Prepare before closing your doorsIf you have to make the hard decision to close your business, be prepared for possible tax consequences. You can close your business by selling all of the assets or converting the assets to personal use. The tax impact of selling your business depends on whether you are operating a sole proprietorship or corporation.
If you are a sole proprietor and sell all your business assets, you’ll report the sale of each one separately to determine the gain or loss. If you close your sole proprietorship business and keep all the assets to use personally, you may have to pay tax on the recapture of depreciation on §179 property or listed property.
If you own a corporation, you can either sell the stock or the assets. If you sell the assets, the corporation will pay the tax on any gain. As the shareholder, you don’t have any tax consequences unless the corporation liquidates and distributes the proceeds to you in exchange for your stock. If the stock is sold, you’ll report the sale of your corporate stock on your personal tax return.
If you take the assets out of the corporation, gain or loss is recognized on the liquidating distribution of assets as if the corporation sold the assets to you at fair market value. As the shareholder, you do not have any tax consequences unless the fair market value of the assets distributed exceeds your stock basis.
As with any sales contract, it’s important to determine the tax consequences before signing on the dotted line.