Closing your business can be a difficult choice to make, and it can become even more challenging when you don’t take the proper steps to do so. There are a lot of administrative tasks to take care of, and you should consult with your attorney and your accountant to guide you through the process. On its website, the IRS has provided guidance to sole proprietors on the steps they should take when closing their business from a federal tax perspective. These steps include the following:
1. If your business has one or more employees, you (the employer) should file final employment tax returns and make employment tax deposits for the calendar year in which the business makes its final wage payments. Employment tax returns include Form 940, Form 941 and Form 944. These returns must be marked “final return.” A final Form 941 must be accompanied by a statement indicating where the employment tax records will be kept and the name and address of the new owner of the business, if any. If there was no sale or transfer of the business, that fact should be included in the statement.
2. You will need to provide employees with Forms W-2 (Wage and Tax Statement) and File Form W-3 (Transmittal of Income and Tax Statements) to transmit Form W-2, Copy A, to the Social Security Administration for the calendar year in which the business makes its final wage payments. Most federal tax deposits must be made using the Electronic Federal Tax Payment System (EFTPS). The EFTPS requires registration before it can be used to make payments, so early planning is required.
3. If your business paid any nonemployee workers (independent contractors) $600 or more, you will need to provide them with Forms 1099-NEC and, if not e-filing its Forms 1099-NEC, the business will need to use Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) to transmit paper copies of Forms 1099-NEC to the IRS. Forms 1099-NEC can be filed electronically using the IRS’s Filing Information Returns Electronically (FIRE) system. You will need to register for FIRE, obtain a FIRE System Transmitter Control Code, and have software or a service provider that will create the file in the proper format.
4. Generally, if your business operates a “large food or beverage establishment” and has tipped employees, you must file Form 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips) to report final tip income and allocated tips.
5. If your business provided employees with a pension or benefit plan, you will need to file a final Form 5500 (Annual Return/Report of Employee Benefit Plan). Form 5500 and Form 5500-SF (Annual Return/Report of Employee Benefit Plan Short Form) must be filed electronically. Form 5500-EZ (Annual Return of One Participant (Owners and their Spouses) Retirement Plan) can be electronically filed using EFAST2 rather than being filed on paper with the IRS.
6. You must file your individual income tax return and pay any taxes due. With the Form 1040 or Form 1040-SR, you should file a Schedule C to figure any profit or loss from the business. A Schedule SE (Self-Employment Tax) should also be filed if any self-employment tax is due. If you sold the business, you should also attach to the return Form 8594 (Asset Acquisition Statement). If you sold business property, you should attach to the return Form 4797 (Sale of Business Property).
7. You should close the business’s account with the IRS. After all returns are filed, send the IRS a letter with the business’s complete legal name, employer identification number (EIN), and business address, explaining why the business wants to close its account. If available, a copy of the business’s SS4 letter containing its EIN assignment (also known as a CP 575 B letter) should be included. The letter should be sent to: Internal Revenue Service, Cincinnati, Ohio 45999. All appropriate tax returns must be filed before the IRS will close the business’s account.
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