Deducting Organizational Costs

[LCP]

Is there any distinction between a new partnership's organizational expenses based on the activity?

Most of the references refer to "businesses" being allowed to expense them rather than amortize them ........... what about a partnership set up to hold a rental property?

And while I'm at it ................ is there any question whether a self-storage property should be treated as a rental (no SE) or a business (possible SE)?

[Bees Knees]

Regulation Section 1.1402(a)-4(c)(2) says the rental of storage garages is considered to be a service and not the rental of real estate, thus, the activity would be subject to SE tax.

Being subject to SE tax would also indicate it is a trade or business subject to the capitalization of organizational expense rules.

[jainen]

you can do neither

Nobody can "expense them rather than amortize them." An election under Sec. 195 lets you expense certain costs and amortize certain others. Without the election you can do neither.

[LCP]

Nobody can "expense them rather than amortize them." An election under Sec. 195 lets you expense certain costs and amortize certain others. Without the election you can do neither.

Correct me if I'm wrong but isn't the formal "election" required to amortize them. If you expense them you are deemed to have made the election to do so.

Assuming that is correct, I wonder if it is neccesary to identify them as "Organization expenses" rather than leave them in "Legal"

[jainen]

make a formal election

>>Correct me if I'm wrong<<

You must make a formal election. If you don't, your only choice (well, it's not a choice) is to capitalize the expenses and recover them at the time of disposition of the business. If you make the election, it is to deduct the expenses up to the limits, with 180 month amortization for the rest. The election only covers the specific expenses identified in your statement. You can revise the statement within the time limits. Deductions and amortization start when business operations begin, not before.

[LCP]

Election needed !?!?!

The TaxBook p8-17" "A taxpayer chooses to curently deduct ........... No statement is required for taking the current deduction".

[jainen]

Doggone it

Doggone it, I'm stumbling again. There IS an election to make, but you simply make it by the way you report on Form 4562. No separate statement needed.

[Bees Knees]

IRS Pub 535: "How to make the election. You elect to deduct the start-up or organizational costs by claiming the deduction on the income tax return (filed by the due date including extensions) for the tax year in which the active trade or business begins."

It is an election to deduct as a current expense, but the election is made simply by taking a deduction for the expenses on the return. Nothing else is required.

[JON]

I think I disagree with Bees

Ultra tax 2005 has as one of its elections one electing to expense the maximum and amortize the excess. Bees could be right in 2005, but as in previous years I will attach elections-if later it is determined I have an excess I still want to be able to amortize the excess and not wait until corporation liquidates to get the expense.

[jainen]

Me too

Me too--I also disagree with Bees Knees but I do thank him for putting me back on track. My previous post was all wet, and to tell the truth I think I was getting mixed up about which thread I was posting on.

On to Pub 535. I don't know if you have last year's version or what, Bees Knees, but I can't find that durn quote of your'n. Page 32 of the new one talks about startup and organizational expenses. No doubt about it, a formal written election must be attached to the return, listing the expenses involved and what you choose to do about them. If you don't do it that way, you can sit on the expense with no deduction at all, forever.

[Bees Knees]

2005, IRS Pub 535, page 29, middle column, 3rd paragraph.

Page 32 talks about how to amortize the expenses that are in excess of the $5,000 deductible amount.

[JON]

Hypo

You expense $4,500 of organizational costs on the first year return. Your audited and son of a gun in repairs is another $10,000 of organizational costs you missed. Will they let you deduct another $500 and amortize the balance or because no election was made will they say put this on your tax balance sheet until your out of business. If Bees is giving out promises I'll go for it and put per Bees on the returns.

[Bees Knees]

Neither. You make the election for the expense by deducting it. If you don't deduct it, you didn't make the election.

You make the election to amortize by attaching the statement. If you don't attach the statement because you didn't think you needed to amortize anything, then you didn't make the election.

I didn't say you can't attach a statement for the expense part. I would attach the statement on page 24-10 to the return for both just to be safe.

[JON]

That is right attach

the statement. Ultra Taxes standard even says will expense the max and amortize excess. New law allows a nice first year deduction, but CYA and always have the election attached in case something changes.

[LCP]

So do you think it is important to call it "Organizational Expense" in the Other Deductions area?

Or is it adequate to look at the Legal and Professional expense total, see that it is less than $5000, and leave it where it is?