The Clifton partnership, a calendar year partnership, incurs and pays the following costs during 20X1, its first taxable year:
| Item | Date Paid | |
|---|---|---|
| Legal fees for drafting the partnership agreement | $14,000 | May 19, 20X1 |
| Accounting fees to set up the books | $9,000 | June 22, 20X1 |
| Brokerage commissions to sell limited partnership interests | $12,000 | July 13, 20X1 |
The Clifton partnership begins business on September 1, 20X1. If the Clifton partnership makes a proper election, what is the maximum total deduction which it may take for the above costs on its 20X1 partnership return?
- a. $778
- b. $5,400
- c. $511
- d. $5,667
The correct answer and explanation is:
The correct answer is: b. $5,400
Explanation:
The costs incurred by the Clifton Partnership fall into different categories for tax treatment purposes under IRC Section 709 (organizational and syndication costs) and IRC Section 195 (start-up costs).
- Legal fees for drafting the partnership agreement ($14,000):
- This qualifies as an organizational cost because it is directly related to forming the partnership.
- Under IRC Section 709, a partnership may deduct up to $5,000 of organizational costs in the first year, phased out dollar-for-dollar when total organizational expenses exceed $50,000.
- The remaining balance must be amortized over 180 months (15 years).
- Accounting fees to set up the books ($9,000):
- This also qualifies as an organizational cost and is grouped with the legal fees for the purpose of the $5,000 immediate deduction.
- Since the total organizational costs are $14,000 + $9,000 = $23,000, the partnership can deduct $5,000 immediately, and the remaining $18,000 is amortized over 180 months.
- Monthly amortization: $18,000 ÷ 180 = $100 per month.
- Since the partnership starts business in September, it can deduct 4 months (September–December) = $400.
- Brokerage commissions for selling limited partnership interests ($12,000):
- These are syndication costs, which must be capitalized and cannot be deducted or amortized.
Total Deduction for 20X1:
- Immediate deduction: $5,000
- Amortization (4 months of $100/month): $400
- Total deduction = $5,400
Thus, the correct answer is b. $5,400.
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