Question: Sue operated a wholesale business as a sole proprietorship, reporting income and expenses on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). During COVID-19, the business failed. However, she still must make payments on bank debt for an inventory loan and a line of credit for the business. Can she deduct any of those payments of former business expenses on her current Form 1040, U.S. Individual Income Tax Return?
Answer: Yes, Sue’s interest expense on this debt can be reported on Schedule C (Form 1040) as an expense attributable to a prior business activity [Dowd v. Comm’r, 68 T.C. 294 (T.C. 1977)]. The original use of the debt proceeds determines the character of the interest expense and how it may be reported. Presumably, if Sue has self-employment (SE) income from other sources, she can also use the loss from this Schedule C (Form 1040) to reduce the income subject to SE tax.
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