This is Jean Wetzler. I'm talking with Beth Elfrey from the Small Business/Self-Employed division about closing a business.
Beth, I know we all like to see small businesses succeed, but sometimes closing the doors is just unavoidable.
What does a small business owner need to know and do about federal taxes if they need to close?
We hate to see it happen, but sometimes businesses do need to close.
There is more involved than locking the doors and we want to help business owners navigate the process and avoid problems. When closing a business, the owner should file the appropriate income tax returns for the year it closes. And, if it has employees, the business must file all employment tax returns and deposit any required payroll taxes.
Beth, you said the appropriate tax return. What do you mean by that?
The business should file a final income tax return for its type of entity. A corporation will file a Form 1120; an S corporation an 1120-S; and a partnership a 1065 with Schedules K1.
A sole proprietor will file Form 1040 with a Schedule C. In the appropriate space on the form, mark it a "final return." You may also need to include some schedules with the final return. For instance, if the business sold assets when it closed, file a Form 8594, Asset Acquisition Statement, if required. If it sold capital gains property, it should report the gains or losses.
Can you tell us about the final income tax returns and forms for a business that has employees?
Basically, someone going out of business would file the same employment tax returns as in any year. Form 940 for the FUTA, and the quarterly Form 941. Or, Form 944 for the smallest businesses, who are annual filers. Agricultural employees and employers would file Forms 943 and 943-A.
Employees will need their W-2s for the year the business closed so they can file their individual returns accurately. In the case of a food or beverage establishment, the business should also report any tip income or allocation. In addition to filing returns, it's very important to take care of any employment tax liabilities.
Do you have any other final tax tips for closing a business?
If your business has an Employer Identification Number that you will no longer be using, you should also write to the IRS and ask us to close your account. The EIN will still belong to the business entity and you can use it again later if the need arises. The owner should also make sure the business has met all its state and local responsibilities. More information, including a checklist, is on our Website, IRS.gov. Just type the words "closing a business" in the search box.
Thank you, Beth.
I've been talking with Beth Elfrey of the IRS. This is Jean Wetzler.
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