independent contractors and start up costs

[jrmac007]

this is our LLC first year - our organisational costs before starting business were incurred through an independent contractor (operating agreement, filing etc) - and we were supported after start date by the same person - as we are issuing a 1099 to her, when i complete the payments to independent contractors section the amount paid as organisational costs is double counted -how do i address this

[ColeenD3]

I'm thinking that what you are paying her both for her labor and for her own costs incurred.  If this is true, her labor is an expense. Anything she does setting up your company is a start-up or organizational cost.

Organizational Cost.

The cost must qualify as one of the following.

• A business start-up cost.

• An organizational cost for a corporation.

• An organizational cost for a partnership.

For costs paid or incurred after October 22, 2004, and before September 9, 2008, you can elect to deduct a limited amount of business start-up and organizational costs in the year your active trade or business begins. Any costs not deducted can be amortized ratably over a 180-month period, beginning with the month you begin business. If the election is made, you must attach any statement required by Regulations sections 1.195-1(b), 1.248-1(c), and 1.709-1(c), as in effect before September 9, 2008.

Start up costs are those expenses incurred in planning and setting up the business, costs you incur before you open the door.

Here is how it works:

Expenses paid or incurred after October 22, 2004: 

 - You can deduct up to $5,000 in startup and $5,000 organizational costs as current expenses if the costs are under $50,000, respectively.

 - You can choose to amortize startup and organizational costs greater than $5,000, respectively, (but less than $50,000, respectively) over a period of 15 years.

 - If your startup or your organizational costs are more than $50,000, respectively, the excess amount reduces the amount you can deduct.

[jrmac007]

thks, that is right - part of the cost is her time, and part of the expense is costs she incurs, such as filing fees

so i take it that i split the cost between the two categories?

[ColeenD3]

Yes. Whatever her compensation is needs to be treated differently on Schedule C than start-up and organizational costs.

[kelvnator]

Hi,

You mentioned "For costs paid or incurred after October 22, 2004, and before September 9, 2008,... ", but then later state "Expenses paid or incurred after October 22, 2004: ..",  

Would you please clarify if start up costs / renovating expenses are treated differently if they were incurred after Sept. 9, 2008?  Specifically, start up costs and rental expenses that were incurred in 2016 to renovate a rental home that was put into service in 2017.

Thank you in advance!

Kelly

[DaveF1006]

It depends on if you are operating this business as a qualified real estate professional or a non-professional that is in the business of renting houses. It depends if you report your income on a Schedule C or Schedule E. 

If you are operating this business as a qualified Real Estate Professional, the IRS will let you deduct the following startup costs as with any business. Please review this link from IRS.gov for more information.

• An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
• Advertisements for the opening of the business.
• Salaries and wages for employees who are being trained and their instructors.
• Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
• Salaries and fees for executives and consultants, or for similar professional services.

As far as renovation expenses, according to Turbo Tax agent Irene, there are two elections you can make according to this link. You may take  the De Minimis Safe Harbor Election or the Improvements election. 

For both elections each asset that you would normally depreciate over a number of years needs to be $2,500 or less. Any asset over the amount of $2,500 needs to be depreciated over 27.5 years and cannot be expensed. This applies regardless on whether you are operating this as a business as a Qualified Real Estate professional or a non-professional. There are restrictions that apply and you can review this in the link I provided above.

When we speak of assets, we are talking about the costs for such improvements such as:

• Putting in a new porch
• Completely renovating a bathroom or kitchen.
• Building a garage
• Repaving a driveway
• New roof
• New carpeting or wood floors

This is just an example of improvements that can be depreciated or expensed.  Repairs to these structures are not improvements and can be expensed. For an example, plumbing repairs are an expense but if you put in all new plumbing or upgrade the electrical components of your house, then this is an improvement.

I sincerely hope this is the answer you are looking for. 

@kelvnator