Deductibility of Unreimbursed Partnership or S-Corporation Expenses

by

In a partnership, profits and losses generally pass through to their partners.  Typically, the majority of expenses are paid for by the partnership itself.  What happens, though, when a partner personally incurs a partnership expense that is not reimbursed by the partnership?

Generally, a partner may not deduct expenses related to the partnership on his or her individual income tax return.  However, an exception applies when there is an agreement among partners that requires a partner use his or her own funds to pay a partnership expense.  This agreement allows the expenses paid for by the partner to be fully deductible without limitation on their individual income tax return, on Form 1040, Schedule E.  For partners of professional service organizations, deducting a qualifying unreimbursed expense may serve not only to reduce federal and state income taxes, but also to reduce income subject to self-employment tax.

In order to allow your partners to be able to deduct their unreimbursed expenses, we recommend that you review your partnership agreement for a provision described above, requiring partners to use their personal funds to pay partnership expenses.  If such a provision does not exist in your partnership agreement, a simple amendment may be worthwhile to “audit protect” your partners that may be deducting unreimbursed expenses.

Adequate records of all unreimbursed expenses must be maintained in order to claim a deduction.  The following information should be maintained with the documentation for each expense:

  • Date of the expense
  • Place where the expense was incurred
  • The business purpose of the expenditure
  • The amount of the expense

In contrast, there are no similar rules allowing for the deduction of unreimbursed shareholder expenses for organizations operating as S-Corporations.  An S-Corporation’s expenses are solely deductible at the corporate level.  Therefore, unreimbursed expenses incurred by S-Corporation shareholders are not deductible.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: