To join in on this discussion, you must first log in.

Discussion:K1 partner - wants to deduct unreimbursed business expenses

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> K1 partner - wants to deduct unreimbursed business expenses


  • The search engine puts the oldest discussions at the top of the results list - it's not a "best match" algorithm!

Estock (talk|edits) said:

15 February 2006

Client has been self-employed for several years and deducted business expenses on sch C. Now, client is a partner and will receive a K1 with income - where does the taxpayer get to deduct unreimbursed business expenses? I would assume sch A?

Riley2 (talk|edits) said:

15 February 2006
As long as he is not entitled to reimbursement under the partnership agreement, he can deduct such expenses on Sch. E.

Lois (talk|edits) said:

15 February 2006
I believe the reimbursement plan must be started in their operating agreement.

Estock (talk|edits) said:

15 February 2006
Great - thank you both for your replies.

Solomon (talk|edits) said:

15 February 2006
Use notation UPE.

Tom04 (talk|edits) said:

15 February 2006
These expenses will also decrease SE income from that partnership

Nshnider (talk|edits) said:

3 February 2007
where do you deduct the UPE on the SE form to reduce the SE tax?

Neil

Death&Taxes (talk|edits) said:

3 February 2007
Your software should net the figures before carrying it to the SE. It would do the same if you elect to reduce SE Income by the 179 Expense.

AKaccountess (talk|edits) said:

4 February 2007
You can enter another partnership line titled partnership expenses and use the ein of the partnership and enter the expenses as a negative income figure too if you are using lacerte. Then like D&T stated the software will net the figures before carrying it to the SE

Nshnider (talk|edits) said:

4 February 2007
I understand all this but I must be missing something. The SE tax come from the K-1 box 14 and if you deduct UPE on schedule E, how does this and the section 179 get to the SE form. I donot think anything on the Scheule E flow to the SE form

Death&Taxes (talk|edits) said:

4 February 2007
I don't know your software, but when I crossreference the number on Line 2, Schedule SE, it takes me to a Self-Employment Tax adjustments worksheet where it totals the income from Schedule C, the K-1, any other SE income on Line 7 and other income sources such as minister's income. The figure from the K-1 Line 14 is reduced by the UPE before it is entered here, ditto the 179 Deduction. On the K-1 worksheet, you elect whether to reduce SE tax by the 179 deduction.

Www.cpa1.biz (talk|edits) said:

4 February 2007
If you are using Proseries, you can add form called supplemental expense form. From there you can enter in your unreimbursed partnership expenses. It will carry to the Sch E. Part 2 and the line item will say UPE.

Also, almanacers, if the aggreement does not say that the partnership will not reimburse parnters for out of pocket expenses, is this UPE deduction allowed or will it have to be put on the partnership return allowing all the other partners to get a share of the dedcution.

Please advise.

Bj

Kathyt (talk|edits) said:

5 February 2007
It will not be allowed if it's not in the partnership agreement. It cannot go on the partnership tax return if the partnership didn't pay it; unless they reimburse the partner. Someone correct me if I'm wrong, but I think the reimbursement needs to be in the year of the expense.

Solomon (talk|edits) said:

5 February 2007
Does not have to be in writing as long as it is a common practice.

Kathyt (talk|edits) said:

5 February 2007
Solomon I respect your answers but that's not what I remember from seminars. Can you give some authority on that, I have this issue come up many times in the year and I have always just went by what I understood from the seminar speakers. If it doesn't have to be writing I would like to have something for my files on that. As of now I just tell the client the put it in the agreement.

Www.cpa1.biz (talk|edits) said:

5 February 2007
Ya, but an agreement can be oral. So all a partner would have to say if ever audited is that they wont reimburse partners for business expenses paid personally.

Kathyt, Why couldnt the partner just have that as a contribution and expense it for the partnership. Now, I know the partner will not get the total expense but at least they will get thier portion according to allocation of P&L.

Solomon (talk|edits) said:

5 February 2007
Kathy - as Www noted, it only has to be oral. I gather you are referencing the instructions in Sch E. Note that it says a part of the partnership agreement - not necessarily in writing. I might add that the worksheet in Publication 587 is used for this purpose - at least if there is an office at home.

Nshnider (talk|edits) said:

5 February 2007
what are the consequences of deducting the 179 on the SE form? Why wouldn't you want to do it?

Neil

Www.cpa1.biz (talk|edits) said:

6 February 2007
Solomon,

Where on that supplemental expense form would you input office in home expense. Do you make the calculation percentage and just have this as a line item called office in home deduction?

Please advise. I am using Pro Series.

Thanks

Bj

Solomon (talk|edits) said:

6 February 2007
Www - Don't know about Pro Series. I do the worksheet in Pub 587 by hand and make an entry in the K-1 under UPE which in turn transfers to page two of Sch E as UPE with the total expenses. Line 11 of the worksheet is for picking up any other UPE other than office at home.


Sometimes to avoid doing by hand, in a dummy 8829 I do the office at home to get the total and then add to that any other unreimbursed partner expenses.

Www.cpa1.biz (talk|edits) said:

6 February 2007
Solomon,

Sounds good. Thanks for the info.

Www.cpa1.biz (talk|edits) said:

20 February 2007
Almanacers,

I know we were talking about this. Does anyone know where to put Office in Home deductions for the UPE in Proseries or do I just put it as other expenses and call it "office in home".

Please advise.

Thanks

Lalva (talk|edits) said:

15 June 2007
I am reading this and I have a similar situation.

Partnership starts in 2006. Partners have business mileage and out of pocket business expenses in addition to home office. Now I am preparing their personal returns. If they want to be reimbursed by the partnership, is it too late to deduct the 2006 expenses? Can they get reimbursed now for what they paid in 2006?

Thank you

Www.cpa1.biz (talk|edits) said:

15 June 2007
You can still take the deductions on the 2006 tax return. No you cant take 2006 deductions on the 2007 return. You would have to amend the personal return and show the Unreimbursed Partner Expenses (UPE).

Lalva (talk|edits) said:

15 June 2007
If the two partners used a home office and get reimbursed by the partnership for it, How about the depreciation of the home? Do they still take it? Are there consequences if they sell their homes?

Thank you

Solomon (talk|edits) said:

15 June 2007
If the home is sold, then unrecaptured 1250 gain.

Chase (talk|edits) said:

26 October 2007
2 member LLC currently live in same home and use same home office. They are most likely not going to live together much longer but still remain business partners, at which time, they will have separate OIH's. They can either run the OIH expenses through the partnership using the accountable plan or take the expenses as UPE. Can this decision as to how to treat the OIH change from year to year -- they are in the process of preparing the Operating Agreement for the business. Does the operating agreement have to specify exactly which expenses that the P-ship will NOT reimburse? Thanks.

Solomon (talk|edits) said:

26 October 2007
"Does the operating agreement have to specify exactly which expenses that the P-ship will NOT reimburse?" Probably the cleanest.

Chase (talk|edits) said:

26 October 2007
If the OIH expenses are run through the partnership, these expenses could create a loss in the partnership. If this was the case, then the memebers may not benefit in the current year due to basis limitations, correct? On the other hand, if they take them as UPE, the members would be able to reduce other ordinary income by the amount of the UPE related to OIH. Is this correct thinking?

Donniecastleman (talk|edits) said:

26 October 2007
I've got the same situation, deducting UPE's related to a Partnership and it's netting the two out for federal income tax, but the SE tax is still calculating without the offset of the UPE's, am I missing something here?

Death&Taxes (talk|edits) said:

26 October 2007
Donnie, does your software have a SE Worksheet where you can deduct other expenses?

Chase: I think you are asking if they can use the OIH expenses to reduce other income. Question would be does the other income require the use of the home office, and would its use violate the exclusive use rules for the partnership?

Chase (talk|edits) said:

26 October 2007
Hi: I was thinking that since UPE is reported on Sch E, page 2. those amounts flow over to the 1040, page 1. As a result, other income would be offset by the UPE. No? BTW, the other income form wages. etc. does not require the use of the OIH. How would you enter the UPE without letting it flow to the 1040 in Proseries?

Death&Taxes (talk|edits) said:

26 October 2007
I think you use Proseries? On the K-1 worksheet just above Line 1 there is a Quick Zoom that says 'Enter out-of-pocket" expenses. Open it and go to the bottom where you will find another key to supplement business expense worksheet. You will note there is no line for the Home Office Deduction so this you will do on another sheet that you prepare. [Maybe you can print a blank 8829] The total will carry to Sch E, Page 2, Line 28 A, column H, or probably line C if there is a 179 deduction. From there the net goes to page 1; however, if your home office expenses create a loss, you will have to limit them when you enter them on the supplemental expense worksheet and keep carry-forwards in your notes or file.

Chase (talk|edits) said:

26 October 2007
Thank you for this excellent explanation. I appreciate it very much. Have a good weekend.

Chase (talk|edits) said:

26 October 2007
Uh - oh. One last outstanding point about this -- if the home office is run through the partnership using an accountable plan for reimbursement instead of the UPE, then it seems that the partnership could in fact wind up in a loss due to the additional expenses running through from the home office. I guess in this scenario the loss in the partnership would be OK -- but would be limited to the members' basis. What do you think?

Death&Taxes (talk|edits) said:

27 October 2007
I have no idea and I won't pretend to guess!!!!!

CrowJD (talk|edits) said:

27 October 2007
The loss is limited by the member's (outside) basis (basis cannot be allowed to go negative)[this basis will usually track the capital account, but not always]. Distributive share of losses that are not currently deductible by reason of basis limitation rule are carried forward indefinitely until the member has sufficient basis in the LLC to offset all or a port of the suspended loss. IRC 704(d). You are also limited by what the member has at risk. Adjustments to the amounts at risk during operation track the capital account also, practically speaking. Reg. 1.465-66. There's a right of carryover. IRC 465(d) I assume this is not a passive activity. In my experience, it's better not to get involved in accountable plans with the partners themselves, though that is the "preferred" method, let them treat them as UPE. So you need a provision in the OA (unless they have always treated the item in this manner i.e. customary treatment). Sounds like to me it will need to be in the OA on your facts. With an accountable plan, it can end up with a tit for tat thing, and they don't usually submit their documentation etc. Others may disagree with me.

Chase (talk|edits) said:

27 October 2007
I agree with you CrowJD that in this situation the members should treat as UPE. I say this because when they split up and each have an office in home, seems like running 2 home offices through the partnership, specially allocating the home office expenses to the correct member, etc. will be a nightmare. Also, it seems to me that the partnership would have difficulty justifying paying for 2 home offices when the definition of a home office is that it is the space must be used regularly and exclusively as the PRINCIPAL place of business as 1 of the criteria.

Tyler (talk|edits) said:

20 February 2008
I'm coming late to this discussion but am really looking for a simple answer if there is one: I have two partners (not spouses) who own a home together and there is a home office. They file separate returns. I would like to take the home office deduction for one of the partners (oral agreement). I want to deduct insurance, real estate taxes, utilities and depreciation. Is the simplest way to prepare a dummy 8829 to arrive at the correct percentage allocation and then transfer the net figure to Sch E Line 28 column (h) and mark it as UPE -- will this figure along with the section 179 deduction reduce the partnership income and self-employment earnings? And am I required to break out the separate expenses on a separate page? Thank you.

CrowJD (talk|edits) said:

20 February 2008
I don't think one partner can give his deduction to the other on the 1040 level. It should be halved, and taken separately by each partner. Fill out the 8829, and give each one-half of it. You are right, 8829 is not filed with the returns. I probably would show something as an attachment, but I don't know how much detail I would get into.

Tyler (talk|edits) said:

20 February 2008
I can give each partner one-half of the UPE deduction -- no problem. Another question -- do I use form 4562 part III at all for the home depreciation or is it all on the 8829?

Lrizzell (talk|edits) said:

7 March 2008
I have a few questions pertaining to the above.

I have a K1 client who wants to deduct his mileage from his return, (Schedule A). Is that allowed?

Also, I increased the income by the Health Insurance payments and increased the Partner Draw account by the same. I decreased the SE income by the premium amount. Since he is not a W2 employee, I would think that the Health Insurance premium can be deducted on Schedule A. Any thoughts to that?

Thank you

Lrizzell (talk|edits) said:

7 March 2008
Additional info on last posting regarding HEalth Insurance Premiums. Does the premium come off the income as "other adjustments" instead of Schedule A?

Kevinh5 (talk|edits) said:

7 March 2008
Lrizzell

1) fill out your profile.

2) go back and do more research, you are wrong.

Lrizzell (talk|edits) said:

7 March 2008
Certainly you can do better than that. I am wrong in what regard?

Belle (talk|edits) said:

March 7, 2008
He (we)certainly can 'do better'. But why should we, if you won't fill out your profile?


Yt1300inHtown (talk|edits) said:

7 March 2012

Bump -

51% partner gave me his list of out of pocket expenses to book to p-ship which I have done. 49% partner who lives halfway across the country has "decided" to simply use the UPE route on his personal return to book his ouit-of-pocket expenses.

I do not see in their p-ship agreement any reference to reimbursable expenses but just as a practical matter, I don't think he should just make up new ways of doing things. I had planned to force the issue and make him send me his out of pocket expenses.

Or since the p-ship agreement is silent can they just orally agree to do it however they want and I am over-thinking it?

Ckenefick (talk|edits) said:

7 March 2012
Per RR 70-253, a slew of cases and a slew of PLR's, it's advisable to have the partnership agreement include language indicating that the partnership will not reimburse the expenses in question. Absent such language, you still might be okay, but you might not be depending on how hard the IRS presses the matter upon audit. And I've seen it go both ways.

And note that by booking the expenses for one partner, and presumably specially allocating them to that partner (or are reducing that partner's guaranteed payments by a like amount, perhaps), you're essentially trying to hide the matter, which is fine, but it still doesn't completely address the issue.

Spell Czech (talk|edits) said:

7 March 2012
From my experience, all the IRS has to say is "TP alleges there's an oral agreement that the partner's expenses will not be reimbursed, but he cannot support his statement. Deduction of UPE denied." So much for the "common practice" and the "oral agreement."

Bushmaster (talk|edits) said:

7 March 2012
I think it is a little suspicious for a partnership to state "we won't reimburse x, y, or z expenses". Sort of brings into "is this a necessary business expense" question. I think by default if the other partners don't want to reimburse for it, they don't consider it necessary. Yes, I know there are multiple arguments against this, so save the keyboard.


On another note, do you know how many calls I have gotten from bankers wanting a copy of the UPE tax return?

MarkSC (talk|edits) said:

8 March 2012
As others have said, as a matter of state law a partnership agreement can be oral, so there is no need to have a written policy. If the partner is audited, just get a signed statement from all of the partners stating that the partnership does not reimburse.

Yt1300inHtown (talk|edits) said:

8 March 2012
I have dug up some more information on the topic and am pressing the other partner to turn in his expenses and book them through the partnership. I don't feel like UPE was intended for a partner to just use whenever he doesn't feel like turning in his expenses right now.

Thanks for the replies.

Ckenefick (talk|edits) said:

8 March 2012
don't feel like UPE was intended for a partner to just use whenever he doesn't feel like turning in his expenses right now.

That's kind of the IRS' point and it's a point well taken. Going forward, either have a provision in the PA that says certain expenses won't be reimbursed or simply have the partnership reimburse them (which might involve cash capital contributions and then physical reimbursements for the paper trail).

Don't listen to what MarkSC says. He's relying on the "common practice" or "oral agreement" arguments, and as Spell points out, the IRS often ignores these two facets or finds a way to dispute them. For example, all the IRS would have to show is that one partner got one reimbursement in a given year...and that establishes a practice of reimbursement.

To join in on this discussion, you must first log in.
Personal tools