Need Some Deductions for 2011?

Don't overlook these!

Updated for 2011

Closing a Sole Proprietorship

You may decide to close your sole proprietorship permanently or temporarily. A common question people ask when closing their sole proprietorship is:

"When I file my final Schedule C, do I have to let the IRS know that it's my final Schedule C and that I closed my sole proprietorship?"

The answer is no.

Here are some guidelines for sole proprietorships:

File a Schedule C for any tax year if the business had either income or expenses or both at any time during the year.
If your business was inactive for the entire year, it is not necessary to file Schedule C. Your business is considered inactive if it had neither income nor expenses for the entire year.
The is no requirement to inform the IRS about the closing of your sole proprietorship. Your final Schedule C does not have to include any form of notification. For example, it is not necessary that you write "Final Return", or any other comment on Schedule C. Simply fill out your final Schedule C as if the business was still active.

Example:

You operated your consulting business January 1, 2009 through December 31, 2009 and ended up with a net profit of $15,000.
December 31, 2009 was the last day you operated your business. You temporarily close your business to take a job with a consulting firm during 2010.
On January 2, 2010 you began working for a large consulting firm.
From January 2, 2010 through December 31, 2010 you were employed by the consulting firm.
At no time during 2010 did you operate your own business; you had no revenue and no expenses related to your own business, only W-2 income from the consulting firm.

Result:

Schedule C must be filed for tax year 2009 to report the $15,000 net profit.
- You must also file Schedule SE to report self-employment tax. Schedule C and Schedule SE are attached to Form 1040.
Because you closed your business during the entire year of 2010, you are not required to file Schedule C for that year or notify the IRS about the closing.
You must file Form 1040 for 2010 to report your W-2 income from your job.

Suppose your sole proprietorship was inactive for a year or two, then you decide to reopen it to resume conducting business?

If you decide to reopen your sole proprietorship in a later year do the following:

File Schedule C for the year you resume business.
Place a checkmark in the box on Line H of Schedule C.
- Preprinted on Line H is the following: "If you started or acquired this business during 2011, check here."

If you had employees when your business was closed, you must make certain notifications on employment-related tax returns.

Form 941

Form 941 is filed quarterly to report federal withholding taxes (income tax, social security and Medicare taxes). If you go out of business, do the following on your final Form 941:
Complete Part 3 on page 2.
Place a checkmark in the box provided on the form indicating you won't have to file returns in the future, and...
enter the final date wages were paid.

Form 940:

Form 940 is filed annually to report federal unemployment tax if you had employees.
If you go out of business:
- Check the box on page 1 indicating you won't have to file returns in the future.

State Unemployment Tax:

If you had employees, a return for state unemployment taxes is generally filed quarterly.
Check the requirements of your state for how to complete a final return.
- NOTE: A sole proprietor is not considered an employee of his/her business.

State Sales Tax:

Generally, these forms have a box that you check if it's your final return and to cancel your license.
- Check with your state.

Other Tax Forms That You Filed:

If you filed any other federal, state, county, or local tax returns, check each form to see if there's a place to indicate that it's your final return.
If you're not sure what to do, check with the applicable taxing agency.