The Tax Responsibilities When a Business is Sold or Closed
The legal requirements laid out by the IRS and state of OhioBy S.M. Oliva | Last updated on January 27, 2023
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- 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 AssetsBeyond 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.
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