Excess Production Expenditures?

[JoshinNC]

My client recieved a K-1 from an LLC that he invested in that is in the business of constructing and leasing senior housing. His K-1 includes a footnote that the amount of Section 263A(f) excess production expenditures for the tax year is $21,484. How do we treat this information on the return. I think I have determined that this interest (?) must be capitalized. But where would this occur, and against what would it be applied, if anything?

[JoshinNC]

Just moving this back up to the top

I really need help with this one!

[Bees Knees]

I think I have determined that this interest (?) must be capitalized. But where would this occur, and against what would it be applied, if anything?

If it is interest that must be capitalized under the UNICAP rules, then TTB page 8-15 says:

Capitalized interest is added to the cost of the property produced
and recovered when the property is sold or otherwise used by the
taxpayer. If the property is inventory, recover capitalized interest
through the cost of goods sold deduction. If the property is used
in a trade or business, recover capitalized interest through an adjustment
to basis, depreciation, amortization, or other method.

I would assume that since the partnership must capitalize the interest, it is not deducted against ordinary income flowing through to the partner. That in turn means the partner is not reducing basis for the expense. That should mean the partner's basis is already taking the capitalized interest into consideration as it is reflected in the partner's basis in the partnership.

You might want to call the partnership accountant and confirm that is what it means.

[JoshinNC]

I will call the LLC accounting dept.

If it is interest that must be capitalized under the UNICAP rules, then TTB page 8-15 says:



I would assume that since the partnership must capitalize the interest, it is not deducted against ordinary income flowing through to the partner. That in turn means the partner is not reducing basis for the expense. That should mean the partner's basis is already taking the capitalized interest into consideration as it is reflected in the partner's basis in the partnership.

You might want to call the partnership accountant and confirm that is what it means.

Thanks for some clarification. As always, you are a beacon in the storm when it comes to these matters!