Start up expenses

[oceanlovin'ea]

Client bought a restaurant in Oct 2004 and sold it in May 2005. Part of the expenses in getting business going was a deposit with the rental company for $2130. He signed a 3 year lease with them.

The new owner had no credit so the lease for the space is still in his name although the new owner pays the rent. After 1 year, she can negotiate a new lease and he possibly will get his deposit back. But if she defaults in paying the rent, he will be liable for the entire 2 year period.

Should I include that deposit in his costs of getting the business going? If I include it with the costs, thus reducing his profit on the sale, when he gets the deposit back would it be taxable income to him? Or would you just leave it out of the transaction?

Linda F

[Bees Knees]

A security deposit is not taxable to the landlord, and is not deductible by the payer until the deposit is forfeited. So keep it out of the sale price. If it is eventually lost, then take it as a deduction.

[oceanlovin'ea]

Thanks

Bees Knees. That was the way I was leaning but I wanted to make sure.

Thanks again.

Linda F