Plant Assets not placed in service yet ?

[JAinNC]

I have an LLC ( general partnership) client about 30+ members. 2007 purchased land, visited other states to see how other processing plants like their plan works. Had several thousand in travel to go to sites to ok purchase of machines.
Purchased machines from different places to build processing plant on their site, built roads and got permits, temp power at site, legal expenses ---- all of these I consider to be costs of assets or other startup costs to be amortorized when processing beginsin late 2008 or early 2009. No actual business has been conducted in 2007. Payroll to a manager to start learning began in December 2007.
The members have over 1,000,000 invested.
Interest earned in 2007 = 9,500.

My question: On the Form 1065 can any expenses be taken against the interest earned?
It was in a short term CD with no investment fee.

Thanks in advance for all the great responses.

[erchess]

Great Question

I was going to advise you to deduct the costs associated with paying the manager in December but TTB 8-17 specifically lists such as a startup cost whether he is considered an employee or an executive. I believe that everything you mentioned would be either a startup or an organizational cost. I always struggle with what is which so I am not going to advise you on that but I would say that it is probably embarrassing to be caught at an audit having misclassified something even though there would be no difference in the tax.

IHere is a thought. When you account for startup and organizational costs, then your charges would be in those categories would they not? But if you billed separately for reconciling their bank statements it seems like to me that portion of your bill would be currently deductible. In both cases I am relying on my very limited understanding of the "Matching Principle". It would seem to me that cutting checks would be a debatable point. You could go by the nature of the expense the check was for or you could say that cutting checks is something all companies do and therefore current. Then again some or all of this may be current but also de minimis.

I hope my post at least bumps your question up to where someone who really knows can answer it. Like a cat who just ate a pound of Limburger Cheese I await with baited breath the other posts.

[BOB W]

$9,500 of interest among 30+ partners is only about $300.00 each. This is not a big problem for any partner pass-thru.

As stated before, I'm sure there are some expenses that could be taken, like accounting fees, bank charges, LLC formation amortization, and any other non-asset based expense.

I was under the impression that only the cost of installation of an asset + the asset have to be capitalized and depreciated when placed in service. But Organization cost like travel and salaries to get organized would be amortized from day one.

Lets wait for others to chime in for clarification.

[JAinNC]

Thanks for 2 great responses

Bob, Not all members are equal partners. the highest would have 1,000 + interest as taxable on that K-1. They all know this is a work in progress. A higher investor will likely not be bent out of shape by tax on 1,000 extra interest income.
Jeannie

[BOB W]

google search> $5000 write off

"3. Take an upfront deduction if you qualify. OK, so you've tracked all your costs before opening shop. Now comes the good part: You can write off up to $5,000 in startup costs and another $5,000 in organizational expenses in the year that you start your business.
(Note: These deductions are reduced if you have more than $50,000 of either type of expense.) Once you've written off that first $5,000, you can still get a tax benefit from other expenses. However, those costs will have to be written off, or amortized, over 15 years.Sound like a long time to have to wait to get the full benefit of a startup deduction? It is. But for most small startups, these rules are an improvement over what was in place before the American Jobs Creation Act of 2004 was signed in October of that year. Until then, all startup and organizational costs could be deducted over 60 months — but none could be simply written off."

When has a businesss started? Formation? Bank Account with expenditures? Open for sale of products? What?????????????? When???????????????

I think your business has started..............

[Davc]

When a business starts varies depending on the type of business. Since the business in question is either processing something for customers or to sell business can't start until the equipment is ready to be used. If they are selling the output themselves, they must begin processing.

[erchess]

Slightly disagree with Davec

A business has not begun until it begins its principal or one of its principal revenue generating activities. A store begins when it opens the door to customers. My contractor who installs water and air purification systems began business when he opened the call center that was his first attempt to generate business. A manufacturer or processor in my judgment begins on the earlier of the the date on which manufacturing / processing or the effort to make sales begins.

[JAinNC]

Processing Expanation

This company will buy grain from farmers and when the processing equipment is completely built and ready to operate, the plant will produce non-food products such as fuels. They expect to be ready to operate in the fall of 2008. In Jan 08 they started contracting some grain to buy in fall of 08 (with the stipulation that the plant will be ready).

My thoughts that they are not open for business.

[erchess]

I would agree that they are not open

for business at this time and were certainly not open for business at any time in 07. If they would begin to try to line up contracts to sell their products then in my opinion they would be in business.

[JAinNC]

Thank you

Thank you - I agree

[Davc]

From BNA's analysis:

A manufacturing or similar production-related business should be deemed to begin when all of the operating assets have been acquired and are put into use, even if revenues have not been received. The act of manufacturing itself represents a revenue-generating activity. On the other hand, a retailing business should not begin until its doors are opened and revenues flow in. To see why this is so, and to understand how courts and the IRS typically determine when a trade or business begins, it is helpful to review the cases which have employed the Richmond Television test according to the type of business at issue.