J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Tax Reporting in the Final Year

As is the case in starting a business, most businesses do not shut their doors on December 31, so the final year of business may be a “short year” (less than a full 12 months). From a tax-reporting standpoint, a return must be filed even though the business did not operate for the entire year. For example, if a business that reports on a calendar year basis ceases operations on August 10, 2012, it must file a return for 2012. It does not have to prorate deductions for the period in which it operates. For example, if the business closes 8 months after paying a 1-year subscription, it can deduct the full 12 months, even though it enjoyed only 8 months’ worth of magazines.

Indicate on the appropriate tax return that this is the final year of the business. This is done as follows:

• Schedule C—no entry required
• Form 1065—Line G(2)
• Form 1120S—Line F(2)
• Form 1120—Line E(2)

Obtain a tax clearance or consent to dissolution from your state to close your tax account. If you fail to do this, you may continue to be liable for annual filings and be subject to penalty for not doing so.

Special Rules for Corporations

Corporations must notify the IRS of their termination. This is done by filing Form 966, Corporate Dissolution or Liquidation, with the IRS within 30 days after the plan or resolution of liquidation is adopted.

The corporation must recognize gain or loss on the distribution of its assets to shareholders in complete liquidation. In determining gain or ...