Key Considerations in Closing a Business
As tax advisors, there are several steps we can take to make a client’s business closing an efficient process.
A tax advisor should verify any potential payment obligations triggered by the business closure, such as executive compensation payouts or bank loan acceleration. Next, the advisor should prepare an asset inventory, taking into account cash, equipment and intellectual property, among other assets, and, if necessary, obtain a valuation report to assist with the assets’ transfer. This report can become especially important when analyzing the tax consequences of the business’s closure, which vary based on the entity type and its ownership. It is often prudent to set up a reserve account that remains open after the business closes to provide for creditor payments and cover other costs associated with the business’s closing.
Dissolution and Winding Up
A business’s dissolution must first be approved by its owners, after which winding up will commence. A full discussion of dissolution and winding up is outside the scope of this column, but it is critical to advise clients to confer with qualified counsel regarding the state law nuances associated with these processes, including preparation of resolutions to dissolve or a plan of liquidation
If the business has employees, it should issue final wage information to them on Form W-2, as well as any health coverage information on Forms 1094-C and 1095-C and report the corresponding information to the IRS. Additionally, the business should issue final payment information to independent contractors on Form 1099 and report those details to the IRS. A final employment tax return should be filed, with an appended statement providing the name of the person keeping the payroll records and the address of those records, and a final deposit of the related employment taxes must be made. If the business sponsors any qualified retirement plans, it must decide whether to terminate the plans. A final Form 5500 may also need to be filed with respect to certain plans.
Most states require that businesses obtain a tax clearance certificate from the taxing authority before they can close. Generally, a requirement to obtain that certificate entails filing final tax returns for the year the business closes and paying any associated taxes. CPAs should review the instructions supplied by state taxing authorities regarding the clearance process, as supplemental documents are often required. Once the tax clearance certificate is issued, the business can generally proceed to filing dissolution documents with the state’s bureau of business organizations. Notably, if the dissolving business is a corporation, the IRS must be advised of its dissolution on Form 966 within 30 days after the resolution or plan to dissolve the corporation is adopted.
New Jersey Considerations
While every state has specific laws to keep in mind when clients close a business, any business registered with the State of New Jersey wishing to dissolve must follow a specific process to do so, even if that business was inactive for all of its existence. Those businesses registered for sales, employment and gross income taxes must do the following:
- Submit a complete NJ Form REG-C-L. This form can be completed online or sent by mail to the Division of Revenue’s Client Registration Bureau.
- File a final sales and use tax return for the last quarter the business was open, even if no taxes are due.
- File final quarterly gross income tax returns (Forms NJ-927 and NJ-927-W) for the last quarter the business was open, even if the amount withheld for the final filing period is zero.
- Provide each employee with a copy of their Forms W-2.
- File final annual reconciliation of tax withheld (Form NJ-W-3).
- Provide applicable Forms 1099-R, 1099-MISC or other statements of payment to recipients and file copies with the state.
- Complete the back of the Certificate of Authority to Collect Sales Tax and the Business Registration Certificate. Return both forms to the Client Registration Bureau.
- File final corporation business tax or partnership returns by the applicable due dates.
- Complete an application for a tax clearance certificate (Form A-5088-TC) and any required supporting documents.
- File the tax clearance certificate and the dissolving document with the Division of Revenue.
Catherine V. Davis
Catherine V. Davis, CPA, is principal at MSPC Certified Public Accountants and Advisors. She is a member of the NJCPA Federal Taxation Interest Group.
This article appeared in the May/June 2020 issue of New Jersey CPA magazine. Read the full issue.