I'm fairly certain that UPE reduces the overall taxable income as long as it meets all the criteria below. Which mine does. I ended up adding another K-1 named "UPE" to capture the total of the UPE (entered the amount as a negative number) and I now have a separate line on Schedule E, part 2 which shows the UPE as a non-passive loss. I think this is right - just not sure why Turbo tax can't explain the correct way to account for these in the software. The other tax softwares all explain it and have a process for it.
Expenses Incurred on Partnerships
If the partnership would have reimbursed the partner for those expenses, a partner cannot deduct expenses incurred on behalf of the partnership. A partner must pay certain partnership expenses out of his or her own pocket according to the IRS rules for partnership agreement or practice. The partner can then deduct such expenses on the individual tax return. The incurred expenses are claimed on Schedule E when it’s deductible. If a partner was required to pay these expenses under the partnership agreement, unreimbursed ordinary and necessary partnership expenses paid on behalf of the partnership may be deducted on Schedule E as instructed on Form 1040. On a separate line on Schedule E, Part II, enter deductible unreimbursed partnership expenses from activities and put a description “UPE”. The passive activity loss limitations are likely to apply if the unreimbursed business expenses are from a passive activity. At the partner level, the deduction may not be allowed if the partnership agreement specifically states that the partnership has a non-reimbursement policy when expenses incurred outside of the partnership or that certain expenses aren't required to be paid specifically by partners. If there is no direction stated in agreement of the partnership, the routine practice of the partnership will be considered.
The partner’s earned income from the partnership is being reduced by the deductible unreimbursed business expenses. This generally results in a reduction of the partner’s earned income for the purpose of self-employment taxes.
