Unreimbursed Partnership Expenses (UPE) not deducted for Limited Partners

[sky3845]

I am a Limited Partner of a law firm who received K-1 this year.

When I chose Limited Partner from interview, Turbotax won't deduct any of my Unreimbursed Partnership Expenses (UPE).

I answered that I am materially participating and also checked both "I am required to pay supplemental business expense…" and "All of my investment in this activity is at risk" buttons.

However, no matter what I do in the UPE section, Turbotax won't deduct any taxes.

Turbotax deduct those expenses only if I change my partnership to General Partner.

Is this working as intended? Can Limited Partners not claim UPE at all in Turbotax?

[DawnC]

Yes.  For a partner to be permitted to deduct unreimbursed partnership expenses on his or her personal return both of the following elements of this exception must be met: 

(1) the partnership agreement must require the partner to pay such expenses without having a right to be reimbursed; and 

(2) the claimed expenses must be able to be substantiated in the case of an audit by the Internal Revenue Service.

After you indicate that you are required to pay expenses and all your activity is 'at-risk', you will proceed to enter your expenses.   Go through the entire section before checking Schedule E.   There is a question Did you receive any reimbursement? that has to be answered.    Proceed through the section until you get back to the summary page.

To verify the expenses are being included in the Self-Employment tax calculation, view the Schedule E - Suppl Exp - P page in your tax return.   You should see the total unreimbursed expenses on Line 18.   Underneath that, you should see where those expenses are subtracted from the K-1 net earnings.   The net amount is on Line 22 and is used to calculate your self-employment tax on Schedule SE.    

[sky3845]

Thank you so much for the reply!

It was very helpful.

In that case, I think online Turbotax has a bug. If possible, could you file a bug to engineering team?

Currently, online version for TY2022 is not deducting *any* UPE when I chose "Limited Partner or other LLC member" from the 3rd interview question (Choose the Type of Partner).

[AliciaP1]

It would be helpful to have a TurboTax ".tax2022" file that is experiencing this issue.

You can send us a “diagnostic” file that has your “numbers” but not your personal information.  If you would like to do this, here are the instructions: 

In TurboTax Online, go to the black panel on the left side of your program and select Tax Tools. 

1. Then select Tools below Tax Tools. 
2. A window will pop up which says Tools Center.  
3. On this screen, select Share my file with Agent. 
4. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number. 

In TurboTax CD/Download versions, go to the black panel on the top of your screen and select Online. 

1. Scroll down to and select Send tax file to Agent. 
2. You will see a message explaining what the diagnostic copy is.  Click send through this screen and then you will get a Token number. 

Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.   

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution.

@sky3845 

[mamarini5]

I am having the same issue as the original post mentioned! The UPE works fine in my NJ state return for computing self-employment income but is not working in the Federal return.

[PatriciaV]

Please clarify what type of entity is involved. Is this an LLC? And S-Corp? Are you an owner/officer or an employee? There are some limitations on claiming UPE that are based on these answers.

[mamarini5]

I'm a limited domestic partner in the partnership. My K-1 has amounts in 4a, 4c and 14A.

[PatriciaV]

This experience has been reported and is under investigation. You may sign up for updates here: Why aren't my meals 100% deductible for my K-1?  Even if this doesn't seem to apply to your situation, the form & calculations will be updated in TurboTax when the investigation is complete.

[attymwilson]

I am a partner in a law firm with guaranteed payments reflected on our K-1.  The law firm is an LLP.  I am having precisely the same issue as the original poster of this thread.  TT is showing my Schedule E supplement listing the UPE; I checked the boxes confirming that our partnership agreement requires me to pay these expenses out of pocket and that I was not reimbursed; and Schedule E p2 line 27 is checked "Yes." However, the UPE is not reflected in line 28.  Will this be fixed before the tax deadline of 10/16/23?

[Mike9241]

there is nothing in Rev Rul 70-253 or IRS instructions for schedule E that says to deduct UPE you have to materially participate. however, there is a special rule for a passive activity. if you are an LP you are subject to IRC 469(h)(2)

it provides that “no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates,” so technically you not supposed to check the materially participated box in the Turbotax k-1. 

IRS schedule E instructions regarding UPE

Unreimbursed Partnership Expenses

Don't report unreimbursed partnership expenses separately if the expenses are from a passive activity and you are required to file Form 8582; otherwise, do the following

• If the expenses are from a passive activity and you are not required to file Form 8582, enter the expenses related to a passive activity on a separate line in column (g) of line 28. Do not combine these expenses with, or net them against, any other amounts from the partnership.

• Enter “UPE” in column (a) of the same line.

so there is a bug in Turbotax because without materially participated checked in the Turbotax K-1 the UPE flows to form 8582 where it stays rather than flowing to column G on line 28 per the above instructions.  

and if you check it, UPE flows to column i.  

********************

Thank goodness for LLCs.

***************************

there is another problem that is created even if the box is checked. the income for SE tax purposes is supposed to be reduced by the deductible UPE  (the net is on line 22 of the UPE form) but Turbotax only carries the k-1 number (line 14a) to the SE schedule so you'll have to adjust it yourself.  The net QBI is computed net of the UPE so that's correct.  

******************************** 

i find no mention of a limited partner not being able to deduct UPE. however, a tax reference book put out by Thomson Reuters' says the following: General Partner's Unreimbursed Expenses. a general partner may incur business expenses not reimbursed by the partnership. .... These expenses can be deducted on page 2 of schedule E. There is no mention of UPE for a limited partner. the IRS instructions for schedule E are technically unofficial and do not constitute tax law.  

[attymwilson]

Mike --

Thanks for this, very helpful.  I see now another problem in trying to implement your work-around.  My income from the LP is guaranteed payments, box 4a.  In TT, there is a "materially participated" option for box 1 (ordinary business income) and box 2 (net rental real estate income), but none for box 4a.  Any suggestions for what I should do?  Things that come to mind:

--Call my income ordinary business income even though the K1 says otherwise, but I wonder if that will screw up the return in other ways that I don't know about;

--Correct this by hand with manual override

--Enter a new K-1 into TT and call it "UPE" so it gets onto line 28 Sch E

Thanks again

[Rick19744 · Accepted solution]

A couple of comments:

• Not sure how you entered the basic information in TT, but in most states an LLP is a type of general partnership.
• So in my mind, I would indicate in TT that you are a general partner and that should solve the problem based on the original posters comment.  
• I would not recommend overrides as TT will not be able to be efiled and paper filing only leads to a potential quagmire.
• Material participation has nothing to do with line 4a, as a guaranteed payment is essentially the same as a wage; earned regardless of the income of the partnership.

[attymwilson]

I am not a general partner, and as a financial lawyer, I don't like the idea of holding myself out as one on a tax return.   I did override entries.  Not following your quagmire point--what's the problem with paper filing? Thank you.

[Rick19744]

Absolutely you can paper file.

As a tax partner, I've been doing this for a long time, so I am comfortable in what I stated.

What's the problem with paper filing?

• Paper returns sit around unprocessed for a longer period of time
• Potential for human input error
• Higher possibility of scrutiny since there is more human contact

My k-1 from my LLP reflects that I am a general partner.
You are welcome.