The Tax Responsibilities When a Business is Sold or Closed
The legal requirements laid out by the IRS and state of Ohio
on April 27, 2018
Updated on August 2, 2022
Businesses cease operations in Ohio every day for a host of reasons. Some are forced to close due to economic circumstances, while others may be sold to new ownership. But whenever a small business ends, there are certain legal formalities that must be observed, especially with respect to outstanding federal and state tax obligations.
One of the first steps a business owner must take when deciding to close or cease operations is to file and pay any necessary final tax returns with the Internal Revenue Service and the Ohio Department of Taxation (ODOT). If the business is organized as a for-profit domestic corporation, the ODOT requires a “Certificate of Tax Clearance” before the corporation may be legally dissolved.
“There are many issues related to the closing of a business, but from a tax perspective, the most important is making sure you’ve taken care of any trust fund taxes that might exist,” says Steve Dimengo, a tax attorney at Buckingham, Doolittle & Burroughs in Akron. “Those are liabilities like sales taxes that, in Ohio, should have been collected or were collected and haven’t been remitted. … You may also have liability on taxes having to do with your purchases, if you have a direct-pay permit. The other area that comes up a lot if employee withholding taxes that are withheld from wages.”
Some of the tax obligations that an Ohio business may need to satisfy before closing include the following:
- The business must pay any final sales or use taxes and cancel its state vendor’s license. The ODOT provides an online tool to perform this task. If the business sold liquor, it must also transfer or return its liquor license to the Ohio Department of Liquor Control before canceling its vendor’s license.
- Corporations must file a Notification of Dissolution or Surrender and pay any outstanding Ohio corporation franchise taxes. The paperwork for dissolving the corporation itself must be filed with the Ohio Secretary of State.
For small business owners required to withhold income tax or related payments from employees, all final withholding taxes must be paid to the ODOT and the IRS. The business must also file any final W-2 statements for employees, or 1099 forms for contractors where applicable. Any withholding accounts should also be closed.
- If the business had or anticipated at least $150,000 in taxable gross receipts during its final tax year, it may need to file and pay Ohio’s Commercial Activity Tax.
- Where the business was organized as a partnership, any final business income must be reported on the appropriate individual and partnership returns.
Reporting Any Sales or Exchanges of Business Assets
Beyond outstanding tax obligations, an Ohio business must also report the sale or exchange of its assets in connection with its final closing or liquidation. There may be additional taxes on the capital gains or losses related the sale of individual assets—which include stock or partnership interests—or to the business as a whole. It is also important for the buyer to accurately value all business assets acquired, as that will form its taxable basis for those assets.
“When you’re selling your business, there are a lot of tax considerations,” Dimengo adds. “The first is purchase price allocation. That enhances the character of the gain, whether it’s a capital gain that’s taxed at 20 percent if it’s long-term capital, or as an ordinary income item. When you’re selling your business and you’re a pass-through entity—which could be a partnership or limited liability company or an S corp—you want to make sure your sale price is allocated to something that produces a capital gain. The sellers and buyers can negotiate that. That’s important, because it can be taxed at a lower rate. Conversely, you don’t want it to be allocated to something that will produce ordinary income such as the disposition of tangible, personal property. If you’re a C corporation, it’s important to sell stock, if you can; if you sell your assets, then there’s double tax—at the corporate level, and then when you liquidate.”
There are many strategies to take, and they’re all very fact-dependent. However, a universal piece of advice is to refer to the counsel of a reputable CPA and tax attorney. The attorney is especially helpful in dealing with the documentation involved in a sale. Trying to do navigate this on your own “could be disastrous,” Dimengo notes. “You could be surprised by the tax consequences.”
If you want more information on this area of tax law, see our tax overview.