Closing your company can be a demanding and difficult undertaking. The IRS provides resources to assist you. In this situation, you’ll need to follow to close your business from a federal tax standpoint, regardless of the sort of business you own, as well as information to assist you in taking care of your employees. Whether your business is a single proprietorship, a partnership, or a corporation, the information on this page will assist you in determining what to file and how to record income and expenses before closing. When closing a business, remember to check your state’s obligations.
Tax implications are determined by the business structure
When a business closes, its tax classification has major tax implications. Each of the three main business structures has an impact on how the closing is handled for tax purposes:
Reporting Losses, Gains, and Other Items
Gains and losses resulting from the sale or abandonment of business assets are reported as federal income tax gains and losses on your personal tax return. This is because the federal income tax regulations disregard the presence of a sole proprietorship or SMLLC that is classified as a sole proprietorship for tax purposes. As a result, all business assets are regarded directly owned by you (as an individual taxpayer).
When the sale price of an asset exceeds its tax basis, you have a tax gain. The tax basis of an asset is usually equal to its original cost minus any depreciation or amortization deductions.
Gain attributable to earlier depreciation deductions for real estate held for more than one year is now taxed at a maximum federal rate of 25%. Gain due to previous depreciation or amortization deductions is taxed at higher ordinary income rates for other depreciable or amortizable assets (such as furniture, equipment, acquired software, and purchased intangibles) (up to 37 percent under current law).
Long capital gains rates are normally applied to any leftover gain from real estate and depreciable or amortizable assets held for more than a year. Gains on the sale of receivables, inventory, and other assets held for less than a year are taxed at a higher ordinary income rate.
If the asset’s sale price is less than its tax basis, you’ve made a tax loss. In principle, current tax legislation allows you to fully deduct an overall net loss from selling business assets from other income.
C Corporation Concerns – If you’re shutting a C corporation, you’ll most likely arrange for the corporation to sell assets, relinquish some assets, and liquidate. If that’s the case, the corporation will face tax losses and maybe gains, as well as a tax gain or loss on the deemed sale of your stock in exchange for the liquidating distribution you receive from the corporation. As a result, there will be tax implications that must be represented on both the corporation’s final federal income tax return (Form 1120) and your personal Form 1040.
Furthermore, for the year in which it shuts, your pass-through company organization must file a final federal income tax return and distribute K-1 schedules to you and the other owners. If the corporation issued a resolution or plan to dissolve or liquidate any of its stock, the company must file extra IRS papers.
Other Tax-Related Issues
You got an Employer Identification Number (EIN) when you formed your business entity, which was utilized to identify the company for federal tax purposes. If this is the case, you must cancel your EIN and close your IRS business account. The IRS will not cancel your account until you have filed all required returns and paid all taxes. Contact your tax professional for assistance in covering all of your bases.
Your tax advisor can also assist you with a variety of other concerns relating to the closure of your business, including as:
It’s also critical to maintain tax-related records after your business closes in case of an audit. Property records should be retained until the later of the dates listed below:
Maintain tax records for at least four years. Your tax advisor can provide guidance on how long to keep other data, such as tax returns. Your tax expert can assist you in completing the necessary forms to record gains and losses, as well as any business income and deductions, for the final year of operation.