Startup cost - new location

[ZukaAdam]

I have a restaurant client who opened a second location. Business entity ownership is the same, although he did create a new entity for new location. Thoughts out there about deducting pre-opening costs at second location since first location is already open for business instead of amortizing them under sec 195? Thanks.

-Adam-

[kcjenkins]

Since the new location is a seperate entity, I see no problem with taking those as startup costs.

[veritas]

I have a restaurant client who opened a second location. Business entity ownership is the same, although he did create a new entity for new location. Thoughts out there about deducting pre-opening costs at second location since first location is already open for business instead of amortizing them under sec 195? Thanks.

-Adam-

If the operating company is the same for both locations, I don't believe you have any startup expenses.

[OldJack]

>>although he did create a new entity for new location. <<

The new entity must treat any startup costs as such on the tax return of the new entity. The number of locations/entities owned by an individual is immaterial regarding startup costs.

[veritas]

>>although he did create a new entity for new location. <<

The new entity must treat any startup costs as such on the tax return of the new entity. The number of locations/entities owned by an individual is immaterial regarding startup costs.

Hey Oldjack!

Been missing your oneryness self much.

Ther original question was difficult to understand. My point was if an entity started another business of the same type at a new location, I don't believe they have start-up costs.

EXAMPLE: Allen is a wholesaler who started a retail business for his merchandise. Any start up expenses incurred with regard to the opening of the first retail outlet may be deducted and amortized. On the other hand, the start up expenditures to open additional outlets are considered expansion costs of an existing business, deductible under as trade or business expenses, if they do not have to be capitalized. If a separate entity is formed, whether in connection with the expansion in the same line of business or an expansion into a new line of business, the costs are eligible for treatment as start-up expenses. Specialty Restaurants Corporation v. Commissioner, T.C. Memo. 1992-221.

[OldJack]

>>Been missing your oneryness self much<<

Well Veritas where have you been! I thought you were dead. I expect you have been hanging out with the wrong crowd on that other good for nothin forum? Most everyone over there are whiners wanting the authors to do their research for them.. you know better than to associate with those kind.

I have no quarrel with your example. Its about time you gave one!

[veritas]

>>Been missing your oneryness self much<<

Well Veritas where have you been! I thought you were dead. I expect you have been hanging out with the wrong crowd on that other good for nothin forum? Most everyone over there are whiners wanting the authors to do their research for them.. you know better than to associate with those kind.

I have no quarrel with your example. Its about time you gave one!

That's what I've been missing! :)

[jainen]

>>he did create a new entity for new location<<

It depends on what this means. Many lawyers recommend putting each property in a separate LLC for liability protection. Since an LLC is a disregarded entity for tax purposes, it is easy to structure the ownership so the new activity is included in the existing business. In that case the expansion could be deductible instead of treated as start-up costs.

After all these years, I'm still always surprised when a client asks such a fundamental question AFTER spending the money.

[OldJack]

>>Since an LLC is a disregarded entity <<

I would be a little concerned about completely ignoring the new location LLC owned by another entity as you still have the state statute to follow to keep separate accounting for legal purposes. Even if it is disregarded for tax purposes it is still in fact a legal entity that must account for its activities. In my opinion disregarded has to do with filing methods and forms and does not mean ignore. I therefore would treat startup expenses as such for the new location owned by another entity.

I run into a dispute with another CPA, on another forum, where he insisted that a single-member LLC could just combine the LLC activity with all other 1040 Sch-C activities since it was a disregarded entity. I argued that although it could be combined in some cases it could not if there were passive activities or lack of material participation in the activities. In any case I file separate 1040 Sch-C's as that is what can be entered into evidence in court for the LLC.

Then there is the argument that an LLC can own a S-corp. I think not.

[jainen]

>>the argument that an LLC can own a S-corp<<

Harrumph, yes, well, that is of course one of the key flaws in the statement that an LLC is a disregarded entity.

But even though an LLC can't own an S-corp, an S-corp CAN own an LLC, and (I admit I'm talking beyond my expertise here) can make certain arrangements and elections to treat it all as one big happy family.

[OldJack]

>>can make certain arrangements and elections to treat it all as one big happy family. <<

While it is true the S-corp can disregard the owned LLC for tax form filing purposes, the S-corp cannot ignore all the characteristics of the LLC's income and expenses. ie: LLC rental income and expense is still rental income and expense reportable by the S-corp.

[OutWestTax]

>>the argument that an LLC can own a S-corp<<

Harrumph, yes, well, that is of course one of the key flaws in the statement that an LLC is a disregarded entity.

But even though an LLC can't own an S-corp, an S-corp CAN own an LLC, and (I admit I'm talking beyond my expertise here) can make certain arrangements and elections to treat it all as one big happy family.

As long as we are splitting hairs, the IRS did rule in PLR 9745017 that a single member LLC taxed as a individual could own S Corp shares.

First thought is: "Why bother?" May have to actually read the PLR to find out why someone would spend the money to get a PLR on this issue.

Second thought: "Be sure and note before Jainen and OldJack that PLRs cannot be cited as authority" I know, I know, just thought it was interesting.

[OldJack]

Well, lets split some more hairs. PLR 9745017 is a little misleading regarding the LLC. Having read the PLR it shows that the LLC is owned 100% by a trust so its the trust that is allowed as a shareholder of an S-corp by the PLR. Try having a single-member LLC 100% owned by a C-corp and see if you can get a PLR approval.

Internal Revenue Service

Department of the Treasury

Washington, DC 20224

This responds to your letter dated March 6, 1997, submitted on behalf of X in which a ruling is requested under § 1362 of the Internal Revenue Code.

FACTS

X was formed as a corporation. A is a shareholder of X. In Date1, the shareholders of X made an election to have X taxed as an S corporation.

On Date2, X received a ruling from this office that Trust qualified as an S corporation shareholder under § 1361© (2) (A) (i).

Trust plans to form LLC. A plans to transfer shares of X to Trust. Trust plans to exchange shares of X for 100% of the ownership interests in LLC.

X and A represent that X is an S corporation, that A is a citizen of the United States, and that LLC will not elect to be taxed as an association.

LAW AND ANALYSIS

Section 1361(a) (1) of the Code defines an "S corporation" as "a small business corporation for which an election under § 1362(a) is in effect." Section 1362(a) provides, in part, that a small business corporation may elect to be an S corporation.

Section 1361( B ) (1) ( B ) provides that one of the requirements for a taxpayer to be a small business corporation is that the taxpayer is a domestic corporation which does not have as a shareholder a person.., other than a trust described in subsection © (2) who is not an individual.

Section 301.7701-3( B ) (1) (ii) of the Procedure and Administration Regulations states that, unless it elects otherwise, a domestic eligible entity with a single owner is disregarded as an entity separate from its owner. Section 301.7701-3(a) defines an eligible entity as a business entity that is not classified as a corporation under § 301.7701-2( B ) (1), (3), (4), (5), (6), (7), or (8). Accordingly, the owner of the LLC is treated as owning the LLC's assets directly. Thus, in determining whether a corporation is eligible to elect S status or continue its eligibility as an S corporation, any shares held by a single member LLC are treated as being owned directly by the LLC's owner.

Here, X stock will be transferred by Trust to LLC, which is wholly owned by Trust. Because single member LLCs are disregarded as entities separate from their owners for federal tax purposes, the transfer of the X shares to LLC does not terminate the S corporation election of X. In addition, the holding of the X shares by LLC will not adversely affect the ability of X from qualifying as an S corporation.

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that the transfers of X shares to LLC does not terminate the S corporation election of X. In addition, the holding of the X shares by LLC will not adversely affect the ability of X from qualifying as an S corporation.

[OutWestTax]

That's exactly the way I see it too.

To summarize, at first glance a LLC can't own S Corp shares.

Then we dig a little deeper and find a PLR that states:

"Thus, in determining whether a corporation is eligible to elect S status or continue its eligibility as an S corporation, any shares held by a single member LLC are treated as being owned directly by the LLC's owner."

So now our more nuanced (waited a week to use that word) view is a single member, disregarded entity LLC may own S Corp shares if the underlying owner is an eligible shareholder.

Interesting thing to know, but I still haven't figured out why go to the bother of putting a SMLLC in the middle. Can you think of any reason?

[OldJack]

>>Interesting thing to know, but I still haven't figured out why go to the bother of putting a SMLLC in the middle. Can you think of any reason? <<

Its as clear as the nose on your face, another layer of protection from liability. ??? Probably not. I expect the answer to your question is there is really no good reason and that is why the IRS was willing to decide as they did. It is 6 of one and a half-dozen of the other.

[kcjenkins]

Actually, if we are splitting hairs here, why just assume that the new entity is an LLC? Or, if it is, that it is a SMLLC? Just because Adam used 'he' does not mean that it could not be an S corp, or that the 'he' involved is the managing partner in a group.