Upe

[DTS]

Can a partner in an LLC, who will have suspended losses this year, still deduct UPE against their guaranteed payments? I am hopeful, as this would lower the SE tax on the guaranteed payment.

I'm having a heck of a time finding anything to confirm this issue specifically.

Thank you.

[Edsel]

I think So

DTS, how does your software handle it? Of course, this is no guarantee, as we are supposed to know and not depend on software.

I would put the UPE in the same category as the s.179 deduction, which is recorded on a different line item on the back of the partners' Sch E.

[DTS]

Edsel

Thanks so much for jumping in.

Believe me, I wish I did know the answer! There is little to nothing I find out there on this.

Not only is my software is suspending the partner's share of losses, but also the UPE and this seems odd to me since this expenses came out of the pocket of the partner to perform his duties for the LLC.

Right now, Sch SE is showing the suspended loss being utilized to lower the guaranteed payment and then that net amount is SE earnings. It's my understanding the whole guaranteed payment needs to be shown instead. I'm hoping the law permits me to use the UPE to lower this amount. If not, I will have to override the current entry shown on Sch SE.

I can understand the losses being suspended, but not out-of-pocket expenses.

Thanks again.

[JG EA]

How do you have everything marked on your K-1 imput screen?

If the losses are suspended because of basis and if there is no basis again this year then they would stay suspended.

If the losses as passive losses on your K-1 imput screen then they would come off on the E2 but not on the SE.

As far as the UPE - I would think they would go only against partnership income and so be taken off the E2 and not off on the SE. I think this, but I don't know this and also can't find anything quickly on this.

I've always been taught that guaranteed payments do not add to basis - although when checking this out on line I found opinions to the contrary. My software backs up in basis worksheets that it doesn't add to basis.

[WhiteOleander]

OK, since there isn't something spelling this out, I put it into my software. If I show that the business loss is non-deductible because of at risk, it will not allow any UPE to be deducted against the guaranteed payments or SE. It moves the UPE that wasn't allowed to line 4 of the 6198.

Upon further review, I can make my program do it either way. So, I'm no help.

[DTS]

JG and White Oleander,

Thank you both. I found some add'l information in a deskbook on one part of my question and will keep looking tomorrow for the second part.

Thanks again.

[veritas]

I would be inclined

to increase basis as a capital contribution the amount expended for the expenses.

I

[Gretel]

I tend to agree with Veritas. As far as basis is concerned for UPE it's basically a wash. UPE also decreases SE. GP does not figure into the basis calculation, it's just an expense for the partnership.

All of this doesn't answer your question, Dennis. I actually never paid attention if a loss from the partnership should disallow UPE as well.

[S T]

UPE and Baisis

Thanks Veritas and Gretel for the posts to this thread, as I am not arriving at the answer, but now I really am

If the UPE for the partner is added to "basis"would that be a loan to the partnership, and then wouldn't then the partnership report the expense, and that would be reflected in the K-1, line 1 - and of course the partner's share of that expense would be far less than his personal expense. And because this partner still has nothing at risk outside of the UPE, then his losses on line 1 of the K-1 are still suspended.

So end result, it still does not affect the GP nor reduce SE tax calculated on the GP?

Wish there was something in the regulations or publications addressing this issue? I can't find anything definitive to address handling this particular situation for a partnerhsip or LLC filing as a partnership.

Anyone have any thoughts or cites?

Sandy

[DTS]

Link

I found this link that seems to verify what Veritas is saying and I thought I would share it in hopes of getting some add'l input here regarding its content:

http://www.taxalmanac.org/index.php/Discussion:Basis_reduction_due_to_UPE

[JG EA]

I found this link that seems to verify what Veritas is saying and I thought I would share it in hopes of getting some add'l input here regarding its content:

http://www.taxalmanac.org/index.php/...ion_due_to_UPE

Except for the fact the UPE is totally separate from the partnership. It is because there is a partnership agreement that for certain predetermined expenses, this partner will pay them personally and take that expense on their tax return. I can't see how there would be a contribution or loan to the partnership.

[Snaggletooth]

Effect on SE

As so often happens here, the discussion has morphed away from the original question.

We're having all manner of ramifications with UPE, basis, integration with partnership, etc. but the original question is how any of this affects Self-Employment tax.

Not that these things aren't worthy of discussion, but I have been following this thread for several days, thinking of just how one of my own clients' SE will be affected by UPE, and don't yet see an answer.

Not that I can play the part of the scolding teacher, because at least she had an answer. I don't.

[S T]

UPE Effects on SE

Hi Snags,
I am glad you posted, several of us are participating in this issue and following.

I am still having an issue with the effects of UPE reducing GP for the SE tax.

I believe now it maybe has been determined that you can create basis to offset the expense allowed for UPE, but I still haven't found any direction where this UPE amount reduces the GP amount for SE tax purposes. Materially participates.

Keep in mind that this also has a suspended loss due to no basis and at risk issues.

I believe the Original Post is regarding the GP amount reported on K-1 and whether or not it can be reduced by UPE for SE purposes?

One question is the UPE allowed on Schedule E-2, if we presume we can increase basis by the UPE amount, that maybe or should release the UPE deduction

however, does it affect the GP amount for SE tax?

Sandy

[Snaggletooth]

Basis = SE correlation

That's just it Sandy -- I wasn't trying to police the board but I keep reading that we are trying to equate basis to SE earnings, and I just don't think they correlate. For example, you may apply a previous year suspended loss and that affects basis, but I don't believe you can deduct such a suspended loss from SE earnings. And I could be wrong there as well. But I believe this is one reason why a suspended loss requires a separate line item on Schedule E, p.2.

UPE is both an addition and a reduction in basis, as it constitutes both a contribution AND a deduction. I think Veritas hit the nail on the head on this one. In this sense, I believe it would ALWAYS be deductible subject to Sch E rules.

UPE falls in the same category as s.179 expense and depletion on oil/gas properties, and self-employment from the partnership is REDUCED by all three of these things. See page SE-3, column 1 in the 1040 instructions.

[BHoffman]

I'm going to vote No because the GP is different in nature from pass through income (loss). It comes strictly as direct compensation for services rendered. I don't think UPE could be used like that any more than unreimbursed employee expenses could be used to lower gross wages.

I'm inclined to agree with veritas about treating the UPE as though the partner made a capital contribution to increase his basis.

In the future, might be wise to advise partners to submit expense reports and be reimbursed. If the partnership doesn't have the cash, then contribute cash instead of paying expenses out of pocket. That UPE thing can be a beastly mess to untangle.