Business owners know that they need to get their finances in order before they can close — but what exactly does this mean? Business owners will need to do more than just put up a closed sign, shut down accounts, and sell off tangible goods before they can move on with their lives. They may need to review contractual obligations, make sure they do not violate terms of previous agreements, and properly notify employees.
Another important factor to consider before closing: the IRS.
It is a good idea to take Uncle Sam into account whenever money is transferred. When it comes to closing a business, money is transferred in multiple phases. There are the transfers that occur as you close business accounts and additional issues if you are selling portions of the business.
How do I make sure I take care of federal tax obligations before closing my business?
The Internal Revenue Service (IRS) recommends those who are closing a business complete six steps:
- File tax forms. Business owners should file a tax form for their final year of operations, even if only open a few months. Sole proprietors generally file a Schedule C with their personal tax returns, partnerships Form 1065 and corporations Form 966. Additional requirements may apply.
- Transition employees. This means more than paying final wages and serving as a reference for future opportunities. Business owners will also need to pay and report employment taxes like Social Security and Medicare.
- Pay taxes. There are options available for those who cannot pay their business’ tax obligations by the due date. It is important to note that interest penalties generally still apply.
- Report payments to any contracted workers. The IRS requires additional paperwork if you paid contractors more than $600.
- Cancel business accounts. This includes Employment Identification Numbers (EINs) and business accounts.
- Organize records. Make sure to keep copies of all related to documents.
The final step is an important safety net in the event of a future tax audit. Those who receive notification from the IRS of an impending tax audit are wise to take the matter seriously. The attorneys at Goldburd McCone have experience in business tax audits and can advocate for your interests, better ensuring your rights are protected throughout the process.