The time has come. You’re at the end of the road. Whether you’re dissolving your business or handing it over to another company that’s acquired it, you might be looking forward to the day when there’s a lot less on your plate. You’re not there yet, though. Before you shut down your tech company, you need to take some final tax steps.
If you don’t, you could be in trouble. We’ve seen founders left holding the bag in resolving tax issues, even years after they thought they had closed their companies. You could even be subject to penalties for non-compliance.
The last thing you want is to have to pay money for your company long after it stopped earning revenue. To prevent that, take these steps.
Close your accounts
You’ve probably already thought about closing your bank accounts, but that’s not the only area where you need to get things sorted. Specifically, you should look at:
- Payroll accounts, including withholding, Department of Labor, and state unemployment insurance accounts
- Workers’ compensation
- Disability insurance
- Sales tax accounts
- State franchise and income tax accounts
It can be helpful to sit down with your accountant to get a handle on all of the various accounts with which your business is associated, especially if you’ve been relatively hands-off with your company’s tax compliance.
Especially your state accounts
If you had a distributed/remote team, the chances are high that you had employees scattered across multiple states — and maybe even multiple countries. This makes shutting down your company harder. But it also makes it important to protect yourself from future headaches. If you don’t close the appropriate accounts in each and every state where your business operated/paid taxes, you could be subject to infractions.
It’s not uncommon for states to send founders nasty letters years after they shut down their companies. Beyond the unwelcome mail, you could also be subject to penalties.
Some of the particularly notorious states in this area include:
- New Jersey
- New York (and New York City, in particular)
Don’t assume you’re off the hook until you have written confirmation from the appropriate authorities that your tax accounts are shut.
File away R&D tax credit and pandemic aid documentation
If your tech company took advantage of R&D tax credits or pandemic aid (e.g., PPP, ERC, EIDL), you could receive a notice to provide certain information long after you’ve closed your figurative doors. Remember, tax authorities usually take their time to get things processed. Issues could crop up years after you stop operating.
To ensure you don’t have any problems down the road, it’s imperative to hold onto all of the following documentation for any R&D tax credit you took:
- Product roadmaps
- Asana, Jira, and GitHub records for the years in which you took the credit
- Payroll records for any salary you put R&D credit toward and the applicable job descriptions
- Copies of all tax returns and accounting records for the R&D credit year
Similarly, keep a record of all pandemic aid your company received and how it was used, along with the appropriate tax returns and accounting documentation.
Store all of this information somewhere secure and easy to access. If you do receive a notice, you don’t want to be left scratching your head wondering where you put all of this documentation.
File a final corporate tax return
You’re not filing just another tax return here. You need to figure out the protocol to file a FINAL return with both the IRS and any state tax authorities where you conduct business.
This final return informs them that your business is closing. This puts them on notice that you’re not going to be available to receive any future correspondence. That way, they should request any additional information they need sooner rather than later, saving you from an unwelcome surprise years down the road.
Here at ShayCPA, we’ve seen countless examples of founders not filing FINAL tax returns and consequently finding out later on that they left multiple tax periods open. Don’t let that happen to you.
Build a records log
Before you sign off for the last time, download or export the following:
- Financial statements
- General ledgers
- Accounts payable
- Accounts receivable
Add them to your file folder with your R&D tax credit and/or pandemic aid documentation. That way, you can easily reference all of these details if you need them down the road.
If your company had multiple co-founders, you might assume that the person in the “treasurer” role would be responsible for all of the above. It’s not uncommon for other co-founders who had no connection to the finance function to suddenly start receiving notices, though. In other words, if you founded a company — even if you immediately passed finance to someone else — it’s wise for you to take all of the above steps.
That’s true even if your company was acquired or sold in an asset sale. With an equity sale, the buyer may take on some of the responsibility, but there’s a lot of nuances here. Make sure you understand it before you assume you’re off the hook.
We can help
Having a good advisor always matters, but it can be doubly important in bad times. When you’re winding down your company, it’s important to continue to rely on a trusted legal and tax advisor to make your transition as seamless as possible.
If you’re already working with a tax expert, they should be able to help you navigate the waters ahead. But if you don’t have someone in your corner, it’s worth finding someone now. You’re not done just yet — and taking the proper steps now ensures that you truly are finished when you expect to be.
For help determining the final steps you need to take to ensure you don’t run into issues over the years, talk with us. We specialize in helping tech founders, even when the company doesn’t pan out as planned or gets acquired. You can contact us for the guidance you need in this important transition.