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.
