PARTNER UNREIMBURSED BUSINESS EXPENSES
Unreimbursed business expenses are ordinary and necessary expenses incurred by a partner which are not reimbursed.
Individual partners may deduct unreimbursed business expenses that are:
1-Ordinary and necessary
2-Paid or incurred during the tax year, and
3-Are for carrying on a trade or business
An ordinary expense is one that is common and accepted in your field of trade, business, or profession.
A necessary expense is one that is helpful and appropriate for your business.
A partner cannot deduct expenses incurred on behalf of the partnership if the partnership would have reimbursed the partner for those expenses.
Put It In Writing In The Partnership Agreement
The IRS ruled that if, under the PARTNERSHIP AGREEMENT, a partner MUST pay certain partnership out of his or her own funds, he or she can deduct such expenses on their federal individual income tax return.
Thus, unreimbursed ordinary and necessary partnership business expenses paid on behalf of the partnership may be deducted IF a partner was required to pay these expenses under the PARTNERSHIP AGREEMENT.
NOTE: I recommend that the partnership agreement clearly spell out which partners and each applicable expense to avoid any possible inconsistency.
When deductible, these expenses are claimed on Schedule E, Form 1040, Part II, Page #2 with the description "UPE".
Deductible unreimbursed partner business expenses reduce a partner's earned income from the partnership which will also reduce a partner's earned income for self-employment tax purposes.
If the activity is a passive activity for the partner, the passive activity loss rule limitations are likely to apply.
Keep Records
As for all expense deductions, the partner must keep accurate and complete records of each expense in case of an IRS tax audit.
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