Business Expenses

Per Diem Rates from the U.S. General Services Administration

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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").

Closing a Sole Proprietorship

You may decide to close your sole proprietorship permanently or temporarily. A common question 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?

The answer is no.

There is no requirement that a sole proprietor must inform the IRS when the final Schedule C is being filed or that the business was closed. However, if you had employees, follow the instructions pertaining to employment tax returns regarding the closure of the business.

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 is inactive for an entire year (no income and no expenses), it is not necessary to file Schedule C for that year.
  • Since there's no requirement to inform the IRS about the closing of your sole proprietorship, Schedule C itself does not provide any kind of notification. For example, there's nothing on Schedule C that instructs you to write Final Return or to check any particular box or include any comment indicating your intention the close up shop. Simply fill out your final Schedule C the same as you've always done for each active year of business.

Temporarily Closing a Sole Proprietorship and Reopening

You may have closee your sole proprietorship in a prior year and filed your final Schedule C. Then, in a subsequent year you decide to reopen the business' still operating as a sole proprietorship. How is Schedule C affected?

Example:
  • You operated your consulting business January 1, 2019 through December 31, 2019 and ended up with a net profit of $15,000. You operated your business as a sole proprietorship.
  • You close your business from January 1, 2020 through December 31, 2020 to take a job as an employee with a national consulting firm. You start your job with the firm January 2, 2020 and work through the entire year.
  • At no time during 2020 did you have self-employment income or expenses. You only had W-2 income from your new job.

For 2019, you file your final Schedule C to report the $15,000 net profit (You also file Schedule SE to report self-employment tax). You do not have to inform the IRS that this is your final return or that you closed your business.

During all of 2020, while working at your new job, you had no self-employment income or expenses. You file your 2020 Form 1040 to report your W-2 income from your consulting job. Since you had no self-employment income and no expenses during 2020, there's no requirement to file Schedule C.

Reopening Your Business in a Later Year:

Continuing from the example above. You quit your consulting job Decemebr 31, 2020 and reopen your business during January 2021.

Step to take:
  • File Schedule C for tax year 2021 (and Schedule SE if your net profit was $400 or more).
  • 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 2021, check here.

Complete the rest of Schedule C as you normally would.

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 close your business, complete Part 3.
Form 940:
  • Form 940 is filed annually to report federal unemployment tax if you had employees.
  • If you close your business, complete the section on the top right of page page 1 that says: Type of Return (Check all that apply.)
State Unemployment Tax:
  • If you had employees, a state unemployment tax return 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. Check with your state.
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.