IRS Reporting Requirements When Selling or Closing a Business

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Corporations and other business entities can cease operations for many reasons and in a number of ways. In all cases there is far more to it than simply locking your doors. When a business is terminated, or its legal status changes, there are typical reporting requirements that must be met.

Here is a helpful guide to what to do when selling or closing a business:

Selling Your Business

When a business is bought or sold, both the buyer and seller of business assets must report to the IRS the allocation of the sales price and other business assets. IRS Form 8594 (Asset Acquisition Statement Under Section 1060) can be used to provide this information. Form 8594 should also be attached to the buyer and seller’s federal income tax return for that year.

The IRS treats each asset as being sold separately in order to determine a gain or loss. Sold assets have multiple classifications, such as capital assets, depreciable business property, real business property, or property held for sale to customers — e.g., inventory or stock in trade. The sale of capital assets results in capital gain or loss. The sale of real or depreciable business property held longer than one year also results in gain or loss. Inventory sales result in ordinary income or loss.

When sold, “partnership” and “joint venture” interests are treated as capital assets. The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Corporation interests, meanwhile, are represented by stock certificates and usually result in capital gain or loss.

Because corporations generally recognize gain or loss when liquidating their assets, these gains and losses must be reported. Gain or loss is also generally recognized on a liquidating distribution of assets, as if the corporation sold the assets to the distributee at fair market value. These gains and loss, too, must be reported. In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable.

Closing Your Business

When closing your business you must file a final IRS Form 941 return for the last quarter in which wages are paid. If you have employees, you must file the final employment tax returns, in addition to making final federal tax deposits of these taxes. If you continue to pay wages or other compensation for quarters following the closing of your business, you must also file returns for those quarters.

The annual tax return for a partnership, corporation, S corporation, limited liability company, or trust includes check boxes near the top front page just below the entity information. For the tax year in which your business ceases to exist, check the box that indicates this tax return is a final return. If there are Schedule K-1s, repeat the same procedure on the Schedule K-1.

You will also need to file returns to report disposing of business property, reporting the exchange of like-kind property, and/or changing the form of your business. Following is a list of typical reporting actions to take when closing a business, depending on your type of business structure:

  • File final employment tax form
  • Report information from W-2s issued
  • Report capital gains or losses
  • Report partner’s/shareholder’s shares
  • Report information from 1099s issued
  • Report corporate dissolution or liquidation
  • Report business asset sales
  • Report the sale or exchange of property used in your trade or business