Partners and Shareholders Reimbursed and Unreimbursed Expenses: Accountable Plans, Schedule E Deductions, M&E

The Tax Act of 2017 suspended the deduction for out-of-pocket business expenses on Schedule A. Still, pass-through entity owners continue to incur costs on behalf of their entities. Expenses for travel and entertainment, office in the home, seminars, and dues are often paid personally by shareholders and partners.

Sometimes, a partner can deduct expenses directly on Schedule E as unreimbursed partner expenses (UPE). To do so, the partnership must have a qualified agreement in place, and the expenses paid must be ordinary and necessary. The rules concerning the deductibility of business expenses are constantly changing, making it difficult for tax advisers and flow-through members to stay abreast.

Recently the restrictions for deducting meals have been liberalized. The IRS explains in Notice 2021-25 which meals are temporarily deductible at 100 percent. Working from home is more commonplace. These rules and methods surrounding business use of home and traveling for business are complicated.

Establishing an accountable plan eliminates the burden of deducting expenses when allowed on an individual income tax return and saves self-employment taxes. The ability of owners to deduct the costs paid personally varies significantly between partnerships and S corporations. Making sure all allowable expenses are reimbursed or deducted is critical for owners of pass-through entities.

Listen as our experienced panel explains the latest rules for deducting expenses, accountable versus non-accountable plans, and when and how a flow-through entity owner can deduct out-of-pocket expenses on Form 1040.