Navigating LLC/Partnership Expenses: Reimbursement vs. Deduction Options
If you are a member of a multimember LLC taxed as a partnership (as most are) or a traditional partnership, you may sometimes pay for business expenses out of your pocket. These expenses can include travel and meals, car expenses, continuing education, professional dues, and home office costs.
There are two ways to handle these payments:
- the LLC/partnership can reimburse you, or
- you may be able to deduct them on your personal tax return.
Reimbursement by the LLC/Partnership
If your LLC/partnership reimburses you, the payment is (a) tax-free to you and (b) deductible by the LLC/partnership, provided that
- the expenses qualify as business operating expenses,
- you adequately document the expenses, and
- you submit them for reimbursement in a timely manner.
Deducting Unreimbursed Expenses on Your Personal Return
If your LLC/partnership does not reimburse certain expenses, you may be able to deduct them on your tax return—but only if your LLC/partnership has a formal policy of not reimbursing those expenses. This policy must be
- stated in the LLC/partnership agreement or another written document or
- established as a consistent routine within the business.
Your LLC/partnership determines which expenses it will or won’t reimburse.
If needed, the LLC/partnership can amend its agreements to formalize your reimbursement policy. This amendment must be made by the due date of the LLC/partnership tax return for the year (excluding extensions) and will apply to the entire tax year.
How to Claim the Deduction
You deduct unreimbursed expenses on IRS Schedule E. This deduction reduces your taxable income for income tax and self-employment tax purposes.
What’s the Best Approach?
In most cases, getting reimbursed by the LLC/partnership is the better option. But situations exist where members/partners prefer not to use LLC/partnership funds for these expenses.
If you want to discuss LLC/partnership expenses, please call me on my direct line at 713-857-6300.
If needed, the LLC/partnership can amend its agreements to formalize your reimbursement policy. This amendment must be made by the due date of the LLC/partnership tax return for the year (excluding extensions) and will apply to the entire tax year.
How to Claim the Deduction
You deduct unreimbursed expenses on IRS Schedule E. This deduction reduces your taxable income for income tax and self-employment tax purposes.
What’s the Best Approach?
In most cases, getting reimbursed by the LLC/partnership is the better option. But situations exist where members/partners prefer not to use LLC/partnership funds for these expenses.
If you want to discuss LLC/partnership expenses, please call me on my direct line at 713-857-6300.