If the business is changed to a hobby are you required to pay back the taxes from past deductions as a business?

[anonymous5]

My business has not made a profit in the past three years. I have a single member LLC.

1) If I report my business income (less than $200 gross), as a hobby, will I be required to pay back the past deductions as a business?

2) Before I report as a hobby, do I need to close out my LLC? Or is it okay to report the LLC income as a hobby for this year since it is under $200 anyway?

[Critter-3]

1) If I report my business income (less than $200 gross), as a hobby, will I be required to pay back the past deductions as a business?  No 

2) Before I report as a hobby, do I need to close out my LLC? Or is it okay to report the LLC income as a hobby for this year since it is under $200 anyway?   Since a single member LLC is a disregarded entity you will simply stop filing the Sch C.   If you have any assets still being depreciated then you will "sell" them by converting them to personal use. For the federal return that is all you need to do.  

If your state requires it (since an LLC designation is a state issue) you may need to "close" the business with them in the manner they dictate ... check local laws for the rules. 

[anonymous5]

I am hoping that in 2022, things will turn around, so I do not wish to close it. Are you saying that my state might require it just in order to file as a hobby this year?

[Critter-3]

No ... only if you are permanently closing the business ... if it is just taking a break then just enter no income or expenses on the Sch C and let it ride unless you have assets being depreciated then just use the Sch C as normal ... the IRS is going to be very understanding during these covid times that even though you are trying to make money it may not be possible for a time. 

[Mike9241]

if audited and the business was deemed a hobby, the IRS could disallow expenses for the past open years.

no schedule C. hobby income (no expenses) is reported as misc income on schedule 1.

the state does not require cancellation because it's a hobby. the issue is that many states charge substantial LLC fees each year. if your state does then you'll have to pay the fees each year to keep it alive.  every state has different rules but failure to pay results in termination after so many years. Though many allow reinstatement if past fees + penalties are paid.

[anonymous5]

"no schedule C. hobby income (no expenses) is reported as misc income on schedule 1."

This would be my third year operating at a loss which is why I figured I would be required to file as a hobby this year and not claim any expenses. So it's okay to do so, it sounds like, until business picks up? At that point, then I just file a Schedule C again?

[Opus 17]

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@anonymous5 wrote:

"no schedule C. hobby income (no expenses) is reported as misc income on schedule 1."

This would be my third year operating at a loss which is why I figured I would be required to file as a hobby this year and not claim any expenses. So it's okay to do so, it sounds like, until business picks up? At that point, then I just file a Schedule C again?

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"The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year."

That phrase is geared toward making people file as a business and pay SE tax. The opposite is not necessarily true (that a business that only makes a profit 2 of the past 5 years is automatically a hobby).  Lots of businesses lose money in 3 or more consecutive years and aren't downgraded to hobby.

I would look at the 9-factor test.  

https://www.irs.gov/pub/irs-news/fs-07-18.pdf

https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business

If you are really running hard and just not. making it, why wouldn't it still be a business?  But if you've taken a step back, aren't pushing as hard, etc., then maybe it's not a business any more.

https://turbotax.intuit.com/tax-tips/small-business-taxes/when-the-irs-classifies-your-business-as-a...

[M-MTax]

So it's okay to do so, it sounds like, until business picks up?

What kind of business?????

No one runs a plumbing shop or a pest control service or a mom/pop furniture store or a pool cleaning service as a hobby. The IRS has a list that they consider suspect because people start them knowing they will sustain HUGE losses that they can write off against other income. 

[anonymous5]

Affiliate marketing and handmade jewelry. I'm not writing off huge losses at all. But replacing a full time income with this endeavor (as is my true intention, and I'll keep working toward that end), has been very challenging.