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Monday, April 2, 2018

Un-reimbursed Partner Expenses


Under the general rule, a partner in partnership is NOT allowed to deduct un-reimbursed partnership expenses (partnership business expenses paid by the partner that the partner is not reimbursed for) on his/her individual tax return.

An exception applies when there is a provision in the partnership agreement requiring the partner to pay the specific expenses.

Each partner's Schedule K-1 should indicate in Box 20, Code Z along with a statement that the amount is for “UPE”.

Allowable expenses are deducted on Part II, Schedule E, Form 1040 of the partner's individual income tax return.

Report allowable un-reimbursed partnership expenses as a separate item on Line 28, Schedule E. Enter “UPE” as the name of the line item, then list the amount on (h) of line 28.

The “UPE” amount will be deducted from partnership income and will also reduce the net income subject to self-employment tax.

Audit Tip:

Include the requirement that the partners pay the specific expenses in the written partnership agreement to help ensure deductibility in case of an IRS Audit. Also include wording that the partnership will not reimburse the partners for the expenses.

This article was written by Donald M. Scherzi, CPA, CFP, LLC
Mike Lupo, SCORE Counselor
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