when to deduct start-up expenses

[101321]

Hi,

I have a question about when to deduct startup expenses, in the year incurred or year reimbursed. The entity is a multi-member LLC formed 9/2024 using cash basis accounting. The startup & organization expenses, incurred before the official start-date for the business, they were paid by members (in 2024) and now the expenses were reimbursed in 2025. The expenses are under $5k thus do not need to be amortized.

If the expenses had been incurred & reimbursed in 2024 I know these startup expenses would all be deducted on the 2024 Form 1065. But the LLC reimbursed in 2025, and since the LLC uses cash accounting, reimbursements processed in 2025 would normally be included on Form 1065 for 2025. 

I am using TurboTax Business 2024. When I entered startup expenses, incurred 6/1/2024 and paid 2/1/2025, TurboTax includes them on the 2024 Form 1065.

Or since the LLC paid the expenses 2/1/2025, should I just mark them as operational expenses instead of startup expenses? the amount is under $5k, so the tax implications are identical.

thank you

[PatriciaV]

The funds provided by the members to cover startup costs are considered capital contributions to the partnership. Thus, the "reimbursements" of those funds are distributions (return of capital). Neither transaction affects net income, only equity (members capital).

You may expense up to $5,000 in startup costs in the year that your business starts.

[101321]

PatriciaV:

Thank you for the response. 

And for future, non-startup, partner-paid expenses that are subsequently reimbursed, is it common to mark them as capital contributions and distributions? That does make sense, since if the LLC doesn't provide the reimbursement then the partner realizes an increase in basis due to the expenses paid by the partner. Are these considered "cash contributions" on Form 1065?

[RobertB4444]

They are cash contributions which increase that partner's basis and the reimbursements decrease their basis back to where it was.  That is the correct and common way to handle those things.  It also helps to track in case it is several years before the contributed capital can be returned to the partner.

@101321 

[101321]

So then getting a bit deeper into the mechanics of recording the partner paid expenses, in our situation we  plan to submit quarterly expense reports as necessary. The the individual (line item) expenses will be recorded on the books according to chart of accounts, to ensure proper internal tracking and tax reporting, and then a cash contribution for the expense report total is attributed to the partner. Or should the cash contribution be tracked at the individual item level as well, to ensure year matching?

[DianeW777]

Yes a cash contribution for the expense report total is attributed to each partner. It should be easy enough to track the expense payment based on the cash contribution date. In the end it's what seems most logical for you to understand the books and records based on actions taken for each reimbursed expense. Once you decide on your actions, consistency will ensure matching.

@101321