You're finally ready to give up being the boss. Or maybe you got a great offer for your business. Or maybe the COVID-19 pandemic did a number on you and your company.
Whatever your reason, you've decided it's time to close your company's doors.
Make sure that during that process, you take taxes into account.
The Internal Revenue Service offers these tips to business owners who've decided to call it quits.
File the appropriate final return: This filing is for the year you close your business.
The type of return you file, and the related forms you need, depends on the type of business you have. These include —
- Sole proprietorship, which is when a person owns an unincorporated business alone. The key form here is Schedule C (Form 1040 or Form 1040-SR), Profit or Loss From Business, that's filed with your individual tax return for the year you close your business.
- Partnership, where two or more individuals participate in the trade or business. Here Form 1065, U.S. Return of Partnership Income, for the year you close your business.
- Corporation, which is a separate taxpaying entity with at least one shareholder. This includes S corporations. The primary final filing here is Form 1120, U.S. Corporate Income Tax Return, for the year you close the business.
Not so bad, you say? Sorry, there also are potentially many other final forms that must be sent to the IRS when any of the about entities close. You can find details in the filing section of the IRS' special web page on closing a business.
There also are special tax consideration when a married couple is in business together, as well as when your business is a limited liability company (LLC).
An LLC is not a tax entity. It is a business designation under state law. An LLC may be classified for federal income tax purposes as a partnership, a corporation or an entity disregarded as separate from its owner.
Take care of employees and contractors: If you run anything other than a sole proprietorship, you'll need to take care of your staff.
This entails paying any final wages and compensation owed. You must also make final federal tax deposits and report employment taxes.
In cases where you use contractors, where you've paid those folks at least $600 during the calendar year in which you close your business, you must report those payments. That information goes to the contractors via Form 1099-NEC, and is copied to the IRS.
Some filers must file 1099 forms electronically. Where paper forms are issues, send those copies to the IRS by using Form 1096, Annual Summary and Transmittal of U.S. Information Returns.
Cancel your tax identity number and close your IRS account: The employer identification number, or EIN, that your business was assigned when you started it is the permanent federal ID for your closing company. Your IRS business account is keyed to this identifier.
To cancel your EIN and close your IRS business account, you must send the agency a letter that includes the —
- Complete legal name of the business,
- Business EIN,
- Business address, and
- Reason you wish to close the account.
If you kept the notice you received from the IRS when you got your EIN, send a copy of it with your EIN cancellation letter.
The material should be sent to Internal Revenue Service at Cincinnati, Ohio 45999.
But wait, there's more: You can find other key business closure tax matters to take care of — and details on those listed above — at the IRS' special closing a business web page.
As you can see, there's almost as much to take care of tax-wise when ending your entrepreneurial effort as there was when you started. That's why it's also a good idea to talk with your tax professional, or hire one, when you start thinking about closing your business.
A tax pro who specializes in business filings can help ensure that your final business interactions with the IRS are indeed the last time you have to deal with the agency.
You also might find these items of interest:
- Tax implications of business entity choices
- Employee or contractor classifications and other employment tax tips for businesses
- Work Opportunity Tax Credit can help businesses meet staffing needs, save on taxes
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