Schedule C closed with bills to pay...

[Lion]

They're coming out of the woodwork now. New client. Dissolved his LLC (Schedule C) with the state in 1999. Had some disputed bills left over that he paid during 2012 (Sprint phone, interest on biz credit card, something that might be a parking ticket that I have to ask him about, etc.). Do I put a Schedule C in his 2012 return to deduct the bills that I decide are biz expenses? Or are they deducted elsewhere, Sch A maybe? Or are they lost?

I researched a closed partnership where a partner paid some closing expenses; those went to Sch E as if they'd passed through from a K-1. But am not finding similar direction for a sole proprietorship.

[taxea]

Are you serious? It took him from 1999 until this year to fix the problem. I would think that it is too late to expense the items to a business that has been closed for more than 10 years.

[Bees Knees]

You do continue to deduct business expenses on Schedule C that wind up the business activity, even if it is incurred for a year after the final income has been reported.

Having said that, at some point expenses from a former business become personal. That is true regardless of whether it was a corporation, partnership, or sole proprietorship. For example, inventory distributed to a partner that is later sold by the partner is treated as ordinary gain or loss by the partner as if it was inventory sold by the former partnership. That is true for only the first 5 years after it was distributed to the partner in a partnership liquidation. After 5 years, it depends on how the partner is using the inventory. If no new business was formed after the liquidation, the gain or loss would become a capital gain or loss on the sale of personal property (a loss on the sale of personal property would of course not be deductible).

I know that example is different than your case, but it illustrates the point that at some point, former business stuff becomes personal. A business liability over 10 years old could certainly be viewed as a personal liability. You won’t find any time limit mentioned in the IRS Pubs. It’s a facts and circumstances issue.

[Bees Knees]

I could also see another scenario that is a trap for LLCs trying to deduct losses after the business is closed. For federal tax purposes, a single member LLC is a disregarded entity, meaning you ignore the fact that it has entity status under state law. That, however, does not negate the legal status of the entity.

For example, the single member LLC as an entity exists primarily to protect the single member from the liabilities of the business. In your case, the LLC incurred business liabilities while it was supposedly in business. The entity is then later dissolved. My question is, why is the sole proprietor liable for the LLC debts if he/she was shielded from business debts under state law?

I would think this is an indication that the liabilities are personal, because under state law, the LLC member is not personally liable for the LLC debts. Thus, if such member is in fact liable, then it can’t be due to a business liability. Personally incurring expenses for a business does not automatically make them business expenses.