Business Law

Winding Up Business and Accounting

Small businesses have to pay their taxes as long as they have business income. A small corporation that is winding up its business has to pay income taxes for the year that it ceases business and completely liquidates. Even if the last year is a short year, the corporation only has to pay taxes on the actual income earned during that year.

Final Taxable Year

A corporation's final taxable year rarely ends on the last day of the full year, nor does it usually end on the last day of any given month. Consequently, the final taxable "year" is likely to be a short period, just as the corporation's first taxable year was probably a short period. The final tax return is due on the 15th day of the third month following the month in which the final year ends. For example, if the corporation's final year ends in June, the final tax return is due on September 15th of that same year.

A corporation's final taxable year ends on its final day of existence, but the final day of existence for federal tax purposes is not necessarily the final day of existence for state corporate law purposes. In fact, it is not uncommon for corporations to not formally dissolve at all under state corporation law; nonetheless, a corporation's existence for federal tax purposes will end when it ceases business and completely liquidates.

Determining Taxable Income on Final Return

Taxable income is determined the same way for the final taxable year as it was for the first taxable year. That is, even though the taxable year may be a short period, only the actual income earned during the short period will be taxable. So, if a corporation's income for the final taxable year is $ 5,000, its taxable income for that year is $ 5,000. No annualization of income is required. This is different from short-period returns caused by changing the taxable year.

Questions for Your Attorney

  • When is a corporation's federal tax return due for its final taxable year?
  • When does a corporation's final taxable year end?
  • Does a corporation have to annualize its income for its final taxable year if it's a short year?
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