If I transfer/sell equipment that I personally own to my LLC do I have to claim the FMV as personal income if I want to claim the equipment as a business deduction?

[H-H]

My LLC was organized in 2015 based on a hobby.  I have several pieces of equipment that I would like to transfer into the LLC's ownership.  I would like to be able to claim the FMV of this equipment as a either a startup expense or depreciate it's value over time.  If I do this will the IRS be looking for that same equipment FMV to be represented under barter income on my personal income?

[H-H]

Perhaps I'm going about this wrong.  Can I simply claim the equipment purchased the last few years as startup expenses on the LLC?  Or are startup expenses only acceptable when they are the same year as the business opens?  For example, can I claim a startup expense from 2012 on my 2015 business startup?

[Rick19744]

No.  Always keep in mind that you can generally only take expenses in the year incurred.

Start up costs are incurred before the business has begun; market analysis, advertising before the business opens, training employees before the business opens, consulting fees, etc.

If this is not going to be a hobby, then you contribute the assets at your cost basis, then you could take a Section 179 expense election or depreciate them.  You would want to think this through; will you benefit from the entire expense deduction or will you be limited under the at-risk rules.

Additionally, the cost of the assets you contribute provides you with basis and at-risk.  Make sure you maintain a basis schedule from the beginning so you know what your basis is at all times.  This is very important and something that is not handled correctly in many instances.

See the attached IRS publication as this may provide you with some guidance:

<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p334.pdf">https://www.irs.gov/pub/irs-pdf/p334.pdf</a>

[Rick19744]

A couple of things to note:

• The hobby loss rules only allow deductions to the extent of income (can't create a loss)
• You can certainly contribute equipment to your LLC, but the law requires carry over basis not FMV.
• Keep in mind that your LLC is probably a single member LLC which is disregarded for federal income tax purposes.  So not sure what you are attempting to accomplish by setting up a single member LLC for a hobby.
• You kind of get whip sawed under the hobby loss rules; income reported as other income and expenses are reported on Sch A itemized deductions subject to the 2% of AGI limitation in addition to only being able to claim expenses to the extent of income

Not what you were expecting, but those are the limitations.

[H-H]

I called it a hobby, however in the context of the IRS it was never a hobby business.  Why can't I simply sell my personal equipment to the LLC?  I then show that as personal income on my Sch A(easily over the 2% rule) and then the LLC can begin to depreciate the equipment based on FMV.  Is this not what would happen if I sold my equipment to a business that I am not associated with?

[Rick19744]

Many issues here and difficult to go back and forth with questions:

Selling equipment to a business that you are not associated with is different than selling to a business that you own.  The IRS is always very wary of "non-arms length" transactions that occur with the later.

If this is not a hobby as you initially stated, is this going to be a trade or business in which you are actively engaged in making money?

Why would you want to sell equipment to your LLC, which in fact is you, and recognize gain and pay tax?  You will need to be able to determine the FMV of whatever you are selling and support this if audited by the IRS.  I can't imagine what you would be selling that would create a gain, and therefore, why would you not just contribute at your cost basis?  You cannot recognize a loss on a related party transaction.

You may want to discuss with a tax professional to get you started down the right path.  As I said previously, there are many issues and different tax consequences that could have long term impact on you.