Filing taxes for a small business with no income: What you should know

Various business situations may lead you to report no income for an entire tax year. You may have formed your LLC before opening your business. You may have to spend money and time to get the business operational before actually generating any revenue. If you are ending a business, you may have stopped all business activities at your corporation, but you haven't officially filed your articles of dissolution yet.

Whatever the reason, it is important to understand how your business is organized and what type of filing may or may not be required.

What is your business type?

The first step in determining if you need to file a business tax return is how your business was formed legally and the tax election you chose.

Sole proprietorship/single-member LLC (SMLLC)

If you are a solo owner and did not form as a limited liability company (LLC), then you are likely considered a sole proprietorship.

A single-person LLC is commonly referred to as a single-member LLC (SMLLC) and is similar to a sole proprietor for tax purposes. An SMLLC is often referred to as a “disregarded entity" by the Internal Revenue Service (IRS). This is not a negative term; it simply means that the IRS “regards" the entity and the owner as the same for tax purposes.

In both of these situations, you'll record business income and expenses on your personal tax return using the Profit or Loss From Business (Form 1040, Schedule C). There are no additional, separate tax filings for federal income tax purposes.

Partnership/multiple-member LLC (MMLLC)

A partnership is a business formed by two or more individuals and is recognized by the IRS as a separate entity for tax purposes. The partnership is required to file IRS Form 1065, U.S. Return of Partnership Income. An LLC with two or more members is called a multiple-member limited liability company (MMLLC) and is automatically treated as a partnership by the IRS.

The profit or loss from the partnership then passes through to the partners, who receive their share of the partnership's income, deductions, and credits. Each partner reports this information on their own personal tax return and pays tax on their share of the profit or loss.

So, while a partnership return does not actually generate a tax liability, the partnership is required to file a return indicating the income or loss of the partnership and the individual recipients of the income or loss.

C corporation or S corporation

In addition, an LLC (whether an SMLLC or an MMLLC) may elect to be taxed as a C corporation or an S corporation. It must make this election known to the IRS by filing an Entity Classification Election (Form 8832).

A C corporation files taxes on a U.S. Corporation Income Tax Return (Form 1120), and an S corporation files on a U.S. Income Tax Return for an S Corporation (Form 1120-S).

Do you need to file a business tax return with no income?

Based on your business type, you may or may not have to file a tax return if your business has no income for the entire tax year.

Sole proprietorship/SMLLC

Even if your business has no income during the tax year, it may still benefit you to file a Schedule C if you have any expenses that qualify for deductions or credits. If you have no income or qualifying expenses for the entire tax year, there is no need to file a Schedule C for your inactive business.

Partnership/MMLLC

If the partnership doesn't have any transactions that qualify for deductions or credits, or this is the first year of your partnership with no revenue, you generally do not need to file a Form 1065.

C corporation or S corporation

Typically, a C corporation or S corporation must file an income tax return on taxable income during the tax year unless it is exempt from taxes under Section 501 of the Internal Revenue Code.

Limited liability company

Whether or not you need to file a tax return for an LLC with no income depends on your LLC's tax election. If you are a single-member LLC, you will apply the same standards as a sole proprietorship. If your LLC is taxed like a partnership, apply the rules for filing an informational partnership return. If it is taxed like a C corp or S corp, you will need to file an income tax return regardless of whether you have any income.

State tax obligations

States have various tax reporting obligations that are independent of federal tax filing requirements. Be sure to check with your jurisdiction to determine whether you must file a state tax return.

If you have an inactive business with no intentions to ramp back up in the future, it is a good idea to formally dissolve your business.