Closing a business is difficult and challenging. The IRS acknowledges that small businesses and self-employed individuals face challenges in their personal and business lives during these uncertain times. Closing a business is a difficult decision.
Toward the end of 2020, the IRS updated its guidance on closing a business. Anyone in the process of closing a business or considering doing so in the future should read it.
In the guidance, you can find such information as what forms to file and how to report revenue received in the final year of business and expenses incurred before closure.
Note in particular the following guidance:
- What should you file? The type of return to file depends on whether the business is a sole proprietorship, partnership or corporation.
- You’ll find a section for each business type. You can click on the section that applies to you to get the returns and forms you need.
- If you have at least one employee, you must make final federal tax deposits and report employment taxes.
- Even if the business closes, tax payments may be due in the next filing season.
- If your firm pays contractors at least $600 for services (including parts and materials) during the calendar year that your business closed, you must report those payments.
- You need to cancel your employer identification number and close your IRS business account. The IRS can’t close out an account until you’ve filed all the necessary returns and paid all the taxes owed.
- Keep your business records. How long? It depends on what’s recorded in each document. Your tax professional can guide you here.
Don’t neglect retirement plans
A forgotten and yet complicated part of closing a business is winding up any retirement plans. The IRS notes, “Upon plan termination, participants must be immediately 100% vested in all accrued benefits. In a 401(k) plan, for example, this means that employer matching and profit-sharing contributions must become fully vested regardless of the vesting schedule in the plan document.”
Generally, notes the IRS, an employer must distribute assets from a terminated plan as soon as possible, usually within one year after plan termination. Employees typically can roll over the distributions into a new employer’s plan or an individual retirement account.
The bottom line is that closing up a business is about more than putting a padlock on the door.
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