Whether a business is declaring bankruptcy, shutting down permanently, or concluding for the season, closing the books requires an expert analysis of its financial position. Closing the general ledger and payroll together at month-end or year-end always has a substantial checklist, but additional considerations must be added when it is the final close.
For businesses that are seasonally based or linked to tourism (like a farm stand, campground, or ice cream shop) accurately representing the business’s financial situation through closing the books prepares it for potential scenarios in the off-season like selling the business or securing additional funding as well as aiding in routine planning like budgeting for capital expenditures and hiring staff. For businesses that are shutting down or declaring bankruptcy, the final close helps wrap up loose ends to avoid infringing on state or federal regulations. Regardless of the situation, however, conducting a final close is of the utmost importance.
Steps for Shutting Down a Business
The most common reason for an entity to stop operating is a permanent business shut down. While business owners facing a looming downsizing, acquisition, sale, or bankruptcy will have different protocols to follow, the decision to shut down indefinitely involves these general steps:
While each of those steps is critical, closing the books is the most often overlooked, and one of the most vital.
Closing the Books
Preparing a final close is similar to a regular year-end close, however, it includes some additional situational-specific components, and places further emphasis on other items such as:
Performing a final bank reconciliation when business operations cease is essential for following up on undeposited funds. Uncovering checks, electronic payments, or deposits that failed to clear or are still in-transit is necessary for understanding the business’s financial position and reserving enough to pay outstanding debts.
When a business is being sold gains and losses on each asset are viewed separately, so items like capital assets and property are calculated and reported as either income or losses when the books are closed.
These elements combined with accounting for interest earned, voiding outstanding checks, and resolving negative cash balances results in a complete picture of business liquidity. After the business is dissolved this liquidity will determine how much money can be pulled out of the business. For companies simply shutting down for the season, this liquidity can also inform investors and partners to make shrewd business decisions in the off-season.
Record all purchases and sales of inventory and report any business property that is being disposed of to the IRS. With the substantial sale of inventory that typically accompanies the closing of a business, recording this can be time-consuming, but it is essential to accompany end-of-life inventory write-offs to understand what the business has in its possession. Unlike a regular monthly or annual close, the inventory owned by the business will serve as an asset that can be liquidated
All expenses should be carefully classified and updated to realize revenue availability. Furthermore, fully amortized expenses should be removed to project an accurate picture of the business’s expenses. While this is typically done to aid in revenue forecasting for the coming year, performing it at final close allows a business to understand what obligations still need to be satisfied.
Write off PP&E (Property Plant and Equipment) that is fully depreciated and record any capital asset additions and disposals to determine actual tax burden. This is a vital step before submitting final state and federal tax filings.
For seasonal companies that will be starting back up in the following year, ensure that the depreciation schedule being used for long-term assets is correct. Failing to keep tabs on these substantial items can result in gross misrepresentations of asset values, especially for smaller businesses.
While employee benefits like insurance, stipends, and educational incentives are regularly reported during the life of a company, many business owners forget to account for these at final close as a portion of payroll. However, recording these benefits can play a significant role in determining the cash availability a business as it is closing. Additionally, depending on state law, employers may be required to furnish details about these benefits when out-of-work employees seek assistance.
Payroll taxes must also be paid on wages. The IRS places a lot of emphasis on this fact and is likely to audit a business that does not take this important step. The subsequent repercussions can be severe depending on the circumstances of the infraction.
Calculate gains and losses on short-term investments to generate op-to-date investment statements. This information is crucial for determining where investments can be sold or traded. While many small businesses do not carry hefty short-term investments, this is easy to overlook while focusing on the other, more obvious items required to close the books.
Before shutting down, post any outstanding invoices to collect on owed funds. Additionally, indicate collection status on past due receivables and escalate, where needed, to a collections agency to get paid for items received. For accounts receivable items that are not able to be collected, write them off as bad debt to reduce eligible tax burden.
Post invoices for items received where payment has not yet been made and reconcile open purchase orders before paying any outstanding accounts payable entries. Lastly, settle vendor accounts where there are outstanding or disputed items. Taking these steps before doing a final close eliminates the need for revision after the business is dissolved and mitigates the risk of subsequent lawsuits from vendors.
When a business closes it is still liable for tax payments in the current and prior years. Therefore, a company will need to file a sales tax report and payroll taxes like in previous years. Additionally, state and federal tax returns will need to be prepared and filed prior to shutting down. An addendum will need to be submitted as well to provide contact information for whoever is keeping payroll tax records in case the IRS needs to review them in the future.
For a full list of applicable forms, visit the IRS’s business closing checklist online.
An addition to these standard closing procedures, further considerations may be required when a business ceases operating. The business’s location, formation type, and industry can necessitate supplementary steps and paperwork before shutting down. For instance, there may be strict rules of dissolution to follow or to be filed.
Depending on state laws and previous tax activity, a business may also need to pay back owed taxes to complete a “tax clearance” before shutting down. This requires that cash be left in the business to cover debts before paying out business owners. Cash is also required to settle claims, which may trickle in from unexpected sources once creditors have been notified of plans to dissolve. In these instances, accepting or rejecting creditor claims judiciously is essential for avoiding legal repercussions.
Creditors are not the only institutions that should be notified of dissolution plans. Suppliers, vendors, service providers, insurers, and private stakeholders must also be informed. Being transparent regarding the timeframe and operational measures in place to manage the dissolution is crucial for all these audiences.
Lastly, business licenses, certifications, and permits must be terminated to tie up remaining loose ends.
If you are currently trying to close the books on an operation and need help,
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