Closing a Business
A business may be closed by its owner for different reasons. However, regardless of the reason for the closing, the business must fulfill its tax responsibilities and notify the IRS of its plans. The following steps must be taken by the business in order to meet its obligations to the IRS.
- File a final return and any other required forms.
-The business must file a final return in the year in which the business is closed.
-The return to be filed depends on whether the business operated as a corporation, partnership or sole proprietorship.
-Final corporate and partnership returns must have the “final return” box checked.
-Other forms may need to be filed if applicable. Some common forms are:
-The sale of business property if property was sold.
-Asset acquisition statement if the business was sold.
-Final Schedule K-1s for flow through entities.
- Take care of employee matters
-Pay final wages owed to employees and compensation owed to independent contractors.
-Make final withholding tax deposits.
-File final employment and unemployment tax returns.
-Provide W-2 to your employees and 1099-NEC to independent contractors.
-File W-3 with the Social Security Administration.
-Terminate pension plans.
- Pay all taxes due the IRS.
- Cancel the employer identification number (EIN) and close the IRS business account. Note that the IRS will not close the business account until final returns are filed and all taxes are paid.
- Maintain copies of business records. Employment records need to be maintained for four years. Records substantiating items reported on the business returns should be maintained at least three years from the due date of the return.
A business may also have obligations under state and local laws. These are beyond the scope of this article.