Discussion:Capitalize expenses?

Jack

See my other recent discussion thread about deducting the interest and/or any loan costs for any debt your stockholder incurred to purchase that S Corp interest.

Another thought that occurred to me is what happens to your $100K+ outside basis in the S Corp if the S Corp sells the land. Would the S Corp then be dissolved? After distributing the cash back out, you could be left with a capital loss on cratering the S Corp stock. Capital losses have severe deduction limits. No 1244 loss can be taken since your TP was not the original stockholder in the S Corp.

Another thought that occurred to me is what happens to your $100K+ outside basis in the S Corp if the S Corp sells the land. Would the S Corp then be dissolved? After distributing the cash back out, you could be left with a capital loss on cratering the S Corp stock. Capital losses have severe deduction limits. No 1244 loss can be taken since your TP was not the original stockholder in the S Corp.

Good problem to have!

One more question. I am trying to determine how the interest expense on the loan acquired to buy the stock should be treated. The loan was taken out in the name of LLC. According to the instructions for 4952, investment interest expense is interest paid or accrued on a loan that is allocable to property held for investment. Property held for investment is property that produces income not derived in the ordinary course of a trade or business. Since the whole business of both the LLC and the S-corp (now owned by the LLC) is to buy, develop and sale the land, would this exclude this from being investment interest? It is confusing because if you think of it from the standpoint of a sole proprietor or invividual purchasing stock in a company as an investment (on which they borrow money to do so), it is clearly investment interest expense. In my clients case, it is not as straight-forward. Yes, the loan interest, is specifically to purchase the stock, however if they would have done as asset purchase instead they would have capitalized the interest to the cost of the project.

On the question of filing a Schedule C - NOTHING will ever hit a schedule C for this LLC. The LLC is a disregarded entity that simply made a stock purchase. You have to think of all this as being done by the individual and not an entity which not does exist for tax pruposes. This cannot be a trade or business activity. No write off of organization expenses either. 100% outside basis in the stock for everything paid out leading up to the sale plus the sale price & any closing costs. Separate treatment of loan costs if the stock purchase was financed. This is also discussed in the other thread started by me recently.

Kathi

KathiJud - agree that the LLC is a disregarded entity however it has been in business for many years developing land. So on the LLC's books, I was adding an Other Asset "Investment in S-Corp". I realize that the K-1 from the S-corp will go directly to Schedule E and now the interest also on page 2 of sch E. My Quickfinder book indicates that "Costs of investigating business possibilities, such as market analysis, facilities,...etc.", are generally deducted (1) if incurred by an existing business (which the LLC is) in the process of normal expansion, the costs are deducted as current expenses. Once the decision has been made to acquire a specific business, subsequent acquisition costs must be capitalized and are not recovered until the business is sold (outside basis). With this said, just want to make sure you agree and that I am not off my rocker with my thinking! Also, I do have the same issue with you with regards to the loan fees to purchase the investment. I plan to amortize the loan related fees over the loan term as amortization expense on schedule C. This of course contradicts what you said above...where would you include them?

Thanks, Laura

I didn't realize the LLC had an existing land development business instead of being recently formed simply to make the S Corp stock purchase. However, the same thinking would apply. You cannot merge these two activities together on the Schedule C. Ignore the LLC entity and you see one TP with a business activity plus that TP has ownership of a separate S Corp. Doesn't look to me like you expanded the business activity since TP didn't purchase an asset outright and bring it into the existing business. TP acquired a separate established business as a stockholder and all but loan costs are capitalized as outside basis. On the LLC books, everything related to the acquisition posts to its Investment in S Corp account. I suppose there could be some justification for investigation expenses if the TP was first looking at simply buying the land and adding to the LLC's operations. When that plan changed however and the TP began to negotiate to buy the stock the character of the expenses changes. My other thread addresses amortization of the loan costs to buy the S Corp stock on Sch E page 2 just like the interest charges on the loan. I do not believe it would be proper to put them on the Sch C. Owning stock is not a trade or business activity.

Kathi

Oh, the seller of the corporate stock *did* provide the purchaser with some sort of *proof* of the value of the land at the date of the conversion to S corporation, didn't they...? Oh, oops, maybe they didn't or couldn't. And wouldn't that be a mess. The kind of thing that would have reduced the bargained-for purchase price of the S corporation stock by tens of thousands of dollars...

I just went through something similar in trying to get documentation of FMV's at date of conversion on a multi million dollar deal with a lot of real property owned for many years. The S Corp was converted 8 years earlier so two years to go. Large accounting firm that had served this company for many years told me no appraisals or workpapers had been done so not available. Also told me no workpapers done to track the C Corp E&P which appeared to be over ten million looking at the small number for AAA versus large amount of retained earnings. Not very firm ground for me to be able to start off with. GRRRRR

Tired and need to shut the brain down for a few hours.

Night night Harry.

Desribe those expenses for us.

Your client did not buy land, he bought stock.