Dear Tax Talk,
If you have a(n) LLC and there are unequal out-of-pocket expenses from each partner that are not reimbursed through the company books, how does that affect the partnership loss?
-- Patricia
Dear Patricia,
An LLC is taxed the same as a partnership. Although LLC owners are referred to as members, for tax purposes the terms "member" and "partner" are used interchangeably and mean the same thing.
The ordinary loss from a partnership is reported by the partner on their respective tax form. In the case of individual partners, the appropriate form is Schedule E Page 2. A partner can incur certain expenses in carrying out the partnership's business that the partners have decided are not reimbursable.
Technically the partnership agreement (which in the case of an LLC is usually referred to as an operating agreement) would discuss the reimbursement of partner expenses.
A partnership agreement can be either oral or written. A partnership agreement may be modified with respect to a particular taxable year subsequent to the close of such taxable year, but not later than the date (not including any extension of time) prescribed by law for the filing of the partnership return. The modifications may be either oral or written.
The Form 1040 Schedule E instructions provide that you can deduct unreimbursed ordinary and necessary expenses you paid on behalf of the partnership, if you were required to pay these expenses under the partnership agreement.
Unreimbursed partner expenses should be claimed on Schedule E on line 28 and should be labeled as "UPE." You should not combine these amounts with other partnership items, as the IRS matches the partnership K-1 items to your tax return. Any combining could flag your return as omitting income or overstating losses.
Some partnerships may not want to get into the disproportion of the partner expenses and therefore choose not to reimburse these expenses. For example, one partner may have more car expenses because of a better car or a poor driving record. If the partnership reimbursed the expenses, the disparity may cause discord among the partners.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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