Sadly, the pandemic has taken its toll on some businesses, forcing them to permanently close. Owners of sole proprietorships are among those making tough decisions about their futures. For those sole proprietors who are contemplating closing their business due to the pandemic or for other reasons, the Internal Revenue Service (IRS) has provided detailed guidance for the steps that owners must take.
The “Closing a Business” page of the IRS website includes general information about closing a business, as well as a link to Publication 5447, How to Close a Sole Proprietorship. The following steps are a guide to ensure all grounds have been covered when closing a sole proprietorship:
- File Final Employment Tax Returns: For a business that has one or more employees, Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return, and Form 940, Employer’s Annual Federal Unemployment Tax Return, should be filed for the calendar year the business made its final wage payments. It is important to check the box indicating it is a final return, and enter the final date wages were paid.
- Provide Employees With Forms W-2: Forms W-2, Wage and Tax Statement, should be provided to each employee, and Form W-3, Transmittal of Income and Tax Statements, should be filed for the calendar year in which the final wage payments were made.
- Provide Nonemployee Workers With Forms 1099-NEC: Forms 1099-NEC should be provided to any nonemployee workers that were compensated $600 or more. The business can electronically file Forms 1099-NEC through the IRS’s Filing Information Returns Electronically system. However, if such forms are not filed electronically, then Form 1096, Annual Summary and Transmittal of U.S. Information Returns, must be filed in order to transfer copies of Forms 1099-NEC to the IRS.
- Food or Beverage Establishment – File Form 8027: For a food or beverage business that tipped employees, Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, must be filed.
- File Final Employee Benefit Plan Returns: A final Form 5500, Annual Return/Report of Employee Benefit Plan, should be filed electronically if the business provided a pension or benefit plan to its employees. It is important to make sure the box is checked to indicate it is a final return/report.
If the business only provided a pension or benefit plan to the owners and their spouses, then Form 5500-EZ, Annual Return of a One-Participant Retirement Plan or a Foreign Plan, should be paper-filed. As with all other forms filed, mark the box to indicate it is a final return.
- File Individual Income Tax Return (Form 1040) and Pay Taxes Due: A sole proprietor should file Schedule C with the Form 1040, S. Individual Income Tax Return, to compute any profit or loss generated from the business. If any self-employment tax is due, then Schedule SE, Self-Employment Tax, should also be filed. Form 4797, Sales of Business Property, should be filed if the sole proprietor sold any business property.
- Close the Business Account With the IRS: The last step in closing a business should be completed after all returns have been filed. The sole proprietor should send a letter to the IRS that includes the business’s full legal name, employer identification number (EIN), business address, and the reason the business wishes to close its account. A copy of the business’s SS4 letter, that was issued when the business was assigned its EIN, should be included with the letter.
Following these steps and reviewing the IRS guidance for closing a business are great ways to ensure a smooth exit. If you have questions about closing a sole proprietorship or any other form of business, or would like assistance with tax planning and strategy, business management, or audit and assurance, contact a PYA executive below at (800) 270-9629.
