Partnership Organization Expenses

If you decide to conduct your business as a partnership, neither the partnership itself nor you as one of the partners would normally be able to deduct the expenses you paid to organize the partnership. However, your partnership can elect to treat these organizational costs as deferred expenses that can be amortized (deducted in equal amounts) over a period of at least 60 months, starting with the month in which the partnership begins business.

If you decide that your partnership should not make this election, the organizational costs must be added to the tax basis of your partnership interest. In that case, when your partnership interest is sold or the partnership itself is dissolved, the amounts paid for the organizational expenses will reduce the amount of your capital gain or loss.

Save Money Effective for amounts paid or incurred after October 22, 2004, there is an alternative to the standard 60-month amortization of partnership organization expenses. The American Jobs Creation Act of 2004 allows partnerships to deduct up to $5,000 of their organizational expenditures for the tax year in which the partnership begins business. The $5,000 amount must also be reduced by the amount by which the organizational expenditures exceed $50,000. The partnership may deduct any remainder of organizational expenditures ratably over the 180-month period beginning with the month in which the partnership begins business. Similarly, taxpayers may now elect to deduct up to $5,000 of their startup expenses for the tax year in which their trade or business begins. This provision will benefit smaller businesses that have around $5,000 of start-up or organizational expenditures. For larger start-ups, however, amortizing most or all of these expenses over 15 years rather than the five-year period currently provided is not an attractive option.

Requirements. To qualify for the amortization election, an expense must satisfy these three conditions:

• It must be related to the creation of the partnership itself, rather than to the startup of the business operations.
• It must be chargeable to the capital account.
• If the expense is related to the creation of a partnership having a limited life, it must be of a character that would benefit the partnership over its entire life.

Examples of organizational costs that can be amortized include:

• legal and accounting fees for services related to the organization of the partnership, such as negotiation and preparation of the partnership agreement
• filing fees

Examples of costs that can't be amortized (and instead must be included in the basis of the partnership interest) include:

• expenses for acquiring assets for a partnership, or for transferring assets to it
• expenses connected with the admission or removal of partners (other than at the time the partnership is first organized)
• expenses relating to a contract involving the operation of the partnership business
• expenses incurred to promote the sale of partnership interests