This might not apply to you.
So it could just be something to file away for the future.
But I’m hearing enough rumblings from other accountants and seeing some of the signs … SMB owners could be in for a tough ride over the next little while and that could mean any San Francisco Bay Area business could end up shutting its doors.
And sure – nobody likes to think about the end of something. Endings are sad and hard. And then there’s the psychology of it all – it’s difficult to think about closing your business when you’ve invested so much of yourself into it.
But sometimes you find yourself there, the math is just the math, and you’re facing the end of an era for your business – whether via disaster or marketplace factors or you’re just ready to move on.
So if you’re considering closing your business (for whatever reason), you have to have an exit strategy, especially when it comes to your tax obligations. Because even if you’ve closed out your inventory or notified your employees and sent out those painful final paychecks, there are still things you have to take care of with the IRS.
This all seems gloomy – sometimes the exit is a windfall. Let’s plan for THAT and take a look at where you see your business going in the next 5-10 years, and how we can prepare your finances for either eventuality. Use this for that:
But regardless, it’s important to know what happens when a business is shutting its doors. Here are some things to keep in mind…
When a Local San Francisco Bay Area Business Is Shutting Its Doors
“Only those who will risk going too far can possibly find out how far one can go.” – T.S. Eliot
You gave your small business your whole life. But there comes the day when, for whatever reason, your business is shutting its doors. In that emotional moment, taxes and paperwork may be the last thing you want to think about.
We understand. But you’ll do yourself – and those who worked with and for you – a favor if you take the pains to tie all those loose ends.
Let’s look together at what’s involved (from a tax perspective).
Last returns (and payments)
Uncle Sam waits for no one; you must file a final tax return for the year in which you close.
What IRS form you need will depend on your former business. For instance, if you ran a limited liability company (LLC), the IRS might have viewed your company as a partnership, a corporation, or some other kind of entity. Partnerships file IRS Form 1065, corporations file Form 1120, sole proprietors file a final Schedule C in their personal return, and so on. You may need additional forms if you sold the business or its property.
If you created your company by state law (a corporation or an LLC, perhaps), you follow state rules to terminate, including filing state returns and paying fees. If you had a C or S corp that resolved or have plans to dissolve the corporation or liquidate any stock, you must file IRS Form 966, “Corporate Dissolution or Liquidation.” If you sell assets that make up the entire trade or business, you report the transaction on Form 8594, “Asset Acquisition Statement.”
Double-check with us about form, schedules, other documents, and the filing deadline. You also must pay taxes due the state or the feds – and remember that even if you close your business right now, much of the payment and other obligations will come next filing season.
Take care of your people
You have to pay final wages and compensation to your employees – and that means you also must make final federal tax deposits and report employment taxes. (There’s a penalty if you don’t.)
Your quarterly 941 tax return or your annual Form 944 return can cover reporting for your final wage payments. Check the box to tell the IRS your business has closed and enter the date when you paid the final wages. You should also attach a statement to the return showing the name of the person keeping the payroll records and the address where those records will be kept. Also:
- File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for the calendar year in which you paid final wages.
- Give each employee a Form W-2, “Wage and Tax Statement,” for the calendar year in which you pay them their final wages. Give out these W-2s by the due date of your final 941 or 944. Generally, you give copies B, C, and 2 to the employees and file Form W-3, “Transmittal of Income and Tax Statements,” to transmit Copy A to the Social Security Administration. (We can help with this.)
- Did your employees get tips? You file Form 8027, “Employer’s Annual Information Return of Tip Income and Allocated Tips.”
- New this year – If you had independent contractors and you paid them at least $600 during your company’s last year, you have to file a Form 1099 for each of them.
If you had a pension or benefit plan for employees, you’ll have to terminate it (and eventually distribute the money). You’ll need to file Form 5500, “Annual Return/Report of Employee Benefit Plan,” and you may want to file Form 5310 for confirmation of the status of your plan – it can save trouble down the road.
Closing your EIN
The employer identification number (“EIN”) of your business has to be closed out, along with your IRS business account. You close both by sending a letter to the IRS that includes the complete legal name of the business, your EIN, the business address, and the reason you want to close the account.
If you still have it, also send a copy of the notice the IRS sent when you got your EIN. We can get you the right address.
Keep Your Records
There’s always a lot of debate about how long to keep tax records. For businesses, it depends on what’s on each document. For instance, keep records of employment taxes for four years. You generally keep property records until the statute of limitations runs out for the year you got rid of the property.
We know it’s a lot to think about at what’s probably an emotional time – know that we’re here to help. We’re primed to help you sort through what needs to be done if your business ever ends up shutting its doors.
On your team,
Patti ONeill and Gale Bergado
ONeill & Bergado