Key Takeaways
- When closing a business, it is important to inform the IRS.
- The extent of the required paperwork will depend on whether the business was run as an individual or with a group of employees, and if the business had assets.
- If your business had no employees and you ran it as an individual, the process of informing the IRS is relatively simple, but if there were assets involved, separate information might need to be reported.
- If your business has employees, your additional responsibilities will include finishing up payroll responsibilities, issuing final W-2 forms, and filing a final Form 941.
Tax dos and don'ts
Whether you’ve been running a business for two years or 50, it’s possible at some point that you’ll want or need to call it quits. If you are thinking about closing up shop, don’t forget to keep the IRS advised about your plans, as the tax laws require.
The number of loose tax ends you’ll have to tie up will vary depending on whether you’ve been operating alone or with a group of employees. Take a look at the three scenarios below to get an idea of what you need to do before you turn off the lights and shut the door for the last time.
Unincorporated, no employees
If you've been running an unincorporated business by yourself with no employees, reporting your shutdown to the IRS couldn't be easier. Say you’ve been a self-employed consultant for the last several years, filing Schedule C each year to report income and expenses.
You work by yourself out of your home and don’t own any business assets. (Most of the work is done on your family’s old PC and home telephone.) You get a great job offer from one of your clients, so you decide to shut down the business.
TurboTax will ask you if you disposed of your business during the year. If you closed your business just by stopping operations, there is nothing else to do for your income tax return. However, if you sold the business to someone else, TurboTax will guide you through the disposition process and include the transaction on your income tax return.
Business with assets
Things get a little more complicated if your business involves assets.
In addition to filing that final Schedule C, you also have to give IRS details about your asset sales. For example, let’s say you run a small business by yourself making and selling desserts out of some retail space you rent, but after a few years you decide to move on.
Even if you dispose of the business in a single sale to one buyer, the IRS requires you to separately determine the value of each asset—the kitchen appliances, furniture, store lease, etc.—so that each is treated properly for tax purposes.
Determining the assets’ market value allows you to calculate whether there is a taxable gain or loss in each case. You list the assets, plus the value and sale price of each, on Form 8594: Asset Acquisition Statement under Section 1060. Attach it to the 1040 you file for the year in which the asset sales occurred.
TurboTax Tip:
When closing a business, it is essential to make sure all financial records are in order, including attaching a statement about payroll records to the final employment tax return if applicable, and notifying participants and financial institutions of the closure of any retirement plans.
Business with employees
Your tax checklist for shutting down a business gets longer still if you have employees: You’ve also got to wrap up your payroll responsibilities.
Going back to that example of the dessert business, let’s say that instead of going it alone, you employ two bakers and a cashier, all full-time workers. That means you’ve been withholding income and employment taxes from the salaries of these three workers, and also paying the employer’s portion of their employment tax.
Because your payroll tax deposits have exceeded $1,000 annually, you’ve had to make deposits and file Form 941 each quarter. So closing down involves issuing final W-2 forms to your employees by the due date of your final tax return. You also have to file a final Form 941 for the last quarter in which you paid your workers, and use that form to tell IRS about the shutdown.
Check the box on Line 17 and enter the date you last paid wages. (If your employment tax deposits were $1,000 or less annually while you operated your business, you would have qualified to file and make deposits just once a year, using Form 944. In that case, when you close your business you’d file a final Form 944 for the last year in which you paid your workers, and use it to notify IRS about your shutdown.
One more chore
Whatever the size of your payroll, the IRS requires all employers going out of business to attach a statement to the final employment tax return showing the name of the person who has the payroll records of the defunct business and the address where those records are held.
If you operated a pension plan for yourself and your employees, you’ll have responsibilities for that as well. It’s likely that your plan is one of two popular types that are designed specifically for small businesses: The Simplified Employee Pension (SEP) or the Savings Incentive Match Plan (SIMPLE).
Handling a SEP is easy: You can shut down the plan at any time, and you simply notify the participants and the financial institution managing the plan that you won’t be making any more contributions.
For a SIMPLE, despite the acronym, shutting it down is a little more involved, because it’s operated on a calendar-year basis and can’t be terminated until the end of the year in which your business shut down. If, for example, you close up shop on September 30, you still must continue funding the plan as you originally promised for the last three months of the year before you can terminate it.
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