Form 8858 -- Dormant Foreign Disregarded Entity question

Perhaps @pk has some familiarity with Form 8858.

@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

(c) now you want liquidate the FDE

(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.

pk

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. 

@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 

pk

Thanks again, pk. But what do you think about this link, which says that a single member LLC can deduct organizational expenses up to $5000, instead of capitalizing them over many years? I wonder if it's different if your LLC is filing as a dormant entity? And I wonder if fee I paid to a foreign lawyer to get me a business license and register my company is an "organizational expense"?

https://www.nolo.com/legal-encyclopedia/deducting-organizational-costs-single-membrer-llcs.html

These tax law provisions do not apply to one-person LLCs, because they are disregarded entities. The IRS says that one-person LLCs may deduct in a single year organizational costs that do not exceed $5,000. However, if a single member LLC's organizational expenses exceed $5,000, no portion of the expenses is deductible. Instead, the entire amount must be capitalized. This means they would not be deductible until the LLC is dissolved. (Treasury Regs. Secs. 1.263(a)-5(d)(1) and (3).)

Example 1: Larry forms a single-member LLC to run his consulting business. He incurs $800 in expenses for the llc operating agreement, articles of organization, and filing fees. Since these expenses are below the $5,000 threshold, he may deduct the entire amount the first year the LLC is in business.

Example 2: Assume that Larry incurs $6,000 in legal expenses to set-up his one-member LLC. Since this amount is over the $5,000 threshhold, none of these organizational costs are deductible or amortizable. Larry must capitalize the $6,000 expense. These costs will only be deductible upon the LLC's dissolution and termination.

The moral is that if you form a one-member LLC, you should never spend more than $5,000 in organizational expenses. For the great majority of one-member LLCs, this should not pose a problem.

@Gordo5  please see this article -- may help -->  https://www.thetaxadviser.com/issues/2012/dec/clinic-story-09.html

pk

Thanks pk. Well that article seems to say that yes, I can deduct the legal fees of $1200  as well as startup costs if below $5000. So my remaining question is, does the fact that I am filing 8858 as a "dormant" disregarded entity, somehow invalidate my ability to take this deduction because it's dormant, has no profit and no loss, no activity at all?

So I would take the deduction on 1040 Schedule C, is that correct? "Legal and professional services"? Do I have to attach an explanation that it's an organizational cost for my Foreign Disregarded Entity which is described in the attached Form 8858?

Do I have to explain that it's an organizational expense on Schedule C?

Thanks again, pk.

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!

@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. 

pk

Thanks pk. You've helped me a lot!