Unreimbursed Partner Expense - Treatment for Investment Partnership

[dannyboy153]

Thanks in advance for the support from the community and TurboTax experts.

I just formed a General Partnership last year and, of course, this is my first year filing form 1065.  This is an investment partnership where capital gains (K1 Part III lines 8 and 9a) and Dividends/Interest are recorded.  No "ordinary income" (K1 Part III line 1).

I make all the investment decisions; read company financials, make buy/sell decisions, list to earning reports, etc.  So this is not "passive" for me.  I have Unreimbursed Partner Expenses and when entering it in the K1 section (per this suggestion https://ttlc.intuit.com/community/tax-topics/help/can-i-deduct-unreimbursed-partnership-expenses/00/...), it is treated as passive, flows to form 8582 and is disallowed because I do not have any passive income (capital gains only).  

So my question, in TurboTax, should I ignore the portion where it asks if I have UPE for the partnership and just enter a second "dummy" K1 and call it UPE?  How would I enter this expense?  Stated another way, IF I had a K1 for UPE, would I enter this expense as a Part III line 1 Ordinary Loss?

[ZoltanB45]

Creating another K-1 labeled UPE  associated with the EIN of your entity is the way to record those expenses.  When you create the K-1, you will be asked a sequence of questions. Here will be how to proceed.

1. With type of activity, select Business-Box 1. 
2. materially participated
3. enter the ordinary loss in Box 1

[Rick19744]

In general, a partner cannot deduct expenses paid on behalf of the partnership if the partnership would have reimbursed the partner.

Should you win the audit lottery, you need to make sure your partnership agreement indicates that the partnership has a non-reimbursement policy.

In addition, since this is an investment partnership, you also have the hurdle of classifying the expenses:

• Are these expenses ordinary and necessary trade or business expenses under Section 162, or
• Are these investment related expenses
• If investment related, then no deduction as those were eliminated for tax years 2018-2025
• Claiming these as trade or business under Section 162 will be risky, and if audited, I am sure the IRS will challenge this position.

In either case, I would put them on line 13 of the K-1 entry, with a code W if wanting to claim under Section 162 and code L for deductions related to portfolio income.  However, if you are going to take the position that the expenses are investment related, I wouldn't even bother with the 2nd K-1 as that means they are not deductible.

[dannyboy153]

Thanks for the quick reply.  These were travel expenses and necessary to get/meet clients.  Would there be reasons why travel to meet potential new clients would not count for section 162?

[Rick19744]

Yes.  Your partnership does not generate ordinary income; the partnership generates investment income (capital in nature).

As such, you have a hurdle of meeting the Section 162 trade or business expense; there is no clear cut definition.  Always facts and circumstances.

I'm not telling you one way or the other, just providing some guidance for you to make the decision and understand any risk with one position over another.

[dannyboy153]

Thanks Rick. Truly appreciate your guidance and I will follow your recommendation on the K1 of the “UPE” entry in TruboTax.