Ultimate Partnership Scheme

[Snaggletooth]

I've heard it all now.

Bear in mind that SOME personal expenses associated with partnerships and S Corps can be deducted on the reverse of Sch E without being an expense of the entity. The best example is Interest Expense of the investor, in which case it is more advantageous than deducting on a 4952.

OK, here it is.

Three partners A, B, & C started as equal partners with respect to all elements - contributions, gains, losses, etc. Each one put up $100 each to start a partnership. From that moment on, when expenses arose and had to be paid, whichever partner had money would pay for the expense out of his pocket. Until the partnership had revenue, there was no money in the company account to pay for anything.

At the end of the year, A had put up $20K, B put up $15K, and C had only advanced $5K.
The partnership lost $39K, and allocated $13K in loss to each partner. Of course C could only take $5100 of the loss. Partner A was furious that he could only deduct $13K after floating the company with $20K of his own money.

The tax preparer had a brilliant idea. For expenses paid out-of-pocket of the partnership, let the partners deduct these expenses respectively on the back of their individual Schedule Es. Since they are no longer attributable to the partnership, the partnership instead reports a small profit of $1000, which is split three ways.

The owners thought the preparer was a magician. How do y'all feel about this??

[BHoffman]

I've heard it all now.

Bear in mind that SOME personal expenses associated with partnerships and S Corps can be deducted on the reverse of Sch E without being an expense of the entity. The best example is Interest Expense of the investor, in which case it is more advantageous than deducting on a 4952.

OK, here it is.

Three partners A, B, & C started as equal partners with respect to all elements - contributions, gains, losses, etc. Each one put up $100 each to start a partnership. From that moment on, when expenses arose and had to be paid, whichever partner had money would pay for the expense out of his pocket. Until the partnership had revenue, there was no money in the company account to pay for anything.

At the end of the year, A had put up $20K, B put up $15K, and C had only advanced $5K.
The partnership lost $39K, and allocated $13K in loss to each partner. Of course C could only take $5100 of the loss. Partner A was furious that he could only deduct $13K after floating the company with $20K of his own money.

The tax preparer had a brilliant idea. For expenses paid out-of-pocket of the partnership, let the partners deduct these expenses respectively on the back of their individual Schedule Es. Since they are no longer attributable to the partnership, the partnership instead reports a small profit of $1000, which is split three ways.

The owners thought the preparer was a magician. How do y'all feel about this??

UPE - unreimbursed partnership expense? Is that what you mean?

The partnership agreement needs to address the ability/necessity for partners to recoup funds paid out of pocket in this way, but other than that there aren't any problems.

I prefer the partners to submit expense reports and be reimbursed through the business, but UPE works.

Here's a little IRS blurb about how to report UPE:

http://www.irs.gov/newsroom/article/0,,id=168177,00.html

Here's a link to a longer article that talks about UPE:

http://www.allbusiness.com/accounting-reporting/corporate-taxes-joint/200040-1.html

[S T]

Partnership Agreement

What does the partnership agreement say about expenses paid by the partners?

Wouldn't the amounts of money that each partner paid, be considered a loan or capital contribution to the partnership, and then the partnership records the expenses?

At Risk Rules?

I am sure there are more thoughts, but I am not as well versed as some posters on this subject.

Sandy

[Zee]

I would agree partnership loans would have been the easiest way to handle this.