As Small Business Closes, Taxes Live On

CHICAGO (TheStreet) -- For many small businesses, 2009 was the end of the road. With consumer spending down dramatically, owners had no choice but to shut down operations, close up storefronts and sell off equipment.

But an owner's obligations don't end when the employees have been let go and the office is empty. If you closed your business any time during 2009, you still have to file a final annual tax return.

How do you inform the IRS you're no longer in business? That depends on the size and nature of your company. Corporations must file Form 966, "Corporate Dissolution or Liquidation," within 30 days of the decision to dissolve or liquidate the company's stock. Partnerships that file Form 1065, "U.S. Return of Partnership Income," can check the "Final Return" box near the top of the first page.

But many small businesses are sole proprietorships, whose owners report their business profits or losses by filing Schedule C with their individual tax returns. The owner can simply write "Final Return" at the top of his or her 2009 Schedule C to let the IRS know that the company has closed.

Depending on the size of your business and where you conducted it, you'll also have other forms to file. Just as it's relatively easy to start up a business if you're the one and only employee, it's also quicker to shut down a one-person shop.

If you were the sole proprietor, worked from home and didn't purchase any new equipment to do your job, you won't have to do anything but file that last Schedule C.

If, however, you rented a small office and bought a computer, printer and office furniture, then your business had assets, and the IRS expects you to document how you disposed of them. If you sold the assets, you'll have to fill out Form 8594, "Asset Acquisition Statement," detailing the fair-market value and the sales price for each asset. The only good news is that you'll get a tax break if your sale price was below market value, as was often the case last year.

If you've got employees, your stack of paperwork gets a little higher. You must issue final W-2 forms to each of your workers and make your final federal tax deposits. At the end of the last quarter your company was in business, you also should have filed your final employer's tax return, Form 941. (There's a box on line 18 that you can check to indicate your business has closed.)

On your final employment tax return, you also must attach a statement giving the name and address of the person who holds the payroll records of the business. While it may be tempting to wipe the slate clean and put all your business documents through the shredder, it's important to remember that the IRS can still audit your company, even if it no longer exists. Keep every document that relates to taxes, payrolls and company assets in a safe place.

If the IRS discovers that your company was delinquent in paying proper payroll taxes, it can come after the former owner to collect the money. Former employees who held certain responsibilities (such as the authority to sign paychecks) may be held liable for taxes and penalties as well.

Your business may be gone, but the paperwork associated with it must live on.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.

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