Let’s say you’re part of a partnership or a multi-member LLC taxed as a partnership. You have probably picked up the tab for things like business travel, meals, professional dues, or continuing education—even paid for a conference with your own card. While it may feel noble or just convenient to front these costs, if you do not handle the tax side correctly, you could end up doing yourself—and your bottom line—a disservice.
So how do you make sure the IRS does not treat you like a generous but unwise donor to your own business? There are two paths:
⦁ Get reimbursed by your LLC or partnership, or
⦁ Deduct the expenses yourself as unreimbursed partnership expenses (UPE).
Let’s break down both—no accounting degree required.
Option 1: Reimbursement (The Cleanest Route)
If your LLC or partnership allows it, the best route is usually to ask for reimbursement. Why? Because when the business reimburses you for a valid expense:
⦁ The business gets a deduction,
⦁ You get your money back,
⦁ And you avoid the paperwork mess of claiming it on your personal return.
To keep it clean with the IRS, follow what is known as an accountable plan—a fancy way of saying “don’t make it look like a personal slush fund.” This means:
⦁ Submitting receipts and records that show the expense was legit and business-related,
⦁ Doing it in a timely fashion (don’t dig up last year’s conference receipt next Christmas), and
⦁ Paying back any excess reimbursements.
Reimbursed expenses are deducted by the partnership on its tax return (Form 1065, Line 21) and do not get reported as income to you. It’s efficient, IRS-friendly, and partner-equitable.
Option 2: Deduct It On Your Personal Tax Return
Now, if your business does not reimburse you, you may still be able to deduct the expense—but only if certain conditions are met. Specifically:
⦁ Your partnership or LLC agreement must say it will not reimburse you, or
⦁ There must be a documented, consistent practice of not reimbursing those expenses.
No agreement and no clear precedent? No deduction.
In tax court, even medical professionals have not been spared. One case involved a partner paying out-of-pocket for business lunches and trying to deduct them personally—only to be denied because there was no written policy or consistent business practice to back it up. Bottom line: Without something in writing, the IRS might treat that meal as more of a personal splurge than a deductible expense.
If you qualify to deduct it personally, list your unreimbursed partnership expenses on Schedule E (Form 1040), Part II. Clearly label them “UPE” (Unreimbursed Partnership Expense) and do not lump them in with other partnership income or losses.
Bonus tip: These deductions reduce your self-employment income, which can lower what you owe in Social Security and Medicare taxes. Just know they also reduce your qualified business income (QBI) so your 20% QBI deduction might shrink a bit. Still, the tax savings usually outweigh that downside.
Which Is Better?
Let’s run a quick comparison that shows why a reimbursement might make one partner look like a hero… at the expense of the others.
Meet Rachel, a partner in a three-person architecture firm that is organized as an LLC and taxed as a partnership. Rachel owns 33% of the company.
She personally pays $10,000 to attend a week-long green building symposium in Amsterdam—an expense that’s 100% legitimate and clearly tied to the firm’s services. Now she has two options:
Option 1: Rachel deducts the expense on her personal return (Unreimbursed Partnership Expense or UPE).
Because she paid out of pocket and was not reimbursed, Rachel claims the $10,000 as UPE on her personal tax return. Assuming she is in the 32% tax bracket, that deduction saves her $3,200 in federal income taxes. Her out-of-pocket cost for the trip is now $6,800.
Her partners? Financially unaffected. They did not get hit with any share of Rachel’s expense.
Option 2: Rachel submits the expense for reimbursement from the LLC.
Now the LLC reimburses Rachel for the full $10,000. She is not out any money at all—great for her! But the business deducts the $10,000 on its tax return, which reduces the net profit for all three partners.
Here’s how it plays out:
⦁ The partnership’s taxable income goes down by $10,000.
⦁ As a result, each partner’s share of that $10,000 reduction is proportional to their ownership. Rachel’s partnership income is reduced $3,300 of it (33% of $10,000), and the same for her two partners.
⦁ That means each of them “pays” for part of Rachel’s trip in the form of lower taxable income passed through from the business.
Put another way: by having the company reimburse her, Rachel got a free trip, and her partners effectively subsidized $6,700 of it.
Key Point
Reimbursement might seem like a win—but unless the partnership and partners benefit equally from the expense, it may not be the most equitable choice. This is exactly why your LLC or partnership agreement needs to spell out which types of expenses are reimbursable and which ones are not.
If partners are expected to cover some costs themselves—like professional development, travel, or home office supplies—it needs to be written down. That way, no one feels like they are footing the bill for someone else’s career boost (or trip to Europe).
Set It in Stone (or At Least in the Agreement)
Want to avoid future confusion—or worse, an IRS audit? Update your LLC or partnership agreement. Clearly state:
⦁ Which expenses will (and will not) be reimbursed,
⦁ If members can personally incur and deduct expenses that benefit the business.
Good news: You can amend your agreement as late as the due date for the business’s tax return (not including extensions) and still have it apply to the entire year.
If you would like to discuss LLC/partnership expenses, contact Saunders Tax & Accounting at www.SaundersTax.com or call us at 301-714-2071. Open Monday – Thursday 9 am to 5 pm. Awarded the Hagerstown Chamber of Commerce “2023 Small Business of the Year” and Hagerstown Hotlist 2024, we have been providing a Less Taxing Life and More Prosperous Solutions since 1984!
