I have a client who had a restaurant that shut it's doors in 2010. The only thing the client has been doing with the business is paying bills (rent). We could not shut down the business in 2010 becasue she was still paying bills and we didn't want to lose the deductions. My plan was to use the passive losses that she has for 2010 and 2011 to offset ordinary income in 2011. Am I on the right track? I feel that it's passive losses becasue all she is doing is paying bills.
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Passive status is based on her level of activity in the business, not the level of activity that the business is engaged in. If her paying bills is the only thing going on with the business, and there is no other person participating in the activity, then she is considered to be materially participating in the business and it is thus, not a passive activity. Look at page 7-10 in TTB, second column under material participation, test number 2. -
Not only that, but ...
... when the restaurant was closed, that may have changed its status. If it was a passive activity vis-a-vis your particular client and partner, then when it closed, and isn't in the process of being sold, that constitutes a "disposition," allowing for the deduction of the current year's loss plus all suspended prior years' losses. Expenses incurred in subsequent years that are connected with a former passive activity are also allowed.Roland Slugg
"I do what I can."Comment
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Final Return 2011
I will be filing a final return in 2011. IN my opinion that is when the restaurant was disposed of. I will then take half of 2010 and all of 2011 passive losses to offset ordinary income. Do you feel this will raise any red flags with the return. The losses that I will be taking will be only the losses after the business had closed it's doors.Comment
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