Unfortunately, due to COVID-19, a lot of businesses have made the difficult decision to close their doors. If you are a partner in a partnership structure, several steps need to be taken and boxes checked to make sure the business is permanently closed. Below are the steps the IRS lays out to close a partnership entity. Be sure to check with your attorney for state and local requirements to make sure you are covered in all areas.
A partnership is a trade or business made up of two or more partners who each contribute money, property, labor or skill to receive a portion of the profit and loss of the business. These business owners file a Form 1065 – US Return of Partnership Income and the adjoining Schedule K-1s. In the final year, the tax return and K-1s must be marked final. In the year the business is closed, the partnership must also file a Form 4797 – Sales of Business Property if property used in the business is sold or exchanged or a Form 8594 – Asset Acquisition Statement if the business is sold.
If the partnership has employees, final federal and state tax deposits will need to be made for the employees’ payroll taxes. All payroll reports will need to be filed for the applicable quarter and year, have a final date wages were paid and be marked final. These forms include, but are not limited to, Federal Forms 940, 941, W-2 and W-3 and Arizona Forms A1-QRT and Form UC-018. If you have employees in other states, the payroll forms will differ. File Form 1099’s if required.
In a partnership where the employees receive tips, Form 8027 – Employer’s Annual Information Return of Tip Income and Allocated Tips will need to be filed to report final tip income. In a partnership where the employees are offered a pension or benefit plan, a final Form 5500 – Annual Return/Report of Employee Benefit Plan will need to be filed.
When the business is closed, certain records need to be maintained for recordkeeping purposes. The length of time certain records should be kept depends on the action, expense, or event which the document records. You can find the IRS recordkeeping rules here. One document that has strict recordkeeping rules are the payroll forms mentioned above. These forms should be kept for four years.
The final task that needs to be done when closing your business if notifying the IRS of the close. You will need to write a letter to the IRS that includes the legal name of the entity, the EIN number (and a copy of the EIN number assignment letter from the IRS if you have it), the business address and the reason for the close of the account. This can only be done after all the appropriate forms mentioned above have been filed.
Once all these tasks have been completed, the partnership will be closed, and no further action will need to be taken. Please visit the IRS website here to review all of the rules for closing a partnership or contact a Henry+Horne professional with any questions.
KC Kolb, CPA