Tax Obligations When Shutting Down
If your company closes down, you may still have to file tax returns and pay corporation tax. Closing a business involves taking care of tax obligations to prevent future issues. Tell the IRS your business is closed by entering the date final wages were paid on your tax forms.
Company Closure Options
Most small and family companies are close companies. A close company has five or fewer shareholder-directors. A dormant company will not pay corporation tax while dormant.
To close your company, you can apply for voluntary strike-off if it has no debts and has not traded recently. Or members’ voluntary liquidation (MVL) can be more tax-efficient if reserves exceed £25,000. Seek specialist advice to close your company in the most tax-efficient way.
Final Tax Filings and Considerations
- File final return for the year closing.
- Sole proprietors file Schedule C.
- Partnerships file Form 1065 and indicate the final return on Schedule K-1.
- Corporations file related forms.
- Report income and expenses.
- Pay estimated taxes on time.
Consider debt cancellation, net operating losses, depreciation recapture, bankruptcy issues.
- Cancel EIN.
- Close IRS account.
- Explain payment options if unable to pay taxes owed.
Tax Liabilities After Closure
When you go out of business, your tax obligations are your most important debts to repay because governments have significant power to collect back taxes. You may be personally liable for some tax debts, such as payroll taxes, even if your business is a corporation or LLC.
- First priority should go to federal taxes withheld from employees’ paychecks.
- With these obligations settled, take care of the employer’s share of the Social Security and Medicare taxes.
If you cannot get a copy of your W-2 or 1099, you can file taxes by filling out Form 4852, “Substitute for Form W-2, Wage and Tax Statement.” Keep all business records for at least seven years.
Liquidation and Taxes
If you file Chapter 7 bankruptcy, that liquidates your business, and bankruptcy discharges most unpaid debts, although some taxes may survive.
If you sell off your business property after closure, you pay taxes on the property. Many of your business assets are subject to capital gains taxes.
Tax Implications for Loss-Operating Businesses
Businesses often operate at a loss temporarily. If you’re an owner or partner in a business, you are expected to pay taxes on your portion of the business’s profits. If the business operates at a loss, you can report that loss on your taxes, which may impact your tax return. Being an owner of an S corporation, you don’t have to pay another set of taxes on the company’s commercial income tax return.