Closed business with current expenses

[mbigelow]

Client operated a business (sole prop) until 2014 when he sold it. In 2016, he was sued by a former employee and had to pay out back overtime wages. So he has expenses (legal, wages, and payroll taxes). Can I simply file a Sch. C with these expenses and no income? If so, should I include some type of explanatory note to avoid confusion? Thanks.

[spanel]

Client operated a business (sole prop) until 2014 when he sold it. In 2016, he was sued by a former employee and had to pay out back overtime wages. So he has expenses (legal, wages, and payroll taxes). Can I simply file a Sch. C with these expenses and no income? If so, should I include some type of explanatory note to avoid confusion? Thanks.

I would. You can never really close a Sch C as you always can make money.

I would not enclose anything.

Chris

[Roland Slugg]

FWIW, I concur with Chris on both points.

It is fairly common for a sold or closed business to have expenses in a later year ... even several years later. The T/P should just file the usual form he normally would.

I would not enclose any special explanation.

[New York Enrolled Agent]

Client operated a business (sole prop) until 2014 when he sold it. In 2016, he was sued by a former employee and had to pay out back overtime wages. So he has expenses (legal, wages, and payroll taxes). Can I simply file a Sch. C with these expenses and no income? If so, should I include some type of explanatory note to avoid confusion? Thanks.

I think I will disagree a bit with my fellow posters. While I don't disagree that you can deduct the expenses, I would try to protect yourself and your client by filing a Form 8275 with the return. This disclosure form can cite Rev Ruling 67-12 as to why you deduct expenses on a 2016 Schedule C on a now defunct activity.

[Roland Slugg]

I would try to protect yourself and your client by filing a Form 8275 with the return. This disclosure form can cite Rev Ruling 67-12 as to why you deduct expenses on a 2016 Schedule C on a now defunct activity.

F-8275 is used to disclose items in order to avoid the portions of the accuracy-related penalty due to: (A) disregard of rules, or (B) the substantial understatement of income tax, if the return position has a reasonable basis. (It can also be used to try and avoid other penalties.) It may also be used to cite positions taken that are contrary to the law or to rules, such as Rev Ruls.

Rev Rul 67-12 is a 50-year old rule that says that a taxpayer may deduct expenses in a tax year after a business is closed. The deductions referred to in the OP are consistent with that old Rev Rul, not contrary to it.

None of the reasons for filing F-8275 is remotely present in the facts presented in the OP.

[TAXNJ]

Client operated a business (sole prop) until 2014 when he sold it. In 2016, he was sued by a former employee and had to pay out back overtime wages. So he has expenses (legal, wages, and payroll taxes). Can I simply file a Sch. C with these expenses and no income? If so, should I include some type of explanatory note to avoid confusion? Thanks.

Agree that the IRS form 8275 is not needed.

Consider keeping a note for your file if your decide that your position is based on Rev Ruling 67-12 whether or not you decide to include an explanatory note of your position with the return.

[New York Enrolled Agent]

Agree that the IRS form 8275 is not needed.

Consider keeping a note for your file if your decide that your position is based on Rev Ruling 67-12 whether or not you decide to include an explanatory note of your position with the return.

There is no such thing as an "explanatory note" - the Tax Court has ruled multiple times that disclosure for purposes of penalty protection for both the taxpayer and the preparer MUST be on Form 8275. This conforms to the Treasury Regulations.

There is zero reason not to file a Form 8275 in this case. The original poster says there are wages, payroll taxes, and legal fees involved. Legal fees are always problematical. None of us know the amount of the settlement but a Schedule C with no income and significant expenses may cause an IRS review. Why not the 8275 citing the Rev Ruling? Obviously, the OP is concerned - he can help himself by disclosing what happened.

Mr. Slugg is concerned with "consistent with that old Rev Rul, not contrary to it".
Disclosure is not simply to take a position contrary to a Rev Ruling or anything else. A disclosure discloses. It informs the IRS what is going on in a given return. Form 8275 is e-filed with the return is a preparer's best friend.

[TAXNJ]

There is no such thing as an "explanatory note" - the Tax Court has ruled multiple times that disclosure for purposes of penalty protection for both the taxpayer and the preparer MUST be on Form 8275. This conforms to the Treasury Regulations.

There is zero reason not to file a Form 8275 in this case. The original poster says there are wages, payroll taxes, and legal fees involved. Legal fees are always problematical. None of us know the amount of the settlement but a Schedule C with no income and significant expenses may cause an IRS review. Why not the 8275 citing the Rev Ruling? Obviously, the OP is concerned - he can help himself by disclosing what happened.

Mr. Slugg is concerned with "consistent with that old Rev Rul, not contrary to it".
Disclosure is not simply to take a position contrary to a Rev Ruling or anything else. A disclosure discloses. It informs the IRS what is going on in a given return. Form 8275 is e-filed with the return is a preparer's best friend.

NYEA

You have provided some good comments to consider.

As you state “….Form 8275 is e-filed with the return is a preparer's best friend.” It can be or can be their worst enemy? The form can be complicated and cumbersome. Think one would need to be careful in filing it out and the information provided (not too much or too little information) No? The Original Poster would make that decision.

R, Slugg also provided some good comments to consider.

e.g., “Rev Rul 67-12 is a 50-year old rule that says that a taxpayer may deduct expenses in a tax year after a business is closed. The deductions referred to in the OP are consistent with that old Rev Rul, not contrary to it.” None of the reasons for filing F-8275 is remotely present in the facts presented in the OP.
The Original Poster would make that decision.
(p.s. “Rev Rul 67-12, the 50-year old rule” is available on facsimile image!)

Now as far as “explanatory note” - comment was “….if you decide that your position is based on Rev Ruling 67-12 (and) whether or not you decide to include an explanatory note of your position with the return.” The comment states the Original Poster would make that decision and the recommendation was “Consider keeping a note for your file”.

So the bottom line is the Original Poster has all the scenario facts, performs research and has the responsibility of deciding how to best handle their scenario and may or may not consider any or all reply posts.

[mbigelow]

I REALLY appreciate everyone's insight, especially at this very busy time of year. Your comments have definitely given me valuable input and avenues of further research that have allowed me to take informed action for my client and myself. Thanks again and hope the waning days of the 2016 filing season treat you all well!