Although most business owners open their doors with high hopes for financial success, many small businesses fail within the first several years. If you close your business, however, it doesn't end your tax obligation to the Internal Revenue Service, or IRS; you must file tax paperwork for your business, send W2s to your employees and pay all tax due. You can deduct many of the same expenses you deducted while your business was open the year you close it.
Business Expenses
You can deduct any expenses that you incurred during the year when you pay taxes for the year you close your business. For example, if you pay rent on your office, you can still deduct any rent you paid on it the year you closed your business when you do your final taxes for the business. Expenses such as rent, telephone service and Internet access for your business are deductible as well.
Miscellaneous Expenses
If you paid for meals or lodging for yourself or your employees while traveling for business purposes, you can deduct these as miscellaneous expenses. You can also deduct bad business debts, such as loans, due to your business that the debtor failed to pay back. Miscellaneous expenses are subject to the two percent rule; you can only deduct expenses that exceed two percent of your adjusted gross income.
Net Operating Loss
You can deduct your net operating loss for the year that you close your business. Net operating losses, or NOLs, are the portion of expenses that outweigh the revenue your business made for the year. At the time of publication, you must follow a fairly complex series of calculations to carry back part of your NOL and carry forward the rest.
Considerations
When you close your business, you must tie up loose ends with the IRS. Even if you deduct all the expenses you are eligible for, you may still have to pay taxes on the business, and meeting all IRS requirements may be overwhelming or confusing. Because of this, you should consult a tax professional when closing your business to maximize your deductions and ensure that you file all the needed paperwork.
References
- IRS.gov: Closing a Business Checklist
- IRS.gov: Publication 529 (2010) -- Miscellaneous Expenses
- Internal Revenue Service. "Tax Reform: What’s New for Your Business," Pages 3–4. Accessed Oct. 19, 2019.
- Internal Revenue Service. "Tax Reform Provisions that Affect Individuals." Accessed Oct. 19, 2019.
- Internal Revenue Service. "Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs." Accessed Oct. 9, 2019.
- United States Congress. "H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018." Accessed Oct. 9, 2019.
- Social Security Administration. "If You Are Self-Employed," Page 1. Accessed Oct. 9, 2019.
- Internal Revenue Service. "Topic No. 554 Self-Employment Tax." Accessed Oct. 9, 2019.
- Internal Revenue Service. "Publication 587 (2018), Business Use of Your Home." Accessed Oct. 9, 2019.
- Internal Revenue Service. "About Form 8829, Expenses for Business Use of Your Home." Accessed Oct. 9, 2019.
- Internal Revenue Service. "Publication 535 (2019), Business Expenses." Accessed March 16, 2020.
- Internal Revenue Service. "Travel, Gift, and Car Expenses," Page 5. Accessed Oct. 9, 2019.
- Internal Revenue Service. "Tax Guide for Small Business," Page 40. Accessed Oct. 9, 2019.
- Internal Revenue Service. "Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Page 2. Accessed Oct. 9, 2019.
- Internal Revenue Service. "Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)," Page 18. Accessed Oct. 9, 2019.
Writer Bio
Jack Ori has been a writer since 2009. He has worked with clients in the legal, financial and nonprofit industries, as well as contributed self-help articles to various publications.