Land deal fell through

[Gretel]

Corp. with single shareholder used to build single family homes but stopped doing this due to economy. Shareholder started to buy land to build rental complexes and created LLC's for each one (LLC is builder) and employee from corp. was/is rented to the LLC's plus LLC's get charged some other admin costs plus profit.

Now, owner of corp.&LLC's incurred engineering costs for land, which he did not purchase after report came in. I think, if that had been done in corp. name there would be no problem with the deduction, right? However, it was done in owner's name. Is the only place to put these expenses Sch.A, subject to 2%?

[Burke]

He incurred engineering costs before he purchased land? Sounds like an investment loss to me.

[Gretel]

He incurred engineering costs before he purchased land? Sounds like an investment loss to me.

Yes, I agree. So, if incurred within corporation then business expense. If incurred as individual then Sch.A??

[Burke]

Investment losses go on Sche D, corp or individual.

[Gretel]

Sorry for being so tenacious. Thank for helping a light bulb turn on in my mind. I always had a hard time decerning between investment expenses and losses in some instances. So expenses are always related to an ongoing project, whereas losses/gains are related to disposals including disposals of ideas (projects that never got of the ground).

Such losses incurred in a corporation have to flow through as such to the shareholder and are therefor put on Sch. D. So it doesn't really matter if the shareholder or corporation incurres the investment expense, right?

[Nashville]

Capitalizable

Sorry to throw a fly in the ointment, but instead of deciding how and where to deduct engineering costs, I think the question should be whether this is even deductible at all.

If I understand what these costs are, they should be capitalized into the value of the land, and not deductible at all. They would, however, increase basis.

Your situation is more convoluted since the owner paid for this personally instead of out of the corporation, but the engineering costs (pre-evaluation, etc.) by nature are not a deduction. (My opinion)

[Gretel]

Hi Nashville, I am afraid your assumptions are wrong. The land was never purchased just evaluated. Do you agree with the capital loss on Sch.D no matter if Corp. paid of Individual?

[Snaggletooth]

Operating Expense

Yes, my assumptions are wrong. (I am sometimes "Nashville" when working there)

If the engineering costs are in the ordinary course of the corporation's business (even if business is dormant right now), this would be deductible as an operating expense, in my (new) opinion.

If the owner took the engineering invoices, attached them to the expense report, and had the corporation reimburse him, that would remove the stigma of this being a "personal" expense.

[Burke]

I still believe it is an investment loss since land was never purchased, not an operating expense. I would not consider this to be an expense in the ordinary course of operating a business. It is attributable to the purchase of an asset. (BTW, the schedule D (1120S) is different from an individual's Sche D (1040), but you may be looking at 4797 here since it was a business asset.) The expense would be capitalized if the land was actually purchased, as it is still attributable to purchase of an asset, and would not convert to an operating expense in that case. When thinking of "expenses," you need to determine what it is attributable to.