[Federal Register: July 8, 2008 (Volume 73, Number 131)]
[Rules and Regulations]
[Page 38910-38915]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08jy08-12]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9411]
RIN 1545-BE78
Elections Regarding Start-up Expenditures, Corporation
Organizational Expenditures, and Partnership Organizational Expenses
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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[[Page 38911]]
SUMMARY: This document contains final and temporary regulations
relating to elections to deduct start-up expenditures under section 195
of the Internal Revenue Code (Code), organizational expenditures of
corporations under section 248, and organizational expenses of
partnerships under section 709. The American Jobs Creation Act of 2004
amended these three sections of the Code to provide similar rules for
deducting these types of expenses that are paid or incurred after
October 22, 2004. The regulations affect taxpayers that pay or incur
these expenses and provide guidance on how to elect to deduct the
expenses in accordance with the new rules. The text of these temporary
regulations also serves as the text of the proposed regulations set
forth in the notice of proposed rulemaking on this subject in the
Proposed Rules section in this issue of the Federal Register.
DATES: Effective Date: These regulations are effective on July 8, 2008.
Applicability Dates: For dates of applicability, see Sec. Sec.
1.195-1T(d), 1.248-1T(f), and 1.709-1T(b)(5).
FOR FURTHER INFORMATION CONTACT: Grace Matuszeski, (202) 622-7900 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends the Income Tax Regulations (26 CFR part 1)
under sections 195, 248, and 709 of the Code to reflect amendments made
by section 902 of the American Jobs Creation Act of 2004 (Pub. L. 108-
357, 118 Stat. 1418) (the Act). The amendments made by section 902 of
the Act are effective for amounts paid or incurred after October 22,
2004, the date of the enactment of the Act.
As amended by section 902(a) of the Act, section 195(b) allows an
electing taxpayer to deduct, in the taxable year in which the taxpayer
begins an active trade or business, an amount equal to the lesser of
(1) the amount of the start-up expenditures that relate to the active
trade or business, or (2) $5,000, reduced (but not below zero) by the
amount by which the start-up expenditures exceed $50,000. The remainder
of the start-up expenditures is deductible ratably over the 180-month
period beginning with the month in which the active trade or business
begins.
As amended by section 902(b) of the Act, section 248(a) allows an
electing corporation to deduct, in the taxable year in which the
corporation begins business, an amount equal to the lesser of (1) the
amount of the organizational expenditures of the corporation, or (2)
$5,000, reduced (but not below zero) by the amount by which the
organizational expenditures exceed $50,000. The remainder of the
organizational expenditures is deductible ratably over the 180-month
period beginning with the month in which the corporation begins
business.
As amended by section 902(c) of the Act, section 709(b) allows an
electing partnership to deduct, in the taxable year in which the
partnership begins business, an amount equal to the lesser of (1) the
amount of the organizational expenses of the partnership, or (2)
$5,000, reduced (but not below zero) by the amount by which the
organizational expenses exceed $50,000. The remainder of the
organizational expenses is deductible ratably over the 180-month period
beginning with the month in which the partnership begins business.
Explanation of Provisions
This Treasury decision revises the regulations under sections 195,
248, and 709 to reflect the amendments made by section 902 of the Act.
This Treasury decision also updates the manner in which taxpayers elect
to deduct costs under sections 195, 248, and 709. Under these
regulations, taxpayers are no longer required to file a separate
election statement to deduct costs under sections 195, 248, and 709.
The manner of filing these elections is changed because of various
electronic return filing initiatives and in acknowledgment that the
vast majority of taxpayers that incur costs that may be deducted under
sections 195, 248, and 709 elect to deduct those costs. The change also
reduces the administrative burden of making the elections.
The temporary regulations under sections 195, 248, and 709 apply to
expenditures paid or incurred after September 8, 2008. However,
taxpayers may apply all the provisions of these regulations to
expenditures paid or incurred under sections 195, 248, and 709 after
October 22, 2004, provided the period of limitations on assessment of
tax has not expired for the year the election under section 195, 248,
or 709 is deemed made. Expenditures paid or incurred on or before
October 22, 2004, may be amortized over a period of not less than 60
months as provided for under prior law.
Temporary Regulations Under Section 195
Section 195(a) provides that, except as otherwise provided in
section 195, no deduction shall be allowed for start-up expenditures.
Under section 195(b)(1), a taxpayer may elect to deduct start-up
expenditures as provided in sections 195(b)(1)(A) and (B). Section
195(b)(1)(A) allows an electing taxpayer to deduct start-up
expenditures in the year in which the active trade or business to which
the expenditures relate begins. The amount that may be deducted under
section 195(b)(1)(A) in that year is the lesser of the amount of the
start-up expenditures or $5,000, reduced (but not below zero) by the
amount by which the start-up expenditures exceed $50,000. Any start-up
expenditures that are not deductible under section 195(b)(1)(A) may be
deducted by the taxpayer under section 195(b)(1)(B) ratably over the
180-month period beginning with the month in which the active trade or
business begins. All start-up expenditures incurred by the taxpayer
that relate to the active trade or business are considered in
determining whether the start-up expenditures exceed $50,000, including
expenditures incurred on or before October 22, 2004.
For start-up expenditures as defined in section 195(c)(1) paid or
incurred after September 8, 2008, the temporary regulations under
section 195 provide that a taxpayer is deemed to make an election under
section 195(b) to deduct start-up expenditures for the taxable year in
which the active trade or business to which the expenditures relate
begins. Therefore, under the temporary regulations a taxpayer is no
longer required to attach a statement to the return or specifically
identify the deducted amount as start-up expenditures for the election
under section 195(b) to be effective. A taxpayer may choose to forgo
the deemed election by clearly electing to capitalize its start-up
expenditures on a timely filed Federal income tax return (including
extensions) for the taxable year in which the active trade or business
begins. The election to capitalize start-up expenditures is made in
accordance with the form and instructions used by the taxpayer to file
its Federal income tax return. An election either to deduct start-up
expenditures under section 195(b) or to capitalize start-up
expenditures is irrevocable and applies to all start-up expenditures of
the taxpayer that are related to the active trade or business.
In general, a change in the characterization of an item as a start-
up expenditure, or a change in the determination of the taxable year in
which the active trade or business begins, will be treated as a change
in method of accounting with a section 481(a) adjustment.
[[Page 38912]]
Temporary Regulations Under Section 248
In general, the organizational expenditures of a corporation are
not deductible except as provided in section 248. Under section 248(a),
a corporation may elect to deduct organizational expenditures as
provided in sections 248(a)(1)(A) and (B). Section 248(a)(1)(A) allows
an electing corporation to deduct organizational expenditures in the
year in which the corporation begins business. The amount that may be
deducted under section 248(a)(1)(A) in that year is the lesser of the
amount of the organizational expenditures of the corporation or $5,000,
reduced (but not below zero) by the amount by which the organizational
expenditures exceed $50,000. Any organizational expenditures that are
not deductible under section 248(a)(1)(A) may be deducted by the
corporation under section 248(a)(1)(B) ratably over the 180-month
period beginning with the month in which the corporation begins
business. All organizational expenditures incurred by the corporation
are considered in determining whether the organizational expenditures
exceed $50,000, including expenditures incurred on or before October
22, 2004.
For organizational expenditures as defined in section 248(b) and
Sec. 1.248-1(b) paid or incurred after September 8, 2008, the
temporary regulations under section 248 provide that a corporation is
deemed to make an election under section 248(a) to deduct
organizational expenditures for the taxable year in which the
corporation begins business. Therefore, under the temporary regulations
a corporation is no longer required to attach a statement to the return
or specifically identify the deducted amount as organizational
expenditures for the election under section 248(a) to be effective. A
corporation may choose to forgo the deemed election by clearly electing
to capitalize its organizational expenditures on a timely filed Federal
income tax return (including extensions) for the taxable year in which
the corporation begins business. The election to capitalize
organizational expenditures is made in accordance with the form and
instructions used by the corporation to file its Federal income tax
return. An election either to deduct organizational expenditures under
section 248(a) or to capitalize organizational expenditures is
irrevocable and applies to all organizational expenditures of the
corporation.
In general, a change in the characterization of an item as an
organizational expenditure, or a change in the determination of the
taxable year in which the corporation begins business, will be treated
as a change in method of accounting with a section 481(a) adjustment.
Temporary Regulations Under Section 709
Section 709(a) provides that, except as otherwise provided in
section 709(b), no deduction shall be allowed for organizational
expenses. Under section 709(b), a partnership may elect to deduct
organizational expenses as provided in section 709(b)(1)(A) and (B).
Section 709(b)(1)(A) allows an electing partnership to deduct
organizational expenses in the year in which the partnership begins
business. The amount that may be deducted under section 709(b)(1)(A) in
that year is the lesser of the amount of the organizational expenses of
the partnership or $5,000, reduced (but not below zero) by the amount
by which the organizational expenses exceed $50,000. Any organizational
expenses that are not deductible under section 709(b)(1)(A) may be
deducted by the partnership under section 709(b)(1)(B) ratably over the
180-month period beginning with the month in which the partnership
begins business. All organizational expenses incurred by the
partnership are considered in determining whether the organizational
expenses exceed $50,000, including expenses incurred on or before
October 22, 2004.
For organizational expenses as defined in section 709(b)(3) and
Sec. 1.709-2(a) paid or incurred after September 8, 2008, the
temporary regulations under section 709 provide that a partnership is
deemed to make an election under section 709(b) to deduct
organizational expenses for the taxable year in which the partnership
begins business. Therefore, under the temporary regulations a
partnership is no longer required to attach a statement to the return
or specifically identify the deducted amount as organizational expenses
for the election under section 709(b) to be effective. A partnership
may choose to forgo the deemed election by clearly electing to
capitalize its organizational expenses on a timely filed Federal income
tax return (including extensions) for the taxable year in which the
partnership begins business. The election to capitalize organizational
expenses is made in accordance with the form and instructions used by
the partnership to file its Federal income tax return. An election
either to deduct organizational expenses under section 709(b) or to
capitalize organizational expenses is irrevocable and applies to all
organizational expenses of the partnership.
In general, a change in the characterization of an item as an
organizational expense, or a change in the determination of the taxable
year in which the partnership begins business, will be treated as a
change in method of accounting with a section 481(a) adjustment.
Examples
The temporary regulations under sections 195, 248, and 709 contain
examples that illustrate how the election is made, how to calculate the
amount of the deduction that is allowed in the year in which the
election is made, and how to effect subsequent redeterminations in the
characterization of an item or the year in which the trade or business
begins.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. Please refer to
the cross-referenced notice of proposed rulemaking published elsewhere
in this issue of the Federal Register for applicability of the
Regulatory Flexibility Act (5 U.S.C. chapter 6). Pursuant to section
7805(f) of the Code, these final and temporary regulations have been
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Drafting Information
The principal author of these regulations is Grace Matuszeski of
the Office of the Associate Chief Counsel (Income Tax & Accounting).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
[[Page 38913]]
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.195-1 is revised to read as follows:
Sec. 1.195-1 Election to amortize start-up expenditures.
[Reserved]. For further guidance, see Sec. 1.195-1T.
0
Par. 3. Section 1.195-1T is added to read as follows:
Sec. 1.195-1T Election to amortize start-up expenditures (temporary).
(a) In general. Under section 195(b), a taxpayer may elect to
amortize start-up expenditures as defined in section 195(c)(1). In the
taxable year in which a taxpayer begins an active trade or business, an
electing taxpayer may deduct an amount equal to the lesser of the
amount of the start-up expenditures that relate to the active trade or
business, or $5,000 (reduced (but not below zero) by the amount by
which the start-up expenditures exceed $50,000). The remainder of the
start-up expenditures is deductible ratably over the 180-month period
beginning with the month in which the active trade or business begins.
All start-up expenditures that relate to the active trade or business
are considered in determining whether the start-up expenditures exceed
$50,000, including expenditures incurred on or before October 22, 2004.
(b) Time and manner of making election. A taxpayer is deemed to
have made an election under section 195(b) to amortize start-up
expenditures as defined in section 195(c)(1) for the taxable year in
which the active trade or business to which the expenditures relate
begins. A taxpayer may choose to forgo the deemed election by clearly
electing to capitalize its start-up expenditures on a timely filed
Federal income tax return (including extensions) for the taxable year
in which the active trade or business to which the expenditures relate
begins. The election either to amortize start-up expenditures under
section 195(b) or to capitalize start-up expenditures is irrevocable
and applies to all start-up expenditures that are related to the active
trade or business. A change in the characterization of an item as a
start-up expenditure is a change in method of accounting to which
sections 446 and 481(a) apply if the taxpayer treated the item
consistently for two or more taxable years. A change in the
determination of the taxable year in which the active trade or business
begins also is treated as a change in method of accounting if the
taxpayer amortized start-up expenditures for two or more taxable years.
(c) Examples. The following examples illustrate the application of
this section:
Example 1. Expenditures of $5,000 or less. Corporation X, a
calendar year taxpayer, incurs $3,000 of start-up expenditures after
October 22, 2004, that relate to an active trade or business that
begins on July 1, 2009. Under paragraph (b) of this section,
Corporation X is deemed to have elected to deduct start-up
expenditures under section 195(b) in 2009. Therefore, Corporation X
may deduct the entire amount of the start-up expenditures in 2009,
the taxable year in which the active trade or business begins.
Example 2. Expenditures of more than $5,000 but less than or
equal to $50,000. The facts are the same as in Example 1 except that
Corporation X incurs start-up expenditures of $41,000. Under
paragraph (b) of this section, Corporation X is deemed to have
elected to deduct start-up expenditures under section 195(b) in
2009. Therefore, Corporation X may deduct $5,000 and the portion of
the remaining $36,000 that is allocable to July through December of
2009 ($36,000/180 x 6 = $1,200) in 2009, the taxable year in which
the active trade or business begins.
Example 3. Subsequent change in the characterization of an item.
The facts are the same as in Example 2 except that Corporation X
determines in 2011 that Corporation X incurred $10,000 for an
additional start-up expenditure erroneously deducted in 2009 under
section 162 as a business expense. Under paragraph (b) of this
section, Corporation X is deemed to have elected to amortize start-
up expenditures under section 195(b) in 2009, including the
additional $10,000 of start-up expenditures. Corporation X is using
an impermissible method of accounting for the additional $10,000 of
start-up expenditures and must change its method under Sec. 1.446-
1(e) and the applicable general administrative procedures in effect
in 2011.
Example 4. Subsequent redetermination of year in which business
begins. The facts are the same as in Example 2 except that, in 2010,
Corporation X deducted the start-up expenditures allocable to
January through December of 2010 ($36,000/180 x 12 = $2,400). In
addition, in 2011 it is determined that Corporation X actually began
business in 2010. Under paragraph (b) of this section, Corporation X
is deemed to have elected to deduct start-up expenditures under
section 195(b) in 2010. Corporation X impermissibly deducted start-
up expenditures in 2009, and incorrectly determined the amount of
start-up expenditures deducted in 2010. Therefore, Corporation X is
using an impermissible method of accounting for the start-up
expenditures and must change its method under Sec. 1.446-1(e) and
the applicable general administrative procedures in effect in 2011.
Example 5. Expenditures of more than $50,000 but less than or
equal to $55,000. The facts are the same as in Example 1 except that
Corporation X incurs start-up expenditures of $54,500. Under
paragraph (b) of this section, Corporation X is deemed to have
elected to deduct start-up expenditures under section 195(b) in
2009. Therefore, Corporation X may deduct $500 ($5,000-4,500) and
the portion of the remaining $54,000 that is allocable to July
through December of 2009 ($54,000/180 x 6 = $1,800) in 2009, the
taxable year in which the active trade or business begins.
Example 6. Expenditures of more than $55,000. The facts are the
same as in Example 1 except that Corporation X incurs start-up
expenditures of $450,000. Under paragraph (b) of this section,
Corporation X is deemed to have elected to deduct start-up
expenditures under section 195(b) in 2009. Therefore, Corporation X
may deduct the amounts allocable to July through December of 2009
($450,000/180 x 6 = $15,000) in 2009, the taxable year in which the
active trade or business begins.
(d) Effective/applicability date. This section applies to start-up
expenditures paid or incurred after September 8, 2008. However,
taxpayers may apply all the provisions of this section to start-up
expenditures paid or incurred after October 22, 2004, provided that the
period of limitations on assessment of tax for the year the election
under paragraph (b) of this section is deemed made has not expired.
Otherwise, for start-up expenditures paid or incurred prior to
September 8, 2008, see Sec. 1.195-1 in effect prior to that date
(Sec. 1.195-1 as contained in 26 CFR part 1 edition revised as of
April 1, 2008).
(e) Expiration date. This section expires on July 7, 2011.
0
Par. 4. Section 1.248-1 is amended by revising paragraphs (a) and (c),
and adding paragraphs (d), (e), (f), and (g) to read as follows:
Sec. 1.248-1 Election to amortize organizational expenditures.
(a) [Reserved]. For further guidance, see Sec. 1.248-1T(a).
* * * * *
(c) through (g) [Reserved]. For further guidance, see Sec. 1.248-
1T(c) through (g).
0
Par. 5. Section 1.248-1T is added to read as follows:
Sec. 1.248-1T Election to amortize organizational expenditures
(temporary).
(a) In general. Under section 248(a), a corporation may elect to
amortize organizational expenditures as defined in section 248(b) and
Sec. 1.248-1(b). In the taxable year in which a corporation begins
business, an electing corporation may deduct an amount equal to the
lesser of the amount of the organizational expenditures of the
corporation, or $5,000 (reduced (but not below zero) by the amount by
which the organizational expenditures exceed $50,000). The remainder of
the
[[Page 38914]]
organizational expenditures is deducted ratably over the 180-month
period beginning with the month in which the corporation begins
business. All organizational expenditures of the corporation are
considered in determining whether the organizational expenditures
exceed $50,000, including expenditures incurred on or before October
22, 2004.
(b) [Reserved]. For further guidance, see Sec. 1.248-1(b).
(c) Time and manner of making election. A corporation is deemed to
have made an election under section 248(a) to amortize organizational
expenditures as defined in section 248(b) and Sec. 1.248-1(b) for the
taxable year in which the corporation begins business. A corporation
may choose to forgo the deemed election by clearly electing to
capitalize its organizational expenditures on a timely filed Federal
income tax return (including extensions) for the taxable year in which
the corporation begins business. The election either to amortize
organizational expenditures under section 248(a) or to capitalize
organizational expenditures is irrevocable and applies to all
organizational expenditures of the corporation. A change in the
characterization of an item as an organizational expenditure is a
change in method of accounting to which sections 446 and 481(a) apply
if the corporation treated the item consistently for two or more
taxable years. A change in the determination of the taxable year in
which the corporation begins business also is treated as a change in
method of accounting if the corporation amortized organizational
expenditures for two or more taxable years.
(d) Determination of when corporation begins business. The
deduction allowed under section 248 must be spread over a period
beginning with the month in which the corporation begins business. The
determination of the date the corporation begins business presents a
question of fact which must be determined in each case in light of all
the circumstances of the particular case. The words ``begins
business,'' however, do not have the same meaning as ``in existence.''
Ordinarily, a corporation begins business when it starts the business
operations for which it was organized; a corporation comes into
existence on the date of its incorporation. Mere organizational
activities, such as the obtaining of the corporate charter, are not
alone sufficient to show the beginning of business. If the activities
of the corporation have advanced to the extent necessary to establish
the nature of its business operations, however, it will be deemed to
have begun business. For example, the acquisition of operating assets
which are necessary to the type of business contemplated may constitute
the beginning of business.
(e) Examples. The following examples illustrate the application of
this section:
Example 1. Expenditures of $5,000 or less. Corporation X, a
calendar year taxpayer, incurs $3,000 of organizational expenditures
after October 22, 2004, and begins business on July 1, 2009. Under
paragraph (c) of this section, Corporation X is deemed to have
elected to deduct organizational expenditures under section 248(a)
in 2009. Therefore, Corporation X may deduct the entire amount of
the organizational expenditures in 2009, the taxable year in which
Corporation X begins business.
Example 2. Expenditures of more than $5,000 but less than or
equal to $50,000. The facts are the same as in Example 1 except that
Corporation X incurs organizational expenditures of $41,000. Under
paragraph (c) of this section, Corporation X is deemed to have
elected to deduct organizational expenditures under section 248(a)
in 2009. Therefore, Corporation X may deduct $5,000 and the portion
of the remaining $36,000 that is allocable to July through December
of 2009 ($36,000/180 x 6 = $1,200) in 2009, the taxable year in
which Corporation X begins business.
Example 3. Subsequent change in the characterization of an item.
The facts are the same as in Example 2 except that Corporation X
determines in 2011 that Corporation X incurred $10,000 for an
additional organizational expenditure erroneously deducted in 2009
under section 162 as a business expense. Under paragraph (c) of this
section, Corporation X is deemed to have elected to amortize
organizational expenditures under section 248(a) in 2009, including
the additional $10,000 of organizational expenditures. Corporation X
is using an impermissible method of accounting for the additional
$10,000 of organizational expenditures and must change its method
under Sec. 1.446-1(e) and the applicable general administrative
procedures in effect in 2011.
Example 4. Subsequent redetermination of year in which business
begins. The facts are the same as in Example 2 except that, in 2010,
Corporation X deducted the organizational expenditures allocable to
January through December of 2010 ($36,000/180 x 12 = $2,400). In
addition, in 2011 it is determined that Corporation X actually began
business in 2010. Under paragraph (c) of this section, Corporation X
is deemed to have elected to deduct organizational expenditures
under section 248(a) in 2010. Corporation X impermissibly deducted
organizational expenditures in 2009, and incorrectly determined the
amount of organizational expenditures deducted in 2010. Therefore,
Corporation X is using an impermissible method of accounting for the
organizational expenditures and must change its method under Sec.
1.446-1(e) and the applicable general administrative procedures in
effect in 2011.
Example 5. Expenditures of more than $50,000 but less than or
equal to $55,000. The facts are the same as in Example 1 except that
Corporation X incurs organizational expenditures of $54,500. Under
paragraph (c) of this section, Corporation X is deemed to have
elected to deduct organizational expenditures under section 248(a)
in 2009. Therefore, Corporation X may deduct $500 ($5,000-4,500) and
the portion of the remaining $54,000 that is allocable to July
through December of 2009 ($54,000/180 x 6 = $1,800) in 2009, the
taxable year in which Corporation X begins business.
Example 6. Expenditures of more than $55,000. The facts are the
same as in Example 1 except that Corporation X incurs organizational
expenditures of $450,000. Under paragraph (c) of this section,
Corporation X is deemed to have elected to deduct organizational
expenditures under section 248(a) in 2009. Therefore, Corporation X
may deduct the amounts allocable to July through December of 2009
($450,000/180 x 6 = $15,000) in 2009, the taxable year in which
Corporation X begins business.
(f) Effective/applicability date. This section applies to
organizational expenditures paid or incurred after September 8, 2008.
However, taxpayers may apply all the provisions of this section to
organizational expenditures paid or incurred after October 22, 2004,
provided that the period of limitations on assessment of tax for the
year the election under paragraph (c) of this section is deemed made
has not expired. Otherwise, for organizational expenditures paid or
incurred prior to September 8, 2008, see Sec. 1.248-1 in effect prior
to that date (Sec. 1.248-1 as contained in 26 CFR part 1 edition
revised as of April 1, 2008).
(g) Expiration date. This section expires on July 7, 2011.
0
Par. 6. Section 1.709-1 is amended by revising paragraph (b) and
removing paragraph (c) to read as follows:
Sec. 1.709-1 Treatment of organization and syndication costs.
* * * * *
(b) [Reserved]. For further guidance, see Sec. 1.709-1T.
0
Par. 7. Section 1.709-1T is added to read as follows:
Sec. 1.709-1T Treatment of organizational expenses and syndication
costs (temporary).
(a) [Reserved]. For further guidance, see Sec. 1.709-1(a).
(b) Election to amortize organizational expenses--(1) In general.
Under section 709(b), a partnership may elect to amortize
organizational expenses as defined in section 709(b)(3) and Sec.
1.709-2(a). In the taxable year in which a partnership begins business,
an
[[Page 38915]]
electing partnership may deduct an amount equal to the lesser of the
amount of the organizational expenses of the partnership, or $5,000
(reduced (but not below zero) by the amount by which the organizational
expenses exceed $50,000). The remainder of the organizational expenses
is deductible ratably over the 180-month period beginning with the
month in which the partnership begins business. All organizational
expenses of the partnership are considered in determining whether the
organizational expenses exceed $50,000, including expenses incurred on
or before October 22, 2004.
(2) Time and manner of making election. A partnership is deemed to
have made an election under section 709(b) to amortize organizational
expenses as defined in section 709(b)(3) and Sec. 1.709-2(a) for the
taxable year in which the partnership begins business. A partnership
may choose to forgo the deemed election by clearly electing to
capitalize its organizational expenses on a timely filed Federal income
tax return (including extensions) for the taxable year in which the
partnership begins business. The election either to amortize
organizational expenses under section 709(b) or to capitalize
organizational expenses is irrevocable and applies to all
organizational expenses of the partnership. A change in the
characterization of an item as an organizational expense is a change in
method of accounting to which sections 446 and 481(a) apply if the
partnership treated the item consistently for two or more taxable
years. A change in the determination of the taxable year in which the
partnership begins business also is treated as a change in method of
accounting if the partnership amortized organizational expenses for two
or more taxable years.
(3) Liquidation of partnership. If there is a winding up and
complete liquidation of the partnership prior to the end of the
amortization period, the unamortized amount of organizational expenses
is a partnership deduction in its final taxable year to the extent
provided under section 165 (relating to losses). However, there is no
partnership deduction with respect to its capitalized syndication
expenses.
(4) Examples. The following examples illustrate the application of
this section:
Example 1. Expenditures of $5,000 or less. Partnership X, a
calendar year taxpayer, incurs $3,000 of organizational expenses
after October 22, 2004, and begins business on July 1, 2009. Under
paragraph (b)(2) of this section, Partnership X is deemed to have
elected to deduct organizational expenses under section 709(b) in
2009. Therefore, Partnership X may deduct the entire amount of the
organizational expenses in 2009, the taxable year in which
Partnership X begins business.
Example 2. Expenditures of more than $5,000 but less than or
equal to $50,000. The facts are the same as in Example 1 except that
Partnership X incurs organizational expenses of $41,000. Under
paragraph (b)(2) of this section, Partnership X is deemed to have
elected to deduct organizational expenses under section 709(b) in
2009. Therefore, Partnership X may deduct $5,000 and the portion of
the remaining $36,000 that is allocable to July through December of
2009 ($36,000/180 x 6 = $1,200) in 2009, the taxable year in which
Partnership X begins business.
Example 3. Subsequent change in the characterization of an item.
The facts are the same as in Example 2 except that Partnership X
realizes in 2011 that Partnership X incurred $10,000 for an
additional organizational expense erroneously deducted in 2009 under
section 162 as a business expense. Under paragraph (b)(2) of this
section, Partnership X is deemed to have elected to amortize
organizational expenses under section 709(b) in 2009, including the
additional $10,000 of organizational expenses. Partnership X is
using an impermissible method of accounting for the additional
$10,000 of organizational expenses and must change its method under
Sec. 1.446-1(e) and the applicable general administrative
procedures in effect in 2011.
Example 4. Subsequent redetermination of year in which business
begins. The facts are the same as in Example 2 except that, in 2010,
Partnership X deducted the organizational expenses allocable to
January through December of 2010 ($36,000/180 x 12 = $2,400). In
addition, in 2011 it is determined that Partnership X actually began
business in 2010. Under paragraph (b)(2) of this section,
Partnership X is deemed to have elected to deduct organizational
expenses under section 709(b) in 2010. Partnership X impermissibly
deducted organizational expenses in 2009, and incorrectly determined
the amount of organizational expenses deducted in 2010. Therefore,
Partnership X is using an impermissible method of accounting for the
organizational expenses and must change its method under Sec.
1.446-1(e) and the applicable general administrative procedures in
effect in 2011.
Example 5. Expenditures of more than $50,000 but less than or
equal to $55,000. The facts are the same as in Example 1 except that
Partnership X incurs organizational expenses of $54,500. Under
paragraph (b)(2) of this section, Partnership X is deemed to have
elected to deduct organizational expenses under section 709(b) in
2009. Therefore, Partnership X may deduct $500 ($5,000-4,500) and
the portion of the remaining $54,000 that is allocable to July
through December of 2009 ($54,000/180 x 6 = $1,800) in 2009, the
taxable year in which Partnership X begins business.
Example 6. Expenditures of more than $55,000. The facts are the
same as in Example 1 except that Partnership X incurs organizational
expenses of $450,000. Under paragraph (b)(2) of this section,
Partnership X is deemed to have elected to deduct organizational
expenses under section 709(b) in 2009. Therefore, Partnership X may
deduct the amounts allocable to July through December of 2009
($450,000/180 x 6 = $15,000) in 2009, the taxable year in which
Partnership X begins business.
(5) Effective/applicability date. This section applies to
organizational expenses paid or incurred after September 8, 2008.
However, taxpayers may apply all the provisions of this section to
organizational expenses paid or incurred after October 22, 2004,
provided that the period of limitations on assessment of tax for the
year the election under paragraph (b)(2) of this section is deemed made
has not expired. Otherwise, for organizational expenses paid or
incurred prior to September 8, 2008, see Sec. 1.709-1 in effect prior
to that date (Sec. 1.709-1 as contained in 26 CFR part 1 edition
revised as of April 1, 2008).
(6) Expiration date. This section expires on July 7, 2011.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Approved: June 30, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-15459 Filed 7-7-08; 8:45 am]
BILLING CODE 4830-01-P