Thinking of closing your business? Avoid these last-minute tax surprises

For small-business owners facing pressure amid coronavirus, even going broke will cost them money.

Some 610 businesses in the New York City region filed for bankruptcy from March 16 to Sept. 27, an increase of 40% from the year-ago period, according to Bloomberg.

But there’s more to closing your business than just cleaning out your storefront and shutting the doors for good.

“Some people say, ‘Well, I’m going to stop doing business and that’s it,'” said Sheneya Wilson, CPA and founder of Fola Financial in New York. “They walk away without taking any formal steps.”

“But you can’t just stop operating,” she said. “That entity is still in existence with the state and if you don’t comply, you’ll get penalized.”

The steps you’ll need to take going forward will depend on the kind of business you’re operating, its structure and the extent to which your entity has assets that need to be sold off or distributed to partners.

You also will face reporting and payment requirements with the IRS and your state before you can close up.

Here’s what you should know.

The complexity of shuttering your business begins with the way it’s structured.

A small sole proprietorship that you operate alone from your living room with no assets and no employees might be the easiest to dissolve.

The more complex the entity is, the more work it may take to unwind it. So you’ll want to proceed with a tax professional before you pull down your shingle.

For instance, C-corporations can face some of the harshest treatment when they’re being shut down.

“C-corps are hit hardest in taxes for dissolution,” said Nicole Davis, CPA and founder of Butler-Davis Tax & Accounting in Conyers, Georgia.

“They’re either selling off assets or liquidating stocks, and this could result in a taxable event — especially if they are selling assets with a gain that has to be reported,” she said.

C-corps have a two-tier tax structure: Shareholders face taxes if they wind up with a gain that exceeds the amount they originally invested. Meanwhile, the entity itself also faces a tax.

Whether a business is a C-corporation, an S-corporation or a partnership, the entrepreneur can expect to submit a final tax return, along with other necessary paperwork, and report any gains or losses to the IRS.

Other tax obligations will also follow: For instance, if you had employees, be sure to make final tax deposits on payroll and other taxes – and submit Form W-2, which reports wages, to your workers.

Business owners often overlook these responsibilities, which can mean they’re still on the hook for reporting requirements and tax payments even after they’ve ceased operations.

“For people who close a business in January or February, it could be 18 months before they think about filing a tax return,” said Adam Markowitz, enrolled agent with Howard L Markowitz PA CPA in Leesburg, Florida.

“This is why, generally, it’s better to close up before the end of the tax year so you can avoid dealing with this in the new year,” he said.

Closing the books officially with the IRS may signify the end of one chapter. Make sure you don’t forget to resolve everything with your state.

Businesses are responsible for collecting and remitting sales and use taxes, excise taxes and more with their state.

Not only will entrepreneurs need to make sure their state tax authority is paid in full, but they may also need to formally file a notice to shareholders and take extra steps to formally dissolve the business.

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If not, your state could still hit you with additional taxes and penalties — even if you’re no longer running your shop.

“In California, they will still charge you a franchise tax of $800, and you’ll get penalized for not paying it,” said Wilson of Fola Financial. “You can’t close your business until you’ve satisfied the state.”

Thinking of closing up shop? Don’t do it alone. Call your tax professional and start here:

Assess your ownership and structure: How your business is structured and the number of people you’re dealing with will affect the complexity of the dissolution process.

Review your books and records: Maintaining meticulous books and records helps entrepreneurs and their tax pros through the life cycle of a business — right down to when an entity is being liquidated.

Get up to date on your tax obligations: File your final payments and returns with the IRS. Make sure you follow your state’s laws on the dissolution process. It’ll help you avoid surprise taxes and penalties. Shut down any licenses or registrations under the name of your business.

Keep all your tax records: Nobody wants to think about an audit by state or federal authorities. Hold onto your tax returns, unemployment records and other pertinent documents.

“Digitize your files,” said Wilson. “People dissolve their businesses and then forget they still need to have those records on hand.”