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, or 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.

Does a business have to file taxes if it made no money?

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.

In general, you don’t need to file business taxes if:

• You weren’t actively in business
• You were starting up and preparing your business

Outside of these general rules, you also need to consider your business entity type. No tax liability doesn't always mean you don't have to file a return. If your business is a partnership or corporation, you need to file your taxes, whether you have any income or not. This allows you to remain in compliance and to claim deductions.

If you do file taxes with no income, you can still deduct expenses and show a loss on Schedule C.

What is your business type?

The first thing to consider before making a decision as to whether or not you need to file your taxes with no income is your business type.

The most common business types include:

• Sole proprietorship
• Partnership
• C Corporation
• S Corporation
• Foreign entities

If you read that list closely, you might have noticed that limited liability company (LLC), one of the most common business entities, is missing. When it comes to taxes, LLCs are considered a passthrough entity and are recognized differently. Single-member LLCs are automatically taxed as sole proprietorships while multi-member LLCs are taxed as partnerships. 

It is possible to change your tax designation as an LLC and elect to be taxed as a partnership or corporation. To do this, you will fill out IRS Form 8832. 

Sole proprietorship

A sole proprietorship is an unincorporated business with a single owner. Many business owners choose to be a sole proprietor because it's the easiest business structure to start up.

If you’ve registered as a single-member LLC, your automatic tax classification is as a sole proprietorship. You can elect to be taxed as a corporation, but this doesn’t happen automatically.

Even if your business has no income during the tax year, it may still benefit you to file Form 1040, 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

Businesses that fall under the designation of partnership include limited liability partnerships, multi-member LLCs, and LLCs that have elected to be taxed as a partnership.

Partnerships file a return using Internal Revenue Service (IRS) Form 1065.

If you have no partnership income and don'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

Typically, a C 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. This would include religious and charitable organizations. This also includes LLCs that have elected to be taxed as C-corporations. 

According to Internal Revenue Code, a C-corporation must file a corporation income tax return, even if it has no income. It is mandatory for corporations to file annual tax returns. C-corporations and LLCs taxed as C-corporations must file Form 1120. 

S Corporation

Similarly to C-corporations, S-corporations and LLCs that have elected to be taxed as an S-corporation must file an annual tax return. All corporations must file a tax return, even if it was inactive or didn’t receive income. 

An S-corporation or LLC taxed as an S-corporation will file Form 1120-S and Schedule K-1 for federal income tax purposes. 

Foreign business types

A foreign business entity is one that operates in a different state from where it was formed. Foreign business entities have different tax filing obligations than domestic business entities.

• Foreign LLCs: A foreign LLC will follow the guidelines of however it has elected to be taxed. A single member LLC taxed as a sole proprietorship passes through to the individual owner’s taxes. A multi-member LLC is treated as a foreign partnership. An LLC that has elected to be taxed as a corporation will follow the tax rules of the foreign corporation.
• Foreign partnerships: If a foreign partnership makes an election, such as to deduct or amortize business expenses, it must file an annual tax return, even if there’s been no income. 
• Foreign corporations: Just like domestic corporations, a foreign corporation is required to file an annual tax return, even if it had no income for the year. A foreign corporation would use Form 1120-F to file its annual return.

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.

Tips for future taxes

If you had no business income this year, it’s likely that you’re either starting up your business or are getting ready to shut it down. These tips will help you to stay on top of filing business taxes for as long as your in business entity is active:

• Keep detailed records. The best thing you can do to keep your taxes simple is to keep detailed records. Digital tracking of income and expenses can make keeping high quality records simple and efficient. LZ Books can help you easily manage your books with expense and income tracking, invoices, and payments all in one place.
• Pay estimated taxes. As your business grows and you get more business income, it’s important to track your income and set aside money to pay taxes on that income. You can avoid fees and surprise tax bills by paying quarterly estimated taxes. This helps you to stay on top of the expenses and avoids a penalty at the end of the tax year.
• Close your business with your state government. If you’re not planning to continue your business, the easiest thing you can do is to close the business. Your Secretary of State’s website should have information on how to close your business and finalize any open tax needs. 

FAQs

Can you deduct start-up costs with no income?

Yes, you can deduct the start-up costs of your business even if you have no income. You will simply file as having a loss for the year. Some start-up costs can be fully deductible while others will be amortized over a period of time, usually a few years. 

What should I do if I no longer want to run my small business?

If you’re no longer wanting to operate your small business, you have a couple of options. You can look to sell your business to someone else and they can operate it. Or, you can dissolve and close the business.

If you no longer want to operate the business and it has little to no income, you should dissolve it with your state government so that you don’t have to continue to track your finances and file taxes.

What can I do if my business had no income?

If you’re just starting out in business and had a year with no income, that’s ok. Many new businesses have little to no income in their first year. It’s important to focus on building a brand and marketing to your target customer in order to gain a following and bring in more income.

Jeff Johnston contributed to this article.