Posted by Early Growth
March 19, 2020 | 5-minute read (875 words)
You’ve closed your business. If you’ve gone through that process which isn't easy, there's still one more step. When shutting down your business, you must make sure you’re compliant with your tax obligations.
Being in compliance doesn’t just mean paying the taxes you owe, it also means filing your returns and keeping the required records. The IRS has a helpful pre-closing checklist with tax-related and other steps for business owners to follow. When it comes to getting your final taxes straight, among the things you’ll need to take care of are payroll taxes, sales taxes, and of course, your business income taxes.
It’s not just federal taxes, either. You’ll also need to resolve any outstanding state and/or local tax obligations, including delinquent tax payments and penalties. Dealing with the complexity and staying on track — not to mention the benefit of having somewhere to turn if you need to request a payment plan to meet outstanding tax obligations or in the event of a tax audit down the road — are good reasons to let the professionals, tax experts and accountants, help you through this process.
Below are the major types of taxes you need to make sure are squared away after you’ve closed your business.
Whether or not your business owes any income taxes (after deductions and credits), come tax time you’ll still need to file returns for your business’ current/last year of operation. When you do, you’ll check the box on your Form 941 designating it as a “Final Return.” Before you ride off into the sunset, you’ll also have to file returns and pay any outstanding state and/or local tax balances you have due, including for penalties, fees, and interest.
You are responsible for remitting any outstanding payroll taxes, for amounts you withheld from employee paychecks for income tax, social security, Medicare, and unemployment insurance, once you close. Before you close, make sure you’ve withheld the right amounts, recorded, and remitted them to the IRS and state authorities. The IRS takes payroll tax remittance very seriously. Failure to comply opens you up to fines, could put your personal assets at risk, and even expose you to criminal liability.
Hopefully, you’ve used a payroll provider, in which case, you’re likely on top of this. That’s because closing down doesn’t let you off the hook as far as record keeping is concerned. You still have to maintain your historical payroll records, and designate someone the IRS can contact with any requests.
Regardless of whether you still owe sales taxes, you are required to file a final tax return with the state authorities you’re registered with once you cease operations, dissolve or close the sale of your business. Process and timeframes vary depending on the state. For instance in New York, after you officially close your business (including notifying the state) you have 20 days to file your last sales tax return. In California, “you must file the final return by the due date of the quarter in which you close out your account.” And if you record sales, say for office equipment after you’ve closed your business, California might still be able to tax your proceeds.
Other Taxes and Considerations for a Closed Business
If you’re closing your business after a sale, or if you sold off some of the assets before closure, you might owe capital gains taxes on the transaction.
Don’t forget to notify the IRS to cancel your employer identification number (EIN). You’ll also need to file paperwork with the relevant state authorities, in California this is the Secretary of State, to legally dissolve or surrender (for foreign-domiciled businesses) — to legally terminate your business. If you don’t notify the right authorities, you could find yourself still on the hook for a franchise and other annual business taxes long after your business has shuttered.
With so much to keep track of and multiple government entities to communicate with — and that’s just from the tax compliance side of things — winding down your business can be a complex journey to navigate. That’s especially true when you’re likely already riding an emotional roller coaster. That means there are lots of opportunities to get something wrong, or for a crucial step to fall through the cracks.
You’ll want to work with a field-tested accountant or outsourced CFO, and trusted tax professional to be absolutely sure you stay on top of everything. They can help keep you on task, ensure everything is properly documented and your records are organized, and make sure you take advantage of every last deduction you’re eligible for. All of that means you’ll be able to focus on moving forward.
About Early Growth
For over 10 years, Early Growth has provided early-stage companies CFO Consulting Services, Accounting for Startups, Taxes, and 409a Valuation. We saw a need in the marketplace for a service that would allow founders to still focus on business while building a healthy financial story. Our Outsourced CFO, Outsourced Accounting, and R&D Credits services have helped many companies grow.