What Can Be Deducted?

If you are a partner in a partnership, you have probably paid business expenses out of your own pocket because it was the most convenient option. Whether it is office supplies, travel, or a software subscription, paying the expense yourself does not automatically mean you can deduct it on your individual tax return.

The General Rule

Partners may not deduct partnership business expenses they voluntarily pay when the partnership has a reimbursement arrangement or would have reimbursed the expenses upon request.

When Are Out-of-Pocket Expenses Deductible?

Some expenses may qualify as Unreimbursed Partnership Expenses (UPEs) if the partnership agreement or an established, consistently followed partnership policy requires partners to pay certain ordinary and necessary business expenses without reimbursement.

When allowed, these expenses are deducted on Schedule E (Form 1040) as unreimbursed partnership expenses rather than as itemized deductions on Schedule A.

Examples of expenses that may qualify include:

• Professional licensing fees required for the partnership business.
• Required continuing education.
• Business mileage
• Office supplies
• Certain home office expenses may qualify if the partnership requires the partner to maintain a home office for partnership business and the home office independently satisfies all requirements of IRC §280A. (home office rules)

Although the partnership agreement is an important factor, it does not by itself determine deductibility. IRS rules govern whether an expense qualifies as a deductible unreimbursed partnership expense.

What Cannot Be Deducted?

You cannot deduct expenses that:

• The partnership would have reimbursed if you had requested reimbursement.
• Were paid voluntarily without being required under the partnership agreement or an established partnership policy.
• Are personal rather than ordinary and necessary business expenses.
• Have already been reimbursed.

“If an expense was reimbursable under the partnership agreement or an established reimbursement policy, a deduction generally is not allowed.

Keep Good Records

If you deduct unreimbursed partnership expenses, maintain documentation such as:

• The partnership agreement or written reimbursement policy.
• Receipts and proof of payment.
• Mileage logs, when applicable.
• Records showing the business purpose of each expense.

Good documentation can make it much easier to substantiate your deduction if questions arise later.

Plan Ahead

Before paying business expenses personally, understand your partnership’s reimbursement policy. Some partnerships reimburse all ordinary and necessary business expenses, while others require partners to pay certain costs themselves.

If you are unsure whether an expense qualifies as a deductible unreimbursed partnership expense, ask before filing your return. Proper planning can help you maximize allowable deductions while avoiding costly mistakes.

Contact Us Today