Capitalized business expenses

Dear Tax Talk,
A friend and I established a partnership business last year. We'll be providing business administrative services. Shortly after we sent out our grand opening mailing in September, I sustained an injury that left me incapable of working for two months. For that reason, we didn't actively pursue the business for the balance of the year.

We have a federal tax ID number and a state number. I assume we still need to submit tax information, even though we didn't generate an income. What forms are required? Can we use the expenses we incurred last year on the tax returns we file this year? I look forward to your reply. Thanks. -- Shelley

Dear Shelley,
That's terrible about the injury, but I hope you're better now and can get your business off to a rousing start with the New Year.

A partnership files Form 1065 by April 15. Although the form looks complex, you can skip parts of it if you meet all three of the requirements listed on Question 5 of Schedule B on Page 2. Each partner receives a copy of Schedule K-1 that lists his or her net share of partnership income or loss for the year. The managing partner mails the completed partnership forms and K-1 to the Internal Revenue Service and the partner includes his or her share on his or her return in the appropriate schedules or fields.

Expenses paid in connection with the start up of a new business are capitalized and amortized over a period of 60 months commencing when operations start. Capitalized means that the expenses are considered assets of the partnership and thus appear on the balance sheet rather than the income statement. Amortization applies to expensing or writing off a capitalized asset.

For example, if you and your partner incurred phone, rent, legal, accounting and other expenses totaling $6,000 prior to offering your services for compensation, these expenses are capitalized as start-up and organization costs and subject to amortization in the month that you begin to operate even though they may have been paid in an earlier year. Thus, the expenses you paid in 2003 are available to you in 2004 when you commence operations at the rate, based on the example, of $100 a month.

Beginning on Page 33 of Publication 535, Business Expenses, the IRS discusses the requirements to amortize start-up and organization costs. The partnership must elect to amortize these costs on a timely filed return. The election is basically a statement attached to the return.