There’s much more to lose than gain when failing to file a business tax return. You must file if you make money, of course, but it’s also essential to file when you break even or when you lose money.
The rules on filing taxes depend on how your business is structured. Corporations, including LLCs treated as S-Corps, must always file a corporate tax return, even if no business was conducted for the year. However, if you’re a sole proprietor or your business is a single-member LLC filing as a disregarded entity, it all depends on whether you engaged in business activity during that time. Chances are that you did because activity includes revenue exceeding $400 but also loans, losses, deductions, and credits.
Filing a tax return for a business that didn’t make money can benefit you in several other ways:
It’ll save you from failure-to-file penalties. Corporations that are required to file tax returns each year are penalized when they don’t. These penalties can add up quickly. For instance, for returns on which no tax is due, the failure-to-file penalty is $210 for each month (or partial month) up to 12 months for each shareholder. Of course, those penalties increase and include late fees when taxes on revenue are also due.
It’ll allow you to deduct your expenses. Whether you made income or not, you likely had business expenses, including equipment and service fees, cost of goods sold, rent, payroll expenses, office supplies, travel expenses, and more. Deducting these expenses is always important, but it’s even more vital right now. That’s because the CARES Act passed during the COVID-19 pandemic extends certain deductions and losses not normally offered. These include a temporary allowance of 100% for business meals, payroll credit for paid sick leave or family leave, employee retention credit, and more.
You can offset future (and past) gains. When your deductions exceed your income for the year, your business may have a net operating loss (NOL). The IRS expects this to happen, especially in the first few years of operation and in volatile times (like during the pandemic). It’s critical to file your business tax return during this time in order to use any losses to offset gains in the previous or future three years (these are called carryback and carryforward periods). Due to the pandemic, limitations on NOLs for certain taxpayers are repealed for 2018, 2019, and 2020, with reductions in limitations potentially lasting until 2026.
You’ll keep your status as a business. When you don’t file a business tax return year after year, you run the risk of the IRS classifying it as a hobby. When that happens, you’ll lose your right to take deductions and losses. If you intend on making money and meet the criteria outlined by the IRS for a business versus a hobby, don’t lose your opportunity to declare it a business by neglecting to file.
No one expects you to turn a profit every year you’re in business. The IRS understands that and has worked tax advantages into the system to help you in those downtimes. But grabbing those opportunities involves filing your taxes every year, even if you’re not required to do so.