As the COVID-19 pandemic continues to threaten the lives and livelihoods of people around the world, many entrepreneurs are realizing that they will have to close some operations in order to focus efforts on the businesses most likely to outlast the pandemic. With so many American businesses facing the need to wind down, the IRS has launched a redesigned web page to help business owners understand the federal tax processes they need to follow when closing a business. The IRS streamlined its Closing a Business page into six simple steps, so business owners and self-employed individuals can quickly find the information they need.
The six steps focus on the forms that owners need to file and other actions they must take to report revenues, expenses, wages, and employment taxes in the final year of business. The IRS advises that an owner of a closing business should:
- File a final return and related forms. The type of return to file depends on whether the business is a sole proprietorship, partnership, or corporation. The page features a section for each business type. Business owners can click on the section that applies to them to get the returns and forms they need.
- Take care of employees. Business owners with one or more employees must make final federal tax deposits and report employment taxes.
- Pay the taxes owed. Even if the business closes now, tax payments may be due next filing season. If necessary, estimated taxes should be paid in order to avoid any interest or penalties on the final return of the business.
- Report payments to contract workers. Businesses that pay contractors at least $600 for services (including parts and materials) during the calendar year must still report those payments, even if they have closed before the end of the year.
- Cancel EIN and close IRS business account. The IRS cannot close out an account until the business has filed all necessary returns and paid all taxes owed.
- Keep business records. The page provides information on how long a business needs to keep records based on what’s recorded in each document.
The page also has information to help business owners who are declaring bankruptcy, selling their business, or terminating retirement plans.
“The IRS realizes small businesses and self-employed individuals are facing challenges in their personal and business lives during these uncertain times,” says Eric Hylton, Commissioner, Small Business/Self-Employed Division. “Closing a business is a difficult decision and we want to help ease the burden for people making this tough choice. We redesigned the Closing a Business page on IRS.gov to help businesses comply with final tax responsibilities.”
Please note that these are all related to federal requirements. The state your business is organized in may also have specific actions necessary to correctly close a business. If you need additional information about closing your business, please contact a CRI advisor.