Proposed rules would require terminating partnerships to amortize startup expenditures

BY SALLY P. SCHREIBER, J.D.

On Friday, the IRS issued proposed regulations aimed at preventing partnerships from using technical terminations to accelerate their deductions of startup and organizational expenses (REG-126285-12). When finalized, the regulations will apply to technical terminations of partnerships that occur on or after Dec. 9, 2013.

Under Sec. 708(b)(1), a partnership terminates if (1) no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership, or (2) within a 12-month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. The second form of termination is often called a technical termination.

Under Sec. 195(b)(1)(B), startup expenditures that are not fully deductible under Sec. 195(b)(1)(A) must be amortized over a 180-month period (15 years). Sec. 195(b)(2) allows taxpayers that completely dispose of a business before the end of the 15-year period to deduct the remaining expenses to the extent allowed under Sec. 165 as a loss. A similar rule applies under Sec. 709(b)(2) to the organizational expenditures of partnerships.

In response to reports that some taxpayers have taken the position that a technical termination of a partnership permitted an accelerated deduction of unamortized amounts of startup and organizational expenditures, the IRS has issued the new proposed regulations to disallow these accelerated deductions upon a partnership’s technical termination. This rule would bring the treatment of startup and organizational expenditures in line with the treatment of amortization of intangibles under Sec. 197, which may not be accelerated upon a technical termination under Regs. Sec. 1.197-2(g)(2).

— Sally P. Schreiber ( sschreiber@aicpa.org ) is a JofA senior editor.

SPONSORED REPORT

Tax reform complicates year-end tax planning

Get your clients ready for tax season with these year-end tax planning strategies, which address how to make the most of recent tax law changes, such as the new deduction for qualified business income and the cap on the deductibility of state and local taxes.

VIDEO

What RPA is and how it works

Robotic process automation is like an Excel macro that can work on multiple applications, says Danielle Supkis Cheek, CPA. RPA can complete routine, repetitive tasks such as data entry, freeing up employee time from lower-level chores.