Costs of Organizing a Partnership

The costs to organize a partnership are the direct costs of creating the partnership.

Qualifying costs.   You can amortize an organizational cost only if it meets all the following tests.

• It is for the creation of the partnership and not for starting or operating the partnership trade or business.
• It is chargeable to a capital account.
• It could be amortized over the life of the partnership if the partnership had a fixed life.
• It is incurred by the due date of the partnership return (excluding extensions) for the first tax year in which the partnership is in business. However, if the partnership uses the cash method of accounting and pays the cost after the end of its first tax year, see Cash method partnership under How To Amortize, later.
• It is for a type of item normally expected to benefit the partnership throughout its entire life.

Organizational costs include the following fees.

• Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement.
• Accounting fees for services incident to the organization of the partnership.
• Filing fees.

Nonqualifying costs.   The following costs cannot be amortized.

• The cost of acquiring assets for the partnership or transferring assets to the partnership.
• The cost of admitting or removing partners, other than at the time the partnership is first organized.
• The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership.
• The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. These “syndication fees” are capital expenses that cannot be depreciated or amortized.

Liquidation of partnership.   If a partnership is liquidated before the end of the amortization period, the unamortized amount of qualifying organizational costs can be deducted in the partnership’s final tax year. However, these costs can be deducted only to the extent they qualify as a loss from a business.

How To Amortize

Deduct start-up and organizational costs in equal amounts over the applicable amortization period (discussed earlier). You can choose an amortization period for start-up costs that is different from the period you choose for organizational costs, as long as both are not less than the applicable amortization period. Once you choose an amortization period, you cannot change it.

To figure your deduction, divide your total start-up or organizational costs by the months in the amortization period. The result is the amount you can deduct for each month.

Cash method partnership.   A partnership using the cash method of accounting can deduct an organizational cost only if it has been paid by the end of the tax year. However, any cost the partnership could have deducted as an organizational cost in an earlier tax year (if it had been paid that year) can be deducted in the tax year of payment.

How To Make the Election

To elect to amortize start-up or organizational costs, you must complete and attach Form 4562 and an accompanying statement (explained later) to your return for the first tax year you are in business. If you have both start-up and organizational costs, attach a separate statement to your return for each type of cost.

Generally, you must file the return by the due date (including any extensions). However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). For more information, see the instructions for Part VI of Form 4562.

Once you make the election to amortize start-up or organizational costs, you cannot revoke it.

If your business is organized as a corporation or partnership, only the corporation or partnership can elect to amortize its start-up or organizational costs. A shareholder or partner cannot make this election. You, as a shareholder or partner, cannot amortize any costs you incur in setting up your corporation or partnership. Only the corporation or partnership can amortize these costs.

However, you, as an individual, can elect to amortize costs you incur to investigate an interest in an existing partnership. These costs qualify as business start-up costs if you acquire the partnership interest.

Start-up costs election statement.   If you elect to amortize your start-up costs, attach a separate statement that contains the following information.

• A description of the business to which the start-up costs relate.
• A description of each start-up cost incurred.
• The month your active business began (or was acquired).
• The number of months in your amortization period (which is generally 180 months).

Filing the statement early.   You can elect to amortize your start-up costs by filing the statement with a return for any tax year before the year your active business begins. If you file the statement early, the election becomes effective in the month of the tax year your active business begins.

Revised statement.   You can file a revised statement to include any start-up costs not included in your original statement. However, you cannot include on the revised statement any cost you previously treated on your return as a cost other than a start-up cost. You can file the revised statement with a return filed after the return on which you elected to amortize your start-up costs.

Organizational costs election statement.   If you elect to amortize your corporation’s or partnership’s organizational costs, attach a separate statement that contains the following information.

• A description of each cost.
• The amount of each cost.
• The date each cost was incurred.
• The month your corporation or partnership began active business (or acquired the business).
• The number of months in your amortization period (which is generally 180 months).

Partnerships.   The statement prepared for a cash basis partnership must also indicate the amount paid before the end of the year for each cost.

You do not need to separately list any partnership organizational cost that is less than $10. Instead, you can list the total amount of these costs with the dates the first and last costs were incurred.

After a partnership makes the election to amortize organizational costs, it can later file an amended return to include additional organizational costs not included in the partnership’s original return and statement.