Posted by Abundant Wealth Planning LLC

Corporate Dissolution

Corporate Dissolution

The process of closing a corporation can be hectic and complex, especially for its founders and shareholders. The tax issues can be very confusing, but the IRS has given a clear-cut idea on how to go about this process. 


Corporations are unique taxpayer groups where shareholders exchange money and property for the company’s capital stock. The corporation carries out its business and gets net income or losses, pays taxes, and shares profits.

When ceasing operations, corporations must apply specific actions regardless of how long they’ve been in business (a few months or for years). So here’s how they can file the forms and note the taxing schedules. 


The income tax returns process

All corporations to be dissolved must file Form 1120 or the U.S Corporation Income Tax Return and report their capital gains and losses on Schedule D (Form 1120). The company has to file Form 966 if they have adopted the resolution to dissolve or liquidate stocks. 


Corporations will also file forms if they have to sell or exchange the property they used for their business.


Employment tax

The corporation with one or more employees must make a federal tax deposit. If the business doesn’t withhold or deposit income and Medicare Taxes and Social Security, then the Trust Fund Recovery Penalty will apply. The penalty is the total amount of unpaid trust fund tax. 


All corporations seeking to dissolve will need to provide Forms W-2, which is the Wage and Tax Statement, to their employees for the year they made all final salary payments. 


Reporting all due dates

If the employees in the corporation received tips, the company must file Form 8027, which is the Employer’s Annual Information Return of Tip Income and Allocated Tips. This form will report all final tip income and all allocated tips. 


Some businesses provide their employees with a pension or some benefit plan; if your company does this, you need to file a final Form 5500. 


Corporations and contract workers

During the tax dissolution stage, the corporation is expected to report all payments made to contract workers. Contract workers who have been paid at least $600 for their services (this includes materials and parts) in the business calendar year when they dissolve their company. 


The corporation is expected to fill Form 1099-NEC, the Nonemployee Compensation form. Some fillers prefer to fill this form online, but you have to transmit copies of the documents to the IRS if you are to file the paper forms. 


Keeping records

It is essential to know the extent of time the business owner should keep a document or record. The duration will be determined by several factors, including the expenses and events listed in the paper. All corporations should have records relating to property until the termination timeline expires for that year. Business owners should also keep all records of employment taxes for at least four years to simplify the tax dissolution process. 


Employer’s identification numbers 

When the IRS assigns an employer identification number to the corporation, it becomes its permanent federal taxpayer for the company. For any corporation to close its business account, it will need to send the IRS a letter with the identification number, legal business name, and address. Also, the company will include its reason for dissolution. 


Irrespective of dissolution, a corporation will go through a rapid process to handle the taxes, and the IRS has made it easy for all corporations. If effectively adhered to, the steps above will help all founders dissolving their corporations find an easier path to making it happen. 


*For all information on due dates for tax payment, please visit the IRS.gov page. 


FOR MORE INFORMATION ON HOW ABUNDANT WEALTH PLANNING, LLC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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