What are Tax Implications When Terminating a Business Partnership in California?
Sometimes, in life, relationships just do not work out. That is true for marriages and domestic partnerships, as well as business partnerships. Like all relationships that come to an end, it’s important to follow all the proper legal procedures to dissolve the partnership. This is especially true when it comes to tax implications of terminating a business partnership in California.
Before we discuss the tax implications of dissolving a business partnership, the first thing to do is review your partnership agreement to see what steps need to be taken. The main points to consider are paying outstanding partnership debts and how any remaining partnership assets will be divided. A well-written partnership agreement should include instructions for how to legally executive both of those tasks.
California does not require that a business obtain tax clearance before dissolving the partnership. However, the California Franchise Tax Board does require the business to file a final tax return and pay any state taxes due with that return. All tax balances should be paid, including any applicable penalties, fees and interest. And the business must stop doing or transacting business in California after the final taxable year.
When terminating a business partnership, steps also need to be taken with the California Secretary of State Office. If the business filed a Form GP-1, Statement of Partnership Authority, with the Secretary of State when first formed, then it should file Form GP-4, Statement of Dissolution, when the partnership dissolves. Filing a Statement of Dissolution will help make clear the partnership has ended and limits the partners’ liability. Under California law, other people generally are considered to have notice of the partnership’s dissolution ninety (90) days after filing the Statement of Dissolution.
The business must file the appropriate dissolution, surrender, or cancellation forms with the office within 12 months of filing the final tax return. If the business entity is suspended or forfeited, it will need to go through the revivor process and be in good standing before being allowed to dissolve, surrender or cancel. To revive a suspended or forfeited business entity, all delinquent tax returns must be filed. Additionally, all delinquent tax balances, including penalties, fees and interest must be paid, and the business must file a revivor request form.
For federal taxes, the “final return” box on IRS Form 1065 needs to be checked. Under IRS rules, if the partnership terminates before the end of its normal tax year, the final federal return is due by the 15th day of the fourth month following the termination date.
Additionally, if the business partnership has a seller’s permit and collects sales tax, the California State Board of Equalization must be notified in writing that the business is closing. Form BOE-65, Notice of Close-Out, can be used to satisfy this requirement.
It’s important to keep in mind that while a business partnership is a legal entity that may own property and conduct business, it does not pay taxes itself. The partners themselves are responsible for paying the business taxes. Additionally, the profits, losses, deductions and tax credits of the business are passed through the partnership to the partners’ individual tax returns. This means that for tax purposes, a partnership continues until its termination phase is complete. A partnership’s tax year ends on the date on which it terminates.
When you’re terminating a business partnership in California, it’s important to work with an experienced tax attorney who can help you make sure you dissolve your company properly, and you are less at risk for audit in the future. A tax attorney has experience in these areas and can assure you are protected.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.