New proposed regulations would settle a tax controversy involving the treatment of amortizable partnership start-up costs after a “technical termination” of the partnership. (Prop. Reg.–126285–12, 12/23/13)
Basic rules: Under Section 708 of the tax code, a partnership is considered to be terminated for federal income tax purposes (but usually not for state-law legal purposes) if there’s a sale or exchange of 50% or more of the total interests in partnership profits and capital within a 12-month period. The partnership is technically terminated, and a new partnership comes into existence for tax purposes.
Because a technical termination is treated for tax purposes as a liquidation of the terminated partnership, some tax experts have argued that the terminated partnership can immediately deduct any remaining unamortized balance of its start-up costs. But the new proposed regulations refute that theory. Under the new regulations, the remaining unamortized assets would be treated as being transferred to the new partnership, which then must amortize the costs over their remaining amortization period. (Under current rules, the amortization period is 180 months, which equates to a 15-year amortization period.)
Example: After a technical termination, your partnership has an unamortized balance of $10,000 in qualified start-up costs. Previously, costs were amortized over seven years of the original 15-year period. The new partnership can’t deduct the $10,000 of unamortized expenses, even though the old partnership is treated as being terminated. Instead, the balance is transferred to the new partnership, which then amortizes the remaining $10,000 over the last eight years of the original 15-year amortization period.
Online resource: Read the proposed regulations.