Sch C and start-up cost 2014 vs. 2015

[nwtaxlady]

Client started an automotive repair business. He paid Rent on 12/1/2014 for December AND January(2015). He also made some big purchases in November and December such as BIG Tools and Tool Box etc. along with other expenses. He didn't OPEN up the business until the 2nd week of January 2015.

So my question is what is the proper way to treat all these things that was purchased and paid in 2014 but his business was not open until January 5th. Like these BIG Tools were NOT placed into service until 2015 etc.


My other question is, prior to this he was a mechanic as an employee. He purchased tools in 2014 from Snap-On as an employee and of course they are now sitting in business shop. So how do you treat those tools that he purchased beginning of the year (before he new he was going into business for himself).

Thanks!

[ATSMAN]

Client started an automotive repair business. He paid Rent on 12/1/2014 for December AND January(2015). He also made some big purchases in November and December such as BIG Tools and Tool Box etc. along with other expenses. He didn't OPEN up the business until the 2nd week of January 2015.

So my question is what is the proper way to treat all these things that was purchased and paid in 2014 but his business was not open until January 5th. Like these BIG Tools were NOT placed into service until 2015 etc.


My other question is, prior to this he was a mechanic as an employee. He purchased tools in 2014 from Snap-On as an employee and of course they are now sitting in business shop. So how do you treat those tools that he purchased beginning of the year (before he new he was going into business for himself).

Thanks!

I would depreciate the BIG tools purchased at the end of 2014 but put in service in 2015 on the 2015 tax return.

The small tools that he purchased as an employee in 2014, was that deducted on his Sch A for 2014?

[nwtaxlady]

Preparing the 2014 Tax Return now.

I am preparing the tax return now. Their house is paid off, so not enough to itemize on Sch A. So what can be done with the Tools purchased beginning of the year as an employee but then still has them and uses them in his Business that opened up in January 2015?

I agree to depreciate the Big Tools starting in 2015 when actually placed into service. But how about the small stuff and $2000 rent? Should there be a Sch C on the 2014 at all? or put everything on 2015?

Thanks again.

[ATSMAN]

I am preparing the tax return now. Their house is paid off, so not enough to itemize on Sch A. So what can be done with the Tools purchased beginning of the year as an employee but then still has them and uses them in his Business that opened up in January 2015?

I agree to depreciate the Big Tools starting in 2015 when actually placed into service. But how about the small stuff and $2000 rent? Should there be a Sch C on the 2014 at all? or put everything on 2015?

Thanks again.

If the small tools have not been deducted, put it to service in 2015 and either sec 179 them or capitalize.

I would apply the Dec rent as startup cost along with other startup costs such as legal, accounting, business filing fees, marketing etc. I think you are allowed to deduct up to $10,000 of startup costs.

[Nashville]

My Suggestion

You've got several categories.
1) Small tools purchased as an employee. If he was able to deduct them (doubtful) on Sch. A when the cost was incurred, then consider the mass cost as depreciable equipment with depreciation starting in 2014, but does not qualify for s. 179 since they weren't really purchased then.
2) Other equipment eligible for depreciation. Begin depreciating in 2014 or 2015 depending upon when the separate pieces were bought. Can qualify for s.179 in the respective years if there is enough profit to accommodate it (also doubtful).
3) All other costs other than above equipment should be considered OPERATIONAL cost. You are allowed to deduct up to $5000 the first year without treatment as start-up cost, if you incurred this much. All other operational cost until the day the doors open that is in excess of $5000 becomes "Start-up cost" and cannot be deducted in the year(s) incurred. However, the start-up cost can be amortized over 60 months on Form 4562 at the very bottom of the page.

I see three categories of costs with three separate treatments: 1)Equipment which is NOT considered operational cost and is depreciated according to the rules outside the scope of start-up 2)Operational cost to the extent of $5,000 which can be currently deducted, and 3)Operational cost in excess of $5,000 which must be amortized.

There can be subtle variations but the above is "mainstream" treatment.

[Roberts]

Does the client WANT / NEED a 2014 loss on the business if there was no revenue? They can call the rent a start up cost of the business and report it in 2015 with the initial return for the business. As they are self employed now, most people would rather take the loss when self employment tax are applicable so deducting in 2014 wouldn't make sense for many.

http://www.irs.gov/publications/p535/ch08.html#en_US_2014_publink1000208939

The tools weren't placed into service until the business OPENED so personally I wouldn't report any of it in 2014 and would include them as start up expenses in starting the business in 2015. Even small tools purchased in 2014 were arguably purchased as start up expenses. If an auto mechanic would reasonably need those tools - they were investments made during the process of investigating and starting the business.

[TaxGuyBill]

My take:

(1) Large tools were place in service in 2015, and start depreciation in 2015.

(2) Everything else is start-up costs (unless the small tools were able to be deducted as an employee, then they would have a basis of $0). Deduct up to $5000 in 2015, and amortize the rest over 15 years (180 months).

http://www.irs.gov/publications/p535/ch08.html#en_US_2014_publink1000208938

[nwtaxlady]

Thank you everyone!

I agree with you all. The client does not need a loss on the return for 2014. I will discuss this with the client and explain the savings when deducting against Income and being Self employed more reason to take expenses in 2015 when the Business actually opened its doors. Thanks again for everyone's input. I just need reassurance of what I was thinking.
Thanks again.