Business closed, inventory donated to charity. No business conducted during this past year. When it asks about inventory, do I put that I have inventory to report?

[bennybella]

On the 2014 return, I did have an ending inventory. This is why I am curious 🙂 Thank you!

[bennybella]

Thank you, Carl!

[Carl]

If you had a "Beginning of Year Inventory" that was more than zero, then you must indicate that your business had an inventory. You can then indicate that all of that inventory was "removed for personal use". That reduces your inventory to zero. (Which is required when closing the business) Then you can indicate your "personal donation" under the Deductions and Credits tab in the Charitable Donations section.

[fanfare]

@Carl  Hello. Where is the indication on the tax return that "inventory was removed"? Thanks.

[fanfare]

Also, If I tell TurboTAX I'm closing the business, there is no difference on the filed tax return that I can see.
Or does this merely tell TurboTAX to not bring in the Schedule C next year?

[fanfare]

If inventory is removed, that gives the schedule C a loss in the amount of the inventory. Is that acceptable ?

[TaxGuyBill]

@fanfare   Schedule C, Line 37 is where inventory removed for personal purposes is entered.

It won't carry Schedule C to next year, and I *THINK* it forces you to go through each "asset" to indicate if they were sold or converted to personal use.

If inventory is removed for personal purposes, it would reduce the year-end inventory (Line 41).  It would not create a "loss" in regards to the profitability for the business.

[Carl]

I only provided info for the inventory, because that's all that was asked about. But yes, when closing a business you must indicate disposition of inventory and all assets associated with the business. If you donate the assets to charity, then you must reduce the FMV of your donation by the amount of depreciation taken over the business life of the asset. This will commonly result in an amount of zero for your donation deduction. But it's better than paying taxes on the recaptured depreciation.

[akac7002]

Would this be on line 36 not 37? If you had no purchases for the year and you had cost of items withdrawn for personal use would this go in as a negative number so it can be subtracted on line 40 and not added?

[Carl]

This thread is over 3 years old, yet folks are still finding it useful I guess. The below information should answer all questions that arise from all the comments above.

• Closed SCH C Business

You need to report your business as "sold or otherwise disposed of".

Start working through your business "as if" you still own it. On the 2nd or 3rd screen in select the option for "I sold, closed or otherwise disposed of this business in 20xx". If prompted for the date, enter the day after you last day of business in 2017.

If your business had no income in the tax year, you can not leave the business income section blank. You 'must' enter a digit, even if that digit is a ZERO.(Program quirk, so don't ask, just do it and press on with life.)

If you had no business expenses, then you can leave that blank and don't even have to work that section through, if you don't want to.

If your business carried an inventory, the end of year (EOY) inventory must be zero. If it's not, then work through the COGS section (Inventory/Cost of Goods Sold) and indicate that you removed the entire remaining inventory for personal use. That effectively makes your EOY inventory balance, zero.

If your business had assets, then you must show the disposition of those assets. In the Business Assets section work through each individual asset on at a time, and select YES on the screen, "DId you stop using this asset in 2016?". Then on the next screen, "Special Handling Required?" if you sold the asset, select no and you will be prompted for your sales information on that specific asset. If you did NOT sell the asset, click the YES button. You must do this for each individual asset listed, even if it's already fully depreciated.

If you claimed any vehicle expenses in your business at any time from the day you opened your business, then you must most show the disposition of that vehicle. Work through the Business Vehicle Expenses section and indicate that you stopped using that asset in the business, when prompted. Then show your disposition of that vehicle. Most likely, if you sold the business I seriously doubt you sold the vehicle as a part of the business. So just indicate that it was removed for personal use.

Once you have done all the above, that will make the 20xx tax year the last year you will file a SCH C for this specific business. If SCH C data is imported into the TurboTax program next year, then that means you missed something, and as far as the IRS is concerned, you were still "Open for business" for the current tax year.

[danbon1]

Thank you Carl for your information here. I have one additional question. How do I handle small tools inventory for which I have never taken depreciation? None of these items were purchased for more than $50 and are all over 10 years old. Thank you.

[DaveF1006]

I would do nothing with your small tools inventory. You could have expensed or taken depreciation in the years you purchased them. Since you neither expensed or taken depreciation just ignore them unless you wish to amend your prior returns to report those tools.  It would be more trouble than it is worth.

[Carl]

For small tools, don't waste the time, effort and ink. You're wasting time and effor for not gain.

In my business, I might need to replace a few screwdrivers a year, at a grand total cost of "MAYBE" $50 in that year. That $50, even as a deduction (and it is a deductible business expense) will not make one single penny of difference in my tax liability. Now if I was buying $500 screwdrivers (and since I"m not the government, I can't justify that cost) then I would claim it.

[SoLostHELP]

Hi @Carl 

you sound extremely knowledgeable. I have a similar question for you and anyone else who might know.  I recently closed my online pet clothing business in early 2018. My last online sale was early 2016. Because I didn’t make money 2017 I never reported a schedule c for 2017 so my last schedule c was on my 2016 taxes which had an ending inventory of $1500 which was incorrect bc years prior I never added the new inventory purchased since 2010!! The actual correct number is approx $19,000- $20,000 of remaining inventory now. Clearly I can’t amend further than 2017 at this point so what do you recommend me to do that I can maximize tax benefit from my business loss? Can I depreciate the value of my remaining inventory or would I get more deduction if I donate it? Or should I leave everything alone and move on since I haven’t gotten an audit for not officially closing out my business on my taxes? 

[Carl]

@SoLostHELP at this point, my suggesting is that you let that sleeping dog lie. Wake it, and it may turn into a gremlin. That doesn't mean it still can't happen. But with all that's going on in the world today, I'd leave well enough alone.  Here's a few things I note though.

I never added the new inventory purchased since 2010!!

Don't bother adding it now. If it was never added, that means it was never expensed or sold. In other words, it never existed in your business. At this point, there's no need to go back in time to make it exist, as doing so will not make any difference to your tax liability for any of those other years anyway.

Remember, part of closing a business is that you get your EOY Inventory balance to zero. With unsold inventory, the only way to do that is to show it as "removed for personal use" which means what you paid for it is not tax deductible anyway. So it makes no sense at this point to add it to your inventory balance, when all you're going to do is turn right back around a remove it for personal use.

So in a nutshell, you can consider that inventory you purhcased in 2010 as having been purchased by you personally, for you personally, and has nothing to do with the business.

Can I depreciate the value of my remaining inventory

Inventory is never depreciated. No exceptions. Remember, depreciation is not a permanent deduction. When you close a business all prior depreication is recaptured and taxed. Also, what you pay for inventory is not deductible until the tax year you actually sell that inventory. Doesn't matter what year you purchased it either.

or would I get more deduction if I donate it?

Your donation would be a personal donation, having nothing what-so-ever to do with the business. Remember, in order to claim a deduction for a donation, you must donate to a qualified charity recognized as such by the IRS. Your donation would be reported/claimed under the Deductions & Credits tab in the Charitable Donations section. The value of your donation is the lesser of it's FMV or what "you" actually paid for it; whichever is LOWER.

Keep in mind also that you have two basic classes of qualified charities. there's 50% charities and 30% charities. That basically means if you donate to a 50% charity, then only a maximum of 50% of what you donate is deductible from your taxable income. Ditto for a 30% charity. Also, the allowed deduction could be less than 50% (or 30% if applicable) if your income is to high. I don't know what the income thresholds are.

I'm pretty sure the TurboTax program treats all charitable donations as a 50%.

Finally, charitable donations are an itemized deduction. So until the total of all of your itemized deductions exceed your standard deduction, it makes absolutely no difference to your total tax liability.