What Are the Tax Implications of a Small Company Closure?

When shutting a small firm, whether for retirement or economic reasons, make sure you consider the tax implications.

What you’ll discover:

What are the tax implications of a company dissolution?
Is there anything I need to do to dissolve my business?
Is there anything to consider when closing a small firm with employees?
When ending a small firm, how long should I maintain business tax records?
Get guidance when required to ensure that you are in compliance with tax rules.

Operating a small company may be satisfying, but many entrepreneurs come to the conclusion that it is time to call it quits. It is critical to adopt a careful strategy to dissolving a corporation, whether it is connected to a planned retirement or motivated by underlying economic conditions. This includes, where feasible, arranging ahead to fulfill tax filing obligations and other small company tax issues related with dissolution.

What are the tax implications of a company dissolution?

The tax consequences of ending a firm are heavily influenced by the kind of organization you are closing. The following covers the tax effects of shutting a company per business type and will provide you with a basic notion of your liabilities. If final taxes are owing, there are numerous options for paying them.

C-Corp

IRC Section 331 taxes liquidating distributions to corporate shareholders resulting from the business’s dissolution. C-Corporations are subject to “double taxation,” which means that the corporation is obligated to pay taxes on assets distributed to shareholders and the shareholders are taxed on resulting gains or losses on their individual income tax returns.

S-Corp

S-Corporations are often taxed as “pass-through” businesses, which means that the company’s revenues and losses are recorded on individual owners’ tax returns. These distribution requirements, however, do not apply to liquidation distributions. When an S-Corp shuts, it is subject to the same tax laws that apply to the distribution of C-Corp assets. In other words, both the corporate entity and its shareholders must account for dissolution profits and losses.

LLC

LLC revenue is money that is “passed through” to its shareholders, either as sole proprietorship income (the default when the LLC has just one member) or as partnership income. This tax treatment will be maintained until the business’s closure, which means that each individual LLC member is responsible for reporting their portion of dispersed company assets as well as their share of the company’s profits or losses in the company’s last tax period.

Nonprofit

Nonprofits that are dissolving are required by federal law to donate any residual assets solely to another tax-exempt organization. If the nonprofit achieves these standards and continues to function under IRS regulations regulating charitable organizations throughout its last tax period, there will normally be no income tax payments payable to the federal government upon dissolution.

Is there anything I need to do to dissolve my business?

Regardless of the sector or the company’s goods or services, running a small business entails satisfying a variety of recordkeeping obligations. The same is true when it comes to closing a firm.

Forms C-Corp and S-Corp

When you close a C-Corp, you must submit Form 1120 (U.S. Corporation Income Tax Return) with the IRS and declare profits and losses on Schedule D. Similarly, shutting an S-Corp necessitates the submission of Form 1120-S (U.S. Income Tax Return for a S Company), with Schedule D reporting profits and losses. There is a “final return” box that must be ticked on each of these forms. Form 966 (Corporate Dissolution or Liquidation) must also be submitted if the closure is the result of a board resolution or other plan to dissolve the firm or liquidate its shares.

Forms of LLC

For tax reasons, sole-member LLCs are treated as sole proprietorships by default. When submitting your individual income tax return for the last year the firm was in existence, you may show that you ended the business during the tax year on Schedule C of your tax return. LLCs taxed as partnerships will check the box on Form 1065 (U.S. Return of Partnership Income) indicating that the firm has ended and report profits and losses on Schedule D and Schedule K1 (Partner’s Share of Income, Deductions, Credits, and so on).

Forms of non-profit organizations

Nonprofits must inform the IRS that their operations have ended and submit Schedule N of Form 990 with the IRS to detail leftover corporation assets and how they were allocated.

Certain companies may also be required to submit other paperwork, such as forms proving the sale or exchange of business property, or an asset acquisition statement if the firm is sold.

You should cancel your IRS account.

Companies of all sizes should submit the IRS a letter with the company’s name, EIN, and address in order to shut the IRS account and cancel the EIN.

Is there anything to consider when closing a small firm with employees?

Employers must also make final payroll tax payments and report employment taxes using the corresponding quarterly or yearly payroll tax return forms and Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Report) when dissolving a company employing workers.

Employers must also deliver their final wage reports to workers and the IRS using Form W2 (Wage and Tax Statement) by the due date of the last quarterly payroll or yearly payroll tax deposit. Similarly, if your company paid a contract worker more than $600 in the previous tax period for services, you must present the contractor with Form 1099-NEC (Nonemployee Compensation).

When ending a small firm, how long should I maintain business tax records?

Documents pertaining to employment taxes should be kept for at least four years after your firm has closed. Other company tax records must be retained until the appropriate statute of limitations (the time limit within which you may amend your tax return to seek a refund or credit, or the IRS can charge extra taxes) has expired. Depending on the conditions, IRS tax record retention periods vary from three years to forever.

Get guidance when required to ensure that you are in compliance with tax rules.

Please keep in mind that the tax repercussions and procedures stated above only apply to federal tax responsibilities. State and municipal tax authorities may have extra requirements and timeframes for your firm. Failure to submit the necessary paperwork or handle your company’s tax responsibilities may result in fines and penalties, not to mention the frustrations that come with dealing with tax issues.