It provides that costs do not facilitate a transaction when they do not originate in a business acquisition. The judicially developed “origin-of-the-claim” doctrine offers a second, related exception. Other excepted costs include integration, employee compensation and overhead. For instance, an amount to facilitate a borrowing does not facilitate a transaction other than the borrowing. The regulations include exceptions to the default rule for costs deemed not to facilitate a transaction. Payments are treated as facilitating a transaction if made in the process of investigating or otherwise pursuing one of these transactions and often include those remitted to attorneys, investment bankers, accountants, and consultants for services in connection with a transaction.Įxception for costs that do not facilitate the transaction A transfer to a partnership described in Section 721 (whether the taxpayer is the transferor or the transferee).A transfer to a corporation described in Section 351 (whether the taxpayer is the transferor or the transferee).A restructuring, recapitalization or reorganization of the capital structure of a business entity.An acquisition of an ownership in the taxpayer.An acquisition by the taxpayer of an ownership interest in a business entity if, immediately after the acquisition, the taxpayer and the business entity are related under Sections 267(b) or 707(b).An acquisition of assets that constitute a trade or business, whether the taxpayer is the acquirer or the target in the acquisition.
Taxpayers, including partnerships, must capitalize costs paid to facilitate certain transactions specified in Treas. The regulations contain a general default rule that requires capitalization unless an exception applies. Additional guidance can be found in case law and administrative pronouncements.
1.263(a)-5 sets forth rules regarding the treatment of certain costs incurred in a variety of transactions. Taxpayers must determine whether costs incurred in connection with a transaction should be capitalized, immediately deducted, or subject to amortization. This article discusses key concepts to consider when analyzing the federal income tax treatment of transaction costs incurred by a partnership or its partners. A timely and thorough transaction cost study can help identify tax savings, properly document necessary records and make prompt elections, which can ultimately result in significant tax benefits.
It may even require taking certain requisite steps, such as documentation and analysis, long before an election is made. On the other hand, capitalization of facilitative costs may not provide a benefit for several years, if at all.ĭetermining the proper treatment, however, is governed by extremely complex rules and can be influenced by varying factors and conditions. For instance, the ability to deduct a portion of certain success-based fees or items not deemed to facilitate the transaction, like overhead, borrowing and some compliance costs, can provide an immediate benefit. These costs are capitalized, amortized or deducted, with each treatment capable of producing drastically different tax outcomes.
Partnerships are commonly engaged in significant M&A activity, and any time partnership interests or assets are exchanged, the partnership and its partners can incur significant transaction costs.
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