Closing a Sole Proprietorship

You may decide to close your sole proprietorship permanently or temporarily. A common question people ask when closing their sole proprietorship is:

  • When I file my final Schedule C, do I have to let the IRS know that it's my final Schedule C and that I closed my sole proprietorship?"

No.

Here are some guidelines for sole proprietorships:

  • File a Schedule C for any tax year if the business had either income or expenses or both at any time during the year.
  • If your business was inactive for the entire year, it is not necessary to file Schedule C. Your business is considered inactive if it had neither income nor expenses for the entire year.
  • There is no requirement to inform the IRS about the closing of your sole proprietorship. Your final Schedule C does not have to include any kind of notification. For example, it is not necessary that you write "Final Return", or any other comment on Schedule C. Simply fill out your final Schedule C as if the business was still active.

Example:

  • You operated your consulting business January 1, 2014 through December 31, 2014 and ended up with a net profit of $15,000. You operated your business as a sole proprietorship.
  • You temporarily close your business from January 1, 2015 through December 31, 2015 to take a job as an employee with a national consulting firm. You start your job with the firm January 2, 2015 and work through the entire year.
  • At no time during 2015 did you operate your own business. As a result, you had no revenue and no expenses related to your business during 2015. You only had W-2 income from your job as an employee of the consulting firm.

Result:

  • For 2014, Schedule C must be filed to report the $15,000 net profit from your sole proprietorship.
    • You must also file Schedule SE to report self-employment tax.
  • Because you had no income or revenue in connection with your business during the entire year of 2015, you are not required to file Schedule C for that year. Nor are you required to notify the IRS about the closing.
  • You simply file Form 1040 for 2015 to report your W-2 income from your consulting job.

Reopening Your Business in a Later Year

Continuing from the example above.

After your business was inactive all of 2015, you decide to reopen it to resume business in 2016, and continue to operate as a sole proprietorship.

Here's what you do:

  • File Schedule C for tax year 2016, on or before the April 2017 due date (file Schedule SE as well if self-employment tax is due).
  • Place a checkmark in the box on Line H of Schedule C.
    • Preprinted on Line H is the following: "If you started or acquired this business during 2016, check here."

Complete the rest of Schedule C.

Closing Your Business When You Have Employees

If you had employees when your business was closed, you must make certain notifications on employment-related tax returns.

Form 941:

  • Form 941 is filed quarterly to report federal withholding taxes (income tax, social security and Medicare taxes). If you go out of business, do the following on your final Form 941:
  • Complete Part 3 on page 2.
  • Place a checkmark in the box provided on the form indicating you won't have to file returns in the future, and...
  • enter the final date wages were paid.

Form 940:

  • Form 940 is filed annually to report federal unemployment tax if you had employees.
  • If you go out of business:
    • Check the box on page 1 indicating you won't have to file returns in the future.

State Unemployment Tax:

  • If you had employees, a return for state unemployment taxes is generally filed quarterly.
  • Check the requirements of your state for how to complete a final return.
    • A sole proprietor is not considered an employee of his business.

State Sales Tax:

  • Generally, these forms have a box that you check if it's your final return and to cancel your license.

Other Tax Forms That You Filed:

  • If you filed any other federal, state, county, or local tax returns, check each form to see if there's a place to indicate that it's your final return.
  • If you're not sure what to do, check with the applicable taxing agency.

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