Are you planning to stop your sole proprietorship? Then there are more tax implications than you might expect. Especially in the year you stop, you will deal with a combination of rules: you are an entrepreneur for part of the year and possibly an employee afterward.

In this blog, we clearly explain what to watch out for, with a focus on taxes and the most common mistakes. Many people underestimate the tax consequences of stopping a sole proprietorship.

Your final tax return: entrepreneur and employee

If you stop during the year and (re)enter employment, you will have to deal with two types of income in one tax return:

  • profit from business (the period you were an entrepreneur)
  • employment income (the period after)

As an entrepreneur, you pay taxes afterward via your tax return. In employment, taxes are already withheld by your employer. This can make it seem like you are paying twice, but this is corrected in your tax return when you stop your sole proprietorship.

Make sure your tax return is complete and carefully check the pre-filled information.

Cessation profit: often the biggest impact

When you stop your business, you must settle with the tax authorities. This happens through cessation profit, an important part of stopping a sole proprietorship.

This means:

  • your assets move from book value to market value
  • hidden reserves are taxed
  • fiscal reserves are released

As a result, your profit in the final year can suddenly be much higher. When stopping a sole proprietorship, this cessation profit always comes into play. This is often the biggest tax setback when stopping.

The hour criterion: this often goes wrong

An important point is the hour criterion of 1,225 hours. Keep this in mind when you decide to stop your sole proprietorship. This applies per calendar year, not per period you were an entrepreneur. So even if you were only an entrepreneur for, for example, 3 months, you still need to meet the 1,225-hour requirement to qualify for:

  • self-employed deduction
  • maximum benefit of the SME profit exemption

What if you do not meet the hour criterion?

Then you will have:

  • no self-employed deduction
  • less tax benefit
  • often a higher tax burden in your final year

This is often underestimated and can make a difference of hundreds to thousands of euros when stopping a sole proprietorship.

Stopping a sole proprietorship, checking final figures

Deductions and costs: only during entrepreneurship

You can only deduct costs that relate to your period as an entrepreneur. Keep this in mind when stopping your sole proprietorship.

Costs before stopping are usually deductible.
Costs after stopping are no longer deductible.

The same applies to entrepreneur deductions: these only apply if you meet the conditions, such as the hour criterion.

Health Insurance Act (Zvw): watch out for double payments

As an entrepreneur, you pay the Zvw contribution yourself via a provisional assessment. Keep in mind that changes also occur here when stopping a sole proprietorship.
If you enter employment, this is arranged through your salary. However, your provisional assessment may still continue.
Result: you temporarily pay too much. This will be settled later, but it is better to adjust this immediately once you have stopped your sole proprietorship.

Practical: what you should arrange

In addition to tax matters, you should of course properly close your business. Taking the right steps when stopping a sole proprietorship is important to prevent problems. For this, check the checklist from the Chamber of Commerce.

Conclusion

Stopping your sole proprietorship may seem simple, but from a tax perspective it is an important moment. Especially cessation profit and the hour criterion make a big difference in how much tax you ultimately pay. Do you have doubts or want to be sure your final tax return is correct when stopping your sole proprietorship? At Luca Book, we are happy to help you finalize everything properly, without surprises afterward when you stop your sole proprietorship.