Closing Your Business: Essential Tax Steps

Closing Your Business: Essential Tax Steps

No matter the size of your business, closing it creates an extremely stressful time. It’s a daunting task to navigate filled with numerous loose ends you’ll need to tie up. Keep in mind this article gives direction on dissolving your business, not selling your business. Selling your business requires a few different steps. Closing your business improperly could leave you, your credit, and your reputation susceptible to a slew of problems. What do you need to do to make sure you have all of your tax boxes checked? Here’s everything you need to know about what to file, reporting income & expenses, and avoiding any surprises when you close your business.

Formally Dissolve Your Business

The first step is to formally dissolve your business. The type of entity you’ve chosen greatly controls what this step will be like.

If your business is a:

  • Sole Proprietorship. You own an unincorporated business by yourself or with your spouse. It’s your (and possibly your spouse’s) decision alone to close the business, and you can create a formal dissolution notice by yourself.
  • Partnership, LLC, or Corporation. You’ll need a formal agreement between yourself and your associates to close the business. It’s up to each business whether this needs to be a majority vote, unanimous, or something else. Make sure this decision is formally recorded.

It’s likely that your business is registered with the state, so be sure to file a notice of dissolution with them as well. Dissolving your business formally with local & state offices informs them that you are no longer responsible for business taxes in your state. Some states have an annual fee or tax that registered businesses need to pay, so formally dissolving your business is essential in order to avoid these future charges. The necessary paperwork and steps to take for this portion differ from state to state, you will need to find out exactly what your state requires of businesses that are closing.

File Your Final Return

You will of course need to pay any remaining taxes. You’ll need to file one last tax return for the year that you close your business. This step again differs greatly depending on the type of business you own.

If your business is a:

  • Sole Proprietorship. File Schedule C with your individual tax return. This form is to report income or loss from the business you operated. You’ll need to file Form 4797 if there’s been a sale or exchange of property for use with your business. As well as Schedule SE if your earnings amount to $400 or more from your business.
  • Partnership. You’ll need to file Form 1065 for the year you close your business. Like with a sole proprietorship, you will possibly need to file Form 4797 if there’s been a sale or exchange of property for use with your business.
  • Corporation. You’ll need to file Form 966 if you form a plan to dissolve the corporation or liquidate any of its stock. In addition, you’ll need to file your corporation’s final income tax return. In addition, you’ll need to file Form 4797 if there’s been a sale or exchange of property for use with your business. Depending on whether you’re a C corporation or an S corporation, other forms may be necessary.

Close Up Ties With Your Employees

If you have employees, you’ll need to pay them any remaining wages or compensation. You’ll need to make your final federal tax deposits, as well as reporting employment taxes. In addition, you’ll need to provide each of your employees with a W-2 for the final year that you’re paying them wages.

Closing Up With Contractors & the IRS

If you hired a contractor and compensated them $600 or more, you’ll need to report these payments using Form 1099. If your business was assigned an Employer Identification Number (EIN), you’ll need to cancel this and close your business account with the IRS as well. Be sure to keep clean, accurate records of every step of this process. You could close your business in February but still not wipe your hands clean of it completely until the next year. It’s always wise to hold onto these records until everything is finalized and the year is finished.

Don’t Close Your Business Alone

Chris and his team have over 20 years of experience in accounting and tax preparation services. We keep our team constantly educated on local, national, and state tax laws and standards. Closing your business is a process with questions around every corner, so having the right professionals by your side is essential. Contact us today to get your financials in order.