On the 2014 return, I did have an ending inventory. This is why I am curious 🙂 Thank you!
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.
@Carl Hello. Where is the indication on the tax return that "inventory was removed"? Thanks.
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?
If inventory is removed, that gives the schedule C a loss in the amount of the inventory. Is that acceptable ?
@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.
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.
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 If you had no purchases for the year and you had cost of items withdrawn for personal use would this go in as a negative number so it can be subtracted on line 40 and not added?
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.
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.
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.
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.
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.
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?
@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.
@Carl thank you for your detailed response. I agree with you that theres no point in waking the beast so when i had no sales in 2017 i stopped reporting a schedule C and i ended up closing my business feb of 2018 and also did not report a schedule c to my 2018 tax return either. I was told that once you stop reporting a schedule C then the IRS will automatically assume the business is dissolved. HOWEVER, someone else said if i have inventory i need to Zero it out on my tax return before the IRS will consider it dissolved?
1) i was recently told i should amend my 2017 taxes to at least expense all my costs that went to trying to save the business even if i made 0 sales since i still paid income tax for my other job however do you think that would trigger an audit with 0 sales and only expenses ? (its because my website crashed and spent a lot trying to fix it and gave up because i was advised to start fresh with a new website which would cost me even more). claimed a loss on it 2016 too (i can't remember for 2015) but all prior years it was profitable .
2) i officially closed my business feb 2018 with the state board of equalization - do i have to keep reporting schedule C each year until i dispose or sell off the remaining inventory? OR can i just skip a schedule c for 2018 and 2019 and add the schedule c again to my 2020 once i actually get rid of the inventory this year?
3)
in 2016 i showed a loss on my schedule C and in 2017 i had no sales but only expenses. i ended up closing my business feb of 2018. I did not report a schedule c to my 2018 tax return because i officially closed the business with the state board of equalization in feb 2018. HOWEVER, i was recently told i should amend my 2018 taxes to zero out my inventory. but I've also been told that if you don't report a schedule c anymore then the IRS will assume the business is dissolved.
1) IF, i do need to amend and zero out the inventory, what is the best way to do it so that i can use the loss as a tax write off? I have not yet decided if i will donate the inventory, sell for pennies on the dollar, or what to do yet but i will do what makes the most sense for the best tax write off (approx $14k worth of inventory)
2) Since i actually haven't disposed of the inventory yet then do i report it the year i actually dispose of it even though my business has been closed since early 2018?
3) LASTLY, will amending 2 years in a row trigger an audit?
thank you so much for your help!
I was told that once you stop reporting a schedule C then the IRS will automatically assume the business is dissolved.
That's true, but under specific and explicit conditions.
- Your EOY Inventory balance must be zero.
- If the business has depreciable assets, then you must show the disposition of those assets.
- If your business claimed any vehicle business use (even if less than 100% business use) then you must show the disposition of the vehicle.
So if you have no inventory, no assets, and no vehicle use, you can just stop filing the SCH E. Otherwise, you have to show the IRS what you did with the inventory, assets, and vehicles. For the latter, that "is" closing the business and showing it's closure/disposition to the IRS.
1) i was recently told i should amend my 2017 taxes to at least expense all my costs that went to trying to save the business even if i made 0 sales
Hey, it's not common, but it's also not all that uncommon for a business to be "Open for business" and not make any sales. If your 2016 returns shows an EOY inventory balance greater than zero, you have to account for it. I would suggest you amend the 2017 return and show the business income/expenses for what they "really" are. You'll show $0 income and still claim your expenses. Those expenses will be carried over to 2018.
2) i officially closed my business feb 2018 with the state board of equalization - do i have to keep reporting schedule C each year until i dispose or sell off the remaining inventory? OR can i just skip a schedule c for 2018 and 2019 and add the schedule c again to my 2020 once i actually get rid of the inventory this year?
First, having reported to your state that the business was closed in 2018, if you report it on SCH C of your 2019 return, then your state may find you in violation of state law for running an unlicensed/unauthorized business. I would "highly" suggest you amend the 2018 tax return to show to both the IRS and state that you closed the business in Feb 2018. All inventory will be shown as removed for personal use, any business assets will also be removed for personal use, and the same for any business vehicle use.
Get that 2018 return amended yesterday, if not sooner and "get" "it" "done" so that the state will "hopefully" not catch up to you first.
Now take note of this if you're amending the 2017 *and* 2018 return.
When you amend the 2018 return, you will "NOT" be able to import "ANYTHING" from the 2017 return. So after amending the 2017 return make sure you print out the SCH C along with any and all worksheets associated with it. You will "NEED" that information to get the correct BOY balances for 2018 for the following:
- You will need the 2017 EOY Inventory balance, becuase it must match exactly your 2018 BOY Inventory balance.
- If your business has assets, you will need the 2017 IRS Form 4562 (prints in landscape format) so that on the 2018 return you can enter the "correct" prior year's depreciation already taken.
- If your business claims vehicle use, you will need the 2017 worksheet for that so that you can ensure your 2018 start-of-year mileage matches exactly your 2017 end-of-year mileage.
Finally, an amended return can not be e-filed. The IRS says so. You have to print, sign (both the 1040X and the 1040) and mail it to the IRS yourself. Each amended return needs to be mailed in a physically separate envelope.
When amending, if you also amend a state return then that too gets mailed in a physically separate envelope. When you print the amended return upon completion, there will be separate instructions for the federal return, and separate instructions for the state return printed also. The instructions tell you what you need to include in the envelope along with the address to mail it to. The federal return is *NOT* mailed to the same address as the state return. So pay attention to detail.
Good thing the IRS extended the filing deadline for 2019 to July 15th. You've got time to get this stuff done with no worries about penalties now. But you really can't even start your 2019 return until you get all this amending done. Once you get the amending done and start your 2019 tax return, you will be able to import from your amended 2018 return, into your 2019 return. But *PAY ATTENTION* so that you import from the amended .tax2018 file on your computer, and *NOT* the un-amended file in your online account.
@Carl can i just say GOD BLESS YOU!!! are you a tax attorney/accountant? You're amazing!
If i may clarify a couple points you made...
i do use my car for business and chose the standard deduction for miles and i have it roughly recorded in a book when i remember to lol. Even though i ended my business i still use this car for my sch E passive income. I just never reported car usage for sch E because i was already reporting it for my sch C. Now that my last sch C will be for 2018 how do i transfer the car expense/depreciation to my sch E? just put in my sch E i put the vehicle in business in 2015 as shown on my sch E (even though i didn't start my sch E until 2017?)
1) I still made a fair amount from my 1099 misc in 2017 so the expenses from my sch c (-$13k) lowered my tax liability for 2017. In this case- can i still carry over my $13k worth of expenses to 2018? I'm assuming no
2) I will amend my 2018 taxes as you suggested and zero out my inventory. I received an offer from someone to buy all my old/obsolete and discontinued merchandise at a heavy discount of $1000 while the value is $14,000. Im thinking about doing it because a lot of the merchandise started to smell moldy from the storage unit and some damage from the rain as well. So how do i go about this? i just zero out the inventory from $14K to $0 and show on the sales page under other sales for $1000? Should i include an explanation for the heavy discount or they will assume it?
HAPPY EASTER 😃
I know I said in an earlier post to not "wake the beast". But with inventory, assets and vehicle usage, that beast is already awake and just waiting to pounce. So this is why you want to amend things and jump out of the way before the pounce occurs.
are you a tax attorney/accountant?
Not by any stretch of the imagination. I've been a landlord with 3 rental propertys for 30 years now, and operating my own SCH C business for 15 years now. All of my knowledge comes from the school of hard knocks. I've even got the certificate! It reads, "Been there. Done that. Got the T-Shirt"
1) I still made a fair amount from my 1099 misc in 2017 so the expenses from my sch c (-$13k) lowered my tax liability for 2017. In this case- can i still carry over my $13k worth of expenses to 2018? I'm assuming no
Yes you can, provided you did not use those business expenses that exceeded your business income, to lower your tax liability on "other income" for 2017, and provided you close the business (on your taxes) in 2018. When you close the business in 2018, if you still have business expenses that exceed the 2018 business income, then it that year you will be able to claim them against your "other" taxable income.
2) I will amend my 2018 taxes as you suggested and zero out my inventory.
So just understand that you have no choice, but to show that inventory as "removed for personal use" on your amended 2018 tax return.
I received an offer from someone to buy all my old/obsolete and discontinued merchandise at a heavy discount of $1000 while the value is $14,000
Since this sale will occur in 2020, you won't report the income from it until you file your 2020 return next year.
If the person you're selling the inventory will be issuing you a 1099-MISC for that, make sure they use your SSN on that 1099-MISC and not your now defunct EIN from your closed business. You won't deal with reporting the $1000 you receive for that inventory, until you do you 2020 taxes next year. Unfortunately, you won't be able to claim a "loss" on it at all, since it won't be a business sale, but a personal sale. You are not allowed to deduct losses on the sale of personal property, and this has never been allowed.
But things will be "off-set" in a somewhat round-a-bout way. You see, after closing your business, once your business deductions gets your taxable business income to zero, any remaining deductions can be deducted from "other" ordinary income. But you can only deduct a max of $3000 a year from that "other" income.
When you sell the remaining inventory in 2020, you can't claim the loss - but you do have to claim/report the income. That's because when you removed it from the business for personal use in 2018, it became your personal property. Unfortunately, losses incurred on the sale of personal property are not allowed, and never have been.
I would suggest you handle this 2020 sale "as if" you are the middle-man in the transaction, and that you only report the $1000 of income if payment is made in a traceable fashion; i.e.; paid by check, credit card, debit card, bank transfer, or the buyer issues you a 1099-MISC. But don't get into the details of this now. Just wait until you start your 2020 tax return next year. The main thing to understand is that if you report that $1000 of income on your 2020 return, it "will" be taxable income. But unless the rules change we can "offset" it by showing the IRS that you were just the "middle man" between the real seller (your source where you got it in 2018) and the buyer you sold it to in 2020.
i do use my car for business and chose the standard deduction for miles and i have it roughly recorded in a book when i remember to lol.
if you still have all the prior tax returns, there's a vehiclular worksheet that will show you your miles driven for each year and I think it also has the per-mile deduction on it for each of those years too. But you have to use the chart I referenced earlier to see how much of that per-mile deduction is depreciation for each year.
@Carl well you could look into becoming an accountant as your side job bc you're great at it! lol
okay so believe you may have missed my car question if you don't mind me reposted it here to have you answer it
i do use my car for business and chose the standard deduction for miles and i have it roughly recorded in a book when i remember to lol. Even though i ended my such C business in early 2018 i still use this car for my sch E passive income. I just never reported car usage for sch E prior to 2018 because i was already reporting it for my sch C and i didn't keep the books separate since i was using the same car so i ONLY reported to sch C so I'm not double dipping. Now that my last sch C will be for 2018 how do i transfer the car to my sch E? just put in my sch E i put the vehicle in business in 2015 as shown on my sch C (even though i didn't start my sch E until 2017?) and thats it? or am i suppose to close it out on my schedule c saying i disposed of it when my business close and then start fresh on my schedule E with the same vehicle? so confused lol
2) when you say other income do you mean line 21 on 1040 or you mean just any other income i receive? all the other income i receive such a rental property income, interest payments on investments all make more than my schedule C business so every year i use the loss to help lower my tax liability for my other income. so just confused if you mean line 21 "other income" because that has been blank every year on my tax return
Just show the vehicle as "removed for personal use" from the SCH C business and be done with it. You can't do anything else until the tax year you sell, trade-in or otherwise dispose of the vehicle.
There's nothing to transfer. Basically, when you claim vehicle use for SCH E, you'll find that it doesn't make one single penny of difference to your tax liability. In my personal opinion (and we call know what opinions are like) claiming vehicle use for rental property is a total waste of time and effort, since rental property already operates at a loss every year, without claiming vehicle use.
Remember, carry overs losses on rental property is not deductible until the year you sell the rental property. When that occurs, I seriously doubt you are going to sell the vehicle as "a part of" the sale of the rental So you'll end up showing the vehicle removed for personal use from the SCH E too. Then when you sell that vehicle your loss will not be an allowed deduction, because losses on the sale of personal property are not and never have been deductible. Even if you could, when you take depreciation into account you will *STILL* sell/trade-in the vehicle at a loss.
There are two basic types of assets. Those that make you money, and those that cost you money. A vehicular asset will always cost you money.
Hi @Carl i sent you a message in your inbox on sat if you wouldn't mind checking it! thank you!!!
i was trying to copy and paste the message i sent you but for some reason it won't allow to access it. UGH. i don't remember my questions in its entirety but basically just wanted to know
1) when i close out my schedule C business do i have to enter the date of (dispose, sold) for my car that i purchased for personal use that i also used for my schedule C business and schedule E business when i am still currently using it for my schedule E?
2) i never reported the car on my schedule E before but now that I've not claimed a single loss on my schedule E since its profitable bc its a vacation rental i will start to claim car deductions - do i just enter the date that i started using it for my vacation rental even if it overlaps with my schedule C business?
Since you did not sell the car you have to show the car as "removed for personal use" on the SCH C business. After the return is filed and accepted by the IRS, you *NEED* to print the return in it's entirety. For the SCH C business you're basically interested in keeping a hard copy on physical paper of the SCH C, all attachments, all worksheets and all computation forms. *you* *will* *need* *it* at some time in the future. I guarantee it.
Additionally, since you took the "per mile" deduction on the vehicle, be aware that a portion of each mile deduction allowed included vehicle depreciation. Now since the per-mile deduction changes every year, so does the depreciation amount taken for each mile.
When the day comes that you sell or trade in that vehicle, you will be "REQUIRED" to recapture that depreciation. But you have to know how much first. There's a chart about halfway down the page at https://bradfordtaxinstitute.com/Free_Resources/IRS-Mileage-Rates.xml.aspx that shows how much of each mile is depreciation for tax years back to 2003. You'll want to use your mileage records to figure the total depreciation taken on the vehicle as a SCH C business asset and keep that number stored safely away where you can find it when you will need it in the future.
For the SCH E rental business just start tracking your miles for that as you did for the business and don't worry about the overlap in time. It's not an overlap in use, so you're fine.
Finally, understand that depreciation is *NOT* a permanent deduction by any stretch. Basically, it's just a reduction in cost basis of the asset being depreciated. So when you sell, trade or otherwise dispose of that vehicle you are required to recapture "ALL" prior depreciation and pay taxes on it. Recaptured depreciation is added to your AGI and has the potential to bump you into a higher tax bracket. So make sure you understand this.
This is why I recommend one not claim vehicle use for rental property, as it makes practically no difference in your tax liability during the years the asset is being used. But it "CAN" make a different in your tax liability (by increasing your taxes) with the recaptured depreciation in the year you dispose of it.
Thats why I always recommend you try to keep the depreciable value of assets as low as you can legally get away with and prove your value if audited on it.