For Partners in a Partnership – and the business expenses are not reimbursed by the partnership
As a partner in a partnership, it’s crucial to understand how unreimbursed business expenses work and when you can deduct them.
Here’s what you need to know:
What are unreimbursed business expenses?
These are ordinary and necessary expenses you incur for our partnership that aren’t reimbursed.
This is common in service partnerships.
When can you deduct them?
You can deduct these expenses if:
Your partnership agreement or firm policy (written or unwritten) expects you to pay them without reimbursement
In many partnerships It’s a routine practice for partners to cover these costs
How to deduct them:
Report these expenses on Schedule E of your personal tax return
Use a separate line in Part II with the description “UPE” (Unreimbursed Partnership Expenses)
Include these deductions when calculating your net self-employment income on Schedule SE
Impact on your taxes:
These deductions reduce your earned income from the partnership
This may also lower your self-employment tax
Examples of eligible expenses:
➡ Business liability insurance premiums
➡ Professional dues
➡ Work-related education
➡ Tools and supplies
➡ Business travel and lodging
➡ Expenses for developing client relationships
➡ Transportation to and from client meetings
➡ Professional publications
➡ Continuing education
Home office expenses:
If you use part of your home regularly and exclusively for partnership business, you may be able to deduct home office expenses
Report these on Schedule E along with other unreimbursed partnership expenses
This can provide tax savings for both income tax and self-employment tax purposes
If your home office qualifies as your principal place of business, commuting from home to temporary work locations or the partnership’s official office may count as business mileage
Keep detailed records:
➡ Maintain an account book, diary, or log
➡ Save receipts, canceled checks, and other documentary evidence
➡ Note the business purpose for each expense
🚫 Important notes:
You cannot deduct expenses that could have been reimbursed by the partnership.
These are considered “voluntary” expenses and are not deductible.
To avoid issues with the IRS, our partnership should have a clear, written policy stating what expenses will and won’t be reimbursed.
This guidance applies equally to members of LLCs that are treated as partnerships for federal tax purposes.
Remember:
If your partnership would have reimbursed you for an expense, you can’t deduct it.
Also, if these expenses are part of a passive activity, passive activity loss limitations may apply.
Always consult with a tax professional for advice on your specific situation.
If you have any questions about your partnership’s policies on expenses, please don’t hesitate to ask.
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