For the last 3 years I’ve filed Sch. C as a small business but last
year I was injured and didn’t pursue the business…I want to close
it out but can’t find tax info anywhere on how to do this. I have
never shown a profit but have had tax deductions for losses. Does
anyone know how to just close a business and what taxes are due? Any
direction would be greatly appreciated.
Thanks,
Liz
You need to check with accountants in your state. I’m not sure how
you could get tax deductions without showing profit. It doesn’t work
that way in Ohio.
Liz
I would get a tax person to help, depending on assets in your
business, disposal of those assets and accounting from the funds
arising from the disposal, the calculations against depreciation can
get quiet complicated.
Terry
Hi Liz;
A lot will depend on what state your are in, since incorporation is
a state charter, but I’d guess that it’s pretty much the same in most
states. Might have to pay a small processing fee in some states. I
closed a Sub-S in Michigan in 2002 and re-incorporated in NY, and all
I had to do was fill in a form for dissolution of a corporation and
mail it to Mich. There was no fee involved. You will be liable to pay
any sales taxes collected previous to the filing that haven’t been
remitted to the state, anything collected after March 1 will have to
be paid next year (if that’s your business fiscal year end).
You will also have to file all the other federal and state tax forms
for the last year of business or partial year. As with any Sub-S, you
usually have a $100 minium corporate tax due (for me, this month),
and any capital gains or losses are weighed against your personal tax
filings. But consider this. If you have equipment that you have been
spreading out the depreciation on, you’ll want to see if you can get
all of what remains included in your last filing. I have an
accountant take care of all that, but if you are going to do it
yourself, I’d go to the appropriate state.gov website and look up
the procedures. Really, I wouldn’t try to do all this without a CPA,
the dissolution of incorporation, yes, depreciation schedules, etc.,
no.
David L. Huffman
It may sound strange but call the IRS for assistance. They know all
the rules and really will give you some good and save
you money.It is free compared to a tax preparer. You probably won’t
owe anything except some Social Security and Medicare if anything at
all. And depending on your situation-income you may even get earned
income credit which is cash back wether you made a profit or not or
paid any tax!
Good Luck!
Margaret in Oceanside
You need to check with accountants in your state. I'm not sure how you could get tax deductions without showing profit. It doesn't work that way in Ohio.
I think he means Federal taxes. You can certainly report a business
loss, which is a deduction from any other income you have. There’s a
limit, though. If you don’t make a profit for three years out of the
last five, the IRS is likely to deem it a “hobby” and disallow any
further deductions for losses.
Al Balmer
Sun City, AZ
For the last 3 years I've filed Sch. C as a small business but last year I was injured and didn't pursue the business...I want to close it out but can't find tax info anywhere on how to do this.
Incorporated or sole proprietor? If you’re an SP, you probably don’t
need to do anything other than notify the sales tax people that you
won’t be collecting for them any more. If you’re incorporated, ask
your accountant.
Al Balmer
Sun City, AZ
i dont think you have to worry about the U.S. federal taxes but if
you have been collecting state sales taxes there should be a final
no longer in business form included in the particular state forms you
recieve to send in with the payments. best answer is a a documented
phone call or visit to the local tax office have your photo taken
with the agent ask them to xerox any thing stating you are good to
go get there name CYA -
goo
Hi
http://www.irs.gov/businesses/small/article/0,,id=98703,00.html
The above is a link to the IRS page of articles. This is only for
you to read over, however, because I highly recommend the help of a
qualified CPA (not just a CPA a qualified one)…
You said in your email that you had always had a loss. This leads me
to believe that you have used some or all of the money you have made
and also personal money to buy equipment and tools…
What you have to look out for is the past taking of depreciation.
The IRS may want you to “give back” (this is called recapture) some
or all of the depreciation (depending on if you elected sec 179 or
just depreciated over time). If you need to recapture, you will have
to include prior depreciation in your current income and then you
will be taxed on it in the current year. Now, this does not have to
be all bad…but you do need qualified advice. I don’t want to say
any more…I don’t know your whole situation.
Possibly, this is a special case. You mentioned you were injured. I
find it hard to believe the IRS would tax the heck out of someone for
closing their business due to injury. I’m sorry I can’t get more info
for you right now, but it shouldn’t cost you that much to have
someone handle this part of your return for you.
Good Luck
Kim Starbard
http://www.kimstarbarddesigns.com
Hi:
There's a limit, though. If you don't make a profit for three years out of the last five, the IRS is likely to deem it a "hobby" and disallow any further deductions for losses.
It’s actually a little worse than that. If the IRS comes in at any
point and deems you a hobby, here’s how it goes “Hobby losses can
only be deducted to the extent that one has hobby gains”. They will
disallow losses in the current year and also go back to prior years
and disallow losses you have taken prior. They will recalculate the
previous years’ taxes based on the fact that you are reclassed to a
hobby. Not good.
The good news, though, is that it is not hard to prove you are not a
hobby, but a real business. The number would have to be checked
again, but it used to be 400 hours a year. Basically, if you spend
more than 400 hours a year on your endeavor, it is a business. What
you would do is keep a log book or other record of how much time you
spend making pieces. I also keep my acceptance/rejection letters from
shows and records of any other things I spend time on that pertain to
the business.
Good Luck
Kim
Kim Starbard
http://www.kimstarbarddesigns.com
If you're an SP, you probably don't need to do anything other than notify the sales tax people that you won't be collecting for them any more.
Not being an accountant, I have kept out of this - still will,
mostly. (Ask an accountant or the IRS). But it’s true, to my
knowlege, that if you are working on your SSN all you should need to
do is file 1040’s that reflect your income as it is. The IRS doesn’t
care where it came from. Your city business licence and state taxes
are different, somewhat. Meaning that you may not need to “close” the
business, tax wise, but just report whatever income you do get as
income. But an accountant will know it in detail.
feel free to contact me offlist- that said:
if you are a hobbyist in a federal context, the IRS will want to
know how many hours you spent (for classification purposes) at your
task, and what profits were made. Over $2500.00 US you are obliged
to pay fed. taxes, as a business- It boils down to how you have set
it up. This can get sticky if you have done it to “hide” monies
earned, in which case the penalties you will owe for x years of
claiming losses can bite you quite hard. The very last thing I would
recommend is calling them to ask for advice initially unless you
approach it from a theoretical standpoint…(i. e- I am seeking
for a friend that isn’t sure how to file her income from
her cottage industry…) and do not give any specific identifying
unless you would welcome an audit.
Supposing you have set it up legally (inc. as an Ltd., LLC, SP
etc.) and are NOT using your social security number as your EIN, and
issued stock in your corporation, you will be able to claim losses
and receive an earned income credit if you have profits in excess of
$7,800. 00, materials and equipment that can be both appreciated and
depreciated (some equip. does appreciate, more will depreciate… It
is rather involved on a small scale but apparent on a large scale
when the equipment requires a human to operate it, and is then
creating a job which without that human operator would represent both
a loss of income to your corporation, and an at least half-time job
for a wage earner paying taxes. The earned income credit and the UIC
will both apply, first relative to he wage earner (EIC) and then as
it applies to you and yor corporate structure UIC)…actually I can
give you more specific advise if you tell me about your
structure…all dpends on that…should you need my input feel free to
contact me as I haven’t time to detail without a lot of speculating
at this point…
rer
though, is that it is not hard to prove you are not a hobby, but a real business. The number would have to be checked again, but it used to be 400 hours a year. Basically, if you spend more than 400 hours a year on your endeavor, it is a business.
This is from the IRS… I’m not sure where Kim got the
about working for 400 hours…
IRS Summertime Tax Tip 2007-13
Fishing, Gardening, Golf, Sewing, Woodworking, Horsemanship, Scrap
Booking, Stamp and Coin Collecting, etc.
The IRS isn’t trying to spoil your fun but if your favorite activity
makes a profit every year or so, there may be tax implications that
surprise you.
What is a hobby? Hobbies, also called not-for-profit activities, are
those activities that are not pursued for profit. What is a
business? Generally, your activity is considered a business if it is
carried on with the reasonable expectation of earning a profit.
If you are not sure whether you are running a business or simply
enjoying a hobby, here are some of the factors you should consider:
Do you run the activity in a businesslike manner?
Does the time and effort you put into the activity indicate an
intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances beyond your
control or did they occur in the start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you or your advisors have the knowledge needed to carry on the
activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can you expect to make a profit in the future from the appreciation
of assets used in the activity?
An activity is usually considered a business if it makes a profit
during at least three of the last five tax years, including the
current year.
An exception is breeding, showing, training or racing horses. Such
activity is presumed to be a business if it makes a profit during at
least two of the last seven years.
If you are conducting a trade or business you may deduct your
ordinary and necessary expenses. An ordinary expense is an expense
that is common and accepted in your trade or business. A necessary
expense is one that is appropriate for your business.
Losses from a not-for-profit activity (hobby) may not be used to
offset other income. It is possible to claim some deductions for
hobby activities as itemized deductions on your Form 1040 income tax
return.
However, there are special rules and limits to the deductions you
can claim, and those deductions may not exceed the gross income from
your hobby.
Still confused? More is available at IRS.gov. A good
resource is Publication 535, Business Expenses, found on the web site
or by calling 800-TAX-FORM (800-829-3676).
Kim
Basically, if you spend more than 400 hours a year on your endeavor, it is a business.
Thanks for that little tidbit, never having been in that situation,
it is good to know that there are ways of protecting yourself in the
event of an audit, above and beyond the usual receipts.
Terry
I'm not sure where Kim got the about working for 400 hours...
I’m not saying Kim is right or wrong - maybe it’s old policy or maybe
not. But somewhere along the way I’ve heard the 400 hour thing, too.
But I don’t know or remember details, and I’m emphatically not an
accountant. But she didn’t make it up, either…
Hi
Well, it looks like I got the tests mixed up between hobby vs.
business and passive vs. active activity.
One of the tests for determining whether an activity is passive or
active (passive losses can only be taken in as much as one has
passive gains) is “did you materially participate in the activity for
more than 500 hours during the year?”
There are several other tests which you can read about
herehttp://www.irs.gov/publications/p925/ar02.html#d0e3885
The test for whether or not you should consider yourself a hobby or
a business is…did you spend enough time during the year working
on this activity that you consider it a business? This is, of course,
very subjective.
Personally, if I were ever asked whether I am a hobby or a business,
I would say business because…
I spend a good portion of my time working on it
I keep adequate records
I file the appropriate sales/use tax and Schedule C
I have business cards, stationary, a website, a business checking
account, and a credit card which I use primarily for the business
Though rejected in previous years, I apply to several shows and I
intend to make a profit
http://www.irs.gov/businesses/small/article/0,,id=98703,00.html
The above link is the original one posted to the person who has to
close up shop due to injury. What I wanted to point out was to be
careful of prior depreciation taken. Since she said she had mainly
had losses up to that point, I guessed that she probably had spent
some or all of her gain (if any) on acquiring equipment/tools. If sec
179 was taken for this, and business use nows drops to below 50%, the
IRS’s stance is that one must “give back” (called recapture) some or
all of prior depreciation
An example to clarify…
I want to start a business so I set myself up with a bench. I spend
3500 dollars and I take all of this 3500 dollars as an expense
(under sec 179) in my first year of business. In the second year of
business, I find out how hard it is to really get started and decide
to go back to my old job. Should I really be able to keep that 3500
expense? Maybe.
As always, these are issues to be handled by a qualified CPA
Sorry about the mix up.
Kim Starbard
http://www.kimstarbarddesigns.com