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My dad has run a small business for decades. He is now in his 80s and can't let go of it. Since mom died, ten years ago, his record keeping has disintegrated into shambles. He has not made a profit at it in at least that long. He is in California, and sells to other businesses, exclusively wholesale so there is never any sales tax due. As it is not profitable there is also no income tax due. His gross sales are under $10,000, probably much under, and most of his inventory is obsolete. He lives off his social security and pays most of it in interest on a large loan for the business property - where he stores the obsolete inventory and other junk. The state is after him again for failure to file and I have difficulty in finding enough info to prepare an accurate return.

While he thinks he can build the business back up to its former glory, there is no realistic expectation of a profit. At what point can I say this is a hobby and he is not required to file tax returns? It will hurt his feelings to call it a hobby, but it won't hurt mine to stop filing for him. I'm a bit too close to this one to see it objectively, and would appreciate your opinions.

Foolish regards,

Vic
ancora imparo
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Is the business incorporated, or in any form other than sole proprietorship? I think you would need to wind down that entity if you were to meet the requirements of being a "hobby" vs for-profit enterprise. At the very least, it would free you from the (possibly) required annual reports to the state.
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Is the business incorporated, or in any form other than sole proprietorship? I think you would need to wind down that entity if you were to meet the requirements of being a "hobby" vs for-profit enterprise. At the very least, it would free you from the (possibly) required annual reports to the state.

No, it is (was) a sole proprietorship. There is no profit - not even close. He will never be able to use the NOL carryover, even if he qualified for it. In truth, he would be so far ahead to throw out his obsolete inventory, give away or fire sale the salable merchandise, and rent out the building. But he won't. His identity is wrapped up in being an entrepreneur. He thinks his clients - the few that are left - need him. I suspect they feel sorry for him. To me, it has become a hobby as there is no realistic expectation of a profit. But he is determined to keep going.

If I don't file for him, the state will make an estimate and assess - and attach or foreclose on his house - which I will likely inherit. But his lack of record-keeping makes it impossible for me to file an accurate return. The state is sending him their version of a POA, which he is supposed to sign appointing me to act for him. If he does, I'll try the hobby idea on them.

I swear I won't do this to my kids.

Vic
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There is a line on Schedule C that asks - Is this the final year of the business? Mark that YES. Value the ending inventory at $0. Complete the rest of the return as usual. Now the IRS is notified that the business is ended and will not expect another Schedule C.

Then call the state (sales tax office) to notify them that the business is ended. Call the county to notify them (property tax office). Call the county (business license office) to notify them.

I'm not a tax pro. But I don't understand why this would not work for you.

We wrapped up a profitable business and that's basically the way it was done. Actually there was a sale of the business too which included everything. So it's different in that respect.

To the pros: Is there more to it than that?

ML
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To the pros: Is there more to it than that?

That's the correct mechanics of reporting a business as closed.

The question is: when to apply those mechanics? When is the business closed?

--Peter
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