Life changes
Closing a Business: The Final Tax Steps
A business that simply stops operating keeps its tax obligations until it is properly closed. A few final filings end them cleanly and prevent letters arriving years later.
Reviewed by LaToya Clark-Thompson, FounderLast updated
Why closing properly matters
The IRS and SCDOR expect returns from every account they have on file until you tell them to stop. A payroll account left open can generate notices for missing Form 941s. An LLC left active with the Secretary of State can accrue its own obligations. Closing in order also makes sure the last year’s deductions, losses and asset sales are reported correctly, which can matter to your personal return.
The final returns
- Sole proprietor or single-member LLC: the last Schedule C goes with your personal Form 1040 for the year you closed
- Partnership or multi-member LLC: a final Form 1065 with the "final return" box checked, and final K-1s to each partner
- S corporation: a final Form 1120-S with the final box checked, and final K-1s
- C corporation: a final Form 1120, plus Form 966 after the decision to dissolve
- South Carolina: the matching final state business return, if the business filed one
Payroll, contractors and sales tax
- Run the last payroll and make the final deposits
- File the final Form 941, checking the box that the business has stopped paying wages, and a final Form 940
- Issue final W-2s to employees and file them with Form W-3
- Issue 1099s to contractors paid during the final year
- File final South Carolina withholding returns and close the withholding account with SCDOR, and close the unemployment account with DEW
- File the last sales tax return and close the retail license if you had one. See behind on sales tax if returns are missing
Selling or disposing of assets
Equipment, vehicles and property sold when a business closes are reported on Form 4797. If those assets were depreciated, part of the gain can be taxed as ordinary income through depreciation recapture, even if the sale price was low. Assets you keep for personal use are treated as if they left the business. If the whole business is sold, buyer and seller each file Form 8594 to allocate the price across the assets. See selling or buying a business.
Dissolving and closing accounts
Once the final returns are filed, dissolve the entity with the South Carolina Secretary of State (articles of termination for an LLC, articles of dissolution for a corporation) and cancel the local business license. The IRS does not delete an EIN, but you can ask it to close the business account by letter once all returns are filed and balances paid. Keep the books, returns and payroll records after closing, because the IRS can still ask questions about earlier years.
How we help
We close out the books, prepare the final federal and South Carolina returns, file the last payroll forms and W-2s, and give you a checklist of the accounts to close. If earlier years were never filed, we handle those through back tax filing first, since a business cannot close cleanly with gaps. Bring your last filed return, bank statements for the final year, payroll records and any asset sale documents, and start with tax preparation.
Frequently asked questions
Do I have to file a tax return for a business that closed?
Yes. The business files a final return for the year it closed, marked as final, covering income and expenses up to the closing. A sole proprietor reports the last year on Schedule C. Partnerships and corporations file their own final returns and issue final K-1s. Without a final return, the IRS may keep expecting filings and send notices for the missing years.
How do I close my EIN with the IRS?
An EIN is never reused or deleted, but the IRS can close the business account associated with it. Once all returns are filed and taxes paid, send the IRS a letter with the business’s legal name, EIN, address and reason for closing, and include the EIN assignment notice if you have it. The IRS page on closing a business account lists the address.
How do I dissolve an LLC in South Carolina?
File articles of termination with the South Carolina Secretary of State once the LLC has wound up its affairs. Before that, file the final federal and state returns, close SCDOR withholding and sales tax accounts and the DEW unemployment account, and cancel local business licenses. SC annual report filing covers what applies to entities that are still active.
What happens to business equipment when I close?
If you sell it, the sale goes on Form 4797, and part of any gain may be taxed as ordinary income because of depreciation you took earlier. If you keep it for personal use, it is treated as leaving the business, which can also have tax effects. Bring the original purchase records and depreciation schedules so the final return gets this right.
Not the question you had? The full tax FAQ covers more ground, and our client reviews say what the work is actually like.
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