Unfortunately, due to COVID-19, a lot of individuals have had to make the difficult decision to close their businesses. Closing a corporation legally has several steps and boxes to check to make sure the business is permanently closed. A corporation is a separate tax-paying entity with shareholders who own capital stock. S corporations are corporations that elect to pass the income through to the shareholders rather than being taxed as a separate entity. The following are the steps the IRS lays out to close your corporation. Also be sure to check with your attorney for other state and local requirements.
- File a Form 1120 – U.S. Corporation Income Tax Return or Form 1120S – U.S. Income Tax Return for an S Corporation and the related Schedule K-1s. The return and K-1s must be marked final. If there is a resolution or plan to dissolve the corporation or liquidate stock, Form 966 – Corporate Dissolution or Liquidation will need to be filed. Additionally, in the year the business is closed, the corporation must also file a Form 4797 – Sales of Business Property if property used the in business is sold or exchanged or a Form 8594 – Asset Acquisition Statement if the business is sold.
- If the corporation 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 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. In addition, all 1099 forms will need to be filed for the final year.
- If employees are offered a pension or benefit plan, a final Form 5500 – Annual Return/Report of Employee Benefit Plan will need to be filed and plan assets distributed.
- When the business is closed, certain records need to be kept for audit and recordkeeping purposes. The length of time depends on the action, expense, or event which the document records. You will find the IRS recordkeeping rules are strict for the payroll forms mentioned above. These forms should be kept for four years.
- The final task that needs to be done is notifying the IRS of the close. 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 EIN account. This can only be done after all the appropriate forms mentioned above have been filed.
Once all these tasks have been completed, your corporation will be closed with the IRS. Please visit the IRS website here to review all of the rules for closing a corporation or contact a Henry+Horne professional with any questions.
KC Kolb, CPA