Tax Responsibilities when You Close a Business

When you close a business, among the many aspects you need to concern yourself with are your final tax responsibilities. The extent of your responsibilities depends mainly on the legal structure of your business and whether you have employees.

You will need to make your final estimated tax payments for the year based on your projected taxable income. You should take into account the gain or loss you anticipate on the sale or disposal of your business assets and inventory, and any other tax effects involved in closing the business, such as additional income or expenses.

As indicated by TurboTax, if you have been operating as a sole proprietorship by yourself, you can file your final Schedule C and write "Final Return" across the top of the form to let the IRS know that you are closing operations. Form 1065, U.S. Return of Partnership Income and Form 1120, U.S. Corporation Income Tax Return have a box to check to indicate that it is the final return.

If you sell your business as a group of assets, you would need to file Form 8594, Asset Acquisition Statement. On this form you have to allocate the total sales price among the different classes of assets that make up the business you are selling. If you are selling assets individually instead of selling the whole business, you would report the sales on Form 4797, Sales of Business Property.

If you have employees you will have to file your final Form 941, Employer's Quarterly Federal Tax Return. The form has a box to check when you close your business and you must enter the final date you paid wages. And you have to file your final Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. This form also has a box to check indicating that you have closed your business. As pointed out by TurboTax, you must also attach a statement to your final employment tax return indicating the name of the person who will keep your payroll records and where they will be held.

You will need to arrange to have the final W-2 Wage and Tax Statements issued to your employees at the end of the year. And if you make payments subject to 1099 reporting, these forms will also need to be issued.

If you have an employee retirement benefit plan, such as a SEP or SIMPLE, you will have to fund the plan according to the plan conditions. And you will have to file a final Form 5500, Annual Return/Report of Employee Benefit Plan or Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, as applicable. These forms have a box to check to indicate that it is the final report.

You will also have to file your final state and local sales tax and excise tax returns, and your final state income tax return if applicable. You should see your state department of revenue or equivalent website to find out the specific requirements when you close a business.

Sources:

Closing a Business, TurboTax

Closing a Business Checklist, IRS

Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return

Form 941, Employer's Quarterly Federal Tax Return

Form 1065, U.S. Return of Partnership Income

Form 1120, U.S. Corporation Income Tax Return

Form 4797, Sales of Business Property

Form 5500, Annual Return/Report of Employee Benefit Plan

Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan

Form 8594, Asset Acquisition Statement