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