Going Out Of Business Checklist: Tax Issues

Yesterday I discussed what to do when you decide to end your family child care business (that did not involve taxes).Here is a checklist of tax issues to consider when ending your business.

1) Claim all your business income and expenses for the months you were in business when you file your IRS Form 1040 Schedule C at tax time.

2) When you file your IRS Form 8829 Expenses for Business Use of Your Home, calculate your Time-Space Percentage based on the number of months in the year you were in business. In most cases this will mean your Time-Space Percentage will not change. But, the amount of expenses you claim will be lower because you will only be claiming them for the months you were in business.

3) In the year you go out of business, the rules change for items you have been depreciating (home, home improvements, furniture, appliances, etc.). You are entitled to claim only part of a normal year's worth of depreciation. For personal property items (furniture, appliances, computer, TV, DVD player, etc.), you will be able to deduct one-half of a normal year's worth of depreciation. For your home and home improvements, your depreciation deduction will be based on the month you quit your business. For details, see my annual Family Child Care Tax Workbook and Organizer.

4) If you paid employees in the year you went out of business, you will need to check a box on the next quarterly Form 941 (to report social security and Medicare withholding) that is due after your business ends. The box you check will indicate that this is the last Form 941 you will be filing. If you don’t do this, the IRS will continue to think that you have employees and they will expect you to continue filing this form. You must still file Form 940, W-2 and W-3 at the end of the year.

5) After filing your Schedule C and other business forms at the end of your last year in business, do not file any business forms in the next year. You do not need to indicate on your tax forms that you are going out of business.

6) If you sell any items you used in your business (toys, equipment) before you go out of business, you will probably be entitled to a business deduction. If you sell them after you go out of business, you will not be able to claim any business deductions.

7) If you give any items you used in your business to a charity (Goodwill, Salvation Army, etc.), you can only claim a charitable deduction on the amount that you have not previously deducted or depreciated as a business expense. In other words, if you bought an $80 toy and deducted 100% of the cost as a business expense, you will not get a charitable contribution when you give it to Goodwill.

8) If, before you go out of business, you replace items you have been depreciating (carpet, vinyl or wood floors, furniture, appliances, etc.), you will be entitled to deduct all of the remaining unclaimed depreciation on these items on your last business tax forms. For example, if you replace the carpeting in your play room before you go out of business, and it’s the 4th year of depreciation, you can deduct the 5th-7th years of depreciation also. If you wait until after you go out of business to replace such items, you will not be able to deduct any of the remaining unclaimed depreciation.

9) After going out of business, the only thing you need to remember about taxes is that you will owe some taxes when you sell your home. Whether you sell your home immediately after going out of business or years later, you will owe taxes on the depreciation you claimed on your home since May, 1997. (You will owe this tax whether or not you actually claimed depreciation on your home.) Therefore, when you do start to make plans to sell your home, contact a tax professional to help you deal with the tax consequences of this action.

Nobody says taxes are easy! But, by following the above rules, you may be able to claim some deductions you didn’t anticipate.

You may want to print out this article and put it in your business records, so you can refer to it when you decide to close your business.

Congratulations on your family child care career! Good luck in the future.

Tom Copeland – www.tomcopelandblog.comImage credit: https://www.consumer.ftc.gov/blog/2019/12/going-out-business-sales-what-know

For more information, see my book Family Child Care Tax Workbook and Organizer.