If you are not filing taxes as a business, then you need to dissolve the business, which will require notifying your state agency that licenses businesses that you are terminating the LLC. You will also need to terminate your EIN and cancel your sales tax license. If you remain as a business, the IRS could question why you haven't reported taxes for the business. You may want to check into the differences between filing taxes as a hobby and as a business. As a hobby, you don't need to pay self-employment tax, but you cannot take a loss. You can deduct expenses only up to the amount of your income. You would not be able to write off your home office or continue to take depreciation.

BizResearcher and jbeidle - thanks for your thorough replies!

You may want to consider how operating your business as a non-profit may benefit you.  It may allow you the ability to take some deductions while providing the community a service.  For example, helping senior citizens learn how to use a computer can be personally rewarding.  And you could deduct educational expenses, hardware, etc., from taxes.  It would be best to speak with a CPA regarding your business structure and how to best proceed.

Thanks for the information, that's very useful.    I'm most worried that if I remain filing as a business, the IRS will notice that I'm not making a profit and question why I'm still in business -- and then make me pay some penalties for having claimed those expenses and depreciation in the years I did not make a profit.   Would it be acceptable for me to stop the depreciation and deducting my home office? If I did, would I have to pay back those deductions from previous years?

nmsheldon, You seem to be a victim of poor advice. A business does not have to show a profit within 3 years. No such rule exists. I do not know your circumstances well enough to advise you on whether or not you should close your business but you have not posted a legitimate reason here.

Yes, it's certainly possible that I'm misunderstanding something. I found the 'three of five years', on the IRS website as one guideline in determining whether an activity is a business or a hobby:   http://www.irs.gov/newsroom/article/0,,id=169490,00.html   Here's the relevant passage (emphasis mine):   The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year...   All I'm trying to do is make the right decision rather than have the IRS make a decision for me, and therefore probably add extra fines and fees.   From that same article: 'Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.' Most of my time is spent taking care of my kids, and therefore I can't run this as a real business according to that guidline. However, I do not want to close my business, as I may still have occasional jobs in the future, and may have  more time when the kids go off to school.   As the previous poster said, the IRS may question why I'm not filing as a business if I keep my LLC status.   So, my current question is: can I simply stop deducting my home office and depreciations to reduce my losses, or will I have to pay back something if I do that?

Yes you can stop deducting those expenses. No one can predict what the IRS will or will not do.

You may want to contact an accountant and discuss your situation. As you found, it is an IRS guideline, but not a requirement, that you make a profit in three out of five years. You don't want to give the impression that you have created a business as a tax shelter, which could happen if you continue to take a write-off for home office and depreciation without making a reasonable profit. That can attract the attention of the IRS and result in an audit. If you sell your home in the future, you will have to pay taxes on the portion you excluded in past years for home office.

I am in a similar boat, as I was working fulltime and spending all my free time on my consulting business that had a loss for the past three years.   This year I lost my job and as a result needed to abide by the requirement for receiving unemployment.  I spent all my time on trying to find a job, and as a result did not earn anything with my business.  Should I use the same business software for filing?  And will I have a penalty for any refunds received?

Bizresearcher, your response helped me with my situation.  Having been the corporation (now dissolved) route already, I wondered if I could show current income as a hobby.  Is there a limit on hobby income?