Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

Organization expenses and syndication

Expenses not amortizable. Expenses that

Partnership Income

fees. Neither the partnership nor any partner

cannot be amortized (regardless of how the

can deduct, as a current expense, amounts paid

partnership characterizes them) include ex-

or Loss

penses connected with the following actions.

or incurred to organize a partnership or to pro-

mote the sale of, or to sell, an interest in the

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Acquiring assets for the partnership or

partnership.

A partnership computes its income and files its

transferring assets to the partnership.

return in the same manner as an individual.

The partnership can choose to amortize cer-

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Admitting or removing partners other than

However, certain deductions are not allowed to

tain organization expenses over a period of not

at the time the partnership is first organ-

the partnership.

less than 60 months. The period must start with

ized.

the month the partnership begins business. This

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Separately stated items. Certain items must

Making a contract relating to the operation

election is irrevocable and the period the part-

be separately stated on the partnership return

of the partnership trade or business (even

nership chooses in this election cannot be

and included as separate items on the partners’

if the contract is between the partnership

changed. If the partnership elects to amortize

returns. These items, listed on Schedule K

and one of its members).

these expenses and is liquidated before the end

(Form 1065), are the following.

•

of the amortization period, the remaining bal-

Syndicating the partnership. Syndication

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ance in this account is deductible as a loss.

Ordinary income or loss from trade or

expenses, such as commissions, profes-

business activities.

sional fees, and printing costs connected

Making the election. The election to amor-

•

with the issuing and marketing of interests

tize organization expenses is made by attaching

Net income or loss from rental real estate

in the partnership, are capitalized. They

activities.

a statement to the partnership’s return for the tax

can never be deducted by the partnership,

year the partnership begins its business. The

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Net income or loss from other rental activi-

even if the syndication is unsuccessful.

statement must provide all the following informa-

ties.

tion.

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Gains and losses from sales or exchanges

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A description of each organization ex-

of capital assets.

Partner’s Income

pense incurred (whether or not paid).

•

Gains and losses from sales or exchanges

•

The amount of each expense.

of property described in section 1231 of

or Loss

•

the Internal Revenue Code.

The date each expense was incurred.

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Charitable contributions.

A partner’s income or loss from a partnership is

The month the partnership began its busi-

•

the partner’s distributive share of partnership

ness.

Dividends (passed through to corporate

items for the partnership’s tax year that ends

•

partners) that qualify for the dividends-re-

The number of months (not less than 60)

with or within the partner’s tax year. These items

ceived deduction.

over which the expenses are to be amor-

are reported to the partner on Schedule K – 1

•

tized.

Taxes paid or accrued to foreign countries

(Form 1065).

and U.S. possessions.

Expenses less than $10 need not be sepa-

Gross income. When it is necessary to deter-

•

Other items of income, gain, loss, deduc-

rately listed, provided the total amount is listed

mine the gross income of a partner, the partner’s

tion, or credit, as provided by regulations.

gross income includes his or her distributive

with the dates on which the first and last of the

Examples include nonbusiness expenses,

share of the partnership’s gross income. For

expenses were incurred. A cash basis partner-

intangible drilling and development costs,

example, the partner’s share of the partnership

ship must also indicate the amount paid before

and soil and water conservation expenses.

gross income is used in determining whether an

the end of the year for each expense.

income tax return must be filed by that partner.

Amortizable expenses. Amortization ap-

Elections. The partnership makes most

plies to expenses that are:

Estimated tax. Partners may have to make

choices about how to figure income. These in-

payments of estimated tax during the year as a

clude choices for the following items.

1) Incident to the creation of the partnership,

result of partnership income.

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Accounting method.

Generally, estimated tax for individuals is the

2) Chargeable to a capital account, and

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smaller of the following amounts, reduced by

Depreciation method.

3) The type that would be amortized if they

any expected withholding and credits.

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Method of accounting for specific items,

were incurred in the creation of a partner-

1) 90% of the tax expected to be shown on

such as depletion or installment sales.

ship having a fixed life.

the current year’s tax return.

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Nonrecognition of gain on involuntary con-

To satisfy (1), an expense must be incurred

2) 100% of the total tax shown on the prior

versions of property.

during the period beginning at a point that is a

year’s tax return.

•

reasonable time before the partnership begins

Amortization of certain organization fees

business and ending with the date for filing the

Different rules apply to certain higher income

and business start-up costs of the partner-

partnership return (not including extensions) for

individuals and individuals who receive at least

ship.

the tax year in which the partnership begins

two-thirds of their gross income from farming or

business. In addition, the expense must be for

fishing.

However, each partner chooses how to treat

creating the partnership and not for starting or

See Publication 505 for more information.

the partner’s share of foreign and U.S. posses-

operating the partnership trade or business.

sions taxes, certain mining exploration ex-

Self-employment income. A partner is not an

penses, and income from cancellation of debt.

To satisfy (3), the expense must be for a type

employee of the partnership. The partner’s dis-

of item normally expected to benefit the partner-

More information. For more information on

tributive share of ordinary income from a part-

ship throughout its entire life.

a specific election, see the listed publication.

nership is generally included in figuring net

Organization expenses that can be amor-

earnings from self-employment. However, a lim-

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Accounting methods: Publication 538.

tized include the following.

ited partner generally does not include his or her

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Depreciation methods: Publication 946.

distributive share of income or loss in computing

Legal fees for services incident to the or-

net earnings from self-employment. This exclu-

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ganization of the partnership, such as ne-

Installment sales: Publication 537.

sion does not apply to guaranteed payments

gotiation and preparation of a partnership

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Amortization and depletion: Publication

made to a limited partner for services actually

agreement.

535, chapters 9 and 10.

rendered to or on behalf of a partnership en-

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Accounting fees for services incident to

gaged in a trade or business.

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Involuntary conversions: Publication 544

the organization of the partnership.

(condemnations) and Publication 547

Self-employment tax. If an individual part-

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(casualties and thefts).

Filing fees.

ner has net earnings from self-employment of

Page 6

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2002 Page 6

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