Soft costs expensed or capitalized

[STICK85]

My client is a small business LLC partnership located in California and is building a drive thru restaurant to lease out to a national tenant. He spent several thousands in soft cost last year 2022 ; architect fees, legal fees, permit fees, and other soft cost.

Construction began this year in March 2023.

Can we expense the soft cost on 2022 returns then capitalize direct building cost on 2023 return.

How does the TCJA impact this scenario for small businesses ?

[qbteachmt]

I think you are using the phrase "soft cost" incorrectly.

Engineering and architectural costs are part of construction.

I think what you want to do is separate entity costs from its operational costs. Buying stamps for the office is not the same as getting a building permit for construction.

[BobKamman]

Or do you mean "start-up costs" ?  There's a Code section for that.  

[qbteachmt]

Let me offer this:

https://neumannmonson.com/blog/construction-costs-project-costs-building-project-expenses

and you can google: are architectural fees part of construction or expense costs

Project or "soft" costs (things are not built or attached or manufactured or installed) are not expensed because they are part of the project as direct costs. Think of them as preliminary and an invisible investment into the project. They get capitalized. Now, let's pretend this is like Shake Shack and the architectural plans are universal to every project they will build. That means the plan costs are a separate, intangible, asset. Still not expensed. Still direct to project(s).

Startup costs are indirect to an asset and relate to an entity getting a business up and running. Your taxpayer is not the business that will operate the restaurant, anyway, so it doubly doesn't apply to what you asked. I described entity-related costs. The building and its hard and soft costs are customer-related and direct to the construction project.

Startup cost = registering the LLC with the State, registering to be a licensed contractor (incurred even if not yet working on any projects), obtaining liability insurance. Project soft costs = filing for building permit and getting engineering on each project being planned (incurred in the beginning of each and every project), obtaining construction loans, etc.

To revisit this question: "Can we expense the soft cost on 2022 returns then capitalize direct building cost on 2023 return."

What you asked about are direct costs. Not your taxpayer's entity's costs and not startup costs; they are your taxpayer's project costs.