IRS: CLOSING A BUSINESS
Closing your business can be a difficult and challenging task. The IRS has resources that can help you navigate this. On this page, you’ll find the steps you’ll need to take to close your business from a federal tax perspective regardless of your business type and information to help you take care of your employees. Whether a sole proprietorship, partnership or corporation, information on this page will help you understand what to file and how to report income you receive and expenses you incur before closure. Remember to check your state responsibilities when closing a business.
On this page:
1. File a Final Return and Related Forms
2. Take Care of Your Employees
3. Pay the Tax You Owe
4. Report Payments to Contract Workers
5. Cancel Your EIN and Close Your IRS Business Account
6. Keep Your Records
You must file a final return for the year you close your business.
The type of return you file – and related forms you need – will depend on the type of business you have. A limited liability company (LLC) is a business organized 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.
A sole proprietor is someone who owns an unincorporated business by themselves.
A partnership is a relationship between two or more partners to do trade or business.
A corporation is a separate taxpaying entity with at least one shareholder. This includes S corporations.
File Schedule C (Form 1040 or Form 1040-SR), Profit or Loss From Business, with your individual tax return for the year you close your business.
You may also need to file the following forms. You should file these when you file your individual tax return:
– Form 4797, Sales of Business Property, for each year you sell or exchange property used in your business. You also need to file this form if closing your business causes the business use of an eligible property under Section 179 to drop to 50% or less.
– Form 8594, Asset Acquisition Statement, if you sell your business.
–Schedule SE (Form 1040), Self-Employment Tax, if you have net earnings of $400 or more from your business.
–Form 8594, Asset Acquisition Statement, if you sell your business.
If you have one or more employees, you must pay them any final wages and compensation owed. You must also make final federal tax deposits and report employment taxes. If you don’t withhold or deposit employee income, Social Security and Medicare taxes, the Trust Fund Recovery Penalty may apply.
To report employment taxes, you may need to file the following forms:
a. Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return, for the quarter in which you make final wage payments.
Check the box to tell the IRS your business has closed and enter the date final wages were paid on line 17 of Form 941 or line 14 of Form 944.
Attach a statement to the return showing the name of the person keeping the payroll records and the address where those records will be kept.
b. Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for the calendar year in which you paid final wages.
Check box “d” in the Type of Return section to show that the form is final.
You must also provide a Form W-2, Wage and Tax Statement, to each of your employees for the calendar year in which you pay them their final wages. You should provide Forms W-2 to your employees by the due date of your final Form 941 or Form 944. Generally, you furnish copies B, C and 2 to the employees. You file Form W-3, Transmittal of Income and Tax Statements to transmit Copy A to the Social Security Administration.
If your employees receive tips, you must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, to report final tip income and allocated tips.
Pension or Benefit Plans
If you provide a pension or benefit plan for your employees, see how to Terminate a Retirement Plan. If you provide Health Savings Accounts or similar programs for your employees, see About Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
See Paying Your Taxes for ways to pay the tax you owe.
If you have paid any contractors at least $600 for services (including parts and materials) during the calendar year in which you close your business, you must report those payments. Use Form 1099-NEC, Nonemployee Compensation.
Use Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to send paper copies of all Forms 1099 to us. Some filers must file Forms 1099 electronically.
The employer identification number – or EIN – assigned to your business is the permanent federal taxpayer identification number for that business.To cancel your EIN and close your IRS business account, you need to send us a letter that includes:
a. The complete legal name of the business
b. The business EIN
c. The business address
d. The reason you wish to close the account
If you kept the notice, we sent you when we assigned your EIN, you should enclose a copy of it with your EIN cancellation letter. Send both documents to us at:
Internal Revenue Service
Cincinnati, OH 45999
We cannot close your business account until you have filed all necessary returns and paid all taxes owed.
How long you need to keep your business records depends on what’s recorded in each document.
Property records: Generally, keep records relating to property until the period of limitations expires for the year in which you dispose of the property. The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or the IRS can assess additional tax.
Employment tax records: Keep all records of employment taxes for at least four years.
For more details, see How Long Should I Keep Records