Unreimbursed Partnership expenses

[mamarini5]

I have Turbo Tax deluxe and when I enter my K-1, it asks me if I have unreimbursed business expenses, which I do. I entered my vehicle expenses, but they are showing on form 1065 as passive activity losses suspended for the current year. I can't figure out how to get them to show as expenses for the current year. Perhaps I am entering them incorrectly, or do I need a different version of TurboTax?

Thanks in advance for any help you can provide.

[JamesG1]

In TurboTax Premier, I am able to report a partnership K-1 with unreimbursed business expenses.  The expenses are reported as 'UPE' in Part II Page two of IRS Schedule E.  

The losses and expenses may be limited by the passive activity loss limitations on IRS form 8582 Passive Activity Loss Limitations.

Reporting of K-1 income and expense may not be available in the Deluxe version of TurboTax.

@mamarini5 

[mamarini5]

I just upgraded to Turbo Tax home & Business, assuming it would allow for my unreimbursed partnership expenses to be recognized on schedule E.  Schedule E, supplemental business expense worksheet, is showing the UPE and reduces my net self employment income by the UPE. But, on the 1040, the partnership income is coming over without any adjustment for the UPE, so it's computing federal tax on the gross income amount instead of the net self employment income. I am answering yes to the question "does the partnership require you to pay any expenses out of your pocket?" Could I be missing a step to allow the net self employment income to flow through to the 1040?

My state return (NJ) is correctly picking up the UPE and showing the net amount as taxable income. So I can't figure out why the federal is not doing the same.

Any additional help would be appreciated.

[Vanessa A]

If your net self-employment income is being reduced, then your overall income on line 9 of your 1040 would also be reduced.  

You will not see a change on your K-1 worksheet, only on the Schedule E worksheet. Then you will see the number from the Schedule E worksheet on line 5 of Schedule 1.  This will then flow to line 8 of your 1040.  Then your line 9 will be over all lower. 

Line 8 on your 1040 will be a sum of all of your other income from Schedule 1.  

When I walk through the steps, I see all the proper changes and reporting in my return.  If you are not, then you can try deleting the Schedule E worksheet and looking at your numbers, then re-entering them.  But, before you do that start with looking at the lines mentioned above.  You can also use the Data Source feature to see where the numbers are coming from.  To do this hover over line 8 on your 1040, click the magnifying glass then repeat until you back track through all the sheets and see all the numbers that compose line 8. 

[mamarini5]

On the Schedule E worksheet (Supplemental Business Expenses worksheet), line 22 is showing my net self employment income, which is the earnings from my K-1 less the Unreimbursed partnership expenses. However, it looks like Schedule E. pg 2, line 41 is what is flowing to Form 1040, schedule 1, line 5.  This amount is the earnings from my K-1. The UPE are not showing on Schedule E, pg 2 as a loss in column (i), which I think is how UPE are reported.

Turbo Tax is treating the UPE as passive losses, which are disallowed. I can't figure out why, because UPE are not passive losses. Maybe I am entering something incorrectly?

[mamarini5]

Another thought - is there a glitch in TT? I read another post where someone's return was rejected because of an issue with UPE and that a fix in TT was expected by 4/14/23. 

[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.

@mamarini5 

[mamarini5]

Thanks. Token number is 1122182.

I added the UPE as "other SE non farm profit or loss" on the SE adj worksheet to allow the self employment tax to be computed on my net profit from the partnership. I just need to figure out how to get the UPE to apply against my K-1 earnings when computing my taxable income on the 1040.

[AliciaP1]

Your UPEs are not being deducted correctly because you have marked yourself as a limited partner (passive) rather than a general partner.

To correct this you need to revisit the Schedule K-1 entry and change your Type of Partner on the 3rd screen of the entry.

@mamarini5 

[mamarini5]

I changed it to general partner but the UPE are still not being deducted from my taxable income on the 1040.  Changing to a general partner does change the "non farm partnership profit or loss" on the SE adj worksheet, which flows to the Schedule SE-T. But the UPE is still not adjusting taxable income on the 1040.

[RobertB4444]

Unreimbursed Partner Expenses don't reduce the taxable amount that is transferred from your K-1.  They do reduce the amount that is used to compute your self-employment income.  So it sounds like the system is doing it correctly as long as the reduced income is what is being used to compute your self-employment tax.  

@mamarini5 

[mamarini5]

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.

[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: 

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. 
3. 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.

@mamarini5 

[mamarini5]

Token number 1125698

[DawnC]

Looking at the first token you provided (one K-1 with UPE included), on the Type of Activity screen, you selected Other, which indicates investment (nonbusiness) activity, so TurboTax doesn't generate the Did You Participate question.  When I changed this, I got that necessary question.   Also, you don't have the All Investment is At Risk box checked, so you have Form 6198 included with your Sched E.    You do have meals expense on there which are only being deducted at 50% when it should be 100%.   That should be updated this week.

The 2nd token file with the separate K-1 for the UPE has the expenses both deducted and suspended.   So, the way you originally had it was correct, but you need to make those changes.  You may want to delete both K-1s re-enter just the one with the UPE and wait to file until after the meals are updated.   

Please see this discussion if this income is truly an 'other' nonbusiness activity.    The OP did what you did, but see Rick19744's responses.    TurboTax does correctly subtract the UPE if you materially participate.  

General Partners can reduce SE income by Unreimbursed Partnership Expenses if it is in the Partnership Agreement.