Small Business Taxes -- Expenses Incurred Before LLC Formation and in Separate Years

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Hey everyone -- I spent some time on google but frankly couldn't find much in terms of definitive answers. I am a novice when it comes to small business taxes so please bear with me:

I recently started a small specialized photography side business that fills a niche market in the civil engineering world...the rest of the details probably aren't relevant. I decided to start this business in November 2016 and proceeded to invest around $2,000 into it, primarily for equipment. I spent November and December setting things up and getting everything nailed down. Finally formed the LLC (sole membership, just me) in Florida in late January 2017.

My first question is will I have any issues claiming those expenses since they occurred prior to LLC formation?

My second question is can I somehow sell the equipment to myself (specifically the LLC) in 2017 and then just claim the expenses as being part of 2017? I could then just lump all the expenses into tax year 2017.

I have brought in around $350 in revenue so far in 2017, no revenue in 2016.

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Not having an llc doesn't prevent you from taking honest business deductions. Take them in 2016.

To answer your main question - yes, as long as there's nothing excessive you should be able to get away with lumping it all under 2017 LLC expenses.  To be clear, you would be getting away with it, it wouldnt be "proper".  But even if caught, it'll probably be ignored as long as the deductions are legit just claimed in the wrong year, since there's nothing to be gained.

So, just as a starting point, formation of the LLC that is treated as a disregarded entity, in and of itself, is not a tax event (subject to caveats-for example, if what you're doing is regulated and you need to operate as a separate entity in order to be in that business, the LLC formation date could actually trigger the business start date).

You also generally cannot deduct expenses that occurred before your business started (subject to below). Determining your business start date may be complicated depending on the facts. It could possibly be on the date of the LLC formation, but it could also be earlier or later.

As you may know from your research, you can elect to deduct up to $5,000 in the year your business starts (unless total expenses are greater than $50K) and deduct the rest over 15 years. The actual application of this rule is a bit complicated so it may be wise to speak to someone who's familiar with this.

To your second question - why do you want to do this? Just so that I can follow the flow - you want to contribute cash to the LLC, then have the LLC use that cash that you just contributed and immediately turn around and "purchase" this capital asset from you? I'm not going to touch most of the problems with this, but my first response is - have you considered that the "sale" from you to the LLC may subject the LLC to use tax obligations?

Just as a side note - FL is often touted by the online llc formation companies as being a great place to setup an LLC. Do you live in/operate in Florida? If you don't, you may want to reconsider your setup if the reason for your decision is purely because FL doesn't have a personal income tax.



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