Business Expenses - Can we write off prior to LLC?

Question

Recently my girlfriend and I have been remodeling her house, some changes were required (repairs) while others were more cosmetic (general updates). Once finished we will list it as a rental, in a couple months, but we have yet to put our property into a LLC.

Are we able to write off any of these expenses even though the house is not part of a LLC yet?

Eamonn McElroy · Answer

@Derek Smith

Fair enough on the wording.

"there are always grey areas in law; regardless of which area."

"however, the point was that its not all black and white as to which category these all fall into; at least that's my perspective =p"

I'm not sure where you heard or read this, but the tangible property regs are pretty clear on what constitutes a repair vs improvement.  That doesn't mean they aren't nuanced and hard to understand.  Really the process is a little bit much for a forum post and is better suited to a conversation.

The problem in your situation is that you haven't placed the property in service yet.  You were using it as a principal residence.  Until you place it in service as a rental it is still personal use.  You cannot deduct repairs on a personal use asset.  You need to be aware of and acknowledge that first step -- you're leapfrogging it right now...

Natalie Kolodij · Answer

The LLC doesn't matter at all for tax reasons. It's just there for liability protection.

All expenses that you incur BEFORE the property is in service as a rental add to the basis and get depreciated.

Eamonn McElroy · Answer

@Derek Smith

"I guess it depends on the person's perspective, but for the most part I would think all could be written off versus depreciated."

Actually it depends on tax law and to a lesser extent case law, not personal perspective.  : )

If it was a principle residence you wouldn't expense anything during the remodel, everything is capitalized.  Once it's put into service as a rental you might be able to bonus out personal property like @Michael Plaks suggested.

Derek Smith · Answer

@Eamonn McElroy

Thank you for you time and knowledge. I may be able to learn some things from searching the web, but I think to your point, there is a reason why so much time (for a CPA) is dedicated to this area and why it would make sense for us to go this route.

I will continue to self-educate, just because do not want to be completely in the dark, albeit we'll seek out professional assistance.

Thanks again everyone for all your assistance!

Eamonn McElroy · Answer

@Derek Smith

I usually go straight to the regs and read 50% of the time, however I wouldn't advise that for the uninitiated...

The other 50% of my time I refer to proprietary flow charts and summaries that my practice has developed.  They're a big part of the value that I provide to my clients and part of my competitive edge.  I do not give these out...

You can keep on Googling like you have been, that may be the best route to satiate your learning wants.  I realize this post isn't much help, but let me put it in perspective...

Most CPAs go to college for at least 5 years.  They then sacrifice 6 months to 2 years of their social lives to get licensed as a CPA while working 60-90 hours per week during spring and fall "busy season".  Most practicing CPAs don't have an "excellent" grasp of the tangible property regs.  They're spotty at best.

It will be extremely hard for a non-practitioner to Google around, attempt to self-educate without an accounting background (really assuming here because I don't know yours), and then end up with a functional understanding of the tangible property regs.

Sometimes the greatest leaps in life come when we realize our limitations and outsource to individuals who specialize in a field different than ours...

I do not attempt to write operating agreements...  I know my limitations and call an attorney for that.

Derek Smith · Answer

@Eamonn McElroy

I am beginning to skim through this information:

https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations

Would you have any recommendations of other articles to read?

Most of what I've referenced are from various articles people have written. Naturally most will be general information; which is why I am here asking additional questions. Taxes are not my area of expertise, so definitely appreciate everyone's responses/knowledge that may be shared.

As I suspected in the beginning, we wouldn't be able to effectively handle the tax aspect of this project in beginning, so gaining as much knowledge as possible for the time being.

Derek Smith · Answer

@Eamonn McElroy

there are always grey areas in law; regardless of which area.

repairs versus improvements. Replacing a floor; where does that fall? Some would say improvements; however, the sub-flooring had a huge hole in it that we had to cover up. Which forced us to replace both sub-flooring and actual bathroom flooring.

Hanging new drywall in the kitchen; again improvement or repair? Our issue here was the fact the house had zero insulation making the kitchen completely unbearable to be in during the winder months.

"Perspective" may have been an incorrect choice of words; however, the point was that its not all black and white as to which category these all fall into; at least that's my perspective =p. Ultimately, how do we "correctly" define where these should go? Again, this house was bought via foreclosure so how is everything not considered a repair over an improvement.

this may be better suited for some sort of CPA, but the hope was to do this ourselves. May not be plausible off the bat for us, as there is still much to be learned. Sorry if our questions have become too specific

Natalie Kolodij · Answer

You continue to quote me on posts to try to point out things that are incorrect.

Again- and again I note that we're talking in generalities. This was a very vague question. I wasn't going to confuse further by digging into the weeds.

Derek Smith · Answer

I guess it depends on the person's perspective, but for the most part I would think all could be written off versus depreciated. (Just knowledge is fairly limited here).

The house was purchased as a foreclosure and no work was ever done to it until now; 8 years after the initial purchase. My personal opinion would be, everything was truly necessary to make as a rental. Again, limited knowledge, so do not fully know where to draw the line in the sand.

Good news is we've been keeping all receipts for the work being done... just seems to be piling up quickly

Michael Plaks · Answer

Some of these expenses potentially could be written off, instead of being depreciated, once the property becomes a rental. For example, appliances and carpet.

Business Expenses - Can we write off prior to LLC?

Most Popular Reply