Filing requirements for inactive businesses | DiMercurio Advisors

It may feel silly to file a tax return with no activity on it, but it’s probably a good idea anyway

Sometimes you hang onto stuff you're not really using anymore, like a gym membership or your old trumpet from freshman year band class. But what if you own a business entity that’s not currently active?

When it comes time to file your tax return, you may wonder if or how you’re supposed to report on owning a business without any activity that year. Depending on what exactly happened with your business and how it’s structured, you may or may not be required to file taxes for it. But filing could be a good idea even if you’re not technically required to.

The basics

• You should maybe file a tax return for your business even if nothing actually happened with your business that year
• Activity doesn’t just mean income
• Corporations always need to file, other business types may or may not have to

What counts as activity, anyway?

It’s not always clear what “activity” means. But if money is going into or out of the business, that’s a big clue. Some examples to check for include:

• Paying employees
• Using a credit or debit card registered to the business
• Purchasing supplies intended for the business
• Paying any business-related expenses

It’s not always obvious when activity is occurring with the business. If there are investments in other entities made in your business’ name, if there are any loans associated with the business, or if your business owns other entities, that counts as activity even if the business itself doesn’t have any direct revenue or expenses. If your business still has some money in a bank account, the interest generated is typically counted as taxable income, and therefore activity.

And we’re not just talking about expenses associated with normal operations of the business, but any spending that maintains the existence of the business entity. If there’s a website out there you’re still paying to keep online, that’s activity.

Why would a business have no activity?

After all these examples of activity, it might seem strange that a business wouldn’t have any at all. But there are plenty of reasons why that might be the case.

Say it’s been your dream to start your own business, and as soon as you earn the relevant license you quickly file with the state to establish the business entity. But after that, you realize that it’s a better idea to join an established company first and gain experience and credibility. You might hang onto a business entity with no activity for a while before you’re ready to use it.

Another example: you start a business partnership with a few friends, create the entity, but have a falling out before the business gets off the ground. Unfortunate, but it does happen.

You also might own an old company that is no longer active, but you haven’t gotten around to formally shutting it down yet.

Do I need to file a tax return if my business had no activity?

Whether your business had any activity or not, the real question here is: what do you have to do about it? Filing requirements differ depending on the way your business is structured.

• Sole proprietorships are required to file if there’s any expenses you plan to claim as deductions, or if the income exceeds $400.
• If a partnership has any income or expenses at all, it must file a tax return.
• All corporations – including both S-corps and C-corps – must file a tax return every year, no matter what.
• LLCs can elect to be taxed as any of the structures above and will share those filing requirements.
• If you registered a new Employer Identification Number (EIN), you’re required to file a tax return for your business that year.

But you should file even if you’re not legally required to

You always want to stay on the IRS’s good side, and filing no return could potentially raise more questions than filing a return stating that the entity had no activity. It’s common for businesses that operate in multiple states to have no activity in a state in which they’re formally registered, and in that case, filing a return reduces the risk of an audit.

It’s also possible that you’ve missed a detail that would require you to file, so might as well do it just to be safe.

What should I do next with my inactive business?

You may have other reporting requirements besides filing tax returns, which differ from state to state. Additionally, some states require you to let them know when you’ve let a business go inactive. Be sure to check on the requirements in your state.

Eventually, you should do something about your inactive business. You have two main options: either start using the business or shut it down for good.

Voluntarily dissolving a business is a relatively straightforward process, and if you have no plans for your inactive business entity, it’s best to go ahead and take the proper steps to close it. That way, you can rest easy knowing there aren’t any fees or reports you’re forgetting about.

Bottom line

There are plenty of reasons to file a tax return even if you haven’t really done anything with the business that year.

The business could still have activity without any obvious income or expenses. You may be required to file even if there’s no activity. And declining to file a tax return for a business you own is a risk you don’t really need to take. You may want to file no matter what, just to be safe.

Or you could schedule a call with the tax experts at DiMercurio Advisors, and we’ll do it for you.