Does UPE reduce self-employment income and therefore SE tax?

[Captain Kurt]

Does UPE reduce my self-employment income and therefore my SE tax?  I have home office rent exp that I can take on my multi-member LLC as unreimbursed partnership expenses . . . or I can submit my home office rent exp as a reimbursement and show the rent expense on the LLC / partnership return. Do both of these reduce my self-employment taxable income or just the latter?

[JulieR · Accepted solution]

Yes, UPE does reduce self-employment income and therefore SE Tax.  For your expenses to deductible as UPE, however, you must be "required to pay these expenses under the partnership agreement". If they are, you may report the expenses on Schedule E (Partnership Income) as "Unreimbursed Partnership Expenses" (UPE). In this case, TurboTax will ask you about UPE with follow-up entry at the end of the Schedule K-1 input.

But if the partnership agreement specifically states that the partnership has a non-reimbursement policy when expenses are incurred outside of the partnership or that it does not specifically require partners to pay for certain expenses, the deduction may be disallowed at the partner level. If this is the case you would need to choose the latter option of payment and reimbursement.  This method, however, would not reduce your self-employment tax on your self-employment income (Guaranteed Payments).

[Edited 02.24.2019 | 9:32 AM pst]

[JulieR]

Please see edited answer.

[winterescape]

I am not sure that the current TT software (4/14/19 for 2018 tax year) actually treats my K-1 income this way, where it calculates my SE tax on the SE worksheet it is taking the full K-1 box 1 amount and entering it on line 2, it is not first subtracting UPE before calculating my tax.  H&R block tax software appears to subtract UPE before the SE tax calculation aligning with your description and my understanding of how it should be calculated.