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I’m preparing a partnership return for a client (husband & wife business partners) who run a doggy day care, boarding, and training facility out of their home. It is an LLC which opened for business on 03/17/14, and they are the only members. They invested approximately $45,000 of their personal money into purchasing supplies and also into renovating their large property to make it ideal for their business.
I understand that the property improvement costs must be amortized, but I am having a bit of trouble deciding about how to handle the supplies (dog food, collars & leashes, training books, professional certifications, dog beds, crates, toys, etc.) because the wife had been operating a pet-sitting business from home up to the day they opened the day care/boarding/training facility. She had similar or identical expenses for that business for 2013 and for the first few months of 2014. It is difficult to say for certain which expenses were related to the operation of her current business and which were purchased in preparation for the new business.
One problem (in my mind) is that she had previously been operating as a sole proprietor, then upon deciding to expand her current business to provide additional services for more clients, her husband decided to join her and they formed an LLC.
I’m hoping someone can offer their thoughts and/or suggestions about how to go about determining which expenses to amortize on the 1065, and which to deduct on her final Schedule C. Any advice is appreciated. Thanks!!
I understand that the property improvement costs must be amortized, but I am having a bit of trouble deciding about how to handle the supplies (dog food, collars & leashes, training books, professional certifications, dog beds, crates, toys, etc.) because the wife had been operating a pet-sitting business from home up to the day they opened the day care/boarding/training facility. She had similar or identical expenses for that business for 2013 and for the first few months of 2014. It is difficult to say for certain which expenses were related to the operation of her current business and which were purchased in preparation for the new business.
One problem (in my mind) is that she had previously been operating as a sole proprietor, then upon deciding to expand her current business to provide additional services for more clients, her husband decided to join her and they formed an LLC.
I’m hoping someone can offer their thoughts and/or suggestions about how to go about determining which expenses to amortize on the 1065, and which to deduct on her final Schedule C. Any advice is appreciated. Thanks!!
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Tax Professional Answers
Kathryn Morgan
The home improvements must be capitalized as you said. You must,dispose of everything on the Sch C and then move it to the 1065. The basis in the items moved to the 1065 (assuming she was depreciating at lest the home on the C) will be determined using the ending adjusted basis after the disposition of the C. Anything she took the expenses for in total on the C that is moved to use in the 1065 has a zero basis, so no expenses there. Anything that you would normally not capitalize that is an expense for the 1065 that was spent before the in service date of the 1065 must be amortized. You may deduct up to $5k as start up expenses but the rest must be amortized over 180 months. Anything purchased after the start date of the 1065 is treated as normal expenses or capitalized. Really the determination is based on the date the money was spent. Finish the Sch C first, then move everything to the 1065, it will be easier that way.
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466 weeks ago
Jorge Otoya
Interesting question! My thoughts... Based on your description it is entirely possible that the husband and wife may not have to file a partnership tax return and instead use Schedule C's. Take a look at Internal Revenue Code Section 761(f) that allows husband and wife joint filers who each materially participate in the joint trade or business to treat their joint venture as separate sole proprietorships. Both spouses must make this election and there are some considerations.
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465 weeks ago