Start-up bussines tax/accounting questions...

generally, start up expenses are required to be capitalized & amortized ___________________________________

-----> real address on hobokeni or hobokenx

Easy answer. Until you are in business, you have no deductions. So there's no "trickling" down to personal returns. Now, are you fellow actualy IN Delaware? If not, why on earth did you form an LLC there? If in another state, you'll still have to register with that state you know. ChEAr$, Harlan Lunsford, EA n LA

Easy answer. Until you are in business, you have no deductions. So there's no "trickling" down to personal returns.

Now, are you fellows actually IN Delaware? If not, why on earth did you form an LLC there? If in another state, you'll still have to register with that state you know.

ChEAr$, Harlan Lunsford, EA n LA

Once we become operational would the $$ we spent in '06 for planning, etc... be duductible on our personal returns?

No we are not located in Delaware. We just originally registered our LLC there. We were thinking long term and if the business is successful we were going to relocate HQ to Delaware. I do realize that I'll have to apply as a foreign entity to the state we currently operate out of. If we decide not to move the business to DE, then we'll dissolve the LLC in that state and primarily register with MO.

Answer in two parts. First section discusses the ability to deduct these expenses, the second discusses how those deductions flow through to your individual returns. Keep in mind, I am assuming that the LLC did not elect to be taxed as a corporation and is therefore taxed as a partnership. If that assumption is wrong, then the discussion in the second part does not apply. First, once the business becomes operational, and provided that the LLC makes the appropriate elections under Code Sections 195(b) and 709(b), then you can deduct up to $5,000 of your "start-up" costs under Sec. 195 and up to $5,000 of your LLC's "organizational" expenses under Sec. 709 for the year in which you begin operations. Unfortunately, classifying each of your expenses, and particularly determining the amount that is deductible, may be a little involved. However, as a first cut, the following items should constitute "organizational" expenses under Sec.

709: NOLO LLC Book, Registered Agent fee, and Certificate of Formation fee. Thus, the LLC would be allowed a deduction of $213.51 for the year in which it begins operations. The remaining expenses should constitute "start-up expenditures" under Sec. 195. However, the degree to which these expenses are deductible under Sec. 195 depends on the interactions with Sec. 195 of Secs. 167, 168, and 179 (i.e., depreciation and elective expensing). The reason for this is that a start-up expense under Sec. 195 is only deductible under that section if it would have constituted a deductible expense under Section 162 for the year in question. Thus, if an operating business would only have been allowed a depreciation deduction equal to 10% of its total cost for an asset over the same time period in which your LLC is pre-operational, then you would only be allowed to treat 10% of that asset's cost as a Sec. 195 start-up expenditure. For example, under the generally applicable rules, software would be depreciated on a straight-line basis over 36 months, meaning that, if you had purchased the 2 copies of Windows XP as an already-operating business, you would have been allowed a depreciation deduction under Sec. 167 of (5/36)*$203.86, or $28.31 for 2006. Assuming that your business went operational on 1/1/07, you would then be allowed to treat $28.31 worth of the cost of the software as a Sec. 195 start-up expenditure, and would be allowed to deduct that amount for 2007. You would also be allowed a regular depreciation deduction for 2007 of (12/36)*$203.86, or $67.95, for the cost of the software. Thus, for 2007 you would have been able to deduct $96.26 worth of the cost of the software. Please keep in mind that this is only a hypothetical example, and do NOT simply mindlessly copy this example onto your tax returns. There is, however, an alternative that should permit you to deduct the entire cost of the software under Sec. 195 for the year in which you begin operations. Sec. 179 permits certain businesses to elect to take a deduction for the cost of certain assets instead of merely taking the allowable depreciation (although depreciation can be taken to the extent that the full cost is not deducted under Sec. 179). Thus, to continue with my example above, since a going business would, in general, be allowed to take a Sec. 179 deduction for the full cost of the software in 2006 (the year of acquisition), if your business went operational on 1/1/07, you should be able to treat the entire $203.86 cost of the software as a Sec. 195 expense, and would be allowed to fully deduct that expense in 2007 (subject to the $5,000 cap, which it does not appear you'll have a problem with). As a result, for the year in which your business goes operational, the LLC should be allowed a full deduction for the other expenses you listed via the interaction of Sec. 179 and Sec. 195; however, please verify this with an accountant - remember, you get what you pay for and I haven't received a single cent (nor am I asking for any). Thus, assuming you go operational in 2007, the LLC should be allowed a deduction under Sec. 179 of $550.70, and a deduction under Sec. 709 of $213.51. Second, once these amounts are allowed as a deduction to the LLC, they will be included in determining each member's distributive share of the LLC's items of income, gain, loss, deduction, or credit under the subchapter K rules (the partnership accounting rules, principally under Sec. 704). Because none of the expenses in question should have to be separately reported on the K-1's the LLC is required to furnish to each of the members, both deductions will be lumped together in determining the LLC's business income/loss. Thus, the LLC will report to each member his distributive share of the LLC's business income, which will indirectly include a share of the lump-sum deduction of $764.21. In this case, I am assuming that you are each 1/3 equal members, in which case each of you will have a distributive share of the LLC's business income that reflects 1/3 of the lump-sum deduction, or $254.74 (i.e., 1/3rd of $764.21). So, for example, assume that the costs you listed were the LLC's only business expenses, and assume that the LLC had $6,000 of ordinary income from operations in its first year, and that there were no other items that would affect the determination of the LLC's net ordinary income. In that case, the LLC would have net ordinary income of $5,235.79, and each member would have a distributive share of $1,745.26, which the LLC would report on a K-1 provided to each member, and which each member would report on his Schedule E to his Form 1040 for that year. I trust that this makes some sense, and I'm sure that other posters will be very gracious in correcting any mistakes I've made. However, please keep in mind that (a) I don't know all the facts and (b) I didn't get paid, so please, please do not just mindlessly rely on what I've written and make sure you have a competent CPA check out your LLC's books and its tax returns before you go and file anything with the IRS.

Ah, I thought not in Delaware.

anyway, you're going to capitalize those expenditures and write them off (amortize) when you get up and running. But find a local and competent CPA or EA to help you out. You don't just lump them all into one category. There are differences. ChEAr$, Harlan Lunsford, EA n LA

This is a very very thorough post. I appreciate the effort of your reply. I will have to read through this a few more times to get the full value of your advice. I am definetly going to employ a CPA to do my taxes and help set up my books. I am just pro-active and like to understand what my options are and obtain third party advice. Once again, thanks for your post as it is above and beyond what i would expect from a "free" newsgroup. Moderator: Please tell your friends.