Llc

[Bird Legs]

LLC, 2 members, elect to file as partnership. Putting in an RV Park.
Have purchased land and are in the process of putting in the pads and office. etc.
The have purchased several pieces of equipment in order to imrove the land and
put in the improvements.
Have not started renting out pads as of 1/1/06.
The have incurred the following expenses: Fees for filing for LLC $400.
Equipment repairs $ 256. Interest on land $5,300. Insurance on equipment $320.
Depreciation on Equip. Are these all start up expenses? Either written off in
the first year of operations or are they amortized over 15 yrs.
Is the interest paid on the land note added back to the cost of land?
Thanks for your input.

[Bees Knees]

Everything except the interest on the land and the cost of the land is start up costs. You get up to $5,000 of start-up costs, and up to $5,000 of organizational costs (the LLC registration) as current deductions in the year the active trade or business begins.

The same would be true for the interest expense...currently deductible, although that would not count towards the $5,000 limit since it is not a start up cost.

The first year of business starts when the pads are ready to rent.

See TTB 8-17 for info.

[fliszt]

Llc

to add to Bees reply, I quote from a CCH Tax Manual: "Expenditures that are paid or incurred with respect to buwiness start-up or investigatory expenditures may qualify for amortization over a period of not less than 60 months. The amortization period commences in the month the business begins. All business start-up expenses up to the time that the active business actually begins fall with in this election. The qualified start-up expenses include any amount that is paid or incurred in connection with: 1. investigating the creation or acquisition of an active trade or business.... or 2. creating an active trade or business (business creation expenses are costs incurred after the tp's decision to establish a particular business and before the time the business actually begins operating); or 3. any activity engaged in for profit and for the production of income before the day on which the active trade or business begins and in anticipation of that activity becoming an active trade or business".

The interest on the land I believe would be a current deductible expense NOT added back to the cost of land.
Larry M.

[Bees Knees]

Your CCH manual must be old. The new rules since October 23, 2004 is to expense up to $5,000 of start up and $5,000 of organization expenses all in one year. Any excess over the $5,000 limits must be amortized over 180-months. The 5-year option is no longer available.

[jainen]

Under both the new and old rules

Under both the new and old rules, you must make a formal election to expense or amortize. Otherwise the normal procedure is to capitalize startup and organizational expenses and recover the cost when the business is dissolved.

[fliszt]

Correction

Bees, Jainen, thank you for the correction. As always, it is appreciated. BTW, my CCH Tax Book is 2005. (probably printed before the October 24 date you posted. Thanks again.

[Unregistered]

You need to read the rules on "self constructed assets". Everything relating to the construction of the park should be capitalized until it's completed.

A company that is constructing an asset for its own use must capitalize as a cost of that asset certain taxes that relate to construction-related labor, materials, supplies, equipment, land or facilities. Taxes that must be capitalized include all taxes allowable as a deduction under the Code, except state, local, and foreign income taxes, and franchise taxes (all of which remain deductible).612

612Regs. §1.263A-1(e)(3)(ii)(L), (F). Before the 1986 TRA, real property taxes attributable to construction were capitalized and recovered over a 10-year period under pre-1986 TRA §189.

Pre-construction taxes must be capitalized if it is reasonably likely that production will occur at some future date. Thus, for example, the regulations provide that a real estate developer must capitalize property taxes incurred if it is reasonably likely that the property will be subsequently developed.613 Taxes paid or accrued by a taxpayer in connection with the acquisition of equipment and facilities (e.g., sales tax on the purchase of a bulldozer to be used in construction) are treated as a cost of the acquired property and recovered through depreciation.614 If the acquired property is used to construct a self-constructed asset, construction period depreciation on the acquired property (i.e., the property used to produce the self-constructed asset) would be capitalized.615

613See Regs. §1.263A-2(a)(3)(ii), effective for tax years beginning after Dec. 31, 1993. For tax years beginning 1994, it can be argued that such taxes are not related to construction, because they relate to a pre-construction phase. Before 1987, construction period interest and taxes were treated in the same manner under pre-1986 TRA §189, and there is no evidence of any legislative intent to require the capitalization of taxes before the time interest is required to be capitalized. But see Reichel v. Comr., 112 T.C. 14 (1999), in which the Tax Court held that a real estate developer must capitalize property taxes paid in 1993 on undeveloped land held for future production. The court rejected taxpayer's contention that for 1993, §263A(a)(2)(B) did not require taxpayer to capitalize real estate taxes until positive steps were taken to begin producing the property. Examining the legislative history of §263A, the court concluded that Congress intended the capitalization rules to cover costs incurred before as well as during the production period. Citing Von-Lusk v. Comr., 104 T.C. 207 (1995), the Tax Court reiterated its position that Congress intended the term "produce" to be broadly construed. "Congress expected those rules to be applied from the acquisition of property, through the time of production, until the time of disposition." Von-Lusk at 215.

614Regs. §1.263A-1(e)(3)(ii)(I).

615Regs. §1.263A-1(e)(3)(ii)(I).