Reg. § 1.709-1 Treatment of organization and syndication costs.
(a) General rule Except as provided in of this section, no deduction shall be allowed under chapter 1 of the Code to a partnership or to any partner for any amounts paid or incurred, directly or indirectly, in partnership taxable years beginning after December 31, 1975, to organize a partnership, or to promote the sale of, or to sell, an interest in the partnership.
(b) Election to amortize organizational expenses
(1) In general Under section , a partnership may elect to amortize organizational expenses as defined in section and . In the taxable year in which a partnership begins business, an electing partnership may deduct an amount equal to the lesser of the amount of the organizational expenses of the partnership, or $5,000 (reduced (but not below zero) by the amount by which the organizational expenses exceed $50,000). The remainder of the organizational expenses is deductible ratably over the 180-month period beginning with the month in which the partnership begins business. All organizational expenses of the partnership are considered in determining whether the organizational expenses exceed $50,000, including expenses incurred on or before October 22, 2004.
(2) Time and manner of making election A partnership is deemed to have made an election under section to amortize organizational expenses as defined in section and for the taxable year in which the partnership begins business. A partnership may choose to forgo the deemed election by affirmatively electing to capitalize its organizational expenses on a timely filed Federal income tax return (including extensions) for the taxable year in which the partnership begins business. The election either to amortize organizational expenses under section or to capitalize organizational expenses is irrevocable and applies to all organizational expenses of the partnership. A change in the characterization of an item as an organizational expense is a change in method of accounting to which sections and apply if the partnership treated the item consistently for two or more taxable years. A change in the determination of the taxable year in which the partnership begins business also is treated as a change in method of accounting if the partnership amortized organizational expenses for two or more taxable years.
(3) Liquidation of partnership
(i) In general If there is a winding up and complete liquidation of the partnership prior to the end of the amortization period, the unamortized amount of organizational expenses is a partnership deduction in its final taxable year to the extent provided under section (relating to losses). However, there is no partnership deduction with respect to its capitalized syndication expenses.
(ii) Technical termination of a partnership If a partnership that has elected to amortize organizational costs under section terminates in a transaction (or a series of transactions) described in section or , the termination shall not be treated as resulting in a liquidation of the partnership for purposes of section . See for rules concerning the treatment of these organizational costs by the new partnership.
(4) Examples The following examples illustrate the application of this section:
Example 1. Expenditures of $5,000 or less. Partnership X, a calendar year taxpayer, incurs $3,000 of organizational expenses after October 22, 2004, and begins business on July 1, 2011. Under of this section, Partnership X is deemed to have elected to amortize organizational expenses under section in 2011. Therefore, Partnership X may deduct the entire amount of the organizational expenses in 2011, the taxable year in which Partnership X begins business.
Example 2. Expenditures of more than $5,000 but less than or equal to $50,000. The facts are the same as in Example 1 except that Partnership X incurs organizational expenses of $41,000. Under of this section, Partnership X is deemed to have elected to amortize organizational expenses under section in 2011. Therefore, Partnership X may deduct $5,000 and the portion of the remaining $36,000 that is allocable to July through December of 2011 ($36,000/180 × 6 = $1,200) in 2011, the taxable year in which Partnership X begins business. Partnership X may amortize the remaining $34,800 ($36,000 − $1,200 = $34,800) ratably over the remaining 174 months.
Example 3. Subsequent change in the characterization of an item. The facts are the same as in Example 2 except that Partnership X realizes in 2013 that Partnership X incurred $10,000 for an additional organizational expense erroneously deducted in 2011 under section as a business expense. Under of this section, Partnership X is deemed to have elected to amortize organizational expenses under section in 2011, including the additional $10,000 of organizational expenses. Partnership X is using an impermissible method of accounting for the additional $10,000 of organizational expenses and must change its method under and the applicable general administrative procedures in effect in 2013.
Example 4. Subsequent redetermination of year in which business begins. The facts are the same as in Example 2 except that, in 2012, Partnership X deducted the organizational expenses allocable to January through December of 2012 ($36,000/180 × 12 = $2,400). In addition, in 2013 it is determined that Partnership X actually began business in 2012. Under of this section, Partnership X is deemed to have elected to amortize organizational expenses under section in 2012. Partnership X impermissibly deducted organizational expenses in 2011, and incorrectly determined the amount of organizational expenses deducted in 2012. Therefore, Partnership X is using an impermissible method of accounting for the organizational expenses and must change its method under and the applicable general administrative procedures in effect in 2013.
Example 5. Expenditures of more than $50,000 but less than or equal to $55,000. The facts are the same as in Example 1 except that Partnership X incurs organizational expenses of $54,500. Under of this section, Partnership X is deemed to have elected to amortize organizational expenses under section in 2011. Therefore, Partnership X may deduct $500 ($5,000−$4,500) and the portion of the remaining $54,000 that is allocable to July through December of 2011 ($54,000/180 × 6 = $1,800) in 2011, the taxable year in which Partnership X begins business. Partnership X may amortize the remaining $52,200 ($54,000 − $1,800 = $ 52,200) ratably over the remaining 174 months.
Example 6. Expenditures of more than $55,000. The facts are the same as in Example 1 except that Partnership X incurs organizational expenses of $450,000. Under of this section, Partnership X is deemed to have elected to amortize organizational expenses under section in 2011. Therefore, Partnership X may deduct the amounts allocable to July through December of 2011 ($450,000/180 × 6 = $15,000) in 2011, the taxable year in which Partnership X begins business. Partnership X may amortize the remaining $435,000 ($450,000 − $15,000 = $435,000) ratably over the remaining 174 months.
(5) Effective/applicability date This section applies to organizational expenses paid or incurred after August 16, 2011. However, taxpayers may apply all the provisions of this section to organizational expenses paid or incurred after October 22, 2004, provided that the period of limitations on assessment of tax for the year the election under of this section is deemed made has not expired. For organizational expenses paid or incurred on or before September 8, 2008, taxpayers may instead apply , as in effect prior to that date (§ as contained in 26 CFR part 1 edition revised as of April 1, 2008). of this section applies to a technical termination of a partnership under section that occurs on or after December 9, 2013.
[T.D. 7891, 48 FR 20048, May 4, 1983, as amended by T.D. 9411, 73 FR 38914, July 8, 2008; T.D. 9542, 76 FR 50890, Aug. 17, 2011; 76 FR 56973, Sept. 15, 2011; T.D. 9681, 79 FR 42679, July 23, 2014]