Closing and Reopening a Sole Proprietorship

If you temporarily discontinue operating your sole proprietorship for more than one year, then resume operations in a later year, simply do the following when completing Schedule C for the year you resume business:

  • Place a checkmark in the box on line H.
    • Line H states the following:
      • If you started or acquired this business during 201x check here.

Example:

  • Tax Year 2011:
    • You start a graphics design business in 2011.
    • You operate the business as a sole proprietorship.
    • You had no employees.
    • Your business earned a net profit.
    • On December 31, 2011 you discontinue operating your graphics design business in order to find a job working for a major graphics design company.
  • Tax Year 2012:
    • You secure a job with a major graphics design company, ABC Graphics Design, Inc.
    • You work for ABC Graphics Design, Inc. through 2012.
    • On December 31, 2012, you quit your job so that you can go back to operating your own business again.
  • Tax Year 2013:
    • On January 2, 2013, you reopen your graphics design business
    • You operate your business as a sole proprietorship
    • Your business earns a net profit in 2013

Result:

  • Tax Year 2011:
    • You File Schedule C to report your 2011 net profit from your graphics design business.
    • In completing Schedule C, you place a checkmark in the box on Line H because it's the year you started the business.
    • You do not have to indicate anywhere on Schedule C that you intend to close your business during the following tax year to begin working for a major graphics design company.
  • Tax year 2012:
    • Schedule C is not required to be filed for tax year 2012 because you had no income or expenses from your temporarily closed graphics design business.
    • You are not required to notify the IRS that you did not operate your business during 2012.
  • Tax year 2013:
    • You resume operating your graphics design business in 2013.
    • Your business earned a profit in 2013.
    • Schedule C must be filed for 2013.
    • In completing Schedule C, place a checkmark in the box on Line H as if it's the first year of operations even though you started the business in 2011.

Material Participation:

  • Schedule C, Line G: asks:

Did you materially participate in the operation of this business during 200X?

Check the Yes box if you worked at least 500 hours for the entire year (10 hours per week).

If You Had Employees

If you had employees when you closed your business, file the final employment tax returns to let the federal and state governments know that such returns are the final returns for your business.

See Closing Your Business When You Have Employees.

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