What Tax Issues Need to Be Addressed When Closing a Business?

 Posted on June 14, 2023 in Small Business Taxes

Closing a business can be a difficult decision. Despite a business owner's best efforts, a company may be unsuccessful, and it may be necessary to terminate operations and dissolve the business entity. However, wrapping up business operations can be a daunting task that will require careful planning and execution. Tax issues can be some of the most crucial aspects of closing a business, and business owners will need to understand the tax implications that may affect them in these situations.

Filing Final Tax Returns and Other Forms

Business owners or partners will need to make sure all delinquent tax returns for a business have been filed, and they will also need to file a tax return for the year in which the business ceased operations. Any taxes that are owed must be paid. Depending on the way the business was structured, different types of forms may need to be filed with the IRS. In addition to income tax return forms, a business owner may need to report sales of business property, and asset acquisition statements may be required if the business was sold to a new owner. For corporations, a Corporate Dissolution or Liquidation form must be filed with the IRS. When filing a state tax return with the California Franchise Tax Board, it must be marked as a final return, and the business must cease all business operations before the end of that tax year.

Employee Payroll Tax Obligations

Final wages that are owed must be paid to all employees. An employer must also withhold and pay all required payroll taxes, Social Security taxes, and Medicare taxes. Failure to withhold and pay these taxes will result in penalties. Employment taxes can be reported by filing either a quarterly or annual employer's tax return, and a federal unemployment tax return must also be filed. Any payments of over $600 made to contractors during the final year of business must also be reported to the IRS. An employer will be required to provide employees with W-2 forms for the final year in which wages were paid. They may also need to take steps to terminate health plans and retirement plans for employees.

Cancellation of an Employer Identification Number (EIN)

Another important tax issue to address when closing a business is canceling the EIN with the IRS. An EIN is a unique identifier assigned by the IRS to every business, and it is used to track the business's financial activity, including tax returns and payments. When closing a business, a letter must be sent to the IRS that specifies the name and address of the business, the EIN, and the reason for closing the account.

Filing Forms With the California Secretary of State

Within one year after filing the final state tax return for a business, an owner will need to file the proper forms to notify the Secretary of State (SOS) that the business has been dissolved, canceled, or surrendered. Depending on how the business was structured, these forms may include a Certificate of Dissolution, Certificate of Cancellation, Limited Liability Company Certificate of Cancellation, Limited Liability Partnership Notice of Change of Status, or Dissolution Waiver. If a business filed a final tax return for the previous tax year, ceased doing business after the end of the previous tax year, and filed all appropriate documents with the Secretary of State within 12 months of filing its final tax return, it may avoid the minimum franchise or annual tax for the current year and any subsequent tax years.

Contact Our San Jose Business Dissolution Tax Attorney

By addressing tax issues correctly when closing a business, owners or partners can avoid potential penalties or other concerns that could arise in the future. At John D. Teter Law Offices, our San Jose small business tax lawyer can help business owners address these issues correctly. To learn more about how we can assist with tax-related issues during the dissolution of a business, contact us at 408-866-1810 and schedule a consultation.

Sources:

https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business

https://www.ftb.ca.gov/forms/misc/1038.html