LLC & Delayed Rental Property Availability - Start-Up Expenses

[Anonymous]

I'm confused as to when I can report my start-up expenses in this hypothetical situation, as the rental property won't be available to rent until the year after LLC formation.

Timeline:

• 2019-2021: Incur several start-up expenses (travel, research, license fees, etc.) to find an ideal short term/vacation rental/AirBNB property and start an LLC.
• 6/2021: Start a multi-member LLC (with spouse) and purchase a property requiring a lot of renovation (under the LLC).
• 6/2021: Apply for an IRS EIN (showing the start of the business as the date of the LLC formation). Needed EIN for bank accounts and to submit zero-income State franchise tax return for 2021 (filing early 2022).
• 7/2021-6/2022: Extensive renovation of property with carrying costs (mortgage, utilities, insurance, etc.), some of which could be start-up expenses.
• 7/2022: Make the property available for rent.  Finally make income.  Deduct new expenses moving forward.

In 2021, the LLC will not make any income, as the property is not available to rent.

In late 2022, the LLC will make income from short term rentals.

1) When can I apply the start-up expenses in this scenario? 2021, 2022, or both?  The LLC was officially formed in 2021, but the rental business (the actual business of the LLC) doesn't start until 2022.  If I wait to take start-up expenses until 2022, will it raise any red flags that the return shows a "date business started" in 2021?

2) Will I even need to file a form 1065 (partnership return) for 2021 if there is no income (only expenses)?

I've had a hard time reconciling the LLC start date (per the state) vs. the business start date (when the property can be rented).  I hope someone can clarify it for me!

Thanks in advance!

[Mike9241]

1) When can I apply the start-up expenses in this scenario? 2021, 2022, or both?  The LLC was officially formed in 2021, but the rental business (the actual business of the LLC) doesn't start until 2022.  If I wait to take start-up expenses until 2022, will it raise any red flags that the return shows a "date business started" in 2021? the business doesn't start until the property is ready for rental which you say will be 2020

2) Will I even need to file a form 1065 (partnership return) for 2021 if there is no income (only expenses)?

except in community property states, an LLC is required to file a return unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes.

don't know what deductible expenses you'll have in 2021 but if you don't file a return those expenses will never be deductible. the maximum penalty for not filing a 2021 return, if required, is over $5,000.  $210/month/partner for a maximum of 12 months.    

[tagteam]

Start-up expenditures are specified in Section 195 of the Code as being deductible for the taxable year in which the active trade or business begins. 

Note that an "active trade or business" is required while net profit/loss from residential rental real estate is generally considered to be a passive activity.

[Anonymous]

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@Mike9241 wrote:

the business doesn't start until the property is ready for rental which you say will be 2020

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The struggle is that to get a federal tax id number (in order to comply with the local state LLC annual reporting requirements), I have to select a business start date.  I doubt I can put a future date (in 2022 when I'll have rental income), so I imagine I'll put the LLC creation date.  But the "business" of renting won't happen until 2022, so can I take the start-up expense deduction then?

[Anonymous]

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@tagteam wrote:

Start-up expenditures are specified in Section 195 of the Code as being deductible for the taxable year in which the active trade or business begins. 

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If I'm interpreting what your saying correctly, regardless of the business start date (6/2021) on the federal tax id/EIN request AND the first return that I'll file for 2021, I can still take the start-up expenditure deduction in 2022 as that is when the active business of rental begins.  Is that correct?

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@tagteam wrote:

Note that an "active trade or business" is required while net profit/loss from residential rental real estate is generally considered to be a passive activity.

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I definitely plan this to be an active business and NOT an investment/passive activity.  It will be a vacation short-term rental with numerous bookings per month, a large degree of owner involvement (scheduling, communication, coordination, advertising/marketing, repairs, etc.), and regular and continuous work to earn a profit.

[tagteam]

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@Anonymous wrote:
I can still take the start-up expenditure deduction in 2022 as that is when the active business of rental begins.  Is that correct?

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Yes, you will be able to claim startup expenses in the tax year in which your business begins.

[tagteam]

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@Anonymous wrote:
I definitely plan this to be an active business and NOT an investment/passive activity.  It will be a vacation short-term rental with numerous bookings per month, a large degree of owner involvement (scheduling, communication, coordination, advertising/marketing, repairs, etc.),.....

If you plan to operate this enterprise much like a hotel, providing substantial services to your renters, then the tax treatment would be as you stated earlier.