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The Tax Implications of Closing a Business

 

The decision to close a business's doors for good is never an easy one. However, it's important to keep abreast of compliance requirements before you say goodbye. That's why you should take time to visit the closing a business page of IRS.gov. It's designed to help you navigate the process of shutting down. It includes guidance on:

  • What forms to file.
  • How to report revenue received in your final year of business.
  • How to report expenses incurred before closure.

Closing even a simple sole proprietorship requires a fair amount of paperwork. For example, you may have to file the following:

  • Form 4797, Sales of Business Property, for each year you sell or exchange property used in your business. You also need to file this form if closing your business causes the business use of an eligible property under Section 179 to drop to 50% or less.
  • Form 8594, Asset Acquisition Statement, if you sell your business.
  • Schedule SE (Form 1040), Self-Employment Tax, if you have net earnings of $400 or more from your business.

There will likely be additional requirements for partnerships and corporations.

Other steps when closing a business

  • File a final tax return and related forms. The return you need to file depends on the type of business you were running.
  • Take care of employees. You'll need to pay any final wages or compensation, making final federal tax deposits and reporting employment taxes.
  • Take stock of any pensions, benefit plans, health savings accounts and other tax-favored health plans. There are strict rules about how these are handled.
  • Pay any taxes owed. Tax payments may be due next filing season, even if that is after the business closes.
  • Report payments to contract workers. If you paid contractors at least $600 for services, including parts and materials, during the calendar year you go out of business, you must report those payments.
  • Cancel your EIN and close your IRS business account. You have to formally notify the IRS so it can close your IRS business account.
  • Keep business records. How long you need to keep records depends on what's recorded in each document. For example, keep property records until the period of limitation expires for the year you dispose of the property. Employment tax records must be kept for at least four years.

Taking care of employees

These tasks are among the most important. If you have one or more employees, you must pay them any final wages and compensation owed. You must also make final federal tax deposits and report employment taxes.

The following forms are mandatory:

  • Form 941, Employer's Quarterly Federal Tax Return, or Form 944, Employer's Annual Federal Tax Return, for the quarter in which you make final wage payments. Check the box to tell the IRS your business has closed and enter the date when final wages were paid. Attach a statement to the return showing the name of the person keeping the payroll records and the address where those records will be kept.
  • Form 940, Employer's Annual Federal Unemployment Tax Return, for the calendar year in which you paid final wages. Check box "d" in the Type of Return section to show that the form is final.

You must also provide a Form W-2, Wage and Tax Statement, to each of your employees for the calendar year in which you pay them their final wages. If your employees receive tips, you must file Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, to report final tip income and allocated tips.

This is just a summary. Be sure to work closely with a qualified tax professional to make sure you are meeting all the requirements.

 
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Davis & Graves CPA, LLP
Davis & Graves CPA, LLP
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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