If you dissolve your partnership or corporation you will need to zero out the balance sheet on your final tax return. This indicates that you are closing the business and intend to pay whatever tax is due. When transferring a partnership, you may not follow the same rules regarding zeroing out the balance sheet.
As of 2011, the Internal Revenue Service doesn't have any rules for what the balance sheet should look like when a partnership terminates. Many accountants zero out the balance sheet but include a supplemental balance sheet that lists the actual balances held by the partnership just prior to termination. This allows the partnership to report income and pay taxes appropriately while zeroing out the balance sheet, as is necessary to close the business.
Avoid Later Liabilities
If the IRS or a state department of revenue is unaware that a business has closed, it will continue to assess taxes for that business. This can lead to serious tax problems later on. Thus when preparing your final return you should zero out the balance sheet in addition to marking it as a final return so that the appropriate agencies are aware that you are closing your business.
If you are dissolving one partnership and beginning another, you don't have to zero out the old partnership's balance sheet if you don't want to. Instead, you can list the terminating balance on the old partnership's balance sheet and list the same balance as the beginning balance on the new partnership so that the IRS and your investors are both aware of what money was carried over from the old partnership to the new partnership.
Partnership to Single Entity
If one partner leaves the partnership, so that it becomes a sole proprietorship, the partnership is terminated and the accountant must zero out the balance sheet. This is considered a real termination, and thus the balance sheet is zeroed out to indicate that the partnership is no longer in existence. This rule doesn't apply if the partnership is dissolving for the purpose of beginning a new partnership.
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