Publication 541 |
2000 Tax Year |
Partnership Income or Loss
A partnership computes its income and files its return in the same
manner as an individual. However, certain deductions are not allowed
to the partnership.
Separately stated items.
Certain items must be separately stated on the partnership return
and included as separate items on the partners' returns. These items,
listed on Schedule K (Form 1065), are the following.
- Ordinary income or loss from trade or business
activities.
- Net income or loss from rental real estate
activities.
- Net income or loss from other rental activities.
- Gains and losses from sales or exchanges of capital
assets.
- Gains and losses from sales or exchanges of property
described in section 1231 of the Internal Revenue Code.
- Charitable contributions.
- Dividends (passed through to corporate partners) that
qualify for the dividends-received deduction.
- Taxes paid or accrued to foreign countries and U.S.
possessions.
- Other items of income, gain, loss, deduction, or credit, as
provided by regulations. Examples include nonbusiness expenses,
intangible drilling and development costs, and soil and water
conservation expenses.
Elections.
The partnership makes most choices about how to figure income.
These include choices for the following items.
- Accounting method.
- Depreciation method.
- Method of accounting for specific items, such as depletion
or installment sales.
- Nonrecognition of gain on involuntary conversions of
property.
- Amortization of certain organization fees and business
start-up costs of the partnership.
However, each partner chooses how to treat the partner's share of
foreign and U.S. possessions taxes, certain mining exploration
expenses, and income from cancellation of debt.
More information.
For more information on a specific election, see the listed
publication.
Organization expenses and syndication fees.
Neither the partnership nor any partner can deduct, as a current
expense, amounts paid or incurred to organize a partnership or to
promote the sale of, or to sell, an interest in the partnership.
The partnership can choose to amortize certain organization
expenses over a period of not less than 60 months. The period must
start with the month the partnership begins business. This election is
irrevocable and the period the partnership chooses in this election
cannot be changed. If the partnership elects to amortize these
expenses and is liquidated before the end of the amortization period,
the remaining balance in this account is deductible as a loss.
Making the election.
The election to amortize organization expenses is made by attaching
a statement to the partnership's return for the tax year the
partnership begins its business. The statement must provide all the
following information.
- A description of each organization expense incurred (whether
or not paid).
- The amount of each expense.
- The date each expense was incurred.
- The month the partnership began its business.
- The number of months (not less than 60) over which the
expenses are to be amortized.
Expenses less than $10 need not be separately listed, provided the
total amount is listed with the dates on which the first and last of
the expenses were incurred. A cash basis partnership must also
indicate the amount paid before the end of the year for each expense.
Amortizable expenses.
Amortization applies to expenses that are:
- Incident to the creation of the partnership,
- Chargeable to a capital account, and
- The type that would be amortized if they were incurred in
the creation of a partnership having a fixed life.
To satisfy (1), an expense must be incurred during the period
beginning at a point that is a reasonable time before the partnership
begins business and ending with the date for filing the partnership
return (not including extensions) for the tax year in which the
partnership begins business. In addition, the expense must be for
creating the partnership and not for starting or operating the
partnership trade or business.
To satisfy (3), the expense must be for a type of item normally
expected to benefit the partnership throughout its entire life.
Organization expenses that can be amortized include the following.
- Legal fees for services incident to the organization of the
partnership, such as negotiation and preparation of a partnership
agreement.
- Accounting fees for services incident to the organization of
the partnership.
- Filing fees.
Expenses not amortizable.
Expenses that cannot be amortized (regardless of how the
partnership characterizes them) include expenses connected with the
following actions.
- Acquiring assets for the partnership or transferring assets
to the partnership.
- Admitting or removing partners other than at the time the
partnership is first organized.
- Making a contract relating to the operation of the
partnership trade or business (even if the contract is between the
partnership and one of its members).
- Syndicating the partnership. Syndication expenses, such as
commissions, professional fees, and printing costs connected with the
issuing and marketing of interests in the partnership, are
capitalized. They can never be deducted by the partnership, even if
the syndication is unsuccessful.
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