If you're associated with a partnership, you do what needs to be done, including pay expenses from your own pocket when the occasion calls for it. But that doesn't mean that you just want to eat the expenses. You may consider deducting your unreimbursed business partnership expenses by attaching Schedule A to your federal income tax return, but that's not quite right. You can deduct those expenses -- it's just that you use Schedule E, not Schedule A.
Allowable Partnership Deductions
The Internal Revenue Service is pretty generous about allowing deductions for using personal resources for business purposes as a member of a partnership. For example, If you use your car or cell phone to conduct partnership business, you can deduct the full amount of your expenses on your income tax return. Likewise, if you travel out of town on partnership business, you can deduct the full cost of your plane ticket and hotel room. If you entertain a client over dinner or drinks, you can deduct up to 50 percent of your expenses on your income tax returns.
Schedule A or Schedule E
To report unreimbursed partnership expenses on your federal income tax return, use Schedule E. Unlike itemized deductions on Schedule A, expenses reported on Schedule E do not have to exceed 2 percent of your adjusted gross income before you can include them as deductions. You also don't have to list each item that you claim as a deduction, but keep your receipts and records in case the IRS has a question about your return.
Form W-2 or Schedule K-1
Form W-2 and Schedule K-1 both provide reports to the IRS for income paid by a company, but there are not many other similarities between the two. Employees receive Form W-2 that details their earnings and any tax deductions. Schedule K-1 also reports income paid to an individual partner, but includes much more detail about expenses and income than a Form W-2.
Partner or Employee
As an employee, you don't determine the direction the company takes. You don't share in profits beyond your salary and bonuses unless you also own stock in the company. You also don't share financial or legal liability for the company's actions. By contrast, general partners each have a say in running the business and determining its direction. Partners also share profits as well as financial and legal liability for the transactions of the business. Limited partners do not get involved in the operations of the business, and their financial liability is limited to the investment they've made.
- TurboTax: What Are Job-Related Tax Deductions?
- TurboTax: Employees Can Deduct Workplace Expenses
- Aronson Blogs: Often Overlooked Tax Break -- Unreimbursed Business Expenses
- Bankrate.com: Business Expenses That Benefit You
- Bankrate.com: Deducting LLC Business Expenses
- Entrepreneur: Salary Payments in an LLC
- Internal Revenue Service: Independent Contractor (Self-Employed) or Employee?
- The Free Legal Dictionary: Partnership
- Internal Revenue Service: Schedule K-1 -- Partner’s Share of Income, Deductions, Credits, etc.
- Internal Revenue Service: Publication 529 -- Miscellaneous Deductions
- Internal Revenue Service: Instructions for Schedule E -- Supplemental Income and Loss
- Internal Revenue Service: Schedule A -- Itemized Deductions
- Internal Revenue Service: Partnerships
- Internal Revenue Service: Instructions for Schedule SE -- Self-Employment Tax
- Internal Revenue Service: Form 2106 -- Employee Business Expenses
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