Right now, many of our favorite retailers are going out of business left and right and having massive liquidation sales — first Toys R’ Us, then Payless, and now most recently, Charlotte Russe. Whether you run a big corporation or own a small company, closing a business can be tough. Once you make the decision, you’ll need to tie up some loose ends before telling the IRS your business closed down. How difficult it is will depend on your business structure and assets. Here are the three most common types of businesses and what is involved in closing them down officially with the IRS.
Unincorporated Business With No Employees
This is the simplest type of business to close down. We’re going to use the scenario of a small business owner named Dan.
Dan works at home, mostly doing consulting and small digital marketing projects. He uses his Mac to handle the heavy lifting in his home office and doesn’t have any true assets for this business. Dan just got hired at a major marketing company and didn’t feel capable of handling a 9-5 and side-gig, so he merely stopped operations.
Business With Assets
Things are a bit different for Dan’s brother, Darius. He owns a small café that he runs by himself. He thought business would pick up, but it never made it off the ground and is ready to be closed down. Luckily, a well-known café chain is interested in Daniel’s retail space and equipment. It’s a great deal, especially since they want to buy everything in the café too.
Even though he disposed of the business in a single sale to one buyer, the IRS required him to separately determine the value of each asset — the furniture, coffee equipment, kitchen, lease, etc. — so that each is treated properly for tax purposes.
His tax preparer needs to determine the market value of each asset, allowing the preparer to calculate whether there is a taxable gain or loss in each case. Darius came prepared with a list with each asset broken down, including the values sale prices, on Form 8594.
Business With Employees
Dan and Darius have a sister, Danielle. She owned a t-shirt printing shop. With big retailers selling shirts at a fraction of her costs, Danielle decided to leave the industry and close down her company. She owns retail space but also has three full-time employees.
She’s going to follow the same steps as Darius, in addition to a few more. Not only does she have to account for her assets, but she also has to tie up her payroll responsibilities. As with all full-time employees, Danielle was responsible for covering the employer’s portion of their employment tax and for withholding employment and income taxes from their salaries.
As tax season nears, she’ll have to issue final W-2 forms to her staff by the due date of her final tax return. Danielle will also have to file a final Form 941 for the last quarter, which will include the date of her last payroll. This form is how she’ll inform the IRS that her business closed down.
She’ll also inform her tax preparer, and when she files her last tax return, they’ll attach a statement to the final employment tax return showing the name of the person who has the payroll records of her closed business and where they are kept.
Becoming a small business owner has its risks and rewards. You should never feel ashamed for choosing to close down — life happens. But make sure you tie up all the loose ends, so Uncle Sam doesn’t come knocking at your door.
For more helpful tax information, contact Liberty Tax® directly at 1-877-at-Liberty, or schedule an appointment or visit a conveniently located Liberty Tax® office near you. For real-time updates, follow Liberty Tax® on Facebook and Twitter.