If you’re a member of a multi-member LLC taxed as a partnership (as most are) or a traditional partnership, you may occasionally pay for business expenses out of pocket. These expenses—ranging from travel and meals to car expenses, continuing education, professional dues, and home office costs—can impact your taxes more than you might think.
Handling these expenses properly ensures you don’t miss out on tax benefits. Here’s what you need to know:
Two Ways to Handle Partner-Paid Expenses
- Reimbursement by the LLC/Partnership
- Deducting them on your personal tax return
Option 1: Reimbursement by the LLC/Partnership
Getting reimbursed is the simplest and most tax-efficient option. Why? Because:
- The reimbursement is tax-free to you.
- The LLC/partnership deducts the expense.
To qualify:
- The expenses must be business-related.
- You must document them properly.
- You must submit them for reimbursement on time.
Option 2: Deducting Unreimbursed Expenses on Your Personal Return
If your LLC/partnership does not reimburse you for certain expenses, you may be able to deduct them—but only if your business has a formal policy of not reimbursing those costs.
This policy must be:
- Stated in the LLC/partnership agreement or another written document, or
- Consistently applied as a standard business practice.
If your business doesn’t have a formal policy, consider updating the LLC/partnership agreement. Any amendments must be made by the tax return deadline (excluding extensions) to be valid for that tax year.
How to Claim the Deduction
If you qualify, you can deduct unreimbursed expenses on IRS Schedule E. This deduction reduces your taxable income for both income tax and self-employment tax purposes, helping lower your overall tax bill.
What’s the Best Approach?
For most business owners, getting reimbursed is the better option—it keeps tax reporting simple and ensures full deduction benefits. However, if you prefer not to use LLC/partnership funds for certain expenses, a formal unreimbursed expense policy can work, as long as it’s structured correctly.
Don’t Leave Money on the Table
Are you handling partner-paid expenses the right way? If you’re unsure, it’s time for a strategy check. Make sure your reimbursement policy is clear and tax-efficient.
Need expert guidance? Contact us today at [email protected] to optimize your tax savings!
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