6 IRS Tips for Closing a Business

There can be good or bad reasons for closing a business, but regardless of the reason, there are considerations you must take into account to satisfy the IRS. You do not want penalties and interest perhaps years down the road for improper handling of a business closing. Keep these three steps in mind to close your business and stay on the right side of the IRS. They come from the IRS.gov websitei.

  1. File proper forms and a final tax return.

The IRS forms and final tax return required for closing a business will depend upon the type of business; this means sole proprietorship, partnership, or corporation. If the business you are closing is an LLC, the forms and return will depend upon how the IRS classifies the business.

  • Sole Proprietorship Filing Requirements
    • Schedule C (Form 1040 or form 1040-SR) with your individual tax return.
    • Other forms you may need to file include:
      • Form 4797 Sale of Business Property
      • Form 8594 Asset Acquisition Statement
      • Schedule SE, Self-Employment Tax
  • Partnership Filing Requirements
    • Schedule D, Form 1065 Report of Capital Gains and Losses
    • You should check the “Final Return” box.
    • Check the same Final Return box on the Schedule K-1 Partner’s Share of Income, Deductions, Credits, etc.
    • Other forms you may need to file include:
      • Form 4794 Sale of Business Property
      • Form 8594 Asset Acquisition Statement
  • Corporations, including S-Corporations Filing Requirements
    • For all corporations, file form 966 Corporate Dissolution or Liquidations
    • For a C Corporation:
      • Form 1120 U.S. Corporate Income Tax Return for the year the business closes.
      • Report capital gains and losses on Schedule D of Form 1120
    • For an S-Corporation
      • Form 1120-S U.S. Corporate Income Tax Return for the year the business closes.
      • Form 4797 Sales of Business Property
      • Form 8594 Asset Acquisition Statement

This is an overview of the tax forms requirements, so consult with your tax advisors for more information.

  1. Employee Considerations.

Businesses with employees have extra requirements to take care of employees and retirement plans, if any.

  • Employment Taxes – of course you must pay employees any wages or salaries owed. You must also make appropriate federal tax deposits and report the employment taxes.
    • Form 941 Employer’s Quarterly Federal Tax Return, or Form 944 Employer’s Annual Federal Tax Return
    • Check boxes that inform the IRS that the business has been closed.
    • Form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return for the calendar year in which you paid final wages. Also, check the box to show this is the final return.
    • Provide a Form W-2 Wage and Tax Statement to each employee.
  • Pension or Benefit Plans – if you provide a pension or benefit plan to employees, refer to IRS instructions in how to Terminate a Retirement Plan.
  1. Pay the taxes you owe.

It goes without saying that you must pay all taxes owed in relation to the business and its operations. Failure to do so, intentional, or not, can result in IRS demands for payment year in the future with large accumulations of penalties and interest.

  1. Report payments to independent contract workers.

Using Form 1099 and Form 1096, you must report payments in excess of $600 to contract workers and report the summary of those payments.

  1. Cancel your EIN and close your IRS business account.

Your permanent federal employer identification number (EIN) must be canceled and your business account with the IRS must be closed. Send the IRS a letter with the following:

  • The complete legal name of the business.
  • The EIN for the business.
  • The business addresses
  • The reason for closing the account

Send the letter to: Internal Revenue Service Cincinnati, OH 45999.

  1. Retain your records.

Depending on the content of what is recorded in your business documents, there are required retention periods for access by the IRS later.

  • Property records – check with your tax advisor to determine how long you must maintain your business property records.
  • Employment tax records – all employment tax records should be retained for at least four years.

Work with tax advisors to close your business properly to avoid problems perhaps years into the future.

i Closing a Business – IRS.gov

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