Deducting business expenses the year after a business is sold

[MikeInChicago]

Hello.  I sold my business (an LLC) in 2019 and filed the final 2019 Form 1065 business return in early 2020. During 2020, I paid out of my personal bank account outstanding ordinary business operating expenses of approximately $20k. Can I deduct this $20k on my personal 1040 for 2020? If so, where does this get reported?   I was the managing member of this LLC.  Thank you!

[DianeW777]

You will treat the amounts paid by you as if you had made a capital contribution to the LLC.  Since you already determined your final gain or loss last year, when you received your final Form 1065-K1, these expenses essentially become capital losses; short term, as long as they were not used on the final Partnership return. This is treated like a business bad debt which is why it would be considered short term.

• IRS Publication 535 (See Business Bad Debt section)

Report this on Schedule D using the steps below.

1. Open your TurboTax account > Select the Personal tab then Personal Income > I'll choose what I want to work on (Desktop version) or Wages and Income (Online version)
2. Scroll to Investment Income > Select Stocks, Mutual Funds, Bonds, Other > Start or Update
3. Add or Edit your sale that is NOT reported on a Form 1099-B > Select to enter a business bad debt 
4. Enter the Total Proceeds zero > Cost Basis (total amount of business expense)
5. Enter the holding period - short term
6. Continue to finish your sale/bad debt.  

[mmarc2000]

DianeW777, thank you for your thorough explanation.  Do you think there is any opportunity to deduct it on Schedule E as "other expense"?   I've done this in the past for out-of-pocket expenses, but wasn't sure if this was do-able since the business was sold in the prior year.  Note this expense was not previously deducted by me or by the business.   Thank you.

[DianeW777]

I do not suggest entering them on Schedule E.  The amount of the loss is limited as a capital loss, unless you have gains to offset it.  If the amount is below $3,000 the tax ramifications will be equal, otherwise they will not.