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March 15, 2020
Question

I own a small cafe (registered as LLC) with my 2 kids. I have not filed my taxes for 5 years. We are not making any money actually we lost a lot of money.

  • March 15, 2020
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1 reply

KathrynG3
March 15, 2020

Yes, even though you did not make any money, the business activity should be reported for each year of operations. The reporting requirements depend on what kind of LLC was formed for the cafe.

 

You will need to buy software for each prior year, since the rules are different in each year. Click this article for more details: How do I prepare a prior-year tax return?

You may need to amend prior years, but how they are amended depends on the type of LLC that was formed for the cafe. Click this article for more details: How do I amend prior years?

  1. If you are partners with your children, then you have a multi-member LLC.
     
    1. A multi-member LLC requires using TurboTax Business. This program creates the business return and also generates a Schedule K-1 for each owner to be included on each owner's tax return according to the percentage of ownership. It would be taxed as a partnership on Form 1065The informational return is due March 16, 2020 unless you file for an extension no later than March 16, 2020. 
       
    2. Customized Schedule K-1 details that divide any taxes due is reported on each individual member's tax return. In your case, it would have reported losses. Click the link for more details: Where do I enter a K-1 that I received?
       
    3. In this scenario, from at least 2016 forward, (see the article above about amending and what is meant by open years) you and your children would need to amend your tax returns.
       
      1. Each tax year of operations would file Form 1065, an informational tax return. There would be failure to file penalties, but with losses, no failure to pay penalties.
         
      2. Each partner would amend tax return(s) to report their own Schedule K-1 on their own Form 1040, Individual Tax Return and potentially adjust the state tax filing.
         
  2. If you meant that the two kids are helping you but are not financial partners with you, then you could file the cafe business activity as a disregarded entity which is a single member LLC on your personal tax return, Schedule C. Click this link for Help Reporting Business Income and Deductions.
     
    1. Payroll/Contract Labor Issues: Any income they received from the cafe operations would be treated as independent contractor income, and they would be subject to self-employment taxes. If income was provided as wages, when you would be responsible for providing them with Form W-2's, reporting & paying the payroll taxes. 
      1. If they received tips and did not report them, see Entering Unreported Tips for more information about how to report this income.
         
    2. Hobby Loss limitations: Business not making a profit for 3 out of the last 5 years, reporting income on Schedule C: The IRS could reclassify the business as a hobby. If your business is reclassified as a hobby, then all income is taxable and limited or no expenses can be deducted. 
      1. For an overview article, click When the IRS Classifies Your Business as a Hobby.
      2. For IRS resources: Hobby or Business Guidance

Resources for reporting business activity:

IRS Rules for Reasonable Business Expenses

Self-employment Taxes Tax Tips & Videos

Top Tax Write-offs for the Self-Employed