Start up expenses
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I have to prepare an amended return for 2005, client prepared the return at the time. He has some non-major expenses for a company that was formed as a corporation in 2006. How is the best way to claim those expenses, on Schedule C with no income, or on Schedule A, limited to 2% of AGI? AGI is $113,000, expenses total $6,000.
Answer
Wouldn't the proper way be to put the assets/expenses on the corporate books, with a liability to the contributor? If an S corp, then there is basis, so the K1 will pass the expense. If a C corp, either reduces income or becomes a loss carryforward.
Comment
These expenses were provided when the corporate return was prepared but the preparer said to put them on his 2005 return. It is confusing to me because I would have used them as basis.
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I guess with the advice he got from the other preparer at the time, that's why he came to you now rather than the former preparer.
Answer
TucsonCPA is correct and so is Amy2008.
These expenses belong on the S corp return.
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I agree that the expense should be shown on the corporate side and not the individual side. However, keep in mind that they won't be deductible till they are actually paid.
Alternatevly, the individual could track them separately and add the expense to their outside basis in the stock. In this case, it wouldn't appear anywhere on the corporate or individual books. It would only come into play when they sell their stock.
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To clmakin: If the s/h paid the expenses for the benefit of the s corp, then it is treated as if the s corp paid them, owes money to the s/h, and the s corp has expenses and the s/h has loan basis to deduct losses. I am not sure you have all the facts.
I have never heard of outside basis for corporate stock.
How come we cannot comment back to the most recent person on a question, and where is the spel chekcer?
Answer
They need to be reflected on the corporate return and if they were not it should be ammended
Comment
These expenses should not go on the 1040 at all. They belong on the corporate return. This can be accounted for as in investment in the corporation, a loan, or due to shareholder (I’m assuming he is a shareholder).