Running a business can be a lot of work, especially in regard to state tax obligations with the Washington State Department of Revenue (DOR). These obligations don’t automatically end just because you want to close your business. Before you can fully shut down business operations, you must resolve any pending business tax obligations, especially unpaid taxes. If you don’t, the WA DOR and the IRS have powerful tax collection tools available, which include potentially going after you personally for some of your business’s tax liabilities.
The purpose of this blog post is to discuss Washington business taxes you need to be aware of when deciding to close down a business, how to protect yourself during the business wind-down process, what happens if you don’t make arrangements for your taxes when closing a business, and steps you can take to avoid trouble with the WA Department of Revenue. To talk with a specialist now, contact us at Seattle Legal Services today.
Key Takeaways
- When you close your business, you should make arrangements to pay outstanding tax liabilities.
- You also need to file final tax returns.
- Failing to pay tax debts can lead to enforcement actions by the IRS or the WA Department of Revenue (DOR), such as tax warrants, liens, and property seizure.
- If trust fund taxes are involved (such as sales taxes that have been collected, but not remitted to the DOR), the IRS or state can hold you personally liable.
Possible Unpaid Business Taxes
The state of Washington has no income tax, but there are still plenty of taxes that could be due when closing a WA business. These include:
- Business and occupation (B&O) tax: a state excise tax on a business’s gross revenues.
- Sales tax: a tax on the sale of tangible personal property and some services within the state. These are trust funds because they’re collected by businesses and remitted to the DOR.
- Use tax: This is similar to the sales tax, except it’s paid by the consumer when the seller or service provider doesn’t collect a sales tax.
- Personal property tax: Washington imposes a property tax not just on real property, but personal property too, even business assets (like supplies and equipment).
- Other excise taxes: These can include taxes on certain services and products, like heavy equipment rentals, trash collection, tobacco products, and motor vehicles.
- Corporate income tax: If your business is a C-corporation, it may owe corporate income tax to the IRS.
- Payroll taxes: If you have employees, you may owe payroll tax to the IRS.
Depending on certain business characteristics, you’ll report the state taxes to the DOR when you file your excise tax return either monthly, quarterly, or annually. When you end your business, you must file a final excise tax return and pay any outstanding taxes as part of the DOR business account closure process.
Additionally, you will need to file final business and payroll returns with the IRS and pay tax if applicable. If you don’t have enough money to pay these state and federal taxes, you need to contact the agencies to make payment arrangements and consider the consequences of nonpayment carefully.
Closing Your Business in Washington With Unpaid Taxes
It’s common for a closing business to have unpaid taxes – especially if they’re struggling financially. As long as federal taxes are paid when due and state taxes are paid by the 25th of the month following the DOR account closure, there shouldn’t be a problem. If they’re not, then there will be adverse consequences, such as:
- Penalties and interest.
- The issuance (and then filing) of a tax warrant.
- Creation of a tax lien after a tax warrant is filed with a county Superior Court.
- Property seizure.
- Delayed issuance of a Revenue Clearance Certificate by the DOR (this is required to dissolve a corporation in WA).
- Revocation of a business’s tax registration endorsement.
The IRS will take similar measures for unpaid taxes, including penalties, tax liens, and property seizures.
Trust Fund Taxes and Personal Liability
If business taxes go unpaid, it’s often the business itself that’s on the hook for the tax debt. But if the tax bill includes taxes that are considered trust funds by the IRS or the DOR (like collected, but not remitted sales taxes), then personal liability could attach.
Specifically, RCW 82.32.145 states that if the DOR issues a tax warrant for unpaid trust fund taxes from a limited liability business (such as an LLC or corporation) that’s closed or insolvent, then the DOR may pursue the unpaid taxes from “any or all of the responsible individuals.” The Internal Revenue Code (IRC) uses very similar language about unpaid federal trust fund taxes, which include employee withholding and certain excise taxes.
If the responsible individual is the current or former chief executive or chief financial officer, this personal liability applies even if they were unaware of the unpaid trust fund taxes. For all other responsible individuals, personal liability only applies if they willfully failed to pay (or cause to be paid) the trust fund taxes to the DOR.
This means not just the owner could potentially have to pay the trust fund taxes, but also any employee, such as bookkeepers, executive officers, or managers. As a result, personal bank accounts, houses, paychecks, and personal belongings are at risk of seizure by the DOR or the IRS. Basically, if an individual had any part in the decision not to remit collected tax funds, they could be liable.
What To Do When Closing Your Washington Business
If you want to close down your Washington business, you’ll want to complete the following steps:
- Confirm you’re up-to-date with any tax filing or payment requirements. To do this, you can request a tax status letter from the DOR. Or check your online account with the IRS.
- Close down your DOR account, either online using your My DOR account or completing a paper Business Information Change Form.
- Complete a final excise tax return, along with any necessary payments.
- Unsubscribe from text and email filing reminder notifications by updating your DOR subscription preferences.
- File any final IRS tax returns.
If your business is a corporation, you’ll need to officially dissolve it by contacting the Washington Secretary of State and providing them with a Revenue Clearance Certificate. You will apply for this certificate from the DOR, but they’ll only issue it if your business is current with its excise tax filings and payments.
What If Your Business Can’t Pay All of Its Taxes When Closing?
If you can’t pay off your tax bill in full when closing your business, you can set up a self-service payment plan using your My DOR online account and Secure Access Washington (SAW) user ID. To qualify for one of these payment plans, you must:
- Owe at least $100, but less than $100,000.
- Have received a Notice of Balance Due.
- Have no active tax warrants or liens.
- Have a bank account that allows ACH debit payments.
- Not be in active bankruptcy proceedings.
- Not be facing any tax evasion or avoidance penalties.
- Agree to pay the full amount within 12 months.
- Be able to make your first installment payment within 30 days of signing up for the payment plan.
- Pay any other future tax obligations (that are separate from the payment plan) within five days.
One thing to keep in mind is that any applicable penalties or interest will continue to accrue during the payment plan. A penalty waiver may be a possibility if the late or underpaid tax payment is the result of circumstances beyond your control or if you have a 24-month history of tax compliance (all required filings and payments have been made on time).
The IRS also offers payment options for out-of-operation businesses. You can get up to six years to pay income tax and generally up to two years to pay payroll taxes.
Closing Your WA Business With Outstanding Taxes?
If you’re thinking about closing your business because of its tax liabilities, you need to understand that the unpaid taxes remain even if the business closes down. And in some cases, you might be personally responsible for those unpaid taxes if they’re not taken care of before dissolution. Before doing anything else, talk to a Washington business tax professional from Seattle Legal Services, PLLC. You can use our online contact form or call us at 425-428-5262 to schedule a consultation.
Sources
https://www.upcounsel.com/dissolved-company-outstanding-debt
https://www.business.wa.gov/site/alias__business/882/small-business-guide–close.aspx
https://dor.wa.gov/manage-business/close-business/request-tax-status-letter
https://app.leg.wa.gov/rcw/default.aspx?cite=82.32.145
https://dor.wa.gov/file-pay-taxes/late-filing/delinquent-tax-collection-process
https://dor.wa.gov/taxes-rates/use-tax
https://dor.wa.gov/education/industry-guides/insurance-industry-guide/paying-sales-and-use-tax
https://dor.wa.gov/forms-publications/forms-subject/excise-tax-returns-and-addendums
https://dor.wa.gov/taxes-rates/business-occupation-tax
https://dor.wa.gov/manage-business/close-business/close-my-account
https://dor.wa.gov/open-business/apply-business-license/voluntary-disclosure-program
https://dor.wa.gov/sites/default/files/legacy/Docs/pubs/ExciseTax/RetailSales_UseTax/TrustFund.htm
https://dor.wa.gov/education/industry-guides/convenience-stores/state-tax-overview