Business deductions when the business is inactive but receiving passive income

Forum|Forum|7 months ago
February 26, 2026
3 replies
486 views

Hi, I'm unsure whether I would still take business expenses when I didn't actively conduct the business but I received IP royalties from previous work (generating a 1099-MISC, reporting on Sch C). If I were to take all of the sorts of deductions as in previous years (the sort that go under "other"), I'd have several thousands in NOL, which I've had for the past few years and sounds like an audit risk if nothing else. There are however a couple of small expenses that I think remain fair, such as the website informing people of my past work. Also there's the possibility of getting a new contract at some point. Another way to put this is, since I receive income am I still actively conducting business?

Best answer by ThomasM125

Yes, you would report the income on schedule C as business income and only deduct the associated expenses that were ordinary and necessary to generate the income.

MinhT1

Alumni - Intuit

As a self-employed person, you are allowed to deduct business expenses related to your business. In fact there is no absolute limit but you have to keep records of all your expenses in case of verification or audit by the IRS.

The IRS says: To be deductible, a business expense must be both ordinary and necessary.

Please read this IRS document for more information.

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splooshAuthor

Level 2

@MinhT1 Hi, thanks for getting back to me. It turns out that Pub 535 has been replaced by Pub 334, Tax Guide for Small Business. In looking at that, I noticed that its "further info" section lists Pub 925, Passive activities. Reading that led me to this key statement: passive activities do not include

Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. (Pub 925, pg 10)

There are no time or active participation criteria, which I think implies that I should treat 2025's IP royalties the same way as if I was still active, and I take all the relevant deductions on Sch C as before. Correct?

ThomasM125Answer

Alumni - Intuit

Yes, you would report the income on schedule C as business income and only deduct the associated expenses that were ordinary and necessary to generate the income.

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