I recently attended the bootcamp (highly recommended! although I had to leave early…) and am about to get the ball rolling regarding my search for parks.
What I’m unsure about is how to handle expenses incurred during that process (e.g.: skype/headset, mass-mailings, various legal fees, etc). I don’t expect to have a partner for my first park, so I’d likely be following the “Example B” entity structure found on pg. 288 of the Bootcamp Book (a management company, park llc, & homes llc). Obviously I have neither a park nor any homes at this point, so neither of those entities are applicable. Do I form the management company first, and run all initial expenses through that entity? Or is there some kind of separate entity used for the “searching” process when looking for parks to purchase?
I will be discussing this with a CPA, but I also wanted to get input from others to see what they did when in my position.
Thanks!
I formed an LLC and put all my initial expenses into it. Naturally, it had a loss the first year. Those losses carried forward to the next year; by then I had purchased a park and had gains to offset it.
A year or two subsequent, I got audited by the IRS…(!) over that first year’s loss (new entity on my return, with a loss…). But I had no difficulty proving my expenses (keep all your receipts!), and I could trace that first year’s expense activity directly to the second year’s profitability (and tax payment), and the IRS guy actually apologized to me and gave me a clean bill of health and ended the audit right there.
Good luck,
-jl-
Thanks Jefferson (and nice job beating the IRS!).
When you purchased the park, did you assign it to that initial LLC or a completely new one? In other words, what’d you end up doing with the first LLC once it had “served its purpose” - led you to a park, and provided you with legitimate business losses that could be used to off-set gains?
I’m not a CPA either, but keep in mind how the IRS looks at ‘startup expenses’ particularly in a first year with no income. I had the IRS question some of those kinds of expenses a few years ago, and I won the argument, but it can have important tax consequences.
I believe that LLC became my holding company, which I have to this day. That entity receives some management fees from my properties, as well as consulting revenue. It pays for all my trips to conduct due diligence on new properties for acquisition. One can also transfer expenses by billing the new LLC that will operate the property for the expenses incurred by your holding company.
I would not get too hung up on the exact entity that incurs the expenses. I believe the IRS’s standard is simply that you must show you are ‘reasonably trying to make a profit.’ Certainly buying course materials from this website, traveling to MHP conventions and to MHPs themselves will document you are ‘reasonably trying to make a profit.’ Now if 10 years go by and your entity is still showing a loss and you’ve not purchased a property… then the IRS may have a basis for questioning the validity of your expenses. I don’t think you’ll have any difficulty establishing the legitimacy of your expenses if you purchase a property within a few years (or decide it is not for you, and shut down your entity).
Keep your receipts, take photos of places you’ve visited to document your research and the legitimacy of what you are expensing, and go forth.
Good luck in your journey,
-jl-