Partnership Income or LossA partnership computes its income and files its return in the samemanner as an individual. However, certain deductions are not allowedto the partnership. Separately stated items.Certain items must be separately stated on the partnership returnand 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 businessactivities.
- Net income or loss from rental real estateactivities.
- Net income or loss from other rental activities.
- Gains and losses from sales or exchanges of capitalassets.
- Gains and losses from sales or exchanges of propertydescribed in section 1231 of the Internal Revenue Code.
- Charitable contributions.
- Dividends (passed through to corporate partners) thatqualify 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, asprovided by regulations. Examples include nonbusiness expenses,intangible drilling and development costs, and soil and waterconservation 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 depletionor installment sales.
- Nonrecognition of gain on involuntary conversions ofproperty.
- Amortization of certain organization fees and businessstart-up costs of the partnership.
However, each partner chooses how to treat the partner's share offoreign and U.S. possessions taxes, certain mining explorationexpenses, and income from cancellation of debt. More information.For more information on the following topics, see the listedpublication. Organization expenses and syndication fees. Neither the partnership nor any partner can deduct, as a currentexpense, amounts paid or incurred to organize a partnership or topromote the sale of, or to sell, an interest in the partnership. The partnership can choose to amortize certain organizationexpenses over a period of not less than 60 months. The period muststart with the month the partnership begins business. This election isirrevocable and the period the partnership chooses in this electioncannot be changed. If the partnership elects to amortize theseexpenses 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 attachinga statement to the partnership's return for the tax year thepartnership begins its business. The statement must provide all thefollowing information. - A description of each organization expense incurred (whetheror 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 theexpenses are to be amortized.
Expenses less than $10 need not be separately listed, provided thetotal amount is listed with the dates on which the first and last ofthe expenses were incurred. A cash basis partnership must alsoindicate 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 inthe creation of a partnership having a fixed life.
To satisfy (1), an expense must be incurred during the periodbeginning at a point that is a reasonable time before the partnershipbegins business and ending with the date for filing the partnershipreturn (not including extensions) for the tax year in which thepartnership begins business. In addition, the expense must be forcreating the partnership and not for starting or operating thepartnership trade or business. To satisfy (3), the expense must be for a type of item normallyexpected 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 thepartnership, such as negotiation and preparation of a partnershipagreement.
- Accounting fees for services incident to the organization ofthe partnership.
- Filing fees.
Expenses not amortizable.Expenses that cannot be amortized (regardless of how thepartnership characterizes them) include expenses connected with thefollowing actions. - Acquiring assets for the partnership or transferring assetsto the partnership.
- Admitting or removing partners other than at the time thepartnership is first organized.
- Making a contract relating to the operation of thepartnership trade or business (even if the contract is between thepartnership and one of its members).
- Syndicating the partnership. Syndication expenses, such ascommissions, professional fees, and printing costs connected with theissuing and marketing of interests in the partnership are capitalized.They can never be deducted by the partnership, even if the syndicationis unsuccessful.
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