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Partnership Related Expenses: When are Partners Expected to Incur the Expenses?

Typically, partners are not personally liable for partnership-related expenses, but there are exceptions to this rule. For example, partners in service partnerships may incur entertainment expenses while developing new client relationships. They may also incur expenses for transportation to and from client meetings, professional publications, continuing education, and maintaining a home office.

So, how are these expenses treated on your taxes? Let’s take a look.

General Rule of Thumb:

As long as the expenses are the type a partner is expected to pay without reimbursement under the partnership agreement or firm policy (written or unwritten), the partner can deduct the expenses on Schedule E of Form 1040. Conversely, a partner cannot deduct expenses if the partnership would have honored a request for reimbursement.

Additionally, a partner’s unreimbursed partnership business expenses should generally be included as deductions when calculating the partner’s net income from self-employment on Schedule SE.

Let’s look at an example. Say you’re a partner in a local architecture firm. Under the firm’s partnership agreement, partners are expected to bear the costs of soliciting potential new business except in unusual cases where attracting a large potential new client is deemed to be a firm-wide goal.

In an attempt to attract new clients this year, you spend $3,000 of your own money on meal expenses. You receive no reimbursement from the firm. So, on your Schedule E, you should report a deductible item of $1,500 (50% of $3,000). You should also include the $1,500 as a deduction in calculating your net self-employment income on Schedule SE.

  1. Entertainment Expenses: Generally, entertainment expenses are no longer deductible. However, certain meal expenses incurred during business-related entertainment may still be partially deductible if they meet specific criteria set by the IRS.

  2. Transportation Expenses: Transportation expenses incurred for business purposes, such as traveling to and from client meetings, are typically deductible. This can include the cost of public transportation, mileage for using a personal vehicle, and related expenses like parking and tolls.

  3. Professional Publications: Subscriptions to professional publications that are directly related to the partnership’s business are generally deductible as a business expense.

  4. Continuing Education: Expenses for continuing education that maintains or improves skills required in the partner's trade or business are typically deductible. This can include costs for courses, seminars, and related materials.

  5. Home Office: If a partner uses part of their home exclusively and regularly for business purposes, they may be able to deduct expenses related to the home office. This can include a portion of rent or mortgage interest, utilities, insurance, and repairs.

Each of these deductions is subject to specific IRS rules and limitations, and proper documentation must be maintained to substantiate the expenses.

To reiterate, a partner cannot deduct expenses if they were eligible for reimbursement by the firm. To avoid issues with the IRS, partnerships should establish a written firm policy that clearly outlines what will and won't be reimbursed. This ensures that partners can confidently deduct their unreimbursed business expenses without confusion. The written policy should apply to members of LLCs that are treated as partnerships for federal tax purposes since those members count as partners under tax law.


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