Starting or Closing a Business: Tax Checklist Every Owner Needs

Business Taxes · BUSINESS TAXES

Whether you're launching or winding down, your business's tax obligations start on day one and don't end until the final return is filed. Here's what you need to do at each stage.

Starting a business creates immediate tax obligations most new owners don't anticipate. And closing one — even if it loses money — requires filing returns and settling with the IRS before you can truly walk away. This guide walks through the key tax decisions and requirements at both ends of a business's life.

Choosing Your Business Structure

Your entity type determines how your business income is taxed:

• Sole proprietorship — simplest, income reported on Schedule C. You pay self-employment tax on all net profits.
• Partnership — income passes through to partners on Schedule K-1. No entity-level federal income tax.
• S corporation — income passes through to shareholders, but you pay yourself a reasonable salary (subject to payroll taxes), reducing self-employment tax exposure.
• C corporation — pays its own corporate income tax (21%). Double taxation risk on dividends, but useful for certain growth strategies.

The 'best' structure depends on your expected profit, whether you have outside investors, and your state's fees and rules. Consult a tax professional before committing.

Tax Steps When Starting a Business

1. Get an Employer Identification Number (EIN) — free at IRS.gov. Required if you have employees, operate as a partnership or corporation, or open a business bank account.
2. Open a separate business bank account — essential for recordkeeping and demonstrating business intent to the IRS.
3. Choose a tax year — most small businesses use the calendar year, but fiscal years are allowed with IRS approval.
4. Choose an accounting method — cash basis (record income when received, expenses when paid) is simpler and allowed for most small businesses. Accrual is required for certain larger businesses.
5. Register for state and local taxes — sales tax permits, payroll tax accounts, local business licenses vary by state and industry.
6. Set up payroll if you have employees — you must withhold and remit federal income tax, Social Security, and Medicare taxes from day one.

Deducting Start-Up Costs

The IRS lets you deduct up to $5,000 in start-up costs in your first year of business, with any excess amortized over 15 years. Start-up costs include:
• Market research and feasibility studies
• Advertising before opening
• Professional fees (legal, accounting)
• Employee training before opening

The $5,000 limit phases out dollar-for-dollar once total start-up costs exceed $50,000. Organizational costs (filing fees for LLCs and corporations) are treated similarly — $5,000 immediate deduction, rest amortized.

Tax Steps When Closing a Business

Closing a business has just as many tax obligations as starting one:

1. File final income tax returns — mark them 'Final Return.' Partnerships and corporations must file regardless of income.
2. Issue final W-2s and 1099s — all wages and contractor payments for the final year must be reported.
3. Pay remaining payroll taxes — any unpaid payroll taxes survive business closure and can attach personally to responsible parties.
4. Cancel your EIN registration — notify the IRS in writing that your business has closed.
5. Handle asset disposals — when you sell or distribute business assets, you may have taxable gain or deductible loss. Inventory, equipment, and goodwill are all treated differently.
6. Preserve tax records — keep all business records for at least three years after the final return is filed (longer if you have employees).

Bankruptcy and Aborted Business Ventures

If your business fails before it opens, you may still recover some costs. Pre-opening expenses that don't meet the start-up cost definition (e.g., costs for a venture you investigated but never started) are generally not deductible — they're treated as a capital loss when the investment is abandoned. Costs for a business you started but then closed are deductible as ordinary losses. If you file for bankruptcy, special rules apply to debt cancellation income — talk to a tax professional before filing.

Frequently Asked Questions

Do I need an EIN if I'm a sole proprietor with no employees?

Not strictly required if you have no employees and no other EIN-triggering circumstances, but it's still a good idea. Using an EIN instead of your Social Security number on contractor forms reduces your identity theft exposure.

Can I deduct the cost of forming my LLC?

Yes. Organizational costs — state filing fees, legal fees for drafting an operating agreement — are treated similarly to start-up costs: up to $5,000 deductible in year one, the rest amortized over 15 years.

My business lost money in its first year. Can I use that loss to offset my W-2 income?

Generally yes if you are a sole proprietor or operate through a pass-through entity (partnership, S corp) with sufficient basis. The loss flows to Schedule E or C and offsets other income on your Form 1040. At-risk rules and passive activity rules may limit some losses.

What happens to unpaid payroll taxes when a business closes?

Unpaid payroll taxes (especially the employee portion — the 'trust fund' portion) can be personally assessed against any 'responsible person' — an owner, officer, or anyone with authority over payments. These survive bankruptcy and business closure.