Schedule C Did not materially participate

[BHoffman]

I have a 70 year old client who is in bad health.  In the past, he ran his small contracting business through a Schedule C on the cash basis.  He keeps good books.

He had very little income in 2015 and carried back a pretty hefty loss.  He told me he was still submitting bids in 2015.

He had no Sch C income in 2016 and about $18,000 in expenses - mostly depreciation and fees to keep his contractor's license active.  I asked whether he was still submitting bids in 2016, and he told me he tried but his health made it hard.  He says he thinks he will get jobs in the future.  I think not, but he has surprised me in the past.  

He has income from several residential rentals and he collects Soc Sec.

I want to click the "Did not materially participate" box on Sch C, which will make the losses passive.  I've just never done that before.  The allowed losses wipe out the $5,000 net rental income, and the rest carries forward.  

He is depreciating a building that is on the same lot as his residence that is a bona-fide office and warehouse. I'm thinking if he sells the property and closes the business, the passive loss carry forward can be used against any gain he's likely to receive from that building or any other real estate he might sell.  Could that work?  

 

[Gail in Virginia]

That makes good sense to me, but I really doubt he will sell the property and close the business.  It sounds like he will go down still trying to work, and his heirs will sell the property. 

[BulldogTom]

I am with Gail on this one.  I think he is trying, no matter what his physical limitations.  I would not go the route you suggest.  He says he is in business, has a history of being in business, and keeps good books and records.  Still trying to win bids.  You have to have a profit motive, and it seems like he does.  So long as he is doing the work to submit bids, I think he materially participates.

Just my 2 cents.

Tom
Newark, CA

[BHoffman]

Yes.  Gail makes particular sense in that he will identify as a businessman until his last breath, so I just did the loss carry forward election since the carry back periods were used up.  Thanks!