Section 754 amortization

[LouD]

New partners entered existing partnership and paid the existing partners outside of the partnership for their ownership interest. So I'm adding the new partners equity on the balance sheet thru a Section 754 election and will begin amortizing that ownership interest in 2009.

My question is how to handle the amortization expense - does it flow thru normal net income of the partnership and allocated specifically to the new partners, or is it an expense recorded on the books but not included in the net income and handled on Schedule M-1.

I believe I need to also create a special item on the K-1 in Box 20 for the new partners letting them know how much their special amortization was for the year - is that correct.

Thanks in advance for the help!

[jainen]

>>does it flow thru normal net income of the partnership<<

Section 754 is an advanced topic. Since nobody else responded, I'll take an unreliable shot from my inexperience. My understanding is that the partnership must now maintain separate books for the new partners, as the basis step up has no effect on the other partners. It is not the "ownership interest" that is now amortized by the partnership, but the depreciable property defined by the difference between book value and FMV. If you are the one making the decision for the partnership, I hope you have good E&O coverage.

[michaelmars]

your technigue is right, set up a separate item that is specifically allocated to the one partner. don't forget that part of the step-up must be allocated to land. Partnerships are required to book the step-up [you used to have the option of putting it on the books or the partner keeping his own records]. the purchasing partner should supply the amount of the step up in writing to the general partner.