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IRS Stops Deductions on Start Up Expenses in Some Partnership Terminations

When partnerships are formed, the owners typically pay out start-up and organizational expenses such as advertising costs, travel expenses, legal fees and filing fees. Although small partnerships may immediately deduct up to $5,000 of these expenses, larger entities must amortize these expenses over 15 years. If a partnership ceases to exist before this time period is up, the partnership can deduct the outstanding amount in full in its final tax year. However, under new IRS proposed regulations, this acceleration of the deduction is not allowed in the case of partnership “technical terminations.”

What is a ‘Technical Termination’?

If there has been a sale or exchange of 50 percent or more of the total interest in partnership capital and profits within a 12-month period, the taxable year of the partnership closes. This is usually referred to as a “technical” termination because the partnership’s business is not discontinued and the legal entity of the partnership is unchanged. For tax purposes only, the partnership is deemed to terminate and then begin operating again with the same Employer Identification Number (EIN).

New Partnership Inherits Old Amortization Schedule

In explaining the new rules, the IRS noted that some taxpayers are taking the position that a technical termination entitles a partnership to deduct the remaining unamortized expenses. This result is “contrary to the congressional intent…,” according to the IRS. Thus, the proposed regulations seek to put a stop to this practice. Effective December 9, 2013, if a partnership that amortizes organizational expenses terminates because of the sale or exchange of 50% or more of the interests in the partnership, the new partnership formed must continue amortizing the expenses using the same amortization period adopted by the former partnership.

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