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12.9 Small Business/Self-Employed/Other Business : Starting or Ending a Business

I invested personal funds to start a new corporation last year. How can I get credit for this on my personal income tax return?

If you invest your personal funds to start a corporation, this is your basis in the stock of the corporation. Your stock basis will show on the balance sheet of the corporation's Form 1120 (PDF), U.S. Corporation Income Tax Return. Your investment will not show up on your personal income tax return until you sell the stock or until the corporation goes out of business.

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I am starting a small business. What assistance can IRS give me?

If you are starting or already have a small business and need information on taxes, recordkeeping, accounting practices, completing Federal business and employment tax returns, and meeting other Federal tax obligations, there is help available. Much of the assistance is free. The service is called Small Business Tax Education Program, or STEP. Go to Around the Nation for seminars in your area or check out Tax Info For Business on the IRS web site. You can find out more about this program for small business by referring to Publication 334, Tax Guide for Small Business, or Tax Topic 103, Small Business Tax Education Program (STEP).

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I want to start my own business. Do I need a business license?

The IRS does not require or issue business licenses. Whether or not the particular type of business or service you provide is regulated by licensing requirements is a question for your state, city, or local government agencies. To access the state you need to direct your question to, please go to our Alphabetical State Index.

How do I find out about whether or not my business needs to collect sales tax?

Your question is a state tax question. Your state revenue department should provide information regarding sales tax to you. To access the state you need to direct your question to, please go to our Alphabetical State Index.

What forms do you use when you have a small business?

The annual income tax forms that you would use to report you business activity to the IRS would depend on the type of entity you operate your business under.

  • Sole Proprietorships use Form 1040, Schedule C (PDF), Profit and Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit from Business, and Form 1040, Schedule SE (PDF), Self-Employment Tax.
  • Partnerships use Form 1065 (PDF), U.S. Partnership Return of Income, and Schedule K-1.
  • Corporations use Form 1120 (PDF), U.S. Corporation Income Tax Return.
  • S Corporations use Form 1120S (PDF), U.S. Income Tax Return for an S Corporation.
  • Limited Liability Companies use one of the choices above according to their structure.
If you hired employees to work in your business, if you are liable for excise tax, or heavy highway vehicle use tax, other forms and publications would come into play.

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If you start your own business and send in your quarterly estimated income taxes, must you also file a personal income tax return at the end of the year?

If you have $400 or more of net profit from your business, you will have to file a Form 1040 with a Form 1040, Schedule C (PDF), Profit and Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ (PDF), Net Profit from Business, and Form 1040, Schedule SE (PDF), Self-Employment Tax, and these forms are filed at the end of the year.

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I just started a small business and want to know if I have to file my income taxes quarterly or at the end of the year?

The Federal Income Tax return is filed annually. As a self-employed individual, if after deducting withholding and credits you expect to owe more than the amount allowed by law at the end of the year, you should make estimated tax payments on a quarterly basis. Form 1040-ES (PDF), Estimated Tax for Individuals, will assist you in determining if estimated tax payments are due and how they are paid.

When you file the income tax return at the end of the year, you include the income from the business on the return. The forms to be filed are Form 1040, U.S. Individual Income Tax Return, Form 1040, Schedule C (PDF), Profit or Loss from Business, and Form 1040, Schedule SE (PDF), Self-Employment Tax. If estimated tax payments were made during the year, they will be claimed on the individual income tax return as payments. See Form 1040, Line 65.

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How do I report the closing of a sole proprietorship business?

When a sole proprietor ends a business, the last Form 1040, Schedule C (PDF), Profit or Loss from Business, filed for that business does not require notation as a final return because the business is not a separate entity from the sole proprietor. You simply quit filing a Schedule C with your income tax return. If you had employees, you will need to file a final Form 941 (PDF).

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I went out of business this year and still have inventory on hand. Can I take a deduction for inventory that I cannot sell?

Generally inventory losses and gains must be run through the business (shown as sold on Form 1040, Schedule C (PDF), Profit or Loss from Business) when sold even after the business closes. If you cannot sell inventory because it has become obsolete or you have formed the intent to give up possession of the inventory without passing it on to someone else and suffer a loss, you may deduct such losses. If you use any remaining inventory for personal use after you go out of business, you cannot take a deduction for that inventory. If you give the remaining inventory away to a nonprofit organization, claim your deduction on Form 1040, Schedule A, Itemized Deductions. When you have business related expenses after your business has closed, you still may deduct these expenses.

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Which form do I use to file my business income tax return?

To determine which form you should file for your business entity, select one of the following links:

. Publication 541, Partnerships

. Publication 542, Corporations

. Publication 3402 (PDF), Tax Issues for LLCs

. Publication 334, Tax Guide for Small Business

. Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation

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Can you help me fill out my forms

The Internal Revenue Service can provide general information and instructions for preparing tax returns but cannot prepare the tax returns for you. There is a lot of information available to help you at Small Business and Self-Employed One-Stop Resource . For business returns, many entries on the tax return rely upon entries from several schedules or forms. Additionally, a clear picture of a business entity is needed to adequately prepare a return. If the publications or instructions for a form are unclear and you need help completing several sections and/or lines on the return, it may be best to seek the advice of a tax professional.

I need help with Schedule K-1. How do I report this on my income tax return?

If you are a partner in a partnership and have received a Form 1065, Schedule K-1 (PDF), Please see Form 1065, Schedule K-1 Instructions for help in preparing your form.

If you are a shareholder in an S-Corporation and have received a Form 1120S, Schedule K-1 (PDF), please see Form 1120S, Schedule K-1 Instructions for help in preparing your form.

References:

  • Publication 541, Partnership
  • Publication 3402 (PDF), Tax Issues for LLCs
  • Publication 334, Tax Guide for Small Business
  • Entities: Sole Proprietor, Partnership Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S-Corporation

What deductions can I take on my partnership or S Corporation return

In general, ordinary and necessary business expenses are deductible on a business return. However, there are some items that a partnership or S Corporation does not deduct at the business entity level but rather at the partner or shareholder level. These are referred to as separately stated items. For a more complete explanation of business in general, see Publication 535, Business Expenses, Publication 541, Partnerships, Form 1120S Instructions, and Form 1065 Instructions.

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How do I terminate or close down a corporation (S or C)?

The process for closing a corporation consists of many steps that need to be followed in a specific order and within specified time frames. See Small Business/Self Employed - Closing a Business for information to properly terminate your business entity with the Internal Revenue Service.

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I am waiting for K-1s to file my return. What is due date for sending a K-1 to the partners/shareholders?

The due date for a K-1 is the same as the due date of a Partnership or S Corporation return that created the K-1. For example, if you are a partner in a partnership and the partnership return has a due date of April 15, 2004, then the due date for the K-1 is also April 15, 2004. You may wish to file an extension if you do not believe you will receive your K-1 in time to adequately prepare your return.

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What do I need to do to become a Corporation for federal tax purposes?

This depends upon whether your business is organized as a state law corporation or some other state law entity. If your business is organized as something other than a state law corporation, you must file Form 8832 to elect to be treated as a corporation for federal tax purposes. For additional information on requirements at the federal level, please see Publication 542, Corporations. See also Form 8832 (PDF) and its instructions.

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Where is a loss reported on my return and how much can I deduct?

The place where your loss is reported depends on how much is deductible, the type of loss, and the type of return you are filing. If your business deductions are more than your business income for the year, you may have a Net Operating Loss (NOL). You can use an NOL by deducting it from your income in another year or years. Partnerships and S Corporations generally cannot use an NOL. But partners or shareholders can use their separate shares of the partnership's, or S Corporation's business deductions to their individual NOLs. For additional help, see Publication 541, Partnerships, Publication 542, Corporations, Publication 925, Passive Activities and At-Risk Rules, and Publication 536, Net Operating Losses (NOLs) for individuals, Estates, and Trusts.

If you have a Capital Loss, it is generally from the sale or loss of investment property, a business, or a capital asset used in a business. Publication 544, on Sales and Other Disposition of Assets, will provide additional information on this subject.

Special Situations

S Corporations

In general, if an S corporation purchases a C Corporation at the end of the year and the C Corporation has a loss, the S Corporation does not get to claim the C Corporation loss. A C Corporation is a taxable entity in itself and gains and losses do not flow through to the shareholders.

S Corporation shareholders who hold stock at any time during the year may claim their proportionate share of corporate losses on their individual tax returns subject to certain limits. For more information about the limitations, see the instructions for Form 1120S, Schedule K-1 Instructions.

Partnerships

In general, a partner loss is allocated base on his/her percentage of ownership of the year. This percentage is referred to as the partner's distributive share. The partners' distributive share of items is reported to the partner on Form 1065, Schedule K-1 (PDF). A partner's distributive share of partnership loss is allowed only to the extent of the adjusted basis of the partner's partnership interest. A loss that is more than the partner's adjusted basis is not deductible. For additional deductibility of partnership losses, see Publication 541, Partnership, and Publication 925, Passive Activities and At-Risk Rules

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How does a corporation deduct a capital loss?

Subchapter C Corporation

This type of corporation can deduct capital losses only up to the amount of capital gains. If capital losses exceed capital gains, the excess is first carried back three years prior to the loss year and used to offset capital gains. Then, any unused loss is carried forward up to five years from the loss year to offset capital gains in those years. If the corporation is dissolved, the loss is not carried to any other year or return, it is simply lost.

A corporation may not carry a capital loss from or to a year in which it operates as a Subchapter S Corporation.

Rules for Carryback and Carryforward

When carrying a capital loss from one year to another, the following rules apply:

1. When figuring the current year capital loss, you cannot combine it with a capital loss carried another year. In other words, you can carry capital losses only to years that would otherwise have a net capital gain.

2. If you carry capital losses from 2 or more years to the same year, deduct the loss from the earliest year first.

3. You cannot use a capital loss carried from another year to produce or increase a net operating loss in the year to which you carry it back.

Corporation must include capital gain in full in gross but only to the extent they exceed capital losses. A corporation is taxed on net capital gain at the regular tax rate, including the additional phase-out rates for high-income corporations. See Form 1120/1120A Instructions, U.S. Corporation Income Tax Return, andPublication 542, Corporations for additional information, and Form 1139 (PDF), Corporation Application for Tentative Refund.

Subchapter S Corporations

An S Corporation generally passes gains and losses through to the shareholders based on their percentage of ownership (distributive share). For more information on how to calculate and report these losses, see Form 1120S, Schedule K-1 Instructions, Form 4797 (PDF), Sales of Business, Form 1120S (PDF), U.S. Income Tax Return for an S Corporation, Entities: Sole Proprietorship, Limited Liability Company/Partnership (LLC/LLP, Corporation, Subchapter S Corporation.

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How do I terminate a Partnership?

A partnership terminates when one of the following events takes place.

1. All operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership, or

2. At least 50% of the total interest in the partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner.

Regardless of the method of termination, the final Form 1065 (PDF), U.S. Return of Partnership Income, of a partnership and the corresponding Form 1065, Schedule K-1 (PDF), should be marked as "Final Return". This notifies the IRS that the partnership has been terminated. See Treasury Regulation 1.708-1 (b) for additional information on the termination of a partnership.

The partnership's tax year ends on the date of termination. If a partnership is terminated before the end of the tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. Refer to Publication 541, Partnership, for additional information.

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What type of entity am I?

If you an unincorporated business by yourself, you are considered a sole proprietor. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect by filing Form 8832 (PDF),Entity Classification Election, to treat the LLC as a corporation.

An husband or wife may be sole proprietor with the spouse an employee.

An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if it members carry on a trade, business, financial operation or venture and divide its profits.

If a husband and wife jointly own and operate a business and share in the profits and losses, they are partners in a partnership.

The following businesses are taxed as corporations:

  • A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic.
  • A business formed under a state law that refers to it as a joint-stock company.
  • Insurance Company
  • Certain banks
  • A business wholly owned by a state or local government.
  • A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships).
  • Certain foreign business
  • Any other business that elects to be taxed as a corporation by filing Form 8332.

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What is the due date for business returns?

Some forms and entities have due dates other than the well-known April 15th due date. The instructions for the each type of form used will have the appropriate due date(s) noted. In general, sole proprietor's schedule of income and expenses is attached to the 1040. Therefore, the due date is the same as the 1040.

A Corporation must generally use the calendar year, unless the entity can establish a business purpose for having a different tax year. The due date is usually March 15th.

A partnership generally must conform its tax year of the partners unless the partnership can establish a business purpose for having a different tax year. The tax year is the same as one or more partners that own (in total) more than a 50-percent interest in partnership profits and capital. If there is no majority interest tax year, the partnership must adopt the same tax year as that of its principal capital holder. Where neither condition is met, a partnership must use the calendar year. A limited Liability Company reporting as a partnership has the same tax year as a majority of its partners.

References:

  • Publication 541, Partnerships
  • Publication 542, Corporation
  • Publication 334, Tax Guide for Small Business
  • Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation

How is the withdrawal of a partner handled?

The answer to this question has many variables. Publication 541,Partnerships,"Disposition of Partner's Interest" should provide the information needed.

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More Frequently Asked Tax Questions
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