Deducting Expenses from a K-1
Throughout the year, clients have often said, “Here is my income on a K-1. Now here are my deductions!” Let’s clarify this process:
Business Expenses and K-1 Income
You might think that, like with a 1099-MISC for a single-member LLC or sole proprietorship, you can also deduct expenses against partnership K-1 income. This logic seems reasonable, especially if you used a personal credit card for some costs.
However, you should claim business expenses at the entity level. You cannot typically deduct these expenses from the Partnership LLC’s income once reported on a K-1. Attempting to deduct them on your 1040 individual return is difficult. These expenses will likely end up as unreimbursed employee expenses on Schedule A of Form 1040, which will soon be eliminated due to new tax laws. Therefore, make sure your business reimburses you for any personal expenses, and record these expenses on the business’s books.
Expenses for CEOs and Co-Founders
CEOs and co-founders of a Delaware C-Corp may use personal funds for business expenses, expecting to deduct them later on their individual return. However, they often face AMT, which can negate this deduction even if claimed on Schedule A.
Future Tax Compliance
Starting January 1, 2018, you will not be able to claim these types of deductions on Schedule A. If you own a business or are a business partner, use a company card or get reimbursed immediately for any personal expenses. The business will be the only place where you can claim these deductions in the future.
Contact Us
Have questions about managing your K-1 deductions or need help with business expense reporting? We’re here to assist you! Whether you’re dealing with partnership income or navigating complex tax scenarios, our team is ready to provide expert guidance. Reach out to us today for personalized support and advice tailored to your needs.
