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 180 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.

In addition, 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, with the remainder amortized over 180 months.

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 (although start-up costs can be separately amortized).
• 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 and
• 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 (sometimes referred to as syndication costs).