Dear Tax Talk,
Continue Reading Below
When would unreimbursed expenses, or the UPE, not show on the current year Schedule K-1? Can the UPE carry over from a prior year? I have a customer who is showing UPE, but it does not show on his K-1.
UPE stands for unreimbursed partner expenses. They are not reported on the Schedule K-1 of the partnership, as they are expenses incurred by the partner.
Unreimbursed expenses are reported by the partner on his or her tax return. If the partner is an individual, then the expenses would be reported on Page 2 of Schedule E on the lines provided for reporting the partner's share of partner income. Details of the expenses are not required to be disclosed on Schedule E. The partner, however, should keep the detailed records to support the total entered.
The unreimbursed expenses have to be required under the partnership agreement. For example, the partnership agreement should state that each partner is required to pay his own automobile or cellphone costs in pursuit of the partnership's business. Accordingly, the partner would record standard mileage or actual auto expenses plus business cellphone use, and claim that as UPE. If the partner is subject to self-employment tax on the net earnings of the partnership, then he could reduce the income subject to tax by the UPE.
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.