Several times this year the following situation happened with clients either in the office or over email: “Here is my income – it is on a K-1. Now here are my deductions!” Not so fast:
One would logically think that since you can deduct items against a 1099-MISC for your own single member LLC or sole proprietorship, then you should logically also be able to deduct business expenses against the income received from a partnership K-1, especially if some of the costs came from expenses on that partner’s personal credit card.
However, these expenses should always be claimed at the entity level and cannot easily be deducted against the Partnership LLC’s income once it is reported on a K-1 and shown as partnership income on your tax return. Trying to deduct them on your from 1040 individual return is difficult and these expenses would likely end up on Schedule A of form 1040 as unreimbursed employee expenses subject to the 2% floor. This deduction is going away with the next tax legislation, anyway, so the lesson here is that all expenses incurred personally need to be immediately reimbursed by the business and shown as an expense on the business books, not the return of the individual partner. Please do make sure that your partnership reimburses you for all business-related expenses.
Some clients also struggle with this concept in situations where they are the CEO or co-founder of a Delaware C-Corp and have spent their own out-of-pocket money incurring expenses that they figured they would “deduct later on their individual return.” The issue with these types of clients is that they are normally subject to AMT, which has the effect of clawing back this deduction even if you do try to take it on Schedule A of your individual return.
With all this being said, this blog post may me a waste of pixels as Jan 1st of 2018 marks a new era of tax compliance where these types of schedule A deductions won’t exist – Again: if you own a business or are a partner of a business, make sure to use a company card or otherwise be immediately reimbursed for any use of personal funds as the business will be your only place you can take these deductions going forward.