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?

[SoLostHELP]

@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!

[Carl]

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.

[SoLostHELP]

@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 😃

[Carl]

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.

[SoLostHELP]

@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

[Carl]

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.

[SoLostHELP]

Hi @Carl i sent you a message in your inbox on sat if you wouldn't mind checking it!  thank you!!!

[Carl]

Sorry, I don't do PMs on this board.

[SoLostHELP]

Spoiler

@Carl 

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?  

[Carl]

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.

[SoLostHELP]

@Carl Thank you for your response.  I have not depreciated the car because it was a hand my down car so i paid nothing for it.  When filling out my schedule C for car expense it only asks me "Date Sold, Disposed, or Retired" I've not done either and nor is there a question of removed for personal use but then again i didn't remove it for personal use since I'm still using for schedule E.   So I'm assuming i don't need to do anything possibly because I've never depreciated the car?

Also, just curious.  are all the properties you manage and own in the same state or do you have properties out of state as well?  

[Carl]

I have not depreciated the car

Yes you have, weather you know it or not. If you took the per-mile deduction, then a portion of each mail claimed was depreciation. See the chart at https://bradfordtaxinstitute.com/Free_Resources/IRS-Mileage-Rates.xml.aspx about halfway down the page to see how much of your per-mile deduction was for depreciation.

Your issue is a bit different for your situation, and most likely is because  you are not reading the screen that says "Special Handling Required?" Read that screen to understand why you select YES on that screen, then click the YES button.

are all the properties you manage and own in the same state

They're all within 20 minutes drive time. I don't do the long distance rental thing, because it's not worth it to me.