Terminating a Business

You have decided to close your business. What you really want to do is just pick up your box of personal belongings, shut the door, and walk away. But unfortunately, it is not quite that simple.

First, there are some final tax returns that you must file. You are required to file an annual return for your last year in business. If you are doing business as a partnership, corporation, S corporation, limited liability company or trust, you should fill in the box indicating that it is a final return. If you have employees, you have to make final federal tax deposits along with filing final employment tax returns.

If you sold your business, you have to properly account for the gains or losses from various dispositions of your business property. Generally, when a business is sold, each asset is treated as being sold separately for a determination of a gain or a loss. Your assets must be classified as capital assets, depreciable property used in the business, or property, such as inventory, held for resale to customers. Only by properly classifying your assets can you determine the correct tax treatment upon their disposition. Final returns should include information concerning the disposition of business property, any exchange of like-kind property, or the change of your form of business.

Even if you have filed final tax returns, you may be required to file additional returns after your business is no longer in operation. Even though the doors are shut for good, you may receive additional revenue or incur additional expenses in the form of account receivables or payables, refunds, reimbursements, legal settlements or expenditures, or by the disposition of inventory. Any continuing business or financial activity has a corresponding tax responsibility, which obligates you to file tax returns even after you have discontinued your primary business activity.

Along with shutting down your business, you must also shut down your retirement plan. In general, this process includes notifying the participants, notifying the appropriate governmental agencies, and distributing the plan assets. You are usually required to distribute the plan assets from a terminated plan as soon as is administratively possible after the date of the plan termination. The Internal Revenue Service generally interprets this distribution requirement to mean within one year after the plan terminates.