Partnership Income or Loss

A partnership computes its income and files its return in the same manner as an individual. However, certain deductions are not allowed to the partnership.

Separately stated items. Certain items must be separately stated on the partnership return and 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 business activities.
  • Net income or loss from rental real estate activities.
  • Net income or loss from other rental activities.
  • Gains and losses from sales or exchanges of capital assets.
  • Gains and losses from sales or exchanges of property described in section 1231 of the Internal Revenue Code.
  • Charitable contributions.
  • Dividends (passed through to corporate partners) that qualify 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, as provided by regulations. Examples include nonbusiness expenses, intangible drilling and development costs, and soil and water conservation 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 depletion or installment sales.
  • Nonrecognition of gain on involuntary conversions of property.
  • Amortization of certain organization fees and business start-up costs of the partnership.

However, each partner chooses how to treat the partner's share of foreign and U.S. possessions taxes, certain mining exploration expenses, and income from cancellation of debt.

More information. For more information on a specific election, see the listed publication.

Organization expenses and syndication fees. Neither the partnership nor any partner can deduct, as a current expense, amounts paid or incurred to organize a partnership or to promote the sale of, or to sell, an interest in the partnership.

The partnership can choose to amortize certain organization expenses over a period of not less than 60 months. The period must start with the month the partnership begins business. This election is irrevocable and the period the partnership chooses in this election cannot be changed. If the partnership elects to amortize these expenses 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 attaching a statement to the partnership's return for the tax year the partnership begins its business. The statement must provide all the following information.

  • A description of each organization expense incurred (whether or 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 the expenses are to be amortized.

Expenses less than $10 need not be separately listed, provided the total amount is listed with the dates on which the first and last of the expenses were incurred. A cash basis partnership must also indicate the amount paid before the end of the year for each expense.

Amortizable expenses. Amortization applies to expenses that are:

  1. Incident to the creation of the partnership,
  2. Chargeable to a capital account, and
  3. The type that would be amortized if they were incurred in the creation of a partnership having a fixed life.

To satisfy (1), an expense must be incurred during the period beginning at a point that is a reasonable time before the partnership begins business and ending with the date for filing the partnership return (not including extensions) for the tax year in which the partnership begins business. In addition, the expense must be for creating the partnership and not for starting or operating the partnership trade or business.

To satisfy (3), the expense must be for a type of item normally expected 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 the partnership, such as negotiation and preparation of a partnership agreement.
  • Accounting fees for services incident to the organization of the partnership.
  • Filing fees.

Expenses not amortizable. Expenses that cannot be amortized (regardless of how the partnership characterizes them) include expenses connected with the following actions.

  • Acquiring assets for the partnership or transferring assets to the partnership.
  • Admitting or removing partners other than at the time the partnership is first organized.
  • Making a contract relating to the operation of the partnership trade or business (even if the contract is between the partnership and one of its members).
  • Syndicating the partnership. Syndication expenses, such as commissions, professional fees, and printing costs connected with the issuing and marketing of interests in the partnership, are capitalized. They can never be deducted by the partnership, even if the syndication is unsuccessful.