Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for November 18th, 2007

Capitalizing startup costs…

Posted by taxguru on November 18, 2007

Q:

Subject: Depreciation on web site enhancements and portal additions

We are an HMO with website for “E-Health”, designed to enable employees, clients, brokers, practitioners, etc to access info on claims, broker checks, practitioner info/update etc.  We have previously expensed costs associated with this site, to the tune of 800K.  

 

We are now expanding, adding portals, new software, accessibility, info expansion, in the amount of 1.2 million, using third-party vendors. Is there any part of this that can be capitalized?  (Can we change horses in midstream)?

 

Additionally, we have a contract vendor on-site.  We pay them a monthly fee for maintaining all our applications.  All this is expensed as consulting.  If we use folks from this contract pool to develop, train, implement this project, we can’t very well capitalize these costs.  But if we have a special “project contract” with this vendor, for a certain cost, etc., wouldn’t we be able to capitalize this labor?

 

Thanks for your help–our object is to capitalize as much as possible.  If there is a good place to go (besides you!) to get answers, please let me know.  I’ve downloaded every IRS publication I can find on depreciation already and haven’t found an answer.

 

A:

I don’t mean to cop out on this kind of issue; but there is no place to go to help decide how to properly handle the capitalization of start-up costs.  There are several ways in which it can be handled.  That kind of decision requires a lot of analysis of your past, current and future circumstances by an experienced professional tax and accounting advisor. This is in no way something you can do on your own.

Frankly, I find it shocking that you would invest two million dollars in a business start-up without the assistance of tax and accounting professionals from the very beginning.  That is extremely reckless and dangerous on so many fronts.  If that was all your own personal money being used, I guess you will be learning some expensive lessons.  However, if you are using money from outside investors, operating without competent tax and accounting professionals, you are exposing yourself to lawsuits by the investors for fiduciary negligence.

I realize this isn’t the kind of response you were expecting; but anything else would be irresponsible.

Good luck.

Kerry Kerstetter

 

TaxCoach Software: Are you giving your clients what they really want?

 

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Buy SUV personally or through LLC?

Posted by taxguru on November 18, 2007

Q:

Kerry,

I currently have a day job where my gross pay will be around $110,000 for 2007.  I also own a 60% stake in an LLC, seperate from my $110,000 job.  I need to buy an SUV for my LLC for about 80% business and my use only. In respect to Tax Code Section 179, what is my best strategy for buying a $30,000 SUV that is section 179-eligible? Can I personally take the Section 179 tax break? Or do I get only 60% of the section 179 deduction? Can I take the section 179 deduction on my own or does it have to be through the business?  Your help is greatly appreciated.

 

A:

This is the kind of thing you should really be discussing with your own personal professional tax advisor because there are a lot of factors to take into consideration.

Tax-wise, you could achieve pretty much the same benefits either way; buying it personally or through the LLC.

From a more practical sense, what would concern me more is how you and your partner in the LLC can ensure that you are each getting your fair share of the deal.  It’s an easy enough task to specially allocate the Section 179 for the purchase to your K-1.  What gets messier is how to allocate the operating expenses.  Are you going to pay them personally or is the LLC?  The person who is handling the tax and accounting work for the LLC should also be part of this decision process to see if it would just be cleaner to have each of you take care of your vehicles on your own, which is what I frequently see with situations similar to yours.

There are obviously other factors to consider when working with a multi-owner business that wouldn’t be a concern for a company owned by a single person or a married couple. 

Good luck.  I hope this helps you and your personal professional tax advisor work out the best game plan for your unique circumstances.

Kerry Kerstetter

 

Follow-Up:

thanks for the response Kerry!

 

 

 

 

Posted in 179, LLC, Vehicles | Comments Off on Buy SUV personally or through LLC?

Other kinds of employees?

Posted by taxguru on November 18, 2007

Posted in comix, Employees | Comments Off on Other kinds of employees?

Posted by taxguru on November 18, 2007

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