In the final review of the 1065 I am working on, I am getting a message that it was indicated that it is an initial year but the Deemed Election to Amortize Organizational Expenditures has not been made. When you click on fix this problem it goes to another screen which states...
Consider filing a section 709(b) election, even if you don't have any organizational costs to amortize. This protects the company in case of an audit where operating expenses are reclassified as organizational costs.
There are two election forms I found. One for 195(b) election and one for 709(b) election. It appears these are not filed with the return just kept with your records. Is this correct? Also, if you are filing these elections to protect against an audit, there are no amounts to fill in, and then this results in way more errors on the review.
What is the correct way to handle both these elections?
The regulations for both 195 and 709 are almost verbatim as copied below:
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 §1.709-2(a) for the taxable year in which the partnership begins business. A partnership may choose to forgo the deemed election by affirmatively 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.
Based on the above, the election is deemed to occur by just expensing the item. If something is reclassified as organizational instead of operating, then so be it. Just a reclassification. It was still expensed. If the amount exceeds $5,000 then where you would be impacted is that all of the amount will not be able to be expensed in the year of adjustment; this is regardless of whether or not you would have made a "protective election".
Practitioners handle this differently depending on their practice. Based on your comments, it would do no good to only have these "protective elections" in your file copy but not with the return that is filed with the IRS.
I am filing a Form 1065 for the first year of the business. TurboTax is recommended that I make a 195(b)(1) election, but does not give me the form to do so. How do I obtain the form necessary to make said election?
“Therefore, a taxpayer is no longer required to attach a statement to the return or specifically identify the deducted amount as start-up and/or organizational expense for the elections to be effective.”
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