An unfortunate side effect of the global pandemic and economic impact has been the closing of small businesses. But just closing the doors doesn’t end the story. Depending on business structure and number of employees, closing your doors forever can hold additional costs if not done correctly. Today, we’ll discuss the tax implications of closing a business in 2020.
Structure Complexity Impacts Your Tax Implications
How you structured your business will determine the steps you’ll need to take for a full closing. In addition to filing annual returns and related forms, you will need to pay final wages or compensation to employees. You will also need to cancel your employer identification number (EIN) and close your IRS business account.
Sole Proprietorships with zero employees, especially when operated from your dining room table, come with little issues when closing. Businesses operations with contractors, employees, or storefronts will need to follow a run-out strategy for payroll, contracts, and leases as well as additional book-closing steps.
Partnerships operate like sole proprietorships when closing for good. Owners will need to account for dissolution and personal tax impacts.
C-Corporations, because of their complexities, require far more processing. It includes selling off assets or liquidating stocks. Owners will also need to petition the State for dissolution and various clearance certificates.
If your business had employees or used contractors, it should go without saying that you need to pay them. You also need to issue their final income statements for their tax filing purposes.
If you provide a pension or benefit plan for your employees, see how to Terminate a Retirement Plan. If you provide Health Savings Accounts or similar programs for your employees, see About Publication 969.
When you close your business, you will still need to pay final taxes. (You don’t think they’d forget, do you?) This includes n any gains you may have had on selling the business or selling off its remaining assets.
Keep Records of Everything when Closing a Business
Careful bookkeeping helps business owners and their tax pros through the entire life cycle of a business. An audit by state or federal authorities is never fun, especially if the business activity that spawned the audit is now shut down. Then you incur additional cost and relive the closing experience without the benefit of any new money. If you destroy all supporting documentation on a closed business, you have just compounded that bad experience.
So please, hold onto your tax returns, unemployment records, and other business documents. Digitizing files can make it easier to store them without shoeboxes taking up precious real estate in your hallway closet.
This year has been difficult enough, get peace of mind now by addressing the tax implications of closing a business in 2020. Then you can begin the next chapter of your life with a clean slate. Need help pulling together your material or filling out necessary paperwork? Relax! We have years of experience providing efficient tax return preparation services and business minimizing tax liabilities, even after closure. Call John A. Cochran, Esquire, in Greensburg at 724-216-0704 or use our online form to schedule a free consultation.