FEDERAL TAX-RELATED ACTIONS TO TAKE WHEN CLOSING A BUSINESS
At Kennedy & Ruhsam Law Offices, P.A., our experience as business owners, accountants, and tax and business attorneys has helped hundreds of small businesses navigate all aspects of business planning and operations. We are here to help and have convenient locations in Eagan, MN and Cannon Falls, MN.
Closing a business can be a major event with a long to-do list. One important piece is officially changing the status of the business and meeting legal obligations in a timely manner.
The following article outlines some of the most common Federal tax-related actions you should take to close your business.
EMPLOYEE COMPENSATION AND FEDERAL TAXES – Take care of employees first. Pay all wages and other compensation and provide them the information they will need to make the transition. Each employee should receive a Wage and Tax Statement (Form W-2) – typically with Copies B, C, and 2 – by the due dates for your final Form 941 or Form 944. Send the Transmittal of Income And Tax Statements (Form W-3) with Copy A to the Social Security Administration.
Upon paying all employees final wages and compensation, make federal tax deposits according to the predetermined monthly or semi-weekly schedule, and report federal employment taxes. You may be penalized if you do not withhold and deposit employee income, Social Security, and Medicare taxes. The IRS’ Depositing and Reporting Employment Taxes provides some useful guidance.
If you file the Employer’s Quarterly Federal Tax Return (Form 941) or the Employer’s Annual Federal Tax Return (Form 944), you will need to tell the Internal Revenue Service that you are closing your business. On line 17 of Form 941 and line 14 of Form 944, check the box indicating the business has closed, and provide the date final wages were paid. Include an attached statement with the name of the individual maintaining payroll records, as well as the address where the records will be kept.
On the Employer’s Annual Federal Unemployment (FUTA) Tax Return (Form 940) Check box “d” under Type of Return to indicate this is the final filing for the business.
If you employ workers who earn tips, you will need to report final tip income on the Employer’s Annual Information Return of Tip Income and Allocated Tips (Form 8027).
FILE FEDERAL TAX RETURN AND PAY TAXES – Your federal return filing may include the following forms:
- Sales of Business Property (Form 4797) if you sell or exchange property used in the business, or if closing your business causes the business use of an eligible property to drop to 50 percent or less.
- Asset Acquisition Statement (Form 8594) if you sell your business.
- If you file the U.S. Return of Partnership Income (Form 1065), check the “final return” box near the top of the front page, as well as on the Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, Etc.
- File a Corporate Dissolution or Liquidation, (Form 966) if you dissolve a corporation or liquidate any of its stock.
- If you file the U.S. Income Tax Return for an S Corporation (Form 1120-S), check the “final return” box on the Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, Etc.
CONTRACTOR PAYMENTS REPORTING – For each contractor who received more than $600.00 in the calendar year from your business, you must report those payments. Send a Nonemployee Compensation (Form 1099-NEC) to the contractor and to the Internal Revenue Service electronically or with paper copies using the Annual Summary and Transmittal of U.S. Information Returns, (Form 1096).
TERMINATE BENEFITS – If you offer benefits, such as retirement and health insurance plans, work with tax and legal professionals who are well-versed in these types of plans to terminate them legally and efficiently. Reviewing the Internal Revenue Service’s guide on how to Terminate a Retirement Plan and its publication, Health Savings Accounts and Other Tax-Favored Health Plans will prepare you for working with your advisors.
BUSINESS RECORDS – Keep your business’ employment tax records for a minimum of four years. Property records should be kept until the period of limitations (the time you have to amend your tax return) expires for the year in which you dispose of the property.
CANCEL YOUR EMPLOYER IDENTIFICATION NUMBER (EIN) AND CLOSE IRS BUSINESS ACCOUNT – After you have filed all required returns and satisfied the business’ tax obligations, you should cancel your business’ EIN and close its Internal Revenue Service account. To do so, send a letter to the Internal Revenue Service at:
Internal Revenue Service, Cincinnati, Ohio 45999
explaining why you want to cancel the account. Include the legal name and address of the business and the EIN.
REACH OUT TO OUR TAX AND BUSINESS ATTORNEYS – Kennedy & Ruhsam Law Offices, P.A., is built on decades of experience guiding small businesses throughout Southeastern Minnesota and the Twin Cities. We understand that closing a business can be an overwhelming process, and we’re here to guide and support you as you move forward. Contact our tax attorney, Sam Chapin, at 651-262-2083 or sam.chapin@mpkennedylaw.com.