Form 8858 -- Dormant Foreign Disregarded Entity question

Forum|Forum|3 years ago
October 5, 2022
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I started a Foreign Disregarded Entity late in 2021 and it had no business activity at all in 2021, so I want to simplify my tax preparation by filing Form 8858 as a “dormant” FDE. Can I do this and still get a deduction for the money I paid the lawyer to get me a business license?

That legal fee was paid by me, not by the business. It was paid before the business license was granted. Where would I take that deduction? Schedule C? What line on Schedule C?

I have an extension to file until October 15.

Thanks for any help.

Not A Product Question

Anonymous_

Level 15

Perhaps @pk12_2 has some familiarity with Form 8858.

pk_

Level 15

@Gordo5 , give me till tomorrow to come back on this ---- what I get is that

(a) you established an FDE ( because you are sole owner of a foreign entity or a Branch of a foreign entity 0

(b) you have had no income from this effort in 2021

(d) so you would like to file a 8858 to liquidate the FDE and a schedule-C to use NOL ( because of seting up expenses )

I will come back tomorrow ( because I thought setting up expenses on a sole owner business with nil income is lost and not eligible for NOL treatment -- so I need refresh my memories.

Gordo5Author

Level 2

Thanks for your reply, pk. Sorry for my late reply, I was travelling. A and B are correct but C is not--I don't want to liquidate the entity, I just started it last year. Net Operating Losses (NOLs) is what you're referring to? I just want to know if I can file my 8858 as a dormant entity because it had no activity in 2021--no income and no expenses--thus making it much easier for me to fill out the complicated form.

Dormant entity writes at top margin of form: “Filed Pursuant to Announcement 2004-4 for Dormant FDE.”

And I want to know that, if I do this, can I still take a deduction on 2021 return for the fee I paid to a foreign lawyer to get me a business license? About $1,200. I consider that a startup expense as I paid for it, the business did not pay for it. And I paid it before the business was licensed. Would I take this deduction on Schedule C? Or I cant do it because the business had no activity in 2021? Or does the legal fee have to be amortized over 10 years? Because if it has to be amortized, I just wont take the deduction, it will make tax preparation too complicated for my simple business.

At this point, I have to file in a few days, and I don't even know if I have to file a Schedule C for my dormant, inactive foreign disregarded entity.

Many thanks if you can reply again.

pk_

Level 15

@Gordo5 , you are correct that as a dormant entity, you still need to file 8858 following the IRB you referred to earlier.

Sorry I mis-understood your comments about FDE/ SB current status -- it is alive with plans for growth

For the start-up cost , these are generally capitalized -- viewed as paid in capital / basis in the business.

Here is some details from IRS --> https://www.irs.gov/newsroom/heres-how-businesses-can-deduct-startup-costs-from-their-federal-taxes

Gordo5Author

Level 2

If somehow I have misunderstood this issue, and IRS decides the deduction is not valid, is there a penalty? How big?

It's so stressful doing one's own taxes!

pk_

Level 15

@Gordo5 , try it --- there is not penalty if IRS disagrees. There may be interest charges on the owed difference but one can always argue that the situation is unclear since it is a dis-regarded entity ( foreign or otherwise ). I personally think there is a good case to be made and enough people ask then there will be a declared position by the IRS.