2020 was such a crazy and unprecedented year for everyone. So many ups and a lot of downs. The rug of life was pulled right out from under us and now many of us are still recovering and trying to put the pieces back together. A lot of people saw unmatched success while many others struggled to survive and unfortunately mounting financial complications and a changing client landscape, was too much for even the most profitable of small businesses and organizations to survive. As with the course of life, there is a natural ebb and flow of things and businesses are no exception.
Because things didn’t work out for your small business as planned in 2020, you are now ready to move on and seek new opportunities, but before you can close that particular chapter of your life, you will need to officially close that business. The first thing you should do is settle up on all your capital. You will want to make your final federal tax deposits, so that you can pay Uncle Sam his cut.
You will also want to file your final quarterly or annual employment tax forms as well. Once you complete that, you can move on to issuing the final wage and withholding information to your employees. It is something about the finality of issuing these statements to your soon-to-be former employees that can really bring home the realization of your business entering into its final days.
Additionally, you will need to report information from the W-2’s, file final tip income and the allocated tips information, if applicable, and you will also need to report any capital gains or losses. For any contractors you may have used and paid more than $600 to, you will need to file a 1099-NEC.
After you complete these items, you will be able to file your last annual tax return and pay any taxes you may owe. On the Income Tax Return Form 1120, you must check the box that indicates that this is the final tax return for the business, or if using Form 1040 Schedule C, just note that there is no box to check.
Another thing you may have to look into is if you had previously offered your employees the option to participate in a pension plan. If so, you will need to take steps to terminate that plan and can start by calling the trustee.
For the business entities of sole proprietorship, partnership and corporation fillings, you will be required to follow separate guidelines to complete the final forms.
For the sole proprietor, you will need to file your Schedule C form, which is the Profits and Losses incurred from your business. If you are selling or exchanging the property that was used in your business, you will need to fill out Form 4797, the Sale of Business Property. If you happen to be selling your business, then Form 8954, Acquisition Asset statement is the form you will need. Moreover, if you have any earnings more than $400, you will need to complete the Schedule SE Form 1040 to figure out the taxes on your earnings for self-employment.
If your business was a partnership, then you will need to close your business by filing Form 1065. Because a partnership entity does not pay taxes on their income and they pass the taxes of any profits or losses to its partners, they will be the ones to have to report these items on their returns. Reporting any capital gains or losses will be done on Form 1065 and be sure to check the box that will indicate that this is the final return for the business. The business will also need to file Form 4797, if you are selling or exchanging any property of the business, or file Form 8594 if the business is being sold.
For corporations, which also include S-Corps, if you plan to adopt a resolution, then you must file the Corporation Dissolution or Liquidation, better known as Form 966. If you have a C-corp, then you will need to file Form 1120, the U.S. Corporate Income Tax Return, for the year that you close the business and report any gains or losses on the Schedule D form as well.
If you are closing down an S-corp, then you will need to file the U.S. Corporate Income Tax Return for an S Corporation. Similarly, to the C-corp you will have to file the Schedule D and the Schedule K-1, and be sure to check the box indicating the final return. Just like the other business types, if you have sold or exchanged any property you will need to file the additional Form 4797 and if you sold the business, then Form 8594 would be applicable.
Once all the endless and mind boggling, heavy lifting is done when you file your taxes, you can move on to the easier aspects such as canceling your government issued Employer Identification Number (EIN). In order to cancel this number you will need to write a letter to the IRS main office located in Cincinnati, Ohio and include some very important information. In the letter, you should include the complete and legal name of the business, the business EIN, the business address and the reason you wish to close the account. If you kept the record, send a copy of the EIN notice you received when you originally requested the number, as it could aid in a faster process. Of course, before they officially close your account, you will have to pay any and all taxes owed, but then you will be free and clear.
When it’s all said and done and you’re finalizing all these loose ends, it will be very smart of you to keep all your records. Because it is the federal government, you just may never know when they might want to ask you questions via an audit, so better safe than sorry. For any property records, you should keep them at least until the period of limitations expires, which will be the same period of time in which you can amend your tax return to claim a credit or refund. Any employment tax records should be held for at least four years. Then you will officially be done with your business.
Closing down a business can be hard emotionally and take a toll on us physically as well. It is hard to let go of something you worked hard for and closing a business is no exception. While there are many aspects to consider and complete, it can be done with time. Having a CPA or tax strategist to help guide you through the process, is something that can drastically reduce the anxiety and stress related to an already agonizingly difficult process. As with every facet in life, there are natural chapters that open and close. Starting a business is a great thing, but when things don’t work out as we plan, it is ok to move onto something else. Take time to regroup and plan out your next steps or find your next adventure. Either way, take comfort in the fact that Accolade Accounting will be here to support your decisions every step of the way.
Until next time my friends,
Cheers!
JD Longino, CPA
Do you have still any question about closing a business? Call Accolade Accounting is a full-service accounting firm in Decatur and Atlanta, also serving nearby areas. We are specialized in accounting, business taxation, tax planning, and advising. Call us at 470-646-2663 for a free consultation.
