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Deducting Partner Expenses

A frequent question that arises is how to handle the deductible business expenses of individuals in a partnership. We often have clients claim they have business travel or other expenses they paid in connection with a partnership. Generally, the partnership should reimburse each partner for any allowable expenses; those expenses would then be deducted on the partnership’s 1065 return.

If the partnership does not reimburse these expenses, the following instructions from Part II of Form 1040, Schedule E apply: “You can deduct unreimbursed ordinary and necessary expenses you paid on behalf of the partnership if you were required to pay these expenses under the partnership agreement.”

The inference here is that, if the partnership agreement does not require the partner to pay expenses, those expenses are not deductible.

If they are deductible, the expenses are claimed on Part II of Schedule E. See line 27 (page E-11) of the 2021 Schedule E instructions to learn how to fill in the entry on line 28 based on whether the activity is passive or active. Be sure to check the “yes” box on line 27 to indicate that there are unreimbursed partnership expenses. Refer to your software’s instructions on how to achieve the desired result.

Whatever you do, do not adjust the K-1. That is the incorrect place to do so; in addition, not using the numbers from the filed K-1 necessitates that Form 8082 (Notice of Inconsistent Treatment) also be filed.

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