Closing a Business

The old saying —all good things must come to an end— holds true for small businesses, too. 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 put the IRS on your to-do list, because tax rules require you to keep the tax agency in the loop. 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.

Lone Ranger

Let's take the simplest scenario first: 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. Here's all you do tax-wise: When you file Schedule C for the last year in which you operated the business, write —Final Return— across the top of the form to let IRS know you've halted operations.

Asset Shedding

Things get a little more complicated if your business contains 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 deductible loss in each case. You list the assets plus the value and sale price of each on Form 8594, Asset Acquisition Statement, and attach it to the 1040 you file for the year in which the asset sales occurred. For more information on how to treat different types of assets for tax purposes, see the TurboTax article, —Managing Assets.—

Paring the Payroll

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. That 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 16 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 employment-tax 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. As 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 Sept. 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.

Updated for tax year 2007