Business Closing Checklist: Tax Steps You Must Take Before Shutting Down

Step 1: File Your Final Tax Return & Related Forms

When you close your business, the IRS requires you to file a final federal tax return. The forms you need will depend on your business structure.

👤 Sole Proprietor

✅ Required:

• Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business
  Attach to your individual tax return for the year you close your business.

📌 You may also need to file:

• Form 4797, Sales of Business Property
  If you sold or exchanged business property, or the business use of a Section 179 eligible property dropped to 50% or less.
• Form 8594, Asset Acquisition Statement
  If you sold your business to another party.
• Schedule SE (Form 1040), Self-Employment Tax
  If your net earnings were $400 or more.

👥 Partnership

✅ Required:

• Form 1065, U.S. Return of Partnership Income
  Mark the “final return” box on the first page.
• Schedule D (Form 1065), Capital Gains and Losses
• Schedule K-1, Partner’s Share of Income
  Also mark “final return” on each K-1 issued to partners.

📌 Additional forms you may need:

• Form 4797, Sales of Business Property
  For property sales and exchanges, or if usage of an eligible Section 179 property drops below 50 percent.
• Form 8594, Asset Acquisition Statement
  If the business was sold.

🏢 Corporation (C or S Corp)

✅ Required for All Corporations:

• Form 966, Corporate Dissolution or Liquidation
  File when you adopt a resolution or plan to dissolve the corporation or liquidate its stock.

🧾 If You’re a C Corporation:

• Form 1120, U.S. Corporate Income Tax Return
  Check the “final return” box.
• Schedule D (Form 1120), Capital Gains & Losses

🧾 If You’re an S Corporation:

• Form 1120-S, Income Tax Return for an S Corporation
  Check the “final return” box.
• Schedule D (Form 1120-S), Capital Gains & Losses
• Schedule K-1, Shareholder’s Income & Deductions
  Check “final return” for each shareholder’s K-1.

📌 Additional forms (C or S Corp):

• Form 4797, Sales of Business Property
  Required for asset sales and exchanges, or Section 179 usage reduction.
• Form 8594, Asset Acquisition Statement
  Required if the business is sold.

Step 2: Wrap Up Employment & Payroll Records

Before officially closing your business, you must:

• Pay all employees their final wages and any compensation they are due.
• Make your final federal tax deposit.
• File the appropriate employment tax forms with the IRS.

🧾 Required Employment Tax Forms

Here are the key forms you may need to complete based on your final wage payments.

Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return

This is used for reporting Social Security, Medicare, and withheld federal income taxes.

• File for the quarter/year in which you paid final wages.
• Check the box indicating your business has closed.
• Enter the date you paid your final wages.
• Attach a note that includes the name and contact information for the person responsible for maintaining your payroll records.

Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return

• File for the year in which final wages were paid.
• Check Box D to indicate this is your final return.

Form W-2, Wage and Tax Statement

• Issue a Form W-2 to each employee for the calendar year in which you made their final payment.

Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips

• Required if employees received tips during their employment.
• File for the year you paid final wages.

Step 3: Pay What You Owe or Secure a Payment Plan

Although your business may no longer be operational, you are still responsible for paying any taxes due. If you are unable to pay your tax balance in full and owe less than $25,000, apply for an installment agreement as soon as possible. This will allow you to make smaller payments over several months (or years) and avoid collection actions.

To apply for a payment plan online, you will need the following:

• Your Employer Identification Number (EIN)
• The date the business started
• Your caller ID from your tax notice
• If you have not received a notice or recently filed your final tax return, you will also need to provide:
  • Your business address from the most recent tax return filed
  • The balance due amount
  • The tax form filed or examined
  • The tax period filed or examined

If you elect to make payments through automatic withdrawals, there is a $22 setup fee.  For other monthly payment options, the setup fee is $69. You can also set up a payment plan by phone, mail, or in person, but the fees may be higher.

Sole proprietors and independent contractors should apply for a payment plan as individual taxpayers. Although setup fees are similar, the total tax balance allowed increases to $50,000.

If the amount you owe exceeds the limits for a payment plan or you are experiencing extreme financial hardship, you may be eligible for an Offer in Compromise (tax settlement) or Currently Not Collectible status.

Step 4: Report Contractor Payments (Form 1099‑NEC)

Any payments of $600 or more made to contractors during the final year must be reported using Form 1099‑NEC, Nonemployee Compensation. If you submit your 1099-NEC forms to the IRS by mail, you must complete Form 1096, Annual Summary and Transmittal of U.S. Information Returns. If filing electronically, there’s no need for Form 1096.

Step 5: Cancel Your EIN & Close the IRS Business Account

Once you’ve filed all required returns and paid any outstanding taxes, the next step is to officially close your business account with the IRS. This involves canceling your Employer Identification Number (EIN).

✉️ How to Cancel Your EIN

To close your business account, send a signed letter to the IRS that includes:

• The Legal name of your business
• Your Business EIN (Employer Identification Number)
• Your Business address
• Your Reason for closing the account

If you still have the EIN assignment notice (the original IRS letter you received when your EIN was issued), include a copy with your cancellation request.

📮 Where to Send the Letter

Send your cancellation request and original EIN notice (if applicable) to:

Internal Revenue Service

Cincinnati, OH 459999

Keep in mind that the IRS will not close your business account until you have filed all required tax returns and paid your tax balance in full.

Step 6: Keep Your Tax Records For The Required Period

It’s important to hang on to your tax records for at least six (6) years after you close your business. The IRS generally has three (3) years from the date a return is filed, or the original filing deadline (whichever is later), to assess additional taxes.

There are exceptions to the three-year rule, including:

• Substantial understatement of income (25% or more) – increases the timeframe to six (6) years.
• Filing a false or fraudulent return – no statute of limitations
• Failure to file a required return – no statute of limitations

Additionally, the IRS can audit tax returns from the last three (3) years. If they identify substantial errors, however, they may extend that to six (6) years.

Final Thoughts

Closing your business may mark the end of one chapter, but doing it right can set you up for future success. By fulfilling your federal tax responsibilities – filing the correct forms, paying any outstanding balances, and formally closing your IRS account – you not only stay compliant but also avoid penalties and lingering financial stress. Take the time to tie up all loose ends thoroughly so you can walk away with confidence and peace of mind.