Need Guidance

[S T]

I have this t/p that signed onto one of those Real Estate get rich quick things. Started in 2008, t/p was not in the business, paid really high $$ for all of the educatitonal training and classes, formed an LLC

2008 and 2009 are behind us, managed to get through that "mess" (no deduction no income) now t/p is asking whether or not "costs" associated with locating properties and expenses are deductible in 2010 - No Income - Nothing insight regarding income - just going through the steps - like the Real estate Market is really "booming" right now

My thought is No Deduction - I have yet to see a "viable" business, but then it could be agrued that t/p is trying. - It is ""Rich Dad" " opportunities (you can google Rich Dad), seems they get all of the money, and then the end result is nothing for the taxpayer (odds 1 out 1,000)

Don't know why I am so blessed to have two long time tax clients get involved in these "efforts" that cost them so much money, during the last couple of years, but here I am.

Any thoughts on how to handle for the tax return 2010?

Sandy

[erchess]

How is the LLC Taxed?

If he elected to be taxed as an S Corp I believe there is a presumption of business purpose but of course loss is limited to basis. On the other hand don't his expenditures all add to the basis?

If he elected to be taxed on Sch C to my mind it is possible to file one without income but one needs a believable story about why future years are expected to show income and if they do not at some point the taxpayer will be told that he has a hobby and to treat it that way going forward or else the IRS will attempt to treat it that way going back and forward.

I'm brain dead at this hour but I think I recall that an LLC can elect to be taxed as a C Corp but I'm thinking he probably didn't do that particularly with you on the case to stop him from putting real property in a C Corp.

[S T]

Entity

Thanks Erchess,
I should have included that It is a LLC that is Single Member, Schedule C. not a partnership or S Corp

I do believe the "story" is believable, having cashed in IRA accounts (paying taxes and penalities) and investing more than $35K, and that the the t/p beleves there would be some type of return, however, what is IRS going to believe?
No real estate in the transaction, just really "hard earned saved retirement" $$$, that taxes have been paid on, and the money can never be recouped.

I don't like to say it, but I believe it is just another one of those "get rich quick" we will show you how ventures.

Sandy

[erchess]

Sandy

I agree with you that your client got taken but I would without hesitation file a no revenue schedule C with every expense he can prove and use it to offset other income and or create an NOL. He believed that he was going to make money and the first action the IRS will take will be to offer to overlook the past if he treats it as a hobby from that time forward. I would prepare the client for that letter and state that when it comes he either complies or finds a new tax adviser and prepares for a large increase in fees and a losing fight.

[Lion]

Training for new career

I don't see his original training, probably the most expensive part so far, as a current deduction. That would be just training for a new career, or maybe fattening up before the plucking in his case. If he's really working it, I'd probably go along with losses for a couple of years, educating him myself along the way. But, I'd really have a come-to-Jesus meeting with him before he entered his third year of business. You know the things the IRS looks at: has he changed his methods, kept business-like books, is there a realistic expectation of profit in his industry, etc.