Tax Implications for Businesses Closing During COVID-19

Tax Implications for Businesses Closing

Many businesses have closed because of the COVID-19 pandemic. If this has happened to you, we can help you take care of the tax obligations that you must meet. 

Businesses must file a final income tax return and some other related forms in the year in which they close. The return filed depends on the business. Here’s a rundown.

Tax Filings by Type of Business

Sole Proprietorships. These businesses must file the usual Schedule C, “Profit or Loss from Business,” with their individual return for the year in which the business closes. Sole proprietors may also need to report self-employment tax. 

Partnerships. Partnerships must file Form 1065, “U.S. Return of Partnership Income” and report capital gains and losses on Schedule D. Partnerships should show that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, Etc.”

All Corporations. Corporations must file form 966, “Corporate Dissolution or Liquidation,” when they adopt a resolution or plan to dissolve a corporation or liquidate stock.

C Corporations. File Form 1120, “U.S. Corporate Income Tax Return,” and report capital gains and losses on Schedule D. Indicate this is the last return.

S Corporations. S Corporations must file Form 1120-S, “U.S. Income Tax Return for an S Corporation” and report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All businesses may require other forms to report sales of business property and asset acquisitions.

Obligations to Employees and Contractors

If your business has employees, pay them final wages and compensation owed, make federal tax deposits, and report employment taxes. If you don’t do this, you can be personally liable for what’s known as the Trust Fund Recovery Penalty.

Contractor compensation must also be reported. If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

Additional Tax Considerations

End your business’s employee retirement plan and distribute benefits, being sure to meet detailed notice, funding, timing and filing requirements for the terminating plan. We can help you with this and with other complex requirements related to flexible spending accounts, Health Savings Accounts, and other employee programs.

We can assist you with many other complicated tax issues related to closing your business, including Paycheck Protection Plan (PPP) loans, the COVID-19 employee retention tax credit, employment tax deferral, debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.

You should keep business records for a specified amount of time, cancel your EIN, and close your IRS business account. We can help you with these various requirements. 

If your business can’t pay all of its taxes, we can explain the payment options. Contact your trusted Smolin advisor to discuss these issues and get answers to your questions.