Unreimbursed partnership expense

[danielle-51]

Can you claim as an unreimbursed partnership expense an item that might have otherwise had to be depreciated if the partnership had paid for it?  An example would be a used piece of machinery or lumber for a new fence. So if you spent four thousand dollars on tools or equipment can you claim as a UPE the entire four thousand dollars? If not, how does it work exactly?

[Opus 17]

[…]

[Anonymous_ · Accepted solution]

---

@danielle-51 wrote:

.....if you spent four thousand dollars on tools or equipment can you claim as a UPE the entire four thousand dollars? If not, how does it work exactly?

---

You can deduct unreimbursed ordinary and necessary partnership expenses you paid on behalf of the partnership on Schedule E if you were required to pay these expenses under the partnership agreement. You can only deduct unreimbursed expenses on Schedule E that are trade or business expenses under section 162.

See https://www.irs.gov/instructions/i1040se#en_US_2022_publink24332td0e1927

I am not certain precisely how the foregoing would be applicable to an asset purchased that would be required to be capitalized, however, so I will page @Rick19744.

[Rick19744]

The facts are very limited:

• Why is the partner incurring these type of expenses?
• Is the partner required to incur these type of expenses; the partnership agreement mandates the expense.
• Maybe a few more facts would help clarify.

[danielle-51]

It was mandatory because at the time of purchase, there was not the cash flow in the business to purchase these things. So this partner, and we are all family, incurred the cost himself, for the good of the business,  not expecting anything in return. He knew the need was there for these things and was willing to buy them himself.

The biggest item was a piece of machinery, that I would assume would have to be depreciated. It cost around four thousand dollars. The other things are tools, and lumber, etc, to build a new fence around our business. I had never even heard of unreimbursed partnership expenses until a few days ago through a reply to one of my questions. We still cannot reimburse him, and would not have these things had he not purchased them himself for the good of our shop. He is an active member-manager of our LLC. I just need help understanding all of this. Thank you.

[Rick19744]

Thanks for the additional details.  I don't believe the items purchased qualify as unreimbursed partner expenses (UPE).  A partnership agreement should include details as to when and what expenses will not be reimbursed.  Generally these types of expenses are:

• Malpractice insurance
• Educational expenses
• Work clothes, etc.

What should happen in this case, is that the partnership should include a loan on the books, with interest, and pay this partner back.  The other option is that the funds spent should be included in the partners equity contribution; which would change everyone's equity.

Regardless of the option chosen, the partnership would then be eligible for the depreciation.

Based on the facts, the items technically belong to the partnership, and as such, the partnership takes the depreciation.

These types of scenarios are not uncommon with small businesses, and are handled as noted above.

[danielle-51]

Thank you, Rick. That gives understanding as to how it all should work.

So just because a partner has used their own personal money to purchase what would have been an expense for the business, does not mean that automatically qualifies as an unreimbursed partnership expense on their individual tax return. It has to meet the requirement of what one is expected to pay, not necessarily what one chooses on his own to pay for, even if it is for the good of the business.

The examples you gave helped, like work clothes, education, etc,. I appreciate your time.

[Rick19744]

I believe you have a better understanding.

You are welcome.