IRS Guidance for Closing a Business

There are several reasons for closing a business, not all of them due to finances or a poor business climate. Whatever the reason(s), the small business owner should be as concerned taxwise in closing a business as they were when they started it. Leaving loose ends can come back to haunt you later, and they can come back with penalties and interest.

The IRS has a website page with specific instructions and resources for closing a business.i Following these steps can help you to avoid a costly situation later.

File a Final Return

You must file a final return for the year in which you close your business. Though you probably were not thinking about closing your business when you started it, the business structure/type you chose then also bears on the type of return you file when you close your business.

Sole Proprietorship

As with your operating tax years, you will need to file a Schedule C, Profit or Loss Form. Depending on other factors, you may also need to file:

  • Form 4797, Sales of Business Property – if closing your business causes the business use of an eligible property under Section 179 to drop to 50% or less.

  • Form 8594, Asset Acquisition Statement – this form must be filed if you sell your business.

  • Schedule SE, Self-Employment Tax – filed if you had earnings of more than $400 in your final year of business.

Partnership

You must file Form 1065, Return of Partnership Income, for the year you close the business, and when you file you must:

  • Report capital gains and losses on Schedule D.

  • There is a checkbox on the return to indicate that it is a “final return.”

  • There is the same checkbox on the Schedule K-1, Partner’s Share of Income, Deductions, Credits, Etc.

  • There are other forms you may need to file with the Form 1065:
    • Form 4797, Sales of Business Property – if closing your business causes the business use of an eligible property under Section 179 to drop to 50% or less.

    • Form 8594, Asset Acquisition Statement – this form must be filed if you sell your business.

Corporations, Including S-Corporations

If you adopt a resolution or plan to dissolve the corporation or liquidate any of its stock, you must file Form 966, Corporate Dissolution or Liquidation. You will also file your corporations final tax return, and that checkbox is there to indicate that fact.

  • C Corporation – for the year you close the business, file Form1120, U.S. Corporate Income Tax Return. If any, report capital gains and losses on Schedule D (Form 1120).

  • S Corporation – file Form 1120-S, U.S. Income Tax Return for an S Corporation for the year you close the business. Report gains and losses on Schedule D. Do not forget to check the “final return” box on Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, Etc.

  • For Any Corporation – File Form 4797, Sales of Business Property – if closing your business causes the business use of an eligible property under Section 179 to drop to 50% or less. If you sell your business, file Form 8594, Asset Acquisition Statement.

Work with a business tax professional to make sure you file all the required forms in a timely manner.

Pay Employees and File Employer Returns

Pay all final wages owed to employees and make the appropriate federal tax deposits and report employment taxes. Be sure to get all final numbers properly calculated, as there could be collection actions later if you fail to pay all amounts due. To report the taxes, you may need to file:

  • Form 941, Employer’s Quarterly Federal Tax Return or Form 944, Employer’s Annual Federal Tax Return – the appropriate form should be filed for the quarter in which you make your final wage payments.

  • Form 940, Employer’s Annual Federal Unemployment Tax Return (FUTA) – filed for the year in which you paid final wages. This and the other forms here all have a place to indicate that it is a final return for the business.

  • Contract Worker Payments – if you have paid any contractors $600 or more in the final year of business, you must report those payments using Form 1099-NEC, Nonemployee Compensation. Use Form 1096, Annual Summary and Transmittal of U.S. Information Returns to send paper copies to the IRS.

You must also present your employees a Form W-2, Wage and Tax Statement for the calendar year in which they were paid final wages. If your employees receive tips, you must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.

If you have a pension or benefit plan for employees, you must terminate the plan according to IRS instructions.

Close IRS Business Account and Cancel Your EIN

You want to do this right, as the IRS will not close your business account until you have taken these steps:

  • Send a letter to the IRS that includes:
    • Your business’ complete legal name

    • The business address

    • The business EIN

    • The reason you are closing your business account

  • Many business owners keep their notice that the IRS sent assigning their EIN when they started. If you did, send that back with your letter as well. The IRS says to send them to Internal Revenue Service Cincinnati, OH 45999.

Make sure to get this done or the IRS will keep your business account open.

Maintain Your Records

There are time requirements for maintenance of your business records. The length of time you must keep them depends on the type of document:

  • Property records – keep them until the period of limitations expires for the year in which you dispose of the property.

  • Employment tax records – maintain these records for a minimum of four years.

That is the overview of the IRS instructions for closing a business and terminating your IRS business account properly.

i Closing a Business, IRS website

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