Below, you will find the IRS tax rules for reporting expenses related to a failed business venture. 

Rev. Rule 67-12, 1967-1 CB 29 Jan. 1, 1967, allows ordinary and necessary expenses incurred in a trade or business in prior years and paid in the current year by a cash-basis individual to be deducted under section 162 even though the trade or business has been discontinued. Unfortunately, those expenses must be deducted on a Schedule C, which provides a very poor audit profile. Some practitioners attempt to hide these expenses on other forms and could run afoul of Cir 230 Sec 10.51(4), providing false or misleading information.

Voluntary payments of another’s business expenses, where there is no legal obligation to pay them, are not deductible. This is true even though the payments are made to preserve the individual’s reputation, credit, or professional standing.