Rental Expenses before placed in service date

Section 195 applies to both 162 and 212 deductions. We hashed that out not too long ago in a thread about the Hardy case.

Is the taxpayer sub-$25 million at the single employer level? If so, the real estate taxes could be expensed under section 164, since that is an exception to section 195 and since TRA ‘86 repealed section 189 which, along with section 266, was the only route to capitalization under prior law.

Sec. 195(c)(1), flush:

Right, that’s already been noted. And the actual language in Sec 164 says:

In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 (relating to expenses for production of income).

You see, Sec 164 only allows a trade or business tax deduction if in connection with “carrying on a trade or business.” If the business is not being carried on yet, Sec 164 wouldn’t allow it. And if Sec 164 wouldn’t allow it, then the part of Sec 195 that you cite: “A start-up expenditure does not include a deduction allowable under Section 164”…is N/A.

Now, maybe you’re saying that the tax in question is a property tax, as identified in Sec 164(a)(1), and not a trade/business tax as identified at the end of 164(a)…which is it?

You see, Sec 164 only allows a trade or business tax deduction if in connection with “carrying on a trade or business.” . Right, and, as I read it, it only allows a 212 activity deduction if in connection with "carrying on ... an activity described in section 212 (relating to expenses for the production of income)."

Section 195 is inapplicable to rental property because renting is not considered an active trade or business, but rather a passive activity.

Whoa! If Sec 195 is inapplicable to rental properties, why would the IRS say that it is applicable, like they did in the Woody case?

It is respondent's position that even though Mr. Woody incurred these expenses, they are, at best, start-up expenditures, as opposed to section 162 business expenses.

And why would Coddington say:

Section 195 applies to both 162 and 212 deductions. We hashed that out not too long ago in a thread about the Hardy case.

Also, active (for 195 purposes) vs. passive (for 469 purposes) is kind of apples and oranges

Let me try again.

If it had been in business and it was a small business, 263A would not have applied. Sec. 263A(i). If 263A would not have applied (and if there was a business already up and running), the expense would have been allowable as a deduction under 164 for the taxable year in which paid or incurred. Sec. 195(c)(1)(B).

But . . . there was no business. So no deduction was allowable under 164. Woody, etc. So the flush language in 195(c)(1) is not applicable. I think this means that 195 can apply, assuming a small business.

If the taxpayer meets the exemption of IRC Sec 263A(i), wouldn't the property taxes be deductible (as Coddington noted in post #21)?

IRC Sec 164 is specifically excluded from start-up expenditure treatment under IRC Sec 195 (as Nilodop noted in post #2).