LLC Partnership Members Deduction

[K Moust]

Hi - 

I have a newly established LLC partnership (partners are me and another person). We run the business virtually. I have a dedicated office in my home for the business.

1- How do the deductions for utilities and space work? In other words, can my deductions be different than my business partner deductions (each of us have their own homes, utilities, phones etc.  and expenses for space and utilities are paid from our personal accounts separately). 

2- Should these expenses be listed on the K-1 schedule generated by the business and then applied on our personal tax filing? or there is no need to list these expenses on our business report (an hence will not be reflected on the K1 schedule) as each have different expenses which will lead to different deductions? 

Best, 

[Critter-3]

1- How do the deductions for utilities and space work? In other words, can my deductions be different than my business partner deductions (each of us have their own homes, utilities, phones etc.  and expenses for space and utilities are paid from our personal accounts separately).    Expenses the partners are expected to pay personally and are agreed on by the partnership are reported on the Sch E page 2 on the personal tax return ONLY.

2- Should these expenses be listed on the K-1 schedule generated by the business and then applied on our personal tax filing? or there is no need to list these expenses on our business report (an hence will not be reflected on the K1 schedule) as each have different expenses which will lead to different deductions?  On the personal return ONLY.

If this is your first filing of the 1065 I highly recommend you seek local professional guidance to get educated on all the rules.  And if you are trying to complete the 2021 form 1065  then I hate to tell you the return is now LATE and accruing a penalty at the rate of $200 per partner per month since March ... and a local pro can help you with that as well. 

[Mike9241]

It would seem the partnership has not paid the expenses and therefore can not deduct them

hope your buddy also has a dedicated space for the business because he is subject to the home office rules 

so it comes down to what you agree to.

here are your options

a) Deduct the cost as an unreimbursed partner expense (UPE), or
b) Get reimbursement from your partnership via an accountable plan 

a) Unreimbursed Partner Expense
As a partner in a partnership, you generally can’t deduct any of the partnership expenses on your individual tax return—the partnership should pay for and deduct its own business expenses.

But if your partnership agreement or business policy forces you to pay for the expense out of pocket with no reimbursement available, then you can deduct the business expense in full on your individual tax return as Unreimbursed Partner Expenses (through the partnership K-1). Turbotax allows this. note the need for a partnership agreement or business policy which should be in writing and signed by both partners. 

Because the UPE is a trade or business expense, it also reduces your self-employment tax. You can deduct your full home-office expense even when the partnership has a tax loss for the year. Use Form 8829 to calculate the amount (but don’t include it with your tax return). 

b) Accountable Reimbursement Plan
The other option for realizing your home-office deduction is to have your partnership reimburse you for your home-office expenses under an accountable plan. This should be in writing 

When your partnership does this, the reimbursement is tax-free to you, the partner, and tax-deductible to the partnership, which reduces your share of the taxable net income from the partnership.
Here are the steps to obtaining the reimbursement:

a) Each of you uses Form 8829 (including depreciation)  to calculate the amount this can be done annually but the partnership can not deduct the reimbursement until it is actually paid to the partners. reimbursement can be as frequent as you agree to. 
b) Each submits the reimbursement request with appropriate documentation within the time frame required by your partnership’s accountable plan policy.
c) the partnership issues the reimbursement check 

if you each want to bear your own expenses the UPE option is probably the best choice. 

each of you will need to keep track of the depreciation taken because if you sell your homes at a gain, the depreciation taken must be recaptured before the home sale exclusion can be applied. the tax basis of your home is reduced by the depreciation deduction. 

[Carl]

@Critter-3 just curious why you state home office expenses are reported on SCH E.  I see nothing in the post that clarifies the business rents out assets, or even manages rental assets. I think you meant to type SCH C?  That can't be right either, since the partnership files a 1065 return. Maybe you did what I did in the past, and posted the right response, but to the wrong thread?

[Critter-3]

@Carl 

UPE is reported on page 2 of the Sch E.

[LSBTeam]

Thank you for the detailed answer. The business is not doing any $$ yet to reimburse me but it is in the agreement that each will have their own space and pay for it. 

My partner has their space but it is shared with parents and hence they do not pay for it. 

@Critter-3 does what you mentioned apply for other expenses that are covered from personal accounts like: advertising costs, buying product samples, etc... ?

[Critter-3]

First you and your partner really should sit down with a local tax pro who can educate you on the venture you are in and what can and cannot be done.   For auto and home expenses where the partnership doesn't own the car or home then they are UPE on the personal return Sch E page 2.   All other expenses MUST be paid thru the partnership bank account and the partners need to fund the partnership until it is self sustaining and can repay the loans made by the partners.